Whitney Tilson on the latest Lumber Liquidators news – excerpted from an email Tilson sent to clients.
Lumber Liquidators
(I have no comment on today’s Lumber Liquidators settlement with CARB, as it isn’t part of my investment thesis, which you can review in my latest presentation, posted at www.tilsonfunds.com/LL.pdf.)
The CDC released its revised report after the close today (the full report is attached; below are the two summary web pages the CDC posted). I have three comments on Lumber Liquidators:
1) As a result of correcting the error, which more than tripled the calculated formaldehyde levels, the CDC acknowledged greater short- and long-term health risks (my emphasis added):
Change in conclusion for short-term health effects
After correcting the measurement error in the model, CDC/ATSDR revised the report’s conclusion about possible health effects from exposure to formaldehyde. In the report that used an incorrect value for ceiling height, we concluded that exposure to the low end of the modeled levels of formaldehyde in the CPSC-tested laminate flooring could cause increased irritation and breathing problems for children, older adults, and people with asthma and Chronic Obstructive Pulmonary Disease (COPD). In the updated report, which used the correct value for ceiling height, we concluded that irritation and breathing problems could occur in everyone exposed to formaldehyde in the laminate flooring, not just sensitive groups and people with pre-existing health conditions.
Change in conclusion for long-term health effects
We also increased the estimated lifetime cancer risk from breathing the highest levels of formaldehyde from the affected flooring all day, every day for 2 years. The lifetime cancer risk increased from the previous estimate of 2 to 9 extra cases for every 100,000 people to between 6 and 30 extra cases per 100,000 people. To put these numbers into perspective, the American Cancer Society estimates that up to 50,000 of every 100,000 people may develop cancer from all causes over their lifetimes.
2) The CDC changed its language around how long the high formaldehyde levels linger. In the first report, it confidently stated:
Research suggests that formaldehyde levels in recently built or renovated homes dissipate within the first two years after installation of formaldehyde-containing materials (Brown, 2002; Park and Ikeda, 2006; Wolkoff et al., 1991), reaching background (“normal”) levels of indoor formaldehyde within the initial off-gassing period of two years.
In the revised version, the CDC is much more cautious:
Several studies have shown that indoor air concentrations of formaldehyde from new building products usually decrease over time, particularly during the first two years. Even though levels reduce over time, we calculated lifetime risk very conservatively and in a manner that is most protective of health, assuming a constant 24-hour, 7-day a week exposure to the measured floorboard emissions for the entire 2-year off-gassing period. If we instead assume a constant formaldehyde decay rate over the same 2-year period, these cancer risks would be reduced by half. If formaldehyde concentrations are assumed to remain elevated after a two-year period, the cancer risks would be proportionally increased.
I still think the CDC is wrong (for reasons detailed on pages 23-28 of my latest Lumber Liquidators presentation), but it’s less wrong.
3) The CDC’s report isn’t the final word: it’s the Consumer Product Safety Commission that did the testing and will ultimately determine what LL will have to do. I don’t think it’s likely that the CPSC will force LL to do this, but this is what should happen (page 37 of my presentation):
Regulators should require Lumber Liquidators to do what any honest and reputable company would have immediately done:
1) Offer a full refund to any customers who want to return Chinese-made laminate that was purchased prior to 5/7/15 (when Lumber Liquidators finally suspended sales of this product)
2) Rather than waiting for inbound calls and complaints, Lumber Liquidators should send a letter to every customer who purchased its Chinese-made laminate flooring between, say, 2010 and 5/7/15, informing them that the product may be emitting dangerous levels of formaldehyde and offering a proper test
3) Cease the bogus “Bio-Badge” formaldehyde testing program that it’s currently offering customers (see my article, Lumber Liquidators’ Offer to Do Indoor Air Quality Testing Appears to Be a Sham), and instead offer to send a trained specialist with sophisticated equipment to do proper testing
4) For any customers with a reading above 0.016 parts per million (16 ppb or 20 ?g/m3), the standard set by both FEMA and NIOSH (I’m being generous – 7 ppb is the limit set by the California Office of Environmental Health Hazard Assessment; for more on this, see my article, More On Lumber Liquidators And Formaldehyde), offer to pay all costs for them to, if they wish, temporarily move out of their home until the flooring can be removed and replaced with safe flooring; also, for these customers, offer to pay all medical bills for anyone in the home suffering symptoms consistent with formaldehyde exposure
5) Establish a fund to pay for future health costs of customers who suffer adverse health effects associated with exposure to formaldehyde
———————-
Laminate Flooring Test Results – Health Issues and Solutions
Statement Regarding Changes in the CDC/ATSDR Formaldehyde in Laminate Flooring Report
On February 10, 2016, CDC/ATSDR released a report entitled Possible Health Implications from Exposure to Formaldehyde Emitted from Laminate Flooring Samples Tested by the Consumer Product Safety Commission. On February 12, CDC/ATSDR was notified that a private individual who reviewed the report suspected that a conversion error might have been made. CDC/ATSDR staff reviewed the report and discovered that an incorrect value for ceiling height was used in the indoor air model. As a result, the health risks were calculated using airborne concentration estimates about 3 times lower than they should have been. Neither CDC/ATSDR nor the report’s peer or partner reviewers or reviewers noticed the error.
Change in conclusion for short-term health effects
After correcting the measurement error in the model, CDC/ATSDR revised the report’s conclusion about possible health effects from exposure to formaldehyde. In the report that used an incorrect value for ceiling height, we concluded that exposure to the low end of the modeled levels of formaldehyde in the CPSC-tested laminate flooring could cause increased irritation and breathing problems for children, older adults, and people with asthma and Chronic Obstructive Pulmonary Disease (COPD). In the updated report, which used the correct value for ceiling height, we concluded that irritation and breathing problems could occur in everyone exposed to formaldehyde in the laminate flooring, not just sensitive groups and people with pre-existing health conditions.
Change in conclusion for long-term health effects
We also increased the estimated lifetime cancer risk from breathing the highest levels of formaldehyde from the affected flooring all day, every day for 2 years. The lifetime cancer risk increased from the previous estimate of 2 to 9 extra cases for every 100,000 people to between 6 and 30 extra cases per 100,000 people. To put these numbers into perspective, the American Cancer Society estimates that up to 50,000 of every 100,000 people may develop cancer from all causes over their lifetimes.
Our recommendations remain the same.
Although the conclusions in the report have been revised, CDC/ATSDR recommendations to protect health have not; we continue to recommend that people with the affected laminate flooring:
- Reduce exposure – We provide information on how residents can reduce exposure to sources of formaldehyde in their homes
- See a doctor for ongoing health symptoms – We recommend that residents who have followed the steps to reduce formaldehyde in their homes and still have ongoing health symptoms (breathing problems or irritation of the eyes, nose, or throat) only in their homes, should see a doctor to find out what is causing the symptoms.
- Consider professional air testing if irritation continues.
To ensure the accuracy of the revised report, CDC/ATSDR spent five weeks taking these steps:
- Updating the model parameters and re-running the indoor air model
- Double-checking the model against other air models
- Conducting a quality review of the revised results
- Re-evaluating the possible health implications
- Requesting peer review of the revised report by outside experts and experts from CPSC, the U.S. Environmental Protection Agency (EPA), and the U.S. Department of Housing and Urban Development (HUD)
- Addressing these peer reviewers’ comments
- Revising communication materials to ensure affected people understand the new results.
For more details on the laminate flooring testing report, visit http://www.cdc.gov/nceh/laminateflooring/default.html
