Lifetime Brands, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through retailers, distributors and direct-to-consumer websites. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021. The business is highly seasonal, with 56% of 2021 sales generated in the third and fourth quarters.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $182.7 million | $195.7 million | Down 6.6% |
| Gross margin | $63.1 million; 34.5% | $66.0 million; 33.7% | Dollar decline; margin up 80 bps |
| Income from operations | $4.4 million; 2.4% | $9.2 million; 4.7% | Down $4.9 million |
| Net income | $0.4 million | $3.1 million | Down $2.7 million |
| Diluted EPS | $0.02 | $0.14 | Down $0.12 |
| Cash flow from operations | $13.4 million | $36.3 million | Down $22.9 million |
| Adjusted EBITDA, LTM | $95.1 million pro forma | Not provided in filing summary | Non-GAAP measure |
Distribution expenses increased to $19.2 million from $18.6 million and rose to 10.5% of sales from 9.5%. Selling, general and administrative expenses increased 3.7% to $39.5 million, or 21.6% of sales, primarily reflecting S'well integration costs and related professional fees.
Cash and cash equivalents were $14.8 million at March 31, 2022, down from $28.0 million at December 31, 2021. Working capital was $255.8 million, compared with $270.8 million at year-end. Inventory was $275.2 million, up from $270.5 million, and inventory turnover declined to 1.8 times, or 205 days, from 2.6 times, or 143 days.
Total term loan debt was approximately $241.8 million, net of debt issuance costs, at March 31, 2022. The company had no ABL borrowings outstanding and reported $147.2 million of ABL availability, resulting in approximately $162.0 million of liquidity including cash. The term loan interest rate was 4.5%; the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Consolidated sales declined 6.6%, including a 5.7% decline in the U.S. segment and a 15.4% decline in the International segment. The U.S. declines were concentrated in Kitchenware and Tableware.
- Management attributed lower sales primarily to customer inventory-replenishment timing, weaker kitchen tools and gadgets demand versus the prior-year demand shift, lower dinnerware sales, supply-chain delays and lower sales to an Australian distributor.
- Gross margin percentage improved due mainly to tariff reductions on certain U.S. products and improved International customer mix, but lower sales and higher operating expenses reduced operating profitability.
- Operating cash flow fell substantially due primarily to the timing of accounts payable and accrued expense payments.
- Investing cash outflows increased to $18.4 million, principally due to the $18.0 million cash acquisition of S'well on March 2, 2022. S'well contributed $0.9 million of Q1 net sales.
- Financing cash outflows decreased to $8.2 million from $40.8 million, largely because of lower revolver repayments and a lower term-loan excess-cash-flow payment.
- Equity in earnings from Vasconia was $0.4 million versus a $0.2 million loss in the prior-year quarter.
Guidance, outlook, risks and unusual items
The company did not provide specific revenue or earnings guidance in the filing. Management expects supply-chain disruptions, higher inbound freight, product costs, transportation costs and longer lead times to continue in 2022. A third-party warehouse in the Netherlands was added in the first quarter, with shipments expected to begin in the second quarter.
Management believes cash on hand, operating cash flow and ABL availability, including an anticipated refinancing, are sufficient to fund operations for the next twelve months. The ABL facility matures March 2, 2023, and the company intends to refinance it on or before maturity.
- On March 14, 2022, the board authorized a $20.0 million share-repurchase program. The company repurchased 51,145 shares for $0.7 million during the quarter.
- The S'well acquisition included up to $5.0 million of contingent consideration; $0.7 million was recorded as its preliminary fair value.
- Non-designated interest-rate derivatives produced a $1.0 million mark-to-market gain, compared with a $0.5 million gain in Q1 2021.
- The effective tax rate was unusually high at 102.2%, principally because of state and local taxes and foreign losses without recognized tax benefits.
- The company reserved $0.5 million for probable and estimable Wallace facility remedial-design liabilities, but stated that its ultimate exposure cannot currently be estimated and could be material.
- A Customs and Border Protection classification matter could result in approximately $1.5 million of duties and potential penalties of up to $3.0 million for negligence or $6.0 million for gross negligence. The company considers the potential loss reasonably possible, but not probable.
- Principal risks include inflation, supply-chain disruption, COVID-19 effects, tariffs and trade policy, dependence on third-party manufacturers, foreign exchange, geopolitical developments including the Ukraine conflict, debt refinancing, seasonality, acquisition integration, cybersecurity and product liability.
Important facts for investors to verify
- Verify the company’s ability to refinance the $150.0 million ABL facility before its March 2023 maturity and maintain covenant compliance.
- Monitor inventory levels, turnover, carrying costs and potential excess or obsolete inventory as the company prepares for seasonal demand.
- Assess whether sales declines and elevated distribution and SG&A expenses persist beyond the first quarter.
- Evaluate the integration, sales contribution, contingent consideration and projected synergies associated with S'well.
- Track the Wallace EPA matter and the CBP investigation for changes in estimated exposure or probability of loss.
- Reconcile adjusted EBITDA and pro forma S'well synergies to GAAP results; adjusted EBITDA is a non-GAAP debt-covenant measure and is not a substitute for GAAP earnings.