Lifetime Brands, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through retailers, distributors, e-commerce channels and its own websites. The filing covers the three and six months ended June 30, 2021, with unaudited financial statements. The business is highly seasonal, with approximately 62% of 2020 annual sales generated in the third and fourth quarters.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $186.6 million | $150.1 million | $382.3 million | $295.2 million |
| Sales growth | 24.3% | — | 29.5% | — |
| Gross margin | $66.2 million; 35.4% | $54.2 million; 36.1% | $132.2 million; 34.6% | $107.1 million; 36.3% |
| Operating income (loss) | $11.0 million | $4.3 million | $20.2 million | $(20.9) million |
| Net income (loss) | $5.8 million | $(4.0) million | $8.9 million | $(32.1) million |
| Diluted EPS | $0.26 | $(0.19) | $0.40 | $(1.55) |
| Operating cash flow | Not separately provided | Not separately provided | $42.1 million | $66.2 million |
- U.S. segment sales increased 25.6% in Q2 and 30.9% year to date. International sales increased 14.9% in Q2 and 18.3% year to date.
- Q2 sales growth was led by Kitchenware, up 22.7%, and Tableware, up 58.0%. Six-month Kitchenware and Tableware sales increased 36.6% and 43.0%, respectively.
- Gross margin declined year over year because of higher inbound freight costs, product mix and, for the year-to-date comparison, the absence of a 2020 duty-exclusion benefit.
- Six-month selling, general and administrative expense decreased 2.1% to $74.3 million, while SG&A as a percentage of sales improved to 19.4% from 25.7%.
- The prior-year six-month period included a $20.1 million non-cash goodwill and intangible-asset impairment charge and $0.3 million of restructuring expense. No impairment or restructuring expense was recorded in 2021.
- Adjusted EBITDA, as defined in the debt agreements, was $96.7 million for the four quarters ended June 30, 2021. This is a non-GAAP measure and should not be viewed as a substitute for GAAP earnings or cash flow.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $33.3 million at June 30, 2021, compared with $36.0 million at December 31, 2020. Working capital was $225.6 million, compared with $241.2 million at year-end.
- Inventory increased to $218.2 million from $203.2 million, consistent with seasonal preparation for the holiday shipping period. Accounts receivable declined to $120.5 million from $170.0 million.
- Term loan carrying value was $246.9 million, including $11.5 million classified as current and $235.4 million classified as long term. The term loan interest rate was 4.5% at June 30, 2021.
- The $150.0 million ABL facility had no outstanding borrowings and $146.6 million of reported availability after standby letters of credit. Total liquidity, including cash and ABL availability, was approximately $179.9 million.
- The Company repaid $10.5 million of term-loan principal during the first quarter under the excess-cash-flow provision and repaid $27.3 million of ABL borrowings during the first six months.
- Management stated that cash on hand, operating cash flow and available ABL capacity should be sufficient to fund operations for the next twelve months, subject to availability and changing conditions. The Company was in compliance with its debt covenants at June 30, 2021.
- Net cash used in financing activities was $42.2 million, primarily reflecting ABL and term-loan repayments, dividends and employee tax withholding payments. Capital expenditures were $2.5 million.
Material changes, outlook and unusual items
- Results improved substantially from the pandemic-affected 2020 comparison period, which included impairment charges, restructuring costs, unusually high mark-to-market derivative losses and COVID-19-related cost-saving measures.
- Supply-chain disruption remained a significant pressure. Container shortages, port backlogs, trucking constraints, higher inbound freight and increased product costs caused delays and are expected to affect costs into the third and fourth quarters of 2021.
- The Company sold receivables under its uncommitted HSBC agreement, including $79.5 million during the first six months of 2021. Receivables sold outstanding and due from customers totaled $14.6 million at June 30, 2021.
- Grupo Vasconia diluted the Company’s ownership from approximately 30% to 27% on June 30. The Company recorded a net $0.3 million loss related to the dilution, consisting of a $1.7 million non-cash gain and a $2.0 million loss for amounts previously recorded in accumulated other comprehensive loss.
- After quarter-end, on July 29, 2021, the Company sold 2.2 million Vasconia shares for approximately $3.0 million of net cash proceeds. Management estimated a pretax gain of approximately $1.0 million and a non-cash loss of approximately $1.4 million related to accumulated other comprehensive loss.
- The Company acquired the Year & Day business and certain assets for $0.2 million on February 26, 2021. The acquisition was not material to reported results.
- The Board declared a quarterly dividend of $0.0425 per share on August 3, 2021, payable November 15, 2021.
Risks and contingencies
- Seasonality, inventory accumulation, supply-chain disruption, freight and product-cost inflation, port and trucking constraints, tariffs, foreign exchange and customer creditworthiness could materially affect results and liquidity.
- Interest-rate exposure remains relevant because the term loan is variable-rate debt, although the Company had $75.0 million of interest-rate swap notional value and $10.8 million of foreign-exchange hedge notional value at June 30, 2021.
- The EPA Superfund matter involving the Company’s Puerto Rico facility remains unresolved. The Company cannot estimate its potential share of liability; adverse determinations could be material. EPA estimated remedy costs of $7.3 million for the initial operable unit and $17.3 million for the second operable unit.
- CBP is investigating tariff classifications for certain tableware and kitchenware imports. Potential additional duties were estimated at $2.5 million, with possible penalties of up to $4.9 million for negligence or $9.8 million for gross negligence. The Company considers the potential losses reasonably possible but not probable.
- Goodwill and indefinite-lived intangible assets remain subject to impairment risk if operating performance, projected cash flows, market capitalization or other valuation assumptions deteriorate.
Investor verification checklist
- Verify whether supply-chain, freight and product-cost pressures reduced gross margin in the second half of 2021 and whether pricing or mix offset those pressures.
- Monitor seasonal inventory growth, receivables monetization under the HSBC agreement and operating cash flow during the third and fourth quarters.
- Reconcile term-loan repayments, excess-cash-flow requirements, interest rates and ABL borrowing-base availability.
- Confirm the accounting and cash proceeds from the July 2021 Vasconia share sale and any subsequent reductions in ownership.
- Track developments in the EPA and CBP matters, including potential liabilities, penalties and reserve requirements.
- Assess whether the Company’s stated twelve-month liquidity expectation remains supported by operating cash flow and covenant compliance.