Lifetime Brands, Inc. Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2020, filed March 10, 2021. Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through U.S. and international operations, retailers, distributors, e-commerce channels and limited direct-to-consumer websites. Major brands include Farberware, Mikasa, Taylor, KitchenAid, KitchenCraft, Pfaltzgraff, BUILT NY and Rabbit.
The Company operates through U.S. and International reportable segments. The business is highly seasonal, with 62% of 2020 sales generated in the third and fourth quarters. Walmart represented 20% of consolidated sales, Costco 11% and Amazon 10% in 2020.
Key Financial Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $769.2 million | $734.9 million | +4.7% |
| Gross margin | $274.0 million; 35.6% | $255.2 million; 34.7% | +90 basis points |
| Income from operations | $25.0 million; 3.2% margin | $(23.4) million; (3.2%) margin | Improved |
| Net loss | $(3.0) million; $(0.14) per diluted share | $(44.4) million; $(2.16) per diluted share | Loss narrowed |
| Cash flow from operations | $44.8 million | $29.9 million | +$14.9 million |
| Capital expenditures | $2.1 million | $9.2 million | Lower |
| Cash and cash equivalents | $36.0 million | $11.4 million | +$24.6 million |
| Total debt | $289.9 million | Approximately $303.0 million | Reduced |
U.S. sales increased 6.1% to $683.5 million, led by a 20.5% increase in Kitchenware sales. U.S. Tableware sales declined 9.6% and Home Solutions sales declined 13.7%. International sales decreased 5.6% to $85.6 million, primarily because of COVID-19-related store closures and weaker retailer demand.
SG&A expense declined 3.5% to $155.9 million, while distribution expense was broadly stable at $72.8 million. The Company recorded $20.1 million of goodwill and other impairment charges in 2020, compared with $43.0 million in 2019. Interest expense decreased to $17.3 million from $20.8 million. The 2020 tax provision was $9.9 million, producing an unusually high 177.8% effective tax rate due primarily to nondeductible goodwill impairment, other nondeductible items, equity-based compensation and a U.K. deferred-tax valuation allowance.
Liquidity, Debt and Capital Resources
At December 31, 2020, the Company had $27.3 million outstanding under its $150.0 million senior secured asset-based revolving facility and $262.6 million outstanding under its senior secured term loan. Reported ABL availability was $120.0 million after borrowings and standby letters of credit. The ABL facility matures in March 2023 and the term loan matures in February 2025.
The ABL interest rate was 1.52% and the term-loan interest rate was 4.5% at year-end. Approximately $189.9 million of debt carried variable rates, with approximately $100.0 million economically fixed through interest-rate swaps. Management stated that cash flows from operations and available revolving capacity were sufficient for the next twelve months. The Company was in compliance with its debt covenants at year-end.
Working capital increased to $241.2 million from $221.8 million, while the current ratio declined to 2.3 from 3.1 due largely to higher accounts payable and the estimated excess-cash-flow debt payment. Inventory increased to $203.2 million from $173.4 million as the Company built inventory for expected 2021 demand.
The Company sold $159.4 million of receivables under its HSBC receivables purchase agreement during 2020; $24.7 million of sold receivables remained outstanding at year-end. Cash dividends remained $0.0425 per share quarterly, or $0.17 per share for the year.
Material Changes Versus 2019
- Sales growth was driven by increased demand for food-preparation products, e-commerce and essential retail channels during the COVID-19 pandemic.
- Gross margin improved despite higher inventory reserves and unfavorable International segment mix; 2019 included an $8.5 million SKU-rationalization charge.
- Operating results improved substantially as 2019 included $43.0 million of impairment charges, compared with $20.1 million in 2020.
- The Company recognized a $19.1 million U.S. goodwill impairment and a $1.0 million trade-name impairment in the first quarter of 2020. No further goodwill impairment was identified at year-end.
- Operating cash flow increased, while investing and financing cash outflows were primarily capital expenditures and debt repayments.
- International sales and margins weakened, while U.S. Kitchenware sales increased materially. Higher customer allowances, bad-debt estimates and accrued expenses reflected pandemic-related uncertainty.
- The Company consolidated its U.K. operations into a facility in Aston, England and recorded $0.2 million of related International restructuring expense. No additional restructuring charges were expected for these efforts.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal numerical revenue or earnings guidance. Management expected higher near-term inbound freight costs, possible supplier-capacity constraints and trucking shortages, while anticipating continued demand benefits in certain product categories and e-commerce channels. Management also expected higher U.K. corporate tax rates proposed for 2023 to negatively affect future results.
- COVID-19 could continue to affect demand, store operations, supply chains, manufacturing capacity, workforce availability, customer credit and cybersecurity. The Company reported no significant COVID-19 supply-chain disruption in 2020 but experienced isolated capacity and transportation issues.
- A majority of products are sourced from China and the Company remains exposed to tariffs, commodity costs, labor costs, transportation costs and supplier concentration.
- Customer concentration is significant, particularly Walmart, Costco and Amazon. The Company generally has no long-term customer contracts or minimum-purchase commitments.
- The Company has substantial secured and floating-rate debt, seasonal borrowing needs, covenant requirements and exposure to LIBOR replacement. A 100-basis-point increase in variable rates was estimated to increase annual interest expense by approximately $2.8 million.
- Goodwill and intangible assets remain sensitive to changes in projected sales, EBITDA, discount rates, terminal growth rates and market capitalization. Goodwill was $30.3 million and indefinite-lived trade names were $49.6 million at year-end.
- The Company reported a cyber incident in the first quarter of 2021 with minimal business disruption, but warned that future incidents could adversely affect operations and confidential information.
- The EPA-related Puerto Rico environmental matter has an estimated remedy cost of $24.6 million for two operable units, but the Company stated that its potential share of liability cannot currently be estimated and could be material.
- A U.S. Customs and Border Protection tariff-classification matter could result in approximately $2.6 million of duties and potential penalties of up to $5.2 million for negligence or $10.4 million for gross negligence. The Company considers the potential loss reasonably possible but not probable.
- On February 26, 2021, the Company acquired the business and certain assets of Year and Day, a designer and distributor of dinnerware, flatware and glassware. The filing text does not provide the acquisition price.
Investor Verification Items
- Verify the sustainability of 2020 U.S. Kitchenware demand and the extent to which pandemic-driven e-commerce gains persist.
- Review inventory levels, reserves, customer allowances and receivables collection trends as supply-chain and retail conditions normalize.
- Assess debt maturities, excess-cash-flow repayments, ABL borrowing-base availability and compliance with financial covenants.
- Evaluate sensitivity of goodwill, trade names and deferred-tax assets to changes in forecasts, interest rates and market conditions.
- Monitor tariff, customs, EPA and other legal contingencies, including potential penalties and the timing of regulatory decisions.
- Confirm the final terms and financial contribution of the Year and Day acquisition and any subsequent integration costs.
- Review the effect of Brexit, foreign-exchange movements, China sourcing concentration and proposed U.K. tax-rate changes.
- Confirm continued dividend capacity given the Company’s net loss, leverage, seasonal working-capital requirements and debt-agreement restrictions.