LIFETIME BRANDS, INC quarterly report, Q2 FY2020

Business Context and Reporting Period

Lifetime Brands, Inc. designs, sources and sells branded kitchenware, tableware and home products through retailers, distributors, e-commerce channels and its own websites. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. The business is highly seasonal, with approximately 60% of 2019 sales occurring in the third and fourth quarters.

Financial Results and Key Metrics

Metric	Q2 2020	Q2 2019	Six Months 2020	Six Months 2019
Net sales	$150.1 million	$142.5 million	$295.2 million	$292.5 million
Gross margin	$54.2 million; 36.1%	$44.0 million; 30.9%	$107.1 million; 36.3%	$98.3 million; 33.6%
Income (loss) from operations	$4.3 million	$(12.5) million	$(20.9) million	$(14.8) million
Net loss	$(4.0) million	$(11.5) million	$(32.1) million	$(16.4) million
Loss per diluted share	$(0.19)	$(0.56)	$(1.55)	$(0.80)
Net cash from operating activities	Not separately reported for the quarter	$66.2 million	$7.1 million

Second-quarter sales increased 5.3%; six-month sales increased 0.9%. U.S. sales rose 7.7% in the quarter and 4.7% year to date, while International sales declined 9.8% and 21.0%, respectively.
Q2 gross margin benefited from product mix and the absence of the $8.5 million 2019 SKU-rationalization charge. Excluding that charge, 2019 Q2 gross margin would have been 36.7% versus 36.1% in 2020.
Q2 selling, general and administrative expense declined 15.9% to $34.4 million, reflecting COVID-related cost reductions and lower selling and marketing expenses. Six-month SG&A declined 6.3% to $75.9 million, partly offset by higher bad-debt estimates.
Six-month operating cash flow benefited from inventory reduction, collections, cost savings and payment deferrals. Investing cash outflow was $1.4 million, primarily capital expenditures.
Cash and cash equivalents were $63.5 million at June 30, 2020, versus $11.4 million at December 31, 2019. Working capital was $205.6 million, compared with $221.8 million at year-end.
Debt consisted primarily of a $27.4 million ABL balance and a $255.9 million net term-loan balance, including current and non-current portions. ABL availability was $119.9 million, resulting in reported liquidity of approximately $183.5 million.
Interest expense declined to $4.2 million in Q2 and $9.0 million for six months, from $5.0 million and $10.0 million, respectively. The June 30 interest rates were 1.8% on the ABL and 4.5% on the term loan.
Consolidated adjusted EBITDA, as defined in the debt agreements, was $69.3 million for the four quarters ended June 30, 2020. This is a non-GAAP measure and includes substantial exclusions, including $63.1 million of impairment charges.

Material Changes Versus the Prior Comparable Period

COVID-19 shifted demand toward kitchenware and e-commerce while reducing tableware, Home Solutions and international brick-and-mortar sales. Q2 U.S. Kitchenware sales increased 28.7%, while Tableware declined 18.1% and Home Solutions declined 14.3%.
The Company recorded $20.1 million of non-cash goodwill and indefinite-lived intangible-asset impairments in the first quarter of 2020, driven principally by more conservative projected cash flows amid COVID-19 uncertainty. No additional triggering event was identified at June 30.
International gross margin declined to 23.9% for the six-month period from 36.2%, reflecting customer allowances, higher inventory reserves and lower sales against fixed inventoriable costs.
The Company reduced costs beginning in April 2020 and postponed a quarterly dividend originally scheduled for May. Dividends of $0.0425 per share remained declared for later payment dates.
Six-month cash flow improved materially, but financing cash use increased to $12.3 million from $0.5 million because of revolving-credit and term-loan repayments.
The Company incurred $0.3 million of international restructuring expense and accrued $0.2 million of related severance. Management did not expect additional charges for this reorganization during the remainder of 2020.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide specific revenue, earnings or EBITDA guidance. Management stated that cash on hand, operating cash flows and available ABL capacity were expected to fund operations for the next twelve months, subject to borrowing-base availability and changing pandemic conditions.

COVID-19 may materially affect demand, customer creditworthiness, store operations, supply capacity, distribution, workforce availability, cybersecurity and future impairment testing. Management could not reliably estimate the pandemic’s duration or full financial impact.
The Company has not experienced material COVID-related supply-chain disruption, although certain suppliers faced capacity strain. Distribution centers remained operational and e-commerce sales increased.
Goodwill and intangible-asset valuations depend on projected sales, EBITDA, terminal growth rates, discount rates, foreign exchange rates, tariffs and other assumptions. Further deterioration could produce additional material non-cash impairment charges.
The Company sold $73.9 million of receivables to HSBC during the first six months; $20.8 million of sold receivables remained outstanding and due from customers at June 30. The arrangement is uncommitted and subject to a $25.0 million outstanding purchased-receivables limit.
The Puerto Rico EPA matter remains unresolved. The Company cannot estimate its potential share of liability; adverse determinations could be material. EPA estimated remedy costs are $7.3 million for the initial operable unit and $17.3 million for the second.
In the CBP tariff-classification investigation, the Company estimated potential duties of $3.1 million, plus penalties of up to $6.2 million for negligence or $12.4 million for gross negligence. The Company considers the potential loss reasonably possible but not probable. CBP approved one lead protest covering seven collections; claims for 29 additional collections remain.
The Company was in compliance with debt covenants at June 30, 2020. The debt agreements impose restrictions on additional debt, acquisitions, investments and dividends, and may require a 1.10-to-1.00 fixed-charge coverage ratio if ABL availability falls below specified thresholds.

Important Facts for Investors to Verify

Whether pandemic-related demand shifts and elevated e-commerce sales persist through the seasonally important third and fourth quarters.
Future impairment testing, particularly for the remaining goodwill and intangible assets after the $20.1 million first-quarter charge.
ABL borrowing-base availability, required term-loan repayments and compliance with debt covenants as seasonal inventory builds.
Customer collections, bad-debt allowances and reliance on the uncommitted receivables-purchase agreement.
Status and potential exposure in the EPA environmental matter and the CBP tariff investigation.
Sustainability of cost reductions, gross-margin performance and international operations after COVID-related disruptions and restructuring.