Lifetime Brands, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual Form 10-K; fourth-quarter results are included in the annual report. Lifetime designs, sources and sells branded kitchenware, tableware and home products through U.S. and international retail, wholesale, distributor and direct-to-consumer channels. The company completed the acquisition of Filament Brands on March 2, 2018.
Financial Results and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $704.5 million | $579.5 million | +21.6% |
| Gross profit | $255.8 million | $215.2 million | +18.9% |
| Gross margin | 36.3% | 37.1% | Down 80 basis points |
| Income from operations | $18.6 million | $15.2 million | +22.4% |
| Net income (loss) | $(1.7) million | $2.2 million | Declined |
| Diluted EPS | $(0.09) | $0.14 | Declined |
| Cash flow from operations | $19.2 million | $17.0 million | +12.8% |
| Capital expenditures | $7.9 million | $6.3 million | Increased |
| Adjusted EBITDA | $64.9 million | $40.2 million | Non-GAAP; increased |
The fourth quarter generated net sales of $228.3 million, operating income of $22.9 million and net income of $10.0 million, compared with fourth-quarter 2017 net sales of $182.8 million, operating income of $10.9 million and net income of $1.3 million.
- U.S. segment sales increased to $612.0 million from $481.7 million, primarily reflecting Filament, pantryware and selected retailer programs.
- International sales declined to $92.6 million from $97.8 million, or approximately 7.9% in constant currency, due mainly to lower private-label tableware and export sales.
- Operating income benefited from higher sales and Filament synergies but was reduced by acquisition-related costs, higher amortization, restructuring, a $2.2 million goodwill impairment charge and substantially higher interest expense.
- The effective tax rate was 567.6%, driven by nondeductible Filament acquisition costs, foreign goodwill impairment, uncertain tax positions and state taxes.
Balance Sheet, Debt and Liquidity
| Metric at December 31 | 2018 | 2017 |
|---|---|---|
| Cash and cash equivalents | $7.6 million | $7.6 million |
| Working capital | $233.9 million | $186.9 million |
| Current ratio | 3.8 to 1 | 3.6 to 1 |
| Total consolidated debt | Approximately $315.0 million | Approximately $94.8 million |
| Total assets | $708.6 million | $401.5 million |
| Stockholders’ equity | $279.5 million | $210.3 million |
- Debt at year-end consisted of $42.1 million under a $150.0 million senior secured ABL facility and $272.9 million under a senior secured term loan.
- ABL availability was approximately $104.5 million, with $3.4 million of letters of credit outstanding. The ABL matures in 2023 and the term loan matures in 2025.
- The company was in compliance with debt covenants at year-end and stated that cash flows from operations and revolver availability should fund operations for the next twelve months.
- Interest expense increased to $18.0 million from $4.3 million due to acquisition financing. Approximately $190.0 million of debt remained variable-rate; a $125.0 million interest-rate swap program hedged part of the term loan.
- Operating cash flow was positive, but investing cash flow was negative $224.2 million, including $216.5 million for the Filament acquisition. Financing cash flow was positive $205.3 million, primarily from new borrowings.
Material Changes Versus 2017
- Filament contributed $128.8 million of sales from the acquisition date through year-end and materially expanded U.S. Kitchenware and Home Solutions sales. Lifetime issued approximately 5.6 million shares and paid $217.5 million in cash for the acquisition.
- Total debt increased substantially to finance Filament, while shares outstanding increased from approximately 14.9 million to 20.8 million.
- Gross margin declined because of customer and product mix, although Filament had a favorable effect on mix.
- International sales and operating performance remained weak; the company recorded a $2.2 million non-cash goodwill impairment for its European tableware reporting unit.
- Restructuring expense increased to $2.3 million from $1.0 million, including $2.1 million for Filament integration. Approximately $1.5 million of additional European restructuring and integration charges were expected in 2019.
- Goodwill and other intangible assets increased materially following the acquisition, reaching $338.8 million net at year-end, including $91.7 million of goodwill.
- The company adopted ASC Topic 606 revenue recognition guidance without a significant income statement impact. It also adopted the revised goodwill impairment standard early.
Outlook, Risks, Contingencies and Unusual Items
- Management expected operational efficiencies from Filament integration and planned to consolidate the Birmingham and Corby, England facilities into one Aston, England location in 2019.
- Tariffs on products imported from China, including 25% tariffs on certain products and potentially higher tariffs on others, could increase product costs, reduce demand if prices rise, or compress gross margins if costs cannot be passed through.
- The business is highly seasonal: third- and fourth-quarter sales represented 62% of 2018 revenue, and inventory and borrowing needs increase ahead of the holiday season.
- Key risks include leverage and floating interest rates, retailer concentration, customer purchasing changes, foreign exchange, reliance on Asian suppliers, transportation and product-quality risks, competition, licensed-brand renewals, and e-commerce and cybersecurity risks.
- Walmart represented 14% of consolidated sales in 2018, while the top ten customers represented approximately 56%.
- The company disclosed a material weakness in internal control over financial reporting related to evidence of review of key assumptions used to value intangible assets acquired in the Filament business combination. Management implemented remediation controls before issuing the financial statements, but management and the auditor concluded controls were not effective as of December 31, 2018.
- An EPA Superfund matter involving the company’s Puerto Rico facility remains unresolved. The company cannot estimate its potential liability; an adverse determination could be material. The company entered into tolling agreements in December 2018 without admitting liability.
- The company accrued approximately $1.9 million for probable and estimable non-income-tax exposure matters identified in connection with the Filament acquisition.
- The board continued to intend to pay quarterly dividends, but dividends may be modified or eliminated and remain subject to debt agreement restrictions.
Investor Verification Checklist
- Verify the sustainability of Filament’s contribution, anticipated synergies and the company’s ability to reduce leverage.
- Review gross-margin trends, tariff exposure, pricing actions and the effect of customer and product mix.
- Assess ABL borrowing-base availability, covenant headroom, term-loan amortization and exposure to variable interest rates.
- Review the material weakness remediation and the scope limitation regarding Filament’s internal controls.
- Evaluate European restructuring progress and the sensitivity of goodwill valuations, particularly the combined European reporting unit and the U.S. reporting unit.
- Monitor the Puerto Rico environmental matter, Filament-related tax exposures and other contingencies.
- Confirm customer concentration, Walmart purchasing trends and the company’s ability to manage seasonal inventory and working-capital requirements.