Lifetime Brands, Inc. — 2017 Q3 Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products primarily to wholesale retailers and distributors, with limited direct-to-consumer sales. The filing covers the unaudited three and nine months ended September 30, 2017, compared with the same 2016 periods. The business is highly seasonal, with most sales in the third and fourth quarters and elevated inventory needs before the holiday shipping season.
The company operates through U.S. Wholesale, International and Retail Direct segments. In the third quarter, it acquired the Fitz and Floyd business for $9.1 million, funded with revolving-credit borrowings, and recorded $2.1 million of acquired net sales.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Net sales | $166.0 million | $170.1 million | Down 2.4% |
| Gross margin | $57.2 million; 34.5% | $58.3 million; 34.3% | Margin up 20 bps |
| Income from operations | $9.3 million; 5.7% | $10.8 million; 6.4% | Down $1.4 million |
| Net income | $4.3 million; 2.7% | $6.5 million; 3.9% | Down 32.9% |
| Diluted EPS | $0.29 | $0.44 | Down $0.15 |
| Adjusted EBITDA | $15.7 million | $16.7 million | Down 6.0% |
| Metric | Nine months 2017 | Nine months 2016 | Change |
|---|---|---|---|
| Net sales | $396.7 million | $399.1 million | Down 0.6% |
| Gross margin | $143.9 million; 36.3% | $141.9 million; 35.5% | Margin up 80 bps |
| Income from operations | $4.3 million; 1.1% | $5.3 million; 1.3% | Down $1.0 million |
| Net income | $0.9 million; 0.3% | $1.0 million; 0.1% | Down $0.1 million |
| Diluted EPS | $0.06 | $0.07 | Down $0.01 |
| Adjusted EBITDA | $21.0 million | $21.7 million | Down 3.2% |
Q3 U.S. Wholesale sales declined 1.8% to $137.1 million, International sales declined 5.2% to $25.3 million, and Retail Direct sales declined 7.9% to $3.5 million. For the nine-month period, U.S. Wholesale sales increased 1.5% to $319.3 million, while International sales declined 8.4% to $65.9 million and Retail Direct sales declined 8.0% to $11.5 million.
Operating performance was affected by higher selling, general and administrative expenses, including foreign-currency contract losses, SAP implementation costs, severance, acquisition-related amortization and customer-credit costs. The nine-month effective tax rate increased to 78.9% from 14.9%, primarily because of forecasted jurisdictional mix, foreign losses without recorded tax benefits and tax treatment of share-based compensation.
Cash flow, debt and liquidity
- Cash used in operating activities was $20.9 million in the first nine months of 2017, compared with $30.4 million used in 2016. Working-capital investment included $32.5 million of inventory increases and $10.5 million of accounts-receivable increases.
- Cash used in investing activities was $13.3 million, including $9.1 million for the Fitz and Floyd acquisition and $4.3 million of capital expenditures, including SAP-related software expenditures.
- Cash provided by financing activities was $31.6 million. The company borrowed $191.1 million and repaid $149.3 million under its revolving facility, repaid $9.5 million of term-loan principal, and paid $1.9 million of dividends.
- Cash and cash equivalents were $5.5 million at September 30, 2017, down from $7.9 million at December 31, 2016. Working capital was $215.4 million, compared with $165.2 million at year-end.
- Revolving-credit borrowings were $128.5 million, versus $86.2 million at December 31, 2016. The $175.0 million facility had approximately $43.4 million of availability, and reported liquidity, including cash, was $48.9 million.
- The $7.0 million term loan outstanding at year-end was repaid in April 2017. Revolving-facility interest rates ranged from 2.25% to 5.25%; the credit agreement expires in January 2019.
- The company was in compliance with its debt covenants at September 30, 2017. Borrowing capacity and liquidity are dependent in part on eligible receivables, inventory and trademark values and may fluctuate seasonally.
Material changes, outlook and unusual items
- Gross-margin percentage improved despite lower sales, reflecting customer and product mix and lower ocean freight costs; International margins declined because of customer mix, de-emphasized tableware lines, higher customer allowances and a weaker British pound.
- Hurricane Maria temporarily halted sterling-silver manufacturing in Puerto Rico. The facility sustained no significant asset damage, but the interruption increased fixed overhead costs. Manufacturing resumed in the fourth quarter, and the full-year impact remained under assessment.
- The company recorded $0.5 million of restructuring expense in the first nine months, primarily for European legal-entity integration, and expected approximately $0.6 million of additional 2017 charges.
- Foreign-exchange contracts generated $2.6 million of losses in selling, general and administrative expenses during the first nine months, compared with a $1.3 million gain in 2016.
- The company sold $62.8 million of receivables to HSBC under an uncommitted receivables-purchase agreement during the first nine months, incurring $0.2 million of related fees. Outstanding purchased receivables may not exceed $25.0 million.
- Management stated that implementation of the new revenue-recognition standard, ASC 606, was incomplete but was not expected to materially change the timing or presentation of revenue. Adoption was planned for January 1, 2018 using the modified retrospective method.
- The company declared a quarterly dividend of $0.0425 per share payable February 15, 2018.
Risks, contingencies and governance matters
The filing identifies risks related to indebtedness, liquidity, seasonality, interest rates, foreign exchange, competition, customer practices and credit quality, supply chain and transportation, international operations, acquisitions, product liability, regulatory matters and economic conditions.
A Puerto Rico environmental matter remains unresolved. The EPA has investigated groundwater contamination at the site of a company-leased facility and estimated the selected remedy’s capital cost at $7.3 million. The company states that it did not cause the contamination and cannot estimate its potential share of liability; an adverse determination could nevertheless be material.
On November 8, 2017, the company amended employment agreements with its chief executive officer, chief operating officer and chief financial officer, including enhanced severance and change-in-control provisions. It also entered into a new employment agreement with its president, effective January 1, 2018, including a $512,500 annual base salary through June 2019 and specified bonus and severance arrangements.
Important facts for investors to verify
- Whether seasonal fourth-quarter sales and collections sufficiently reduce inventory-driven borrowing needs before the January 2019 credit-facility maturity.
- The sustainability of the improved consolidated gross margin amid weaker International performance and elevated customer allowances.
- The effect of the Fitz and Floyd acquisition on sales, margins, working capital, goodwill and debt utilization.
- The magnitude and duration of Puerto Rico hurricane-related costs and any ongoing manufacturing or supply-chain effects.
- Potential liability and timing related to the EPA Superfund matter, for which the company has recorded no estimable share of liability in the filing.
- Whether the unusually high nine-month effective tax rate normalizes and how foreign losses, share-based compensation and tax-law changes affect future earnings.
- The company’s compliance with debt covenants, available borrowing capacity and exposure to variable interest rates and foreign-currency movements.