Lifetime Brands, Inc. 2013 Form 10-K Summary
Business Context and Reporting Period
Annual report for the fiscal year ended December 31, 2013, filed March 14, 2014. Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through wholesale and retail-direct channels. Its principal brands include KitchenAid, Farberware, Mikasa, Pfaltzgraff, Kamenstein, Fred, Towle and Wallace Silversmiths. The business is highly seasonal, with 61% of 2013 sales generated in the third and fourth quarters.
The company operates Wholesale and Retail Direct segments and sources most products internationally, primarily from China. Wal-Mart, including Sam’s Club and Asda, represented 15% of 2013 consolidated sales.
Financial Performance and Liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $502.7 million | $486.8 million | +3.3% |
| Gross profit | $187.3 million | $176.8 million | +5.9% |
| Gross margin | 37.2% | 36.3% | +90 basis points |
| Income from operations | $28.2 million | $27.3 million | +3.1% |
| Net income | $9.3 million | $20.9 million | -55.7% |
| Diluted EPS | $0.71 | $1.64 | Declined |
| Operating cash flow | $35.8 million | $22.7 million | Increased |
| Consolidated EBITDA | $43.5 million | $41.2 million | +5.4% |
Kitchenware wholesale sales increased 9.8% to $281.2 million, supported by new cutlery, kitchen tools and gadget programs, including $19.5 million of Fred & Friends sales. Tableware sales declined 4.8% to $149.0 million, partly because of higher European Union duties and weaker luxury tableware demand. Retail Direct sales declined 5.9% to $20.7 million.
Operating expenses included $114.3 million of SG&A, $44.4 million of distribution expense and $0.4 million of restructuring expense related to closing the Fred & Friends distribution center. Interest expense declined to $4.8 million from $5.9 million. The effective tax rate increased to 39.5% from 25.9% in 2012.
Net income was adversely affected by $4.8 million of equity-method losses, including a $5.0 million, net-of-tax reduction in the fair value of the company’s investment in Grupo Vasconia. In 2012, equity earnings included a $4.1 million bargain-purchase gain and a $1.1 million tax benefit.
At December 31, 2013, cash and cash equivalents were $4.9 million, working capital was $145.2 million and the current ratio was 3.09 to 1. Inventory increased to $112.8 million from $104.6 million, while accounts receivable declined to $87.2 million from $97.4 million.
Total debt was approximately $69.9 million, consisting principally of $49.2 million outstanding under the revolving credit facility and $20.6 million under the senior secured term loan. Revolving facility availability was approximately $87.8 million, with $1.3 million of outstanding letters of credit. The company was in compliance with its debt covenants at year-end. Capital expenditures were $3.8 million.
Cash flow from operations was $35.8 million. Investing cash outflow was $3.8 million, primarily capital expenditures, compared with $22.2 million in 2012 when the company acquired Fred & Friends and made an investment in GSI. Financing cash outflow was $29.0 million, including net revolving-credit repayments, dividends and $3.2 million of share repurchases.
Fourth-Quarter Results
| Metric | Q4 2013 | Q4 2012 |
|---|---|---|
| Net sales | $164.9 million | $154.8 million |
| Gross profit | $63.3 million | $56.0 million |
| Income from operations | $16.6 million | $14.5 million |
| Net income | $9.4 million | $15.2 million |
| Diluted EPS | $0.72 | $1.19 |
Fourth-quarter 2013 net income included a $1.1 million non-operating adjustment reducing accounts receivable for previously issued Retail Direct credits related to 2010 and earlier periods. Fourth-quarter 2012 benefited from a $2.3 million non-cash deferred-tax adjustment.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by a full year of Fred & Friends ownership and strong Kitchenware performance.
- Gross margin improved from 36.3% to 37.2%, while distribution expense as a percentage of sales improved from 9.0% to 8.8%.
- SG&A rose 9.6% to $114.3 million, driven by Fred & Friends, trade-show costs, employee-related expenses and higher professional fees.
- Net income and EPS fell substantially because 2012 included significant Vasconia-related gains and tax benefits, whereas 2013 included a $5.0 million Vasconia fair-value charge and a higher tax rate.
- Operating cash flow improved materially, and debt declined through net repayments of the revolving facility and term loan.
- The company repurchased 245,575 shares for $3.2 million and increased declared quarterly dividends from $0.03125 to $0.0375 per share beginning with the February 2014 payment.
Guidance, Outlook, Risks and Unusual Items
Management expected to launch more than 4,000 new or redesigned products in 2014, compared with more than 3,500 in 2013. The filing does not provide specific 2014 revenue or earnings guidance. Management stated that available revolving-credit capacity and operating cash flow were expected to fund operations for the following twelve months.
In January 2014, the company amended and restated its credit agreement, extending the $175.0 million revolving facility maturity to January 11, 2019 and adding a $50.0 million term loan. Proceeds were used to repay the existing term loan and finance the acquisition of Thomas Plant, or Kitchen Craft, for approximately $61.5 million in cash plus shares and potential contingent consideration.
Subsequent to year-end, the company also acquired Built NY and La Cafetière. Purchase-price allocation and pro forma information for Kitchen Craft were not yet available when the filing was prepared.
- Substantial indebtedness, floating interest rates, financial covenants and seasonal borrowing needs create liquidity and refinancing risk.
- Retail concentration and bargaining power are significant; Wal-Mart accounted for 15% of sales, and customer orders generally lack long-term purchase commitments.
- International sourcing and operations expose the company to tariffs, duties, foreign currency, political, labor, transportation and supplier risks.
- Commodity, labor, freight and royalty costs may not be fully passed through to customers.
- Competition, changing consumer preferences, retailer inventory practices and the success of new products could affect sales and margins.
- The EPA continued investigating potential groundwater contamination at the company’s leased Puerto Rico facility. The company could not estimate any potential liability.
- Future obligations included $78.4 million of operating leases, $16.0 million of minimum royalties and $179.6 million of total contractual obligations, including debt and interest.
Most Important Facts for Investors to Verify
- Whether Kitchen Craft, Built NY and La Cafetière generate the expected revenue, margins and synergies without materially increasing leverage.
- Post-acquisition debt levels, covenant compliance, revolving-facility availability and the effect of variable interest rates.
- Underlying earnings excluding the Vasconia fair-value charge, the Retail Direct receivable adjustment and prior-year tax benefits.
- Inventory growth, seasonal working-capital requirements and the sustainability of improved operating cash flow.
- Recovery in Tableware and continued growth in Kitchenware amid retailer pricing and shelf-space pressure.
- The outcome of the EPA investigation and any resulting environmental obligations.
- The company’s continuing reliance on international suppliers and its ability to manage tariffs, foreign exchange, freight and product-compliance risks.