Business Context and Reporting Period
Lifetime Brands, Inc. designs, markets and distributes kitchenware, tabletop, home décor and lifestyle products under owned and licensed brands, primarily to North American retailers. It also sells directly to consumers through branded websites. The filing is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
The business is highly seasonal, with most sales occurring in the third and fourth quarters. Inventory typically increases from June through October ahead of the holiday shipping season.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net sales | $124.7 million vs. $124.9 million | $306.8 million vs. $300.5 million |
| Income from operations | $10.3 million vs. $10.2 million | $14.6 million vs. $15.3 million |
| Net income | $7.5 million vs. $6.6 million | $8.6 million vs. $6.3 million |
| Diluted earnings per share | $0.60 vs. $0.52 | $0.69 vs. $0.51 |
| Operating margin | 8.3% vs. 8.2% | 4.7% vs. 5.1% |
| Net margin | 6.0% vs. 5.2% | 2.8% vs. 2.1% |
- Gross margin declined: cost of sales was 64.5% of sales in the third quarter versus 63.1% in 2010 and 63.6% for the nine-month period versus 61.8%. Management attributed the decline to promotional allowances, product mix and increased low-margin sales of excess inventory and manufacturing-contract products.
- Distribution expenses improved to 8.3% of sales in the quarter and 10.0% for the nine months, compared with 9.0% and 10.3%, respectively, in the prior-year periods.
- Selling, general and administrative expenses declined to $23.6 million in the quarter and $66.5 million for the nine months, compared with $24.6 million and $68.6 million, respectively.
- Interest expense declined to $1.8 million for the quarter and $5.8 million for the nine months, versus $2.1 million and $7.2 million, respectively.
- Cash used in operating activities was $27.1 million for the nine months, compared with $10.1 million used in 2010. Working-capital investment included increases of $23.4 million in accounts receivable and $23.2 million in inventory.
- Capital expenditures were $3.4 million, compared with $2.3 million in the prior-year period.
- Financing activities provided $27.9 million, principally from $52.6 million of revolving-credit borrowings. Cash declined by $2.6 million to $0.8 million at September 30, 2011.
- Accounts receivable were $96.2 million and inventory was $123.2 million at September 30, compared with $72.8 million and $99.9 million at December 31, 2010.
- Debt consisted of $66.7 million outstanding under the revolving credit facility and a $40.0 million term loan. The $24.1 million convertible senior notes were retired on July 15, 2011 using revolving-credit borrowings. The term loan carried a 10.0% interest rate at quarter-end.
- The company reported $135.5 million of stockholders’ equity at September 30, 2011, compared with $127.6 million at year-end 2010.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales were essentially flat, while nine-month sales increased 2.1%. Wholesale sales increased 1.7% in the quarter and 3.4% for the nine months.
- Retail Direct sales declined 36.1% in the quarter and 18.2% for the nine months, primarily because of reduced promotions and termination of the print consumer catalog.
- Kitchenware and tabletop sales increased, while home décor sales declined. Nine-month tabletop sales benefited from $4.1 million of excess sterling silver inventory and manufacturing-contract sales.
- Quarterly net income increased 14.4%, and nine-month net income increased 36.6%, aided by lower interest expense, lower income taxes and higher equity earnings. The nine-month 2010 period included a $0.8 million loss on early retirement of debt that did not recur.
- Equity earnings increased in the quarter to $1.1 million from $0.8 million. The company owns approximately 30% of Grupo Vasconia and has a 50% investment in World Alliance Enterprises Limited.
- On October 28, 2011, the revolving-credit commitment was increased from $125.0 million to $150.0 million and maturity was extended, subject to conditions, to October 28, 2016. The term-loan amendments increased future EBITDA covenant requirements.
- On November 4, 2011, the company acquired Creative Tops, a U.K.-based tableware and kitchenware supplier, for approximately $24.0 million consisting of cash and common stock. The acquisition was not included in the September 30 financial statements.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal revenue or earnings guidance. Management expects continued borrowing and repayment under the revolving facility based on working-capital needs and available borrowing capacity.
- Trailing-four-quarter consolidated EBITDA was $41.3 million at September 30, 2011, versus a $30.0 million term-loan covenant requirement; the company stated that it was in compliance with its debt covenants.
- Key risks include liquidity, economic and political conditions, supply-chain disruption, competition, customer concentration or weakness, intellectual property, personnel, regulatory matters and technology.
- The company began self-insuring a substantial portion of employee health plans in 2011. Accrued claims include reported and incurred-but-not-reported claims, and actual claims may differ significantly from estimates.
- An EPA investigation concerns potential contamination at the San Germán, Puerto Rico site leased by a subsidiary. The company has not been informed that remedial action is required and cannot estimate potential liability.
- The company is exposed to variable interest rates on its revolving facility and term loan and to foreign-currency fluctuations through its Mexican and Hong Kong equity investments.
- A $0.9 million valuation allowance related to Puerto Rico deferred tax assets was released during the quarter following a transfer-pricing study. This contributed to the lower effective tax rate.
- The financial statements received a review, not an audit, and the independent accountants reported no material modifications needed for conformity with U.S. GAAP.
Important Facts for Investors to Verify
- Liquidity after the seasonal working-capital build, including cash of only $0.8 million, revolving borrowings of $66.7 million and stated availability of approximately 45.5% of the facility commitment at September 30.
- The effect of the Creative Tops acquisition on leverage, covenant compliance, sales, earnings and cash flow after November 4, 2011.
- Whether gross-margin pressure from promotions, product mix and low-margin sterling silver and contract sales persists.
- The sustainability of operating cash flow given rising receivables and inventory and the company’s reliance on revolving-credit borrowings.
- The revised term-loan EBITDA covenants and the company’s ability to satisfy the higher thresholds beginning in 2012.
- Potential environmental exposure related to the Puerto Rico site and ultimate costs of self-insured health claims.
- Foreign-exchange effects on the Grupo Vasconia investment and equity earnings, including the reported $2.3 million translation reduction to the investment during the first nine months.