Lifetime Brands, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products primarily through wholesale retail channels, with limited direct-to-consumer sales. The filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Results are highly seasonal, with 62% of 2018 sales generated in the third and fourth quarters.
- Reportable segments: U.S. and International.
- The March 2019 quarter includes a full quarter of Filament Brands operations, compared with one month in the March 2018 quarter following the March 2, 2018 acquisition.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $149.9 million | $118.2 million | +26.8% |
| Gross margin | $54.3 million; 36.2% | $45.1 million; 38.2% | Margin down 2.0 percentage points |
| Loss from operations | $(2.3) million | $(13.3) million | Improved by $11.0 million |
| Net loss | $(4.9) million | $(11.6) million | Improved by $6.7 million |
| Diluted loss per share | $(0.24) | $(0.70) | Improved |
| Cash flow from operations | $17.5 million | $12.5 million | +39.3% |
- U.S. sales increased 32.4% to $127.0 million, driven substantially by the full-quarter contribution from Filament. International sales increased 2.7% to $22.9 million, or approximately 9.9% on a constant-currency basis.
- U.S. sales growth included Kitchenware of $69.3 million, Tableware of $26.5 million and Home Solutions of $31.3 million. Home Solutions increased 138.9%, primarily from Filament.
- Gross margin declined because of product mix, customer mix and promotional activity. Distribution expense fell to 10.6% of sales from 15.1%, while selling, general and administrative expense declined to 26.8% of sales from 34.0%.
- Interest expense increased to $4.9 million from $2.1 million because of financing related to the Filament acquisition.
- March 31, 2019 cash was $6.1 million, versus $7.6 million at December 31, 2018. Working capital was $199.4 million, versus $233.9 million at year-end.
- Inventory was $187.3 million, up from $173.6 million at December 31, 2018. Inventory turnover improved to 2.1 times, or 172 days, from 1.9 times, or 193 days.
- Cash used in investing activities was $1.4 million, principally capital expenditures. Cash used in financing activities was $17.6 million, primarily reflecting net revolving facility repayments and dividends.
Debt and liquidity
- Revolving credit borrowings were $26.5 million, with approximately $109.7 million of availability and $3.2 million of outstanding letters of credit.
- Term loan borrowings were $272.3 million. The term loan interest rate was 6.0% at March 31, 2019; revolving borrowings carried rates ranging from 2.4% to 6.25%.
- Total gross borrowings were approximately $298.8 million, before unamortized debt issuance costs.
- Total liquidity, including cash and ABL availability, was $115.8 million. The company was in compliance with its debt covenants.
- Management expected approximately $9.5 million of excess-cash-flow term-loan prepayment in the first quarter of 2020, based on its current 2019 estimate.
- The company maintains an uncommitted receivables purchase agreement and sold $25.1 million of receivables during the quarter, incurring $147,500 of related expense.
Material changes and unusual items
- Adoption of ASC 842 on January 1, 2019 added approximately $90.9 million of operating lease right-of-use assets and $104.4 million of lease liabilities. The adoption did not materially affect reported operating results or cash flows.
- Restructuring expense was $0.6 million, including Filament integration and European legal-entity integration costs. Management expected approximately $1.2 million of additional European restructuring and integration charges during 2019.
- The company reported a $116,000 equity-method loss from its approximately 30% investment in Grupo Vasconia, compared with $77,000 of equity-method earnings in the prior-year quarter.
- Interest-rate swaps had a $119.0 million aggregate notional value at quarter-end; foreign-exchange contracts had $13.5 million of gross notional value.
- Management reported consolidated adjusted EBITDA of $6.1 million for Q1 2019 and $69.7 million for the four quarters ended March 31, 2019, including $6.1 million of projected synergies. This is a non-GAAP and debt-covenant measure.
Outlook, risks and contingencies
The filing does not provide formal revenue or earnings guidance. Management expects continued seasonal borrowing and repayments under the ABL facility based on working-capital needs, with inventory generally increasing before the holiday shipping season. Management also expects to continue realizing Filament integration synergies and to consolidate U.K. locations during 2019.
- Key risks identified include seasonality, liquidity and leverage, interest rates, tariffs and international trade, Brexit, foreign exchange, supply-chain disruptions, customer practices, competition, acquisition integration, goodwill and brand impairment, and regulatory and product-liability matters.
- The company is involved in an EPA-related Superfund matter concerning groundwater contamination at a Puerto Rico site leased by its subsidiary. The company cannot estimate its potential liability; an adverse determination could have a material effect.
- U.S. federal and state tax returns remain under audit, with no proposed adjustments reported as of March 31, 2019.
- The filing states that there were no material changes to previously disclosed risk factors and that disclosure controls were effective.
Important facts for investors to verify
- Whether Filament-related revenue growth and projected synergies continue to offset lower gross margins and elevated interest expense.
- Actual seasonal inventory buildup, receivables-factoring activity and ABL availability during the third and fourth quarters.
- Compliance with leverage and fixed-charge covenants, including the expected $9.5 million term-loan prepayment.
- Progress and final cost of Filament and European restructuring activities, including the expected $1.2 million of additional charges.
- Potential liability and developments in the Puerto Rico EPA contamination matter.
- Exposure to tariffs, foreign exchange, interest rates and U.K. operating or Brexit-related disruptions.