Lifetime Brands, Inc. — Q3 2020 Form 10-Q Summary
Business Context and Reporting Period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through retailers, distributors and e-commerce channels. The filing covers the unaudited three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The business is highly seasonal, with approximately 60% of 2019 annual sales generated in the third and fourth quarters.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $224.8 million | $215.5 million | $520.0 million | $508.0 million |
| Gross margin | $78.8 million; 35.1% | $72.9 million; 33.8% | $185.9 million; 35.8% | $171.3 million; 33.7% |
| Income (loss) from operations | $21.5 million | $6.9 million | $0.6 million | $(7.9) million |
| Net income (loss) | $13.9 million | $(13.5) million | $(18.2) million | $(29.9) million |
| Diluted EPS | $0.65 | $(0.66) | $(0.87) | $(1.46) |
| Operating cash flow | Not separately provided | Not separately provided | $49.2 million | $(40.0) million |
- Q3 sales increased 4.3%; nine-month sales increased 2.4%.
- Q3 gross margin expanded 130 basis points, while nine-month gross margin expanded 210 basis points. The 2019 nine-month margin included an $8.5 million SKU rationalization charge.
- Q3 operating margin was 9.6%, compared with 3.0% in 2019. Nine-month operating margin was 0.1%, compared with negative 1.8% in 2019.
- Adjusted EBITDA, as defined under the debt agreements, was $29.2 million in Q3 and $72.7 million for the four quarters ended September 30, 2020. This is a non-GAAP measure and includes substantial add-backs, including $53.3 million of goodwill and other impairments over the last twelve months.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $42.7 million at September 30, 2020, versus $11.4 million at December 31, 2019.
- Total liquidity, defined as cash plus ABL availability, was approximately $164.3 million. ABL availability was $121.7 million, after $25.7 million of borrowings and $2.7 million of standby letters of credit.
- Debt consisted primarily of a $25.7 million revolving credit balance and a term loan with $18.5 million classified as current and $237.7 million classified as long term.
- The ABL facility has a $150 million commitment and matures in March 2023; the $275 million original term loan matures in February 2025. Interest rates at September 30, 2020 were 1.8% on the ABL and 4.5% on the term loan.
- The Company was in compliance with its debt covenants at September 30, 2020. The Company believes cash, operating cash flow and ABL availability are sufficient to fund operations for the next twelve months.
- Inventory increased to $209.8 million from $173.4 million at year-end, consistent with seasonal pre-holiday inventory requirements. Accounts payable and accrued expenses also increased substantially, supporting the improvement in operating cash flow.
Material Changes Versus the Prior Comparable Period
- U.S. sales increased 3.2% in Q3 and 4.0% for the nine months. International sales increased 14.3% in Q3 but declined 9.7% for the nine months.
- U.S. Kitchenware sales increased 20.4% in Q3 and 21.0% for the nine months, driven by demand for kitchen tools, gadgets, cutlery, boards, cookware and bakeware, particularly through e-commerce and essential retailers.
- U.S. Tableware sales declined 10.5% in Q3 and 12.4% for the nine months, primarily due to weaker brick-and-mortar and dinnerware demand. Home Solutions sales declined 20.5% in Q3 and 17.3% for the nine months.
- SG&A declined 3.5% for the nine months, reflecting COVID-19 cost reductions and lower selling and marketing expenses, partly offset by higher bad-debt estimates, incentive compensation and other corporate costs.
- The Company recorded $20.1 million of non-cash goodwill and intangible-asset impairment charges in the first nine months of 2020, compared with $9.7 million of goodwill impairment charges in the 2019 period.
- Operating cash flow improved by $89.2 million year over year, benefiting from inventory initiatives, payment deferrals and a favorable change in accounts payable and accrued expenses.
- Financing cash flow changed from $44.9 million provided in 2019 to $16.2 million used in 2020, primarily because of repayments on the revolving facility and term loan.
- The quarterly dividend was postponed in response to COVID-19, then rescheduled for payment in December 2020. The regular quarterly dividend remained $0.0425 per share.
Guidance, Outlook, Commentary and Risks
- The filing does not provide formal revenue, earnings or EBITDA guidance.
- Management reported increased demand for certain kitchenware products and higher e-commerce sales, while store closures, reduced retail traffic and changing customer ordering patterns adversely affected tableware, home solutions and international sales.
- Distribution centers remained operational and the Company had not experienced broad supply-chain disruptions, although supplier capacity constraints and trucking shortages caused some shipment delays.
- Management expects continued borrowing and repayment under the ABL facility based on working-capital needs. Fourth-quarter vendor-payment timing and inventory decisions could cause debt to be higher than otherwise expected.
- COVID-19 creates significant uncertainty regarding demand, customer creditworthiness, supply availability, transportation, workforce, cybersecurity, liquidity and future impairment or restructuring charges.
- Goodwill and intangible-asset valuations remain sensitive to projected sales, EBITDA, terminal growth, cost of capital, interest rates, foreign exchange rates, tariffs and broader economic conditions. Further deterioration could result in additional material impairment charges.
- The Company has interest-rate swaps with total notional value of $100.0 million and recorded a $2.3 million mark-to-market loss on interest-rate derivatives for the nine months. The Company expects this loss to reverse over time as the derivatives mature.
- Potentially material contingencies include the Puerto Rico EPA matter, for which the Company cannot estimate its share of liability, and a U.S. Customs investigation. The Customs matter could involve $3.1 million of duties plus potential penalties of up to $6.2 million for negligence or $12.4 million for gross negligence; the Company considers the loss reasonably possible but not probable.
Most Important Facts for Investors to Verify
- Whether COVID-19-driven kitchenware and e-commerce demand persists after the pandemic and whether tableware, home solutions and international sales recover.
- Accounts receivable quality, customer payment behavior and the adequacy of the increased doubtful-account allowance.
- Inventory levels, turnover and potential future reserves or markdowns following the seasonal build.
- Debt covenant compliance, ABL borrowing-base availability and the estimated $20.0 million excess-cash-flow term-loan payment classified as current.
- Potential additional goodwill or intangible-asset impairments under changing market and operating assumptions.
- Developments in the EPA environmental matter and the Customs tariff investigation, including any claimed duties or penalties.
- The sustainability of operating cash flow and the regular dividend given seasonal working-capital requirements and pandemic uncertainty.