Lifetime Brands, Inc. — 2016 Third-Quarter Form 10-Q
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through wholesale, international and direct-to-consumer channels. The filing covers the unaudited three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Results are highly seasonal, with most sales occurring in the third and fourth quarters and inventory building ahead of the holiday shipping season.
Key financial metrics
| Metric | Three months ended September 30, 2016 | Three months ended September 30, 2015 | Nine months ended September 30, 2016 | Nine months ended September 30, 2015 |
|---|---|---|---|---|
| Net sales | $170.1 million | $163.2 million | $399.1 million | $401.8 million |
| Gross margin | 34.3% | 34.9% | 35.5% | 36.2% |
| Income from operations | $10.8 million | $9.8 million | $5.3 million | $6.6 million |
| Net income | $6.5 million | $5.1 million | $1.0 million | $1.3 million |
| Diluted earnings per share | $0.44 | $0.36 | $0.07 | $0.09 |
| Operating cash flow | Not separately provided | Not separately provided | $(30.4) million | $(11.4) million |
| Consolidated EBITDA | $16.7 million | $14.1 million | $22.1 million | $21.0 million |
At September 30, 2016, cash and cash equivalents were $5.8 million, working capital was $206.2 million and reported liquidity, including cash and available credit, was $49.8 million. Inventory was $171.3 million and accounts receivable were $130.1 million.
Revolving credit borrowings were $128.7 million, compared with $65.6 million at December 31, 2015. The term loan balance was $12.0 million, compared with $35.0 million at year-end 2015, and the China short-term loan was $0.1 million. Revolving facility availability was approximately $43.9 million, and the credit agreement expires in January 2019. The company was in compliance with its financial covenants; its Senior Leverage Ratio was 3.11 to 1.00 versus a September 30 covenant limit of 4.25 to 1.00 after the applicable seasonal adjustment.
Material changes versus the prior comparable period
- Third-quarter sales increased 4.2%, led by U.S. Wholesale sales growth of 6.9%. Tableware and Home Solutions grew 20.0% and 37.9%, respectively, while Kitchenware declined 4.5%.
- Nine-month sales declined 0.7%. U.S. Wholesale increased 0.9%, while International declined 6.1% in reported dollars and Retail Direct declined 6.7%.
- Gross margin declined 60 basis points in the quarter and 70 basis points for the nine months, primarily due to product and customer mix, higher customer incentives and, internationally, the weaker British pound.
- Third-quarter operating income increased 10.4%, supported by lower selling, general and administrative expenses and lower interest expense. Nine-month operating income declined 20.1%, including $1.7 million of restructuring expense.
- Nine-month operating cash use increased to $30.4 million, primarily because of a $42.4 million increase in accounts receivable and a $34.6 million increase in inventory. Financing activities provided $40.1 million, principally reflecting net revolver borrowings.
- The company corrected a prior accumulated-depreciation error, recording $1.3 million of additional distribution expense in both the quarter and nine-month period.
- The company acquired the Amco Houseworks, Chicago Metallic and Swing-A-Way brands from Focus Products Group on September 16, 2016. It subsequently acquired the Copco product line for $12.3 million on October 6, 2016.
- The company sold its 40% interest in GSI and recognized a $0.2 million net gain. Its approximately 30% investment in Grupo Vasconia generated equity losses of $0.5 million for the nine months.
Outlook, commentary, risks and unusual items
Management expects approximately $0.6 million of additional U.S. Wholesale restructuring charges in the fourth quarter of 2016, primarily for severance and consulting. No formal revenue or earnings guidance is provided in the filing.
On September 30, 2016, the company entered into an uncommitted receivables purchase agreement with HSBC, permitting sales of eligible receivables up to an aggregate $25.0 million. No receivables had been sold by September 30; subsequent to quarter-end, the company sold $16.1 million of receivables.
Key risks include substantial reliance on revolving debt, seasonal working-capital requirements, covenant and liquidity constraints, interest-rate and foreign-exchange exposure, customer and retail conditions, supply-chain and international risks, acquisitions and integration, and product and brand risks. The U.K. referendum created additional uncertainty for the company’s U.K.-based businesses, which represented 15.3% of third-quarter sales and 17.5% of nine-month sales.
The company faces potential environmental liability relating to an EPA Superfund site in Puerto Rico. The EPA estimates the selected remedy’s capital cost at $7.3 million, but the company cannot estimate its potential share of liability; an adverse determination could be material.
The filing was reviewed, but not audited, by Ernst & Young LLP. Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify fourth-quarter holiday sales, inventory liquidation and operating cash conversion given the company’s pronounced seasonality.
- Assess whether increased revolver borrowings and the October Copco acquisition affect covenant headroom and liquidity.
- Track the impact of the $16.1 million receivables sale and whether additional factoring is required to fund working capital.
- Evaluate whether restructuring actions offset continued gross-margin pressure and the expected $0.6 million fourth-quarter charge.
- Review integration, purchase-price allocation and earnings contribution from the Focus and Copco acquisitions.
- Monitor British pound and other foreign-exchange movements, particularly their effects on International segment sales and margins.
- Follow developments in the Puerto Rico environmental matter, for which the filing does not provide a clear estimate of the company’s potential liability.