Lifetime Brands, Inc. — Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and other home products through wholesale, international and direct-to-consumer channels. The filing covers the unaudited three- and six-month periods ended June 30, 2016, compared with the corresponding 2015 periods. The business is highly seasonal, with approximately 59% of 2015 sales generated in the third and fourth quarters; inventory typically builds from June through October.
The company operates through U.S. Wholesale, International and Retail Direct segments. During the second quarter, it acquired the brands, product portfolio and certain assets of Wilton Armetale and sold its 40% interest in GS Internacional S/A.
Financial performance and key metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Net sales | $118.1 million | $120.9 million | $229.0 million | $238.6 million |
| Gross margin | $43.0 million; 36.4% | $43.5 million; 36.0% | $83.5 million; 36.5% | $88.4 million; 37.1% |
| Loss from operations | $(0.3) million | $(1.0) million | $(5.5) million | $(3.2) million |
| Net loss | $(1.2) million | $(1.7) million | $(5.5) million | $(3.8) million |
| Loss per share | $(0.08) | $(0.12) | $(0.39) | $(0.28) |
| Operating cash flow | Not separately provided | Not separately provided | $(19.6) million | $10.6 million |
Second-quarter sales decreased 2.3%, while six-month sales decreased 4.0%. Six-month gross margin declined 60 basis points, primarily reflecting customer incentives and mix, despite improved product margins in several divisions. Selling, general and administrative expense declined 5.8% for the six-month period, but restructuring expense was $1.7 million and unallocated corporate costs increased.
- U.S. Wholesale sales declined 2.0% in the quarter and 3.4% year to date. Six-month U.S. Wholesale operating income fell to $1.5 million from $5.1 million.
- International sales declined 4.0% in the quarter and 5.4% year to date in reported dollars; six-month sales declined approximately 0.6% in local currency.
- Retail Direct sales declined 2.6% in the quarter and 9.4% year to date, primarily due to lower Mikasa website sales.
- Interest expense declined to $1.1 million in the quarter and $2.3 million year to date, compared with $1.5 million and $2.9 million, respectively, in 2015.
- Consolidated EBITDA, a non-GAAP measure, was $5.2 million in the quarter and $5.5 million for the first six months, compared with $4.4 million and $6.9 million, respectively, in 2015. EBITDA for the last four quarters was $43.5 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $6.6 million at June 30, 2016, compared with $7.1 million at December 31, 2015.
- Working capital was $181.8 million, compared with $152.0 million at year-end. Inventory increased to $150.6 million from $136.9 million, consistent with seasonal pre-holiday inventory accumulation.
- Revolving credit borrowings were $105.9 million, compared with $65.6 million at year-end. Revolving facility availability was approximately $58.3 million, and liquidity including cash and availability was $57.7 million.
- Term loan borrowings declined to $14.5 million from $35.0 million following a $15.2 million April prepayment. Interest rates on outstanding borrowings ranged from 2.5% to 5.0%.
- The company was in compliance with its credit agreement covenants at June 30, 2016. Its senior leverage ratio was 2.8 to 1.0, versus a maximum applicable ratio of 4.0 to 1.0.
- Net cash used in operating activities was $19.6 million, driven primarily by inventory investment, income-tax receivables and payments of accounts payable and accrued expenses. Investing cash use was $1.1 million, including $1.1 million of capital expenditures. Financing activities provided $20.4 million, principally through increased revolving borrowings.
Material changes, outlook and unusual items
- The U.S. Wholesale restructuring generated $1.1 million of expense in the quarter and $1.7 million year to date, including severance and consulting costs. Management expected no additional restructuring charges; $158,000 remained accrued at June 30, 2016.
- The company recorded a $272,000 loss on early retirement of debt related to the April term-loan prepayment.
- The sale of GSI generated a $189,000 net gain, including $567,000 of cash consideration reduced by $378,000 of reclassified currency translation losses.
- Equity in Vasconia losses was $171,000 in the quarter and $321,000 year to date, versus earnings of $2,000 and $296,000, respectively, in 2015. The company owns approximately 30% of Vasconia.
- On August 4, 2016, the credit agreement was amended to permit certain accounts-receivable sales, subject to lender approval, and to increase the permitted non-recurring-charge limit in the EBITDA definition from $2.0 million to $5.0 million.
- The company declared a quarterly dividend of $0.0425 per share for payment on November 15, 2016. The credit agreement contains restrictions on dividends, acquisitions, investments and additional indebtedness.
- The filing provides no specific full-year revenue, earnings or cash-flow guidance. Management emphasizes seasonality, new product development and cost-reduction initiatives; approximately 5,500 new or redesigned products were expected to be introduced in 2016.
Risks and contingencies
- The company faces retail demand, economic, competitive, customer concentration, supply-chain, product, intellectual-property, foreign-exchange, interest-rate and international-operating risks.
- Brexit-related uncertainty could affect the company’s two U.K.-based businesses. U.K. sales represented approximately 18% of second-quarter consolidated sales and 19% of six-month sales.
- WSPR is involved in an EPA Superfund matter concerning groundwater contamination in Puerto Rico. The EPA’s estimated capital cost for its selected remedy is $7.3 million, but the company cannot estimate its potential share of liability. An adverse determination could have a material effect.
- The company relies significantly on revolving credit borrowings, and borrowing capacity fluctuates with eligible receivables, inventory and trademark values. Liquidity and covenant compliance should be monitored as seasonal working-capital needs increase.
- The interim financial statements were reviewed, not audited. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether seasonal third- and fourth-quarter sales offset the first-half revenue decline and operating loss.
- Inventory conversion, operating cash flow and revolver utilization during the peak shipping season.
- Execution and financial benefits of the U.S. Wholesale restructuring and integration of Wilton Armetale.
- Compliance with leverage and fixed-charge covenants after the August credit agreement amendment.
- Performance of the U.K. businesses and sensitivity to pound/euro volatility and Brexit developments.
- Potential liability and required remediation costs related to the Puerto Rico environmental matter.
- Vasconia’s operating performance, currency effects and the sustainability of the quarterly dividend.