LIFETIME BRANDS, INC quarterly report, Q2 FY2022

Lifetime Brands, Inc. Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2022; unaudited interim results. Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through U.S. and international channels. The business is highly seasonal, with most sales generated in the third and fourth quarters.

Financial performance and key metrics

Metric	Three months ended June 30	Six months ended June 30
Net sales	$151.3 million, down 18.9%	$334.0 million, down 12.6%
Gross margin	$55.2 million; 36.5% versus 35.4%	$118.2 million; 35.4% versus 34.6%
Operating income (loss)	$(0.5) million versus $11.0 million	$3.9 million versus $20.2 million
Net income (loss)	$(3.5) million versus $5.8 million	$(3.1) million versus $8.9 million
Diluted EPS	$(0.16) versus $0.26	$(0.14) versus $0.40
Net cash from operating activities	$(8.9) million versus $42.1 million in the prior-year six-month period

Quarterly gross margin improved primarily from product mix, tariff reductions on certain categories and lower reliance on non-vessel operating common carriers. The benefit was offset by lower volume, higher distribution costs, increased labor rates, supply-chain expenses and higher selling, general and administrative costs. Quarterly distribution expense was 11.5% of sales versus 10.1%; SG&A was 25.3% versus 19.4%.

U.S. segment sales declined 17.6% in the quarter and 11.5% for the six months. International sales declined 29.9% and 22.5%, respectively. Lower sales reflected retailer inventory buildup, weaker brick-and-mortar and e-commerce demand, the absence of a prior-year warehouse-club flatware program and lower international trading activity. S'well contributed $3.5 million of second-quarter sales and $4.4 million for the six-month period.

Liquidity, debt and capital resources

Cash and equivalents were $7.2 million at June 30, 2022, versus $28.0 million at December 31, 2021. Working capital was $247.0 million versus $270.8 million.
Total liquidity, including cash and ABL availability, was approximately $134.1 million. ABL availability was $126.9 million after $20.3 million of borrowings and $2.8 million of standby letters of credit.
Term loan debt was $242.1 million, including current and non-current portions, compared with $247.6 million at year-end. The term loan bears interest at 4.6% at June 30, 2022; ABL borrowings bore rates ranging from 2.44% to 5.00%.
The ABL facility matures March 2, 2023; the term loan matures February 28, 2025. The company stated that it expects to refinance the ABL before maturity and believes cash, operating cash flows and available borrowing capacity are sufficient for the next twelve months.
Six-month investing cash outflow was $19.4 million, including $18.0 million paid for the S'well acquisition. Financing activities provided $7.7 million, including net ABL borrowings. Capital expenditures were $1.5 million.
Six-month inventory increased to $295.1 million from $270.5 million at year-end. Quarterly inventory turnover slowed to 1.4 times, or 270 days, versus 2.3 times, or 162 days, in the prior-year quarter.
Last-twelve-month pro forma adjusted EBITDA, as defined in the debt agreements, was $83.4 million. This is a non-GAAP measure and includes permitted S'well historical and projected synergy adjustments.

Material changes and unusual items

On March 2, 2022, the company acquired S'well assets for $18.0 million in cash, with up to $5.0 million of contingent consideration. Preliminary purchase accounting included $13.0 million of trade-name intangibles and $3.0 million of goodwill. Acquisition-related costs were $0.9 million.
Six-month operating cash flow shifted from $42.1 million provided in 2021 to $8.9 million used in 2022, primarily reflecting the net loss, timing of payments to suppliers and accrued expenses, and working-capital requirements.
The company repurchased 336,791 shares for $4.2 million in the first six months, including 285,646 shares for $3.5 million in the second quarter. The March 2022 authorization permits up to $20.0 million of repurchases; $15.8 million remained available at June 30.
The quarterly dividend remained $0.0425 per share. The board declared another $0.0425 dividend on August 2, 2022, payable November 15, 2022.
Foreign-currency translation reduced accumulated other comprehensive income by $4.4 million in the first six months. Derivative gains increased earnings, including a $1.4 million six-month mark-to-market gain on non-designated interest-rate derivatives.
The company owns 24.7% of Grupo Vasconia. Its investment had a $22.1 million carrying value and a $21.3 million quoted fair value at June 30, 2022.

Outlook, risks and contingencies

The filing does not provide formal revenue or earnings guidance. Management expects seasonal working-capital needs and higher inventory levels through the June-to-October pre-holiday period. It believes available liquidity and anticipated ABL refinancing will fund operations for the next twelve months, but acknowledges that alternative financing may be needed if conditions worsen.

Key operating pressures include inflation, higher raw-material, freight, labor and energy costs, supply-chain disruptions, port and container constraints, weaker consumer demand and retailer inventory buildup.
Other identified risks include COVID-19 effects, tariffs and China trade policy, Brexit-related costs, foreign exchange, geopolitical conflict, interest rates, debt covenant compliance, customer creditworthiness, third-party manufacturing, competition, cybersecurity, product liability and acquisition integration.
The ABL contains a minimum fixed-charge coverage ratio requirement of 1.10 to 1.00 if availability falls below specified thresholds. The company reported compliance with all debt covenants at June 30, 2022.
In the Wallace EPA matter, the company reserved $0.5 million for probable and estimable testing and remedial-design liabilities but cannot estimate its ultimate exposure. Adverse outcomes could be material.
A U.S. Customs and Border Protection investigation could result in approximately $1.4 million of additional duties and potential penalties of up to $2.8 million for negligence or $5.6 million for gross negligence. The company considers the loss reasonably possible but not probable.
Disclosure controls were assessed as effective, and no material changes to internal controls were reported. The filing states that there were no material changes to previously disclosed risk factors.

Investor verification checklist

Verify the company’s ability to refinance or replace the ABL facility before its March 2023 maturity and monitor borrowing-base availability.
Track inventory levels, retailer sell-through, inventory turnover and potential markdown or impairment exposure.
Assess whether sales declines and higher distribution and SG&A costs persist into the seasonally important third and fourth quarters.
Separate GAAP results from debt-defined adjusted EBITDA and review all permitted add-backs, including S'well synergies and integration costs.
Monitor S'well integration, contingent consideration of up to $5.0 million and the acquired brand’s contribution to sales and profitability.
Review interest-rate exposure, derivative maturities, foreign-exchange effects and the scheduled term-loan payments.
Follow developments in the EPA Wallace matter and CBP tariff investigation, including any changes to reserves or estimated exposure.