LIFETIME BRANDS, INC quarterly report, Q1 FY2020

Lifetime Brands, Inc. Form 10-Q Summary

Business context and reporting period

Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through retailers, distributors, e-commerce channels and its own websites. Reported segments are U.S. and International. This unaudited report covers the three months ended March 31, 2020 and was filed May 21, 2020 after a COVID-19-related filing delay.

The business is highly seasonal: approximately 60% of 2019 sales occurred in the third and fourth quarters. COVID-19 effects became significant during the second half of March, particularly through brick-and-mortar store closures and reduced customer demand.

Financial performance and liquidity

Metric	Q1 2020	Q1 2019	Change
Net sales	$145.1 million	$149.9 million	Down 3.2%
Gross margin	$52.9 million; 36.5%	$54.3 million; 36.2%	Margin up 30 bps
Loss from operations	$(25.2) million	$(2.3) million	Worsened by $23.0 million
Net loss	$(28.2) million	$(4.9) million	Worsened by $23.3 million
Loss per diluted share	$(1.36)	$(0.24)	Worsened by $1.12
Net cash provided by operations	$33.7 million	$17.5 million	Up $16.2 million

U.S. sales increased 1.7% to $129.2 million, led by a 14.4% increase in Kitchenware. Tableware declined 10.9% and Home Solutions declined 16.0%.
International sales declined 30.6% to $15.9 million, primarily because of COVID-19-related retail closures and lower demand.
Gross margin improved because of product mix, although International gross margin fell to 22.9% from 34.9%, reflecting higher sales allowances and fixed warehouse and import costs.
Distribution expenses increased to $16.6 million, or 11.4% of sales, from $15.9 million, or 10.6%.
SG&A increased 3.4% to $41.5 million, primarily because of higher bad-debt estimates amid customer credit uncertainty.
Cash and cash equivalents were $85.3 million at March 31, 2020, compared with $11.4 million at December 31, 2019. Working capital was $260.0 million versus $221.8 million.
Total ABL availability was $51.4 million, down from $114.9 million at December 31, 2019. Liquidity, defined as cash plus ABL availability, was approximately $136.6 million.
Debt consisted principally of $74.4 million outstanding under the revolving credit facility and $254.2 million of long-term term-loan debt, plus $8.2 million of current term-loan maturities.
Net cash provided by financing activities was $41.7 million, including revolving-facility borrowings. Capital expenditures were $1.2 million.
Management stated that cash flows from operations and ABL availability were expected to fund operations for the next twelve months, while noting that adverse developments could require alternative financing.

Material changes versus the prior comparable period

The Company recorded $20.1 million of non-cash goodwill and other intangible-asset impairment charges in Q1 2020; no comparable charge was recorded in Q1 2019. The U.S. reporting unit’s estimated fair value was approximately 3.9% below carrying value.
The Company recorded a $2.3 million non-cash mark-to-market loss on non-designated interest-rate derivatives, compared with no such loss in Q1 2019. Management expects the loss to reverse over time as the contracts mature.
Operating loss increased substantially, while the reported net loss also reflected the impairment charge and derivative loss. The effective tax benefit rate fell to 11.6% from 34.1%, primarily because part of the goodwill impairment was nondeductible.
Accounts receivable allowances increased to $13.3 million from $9.7 million at year-end, reflecting increased customer credit risk and economic uncertainty.
Cash generation improved primarily because of the timing of accounts-receivable collections and working-capital changes, while financing cash flow shifted from a $17.6 million use in Q1 2019 to a $41.7 million source in Q1 2020.
Comprehensive loss was $35.5 million, including $7.3 million of other comprehensive loss from foreign-currency translation and cash-flow hedges.

Guidance, outlook, risks and unusual items

The filing does not provide specific numerical revenue or earnings guidance. Management expects COVID-19 to materially and adversely affect sales, results of operations, cash flows and financial condition during the remainder of fiscal 2020, but states that the duration and severity cannot be reliably estimated.

Distribution centers and the supply chain were reported operational as of the filing date, but customer store closures, reduced retail traffic, changing ordering patterns and extended payment requests were affecting demand and collections.
In April 2020, the Company reduced certain executive and director cash compensation and furloughed employees. It also postponed the May quarterly dividend of $0.0425 per share to December 16, 2020.
The Company drew $43.1 million under the ABL facility in March 2020 for liquidity and financial flexibility. It paid a $6.9 million term-loan prepayment in April 2020.
Debt agreements contain restrictions on additional debt, acquisitions, investments and dividends. The Company was in compliance with debt covenants at March 31, 2020.
Further impairment charges remain possible if economic conditions, operating results, market capitalization or forecast cash flows deteriorate.
The Company is exposed to seasonality, customer credit risk, supply-chain and tariff pressures, foreign-exchange movements, interest-rate risk, international operations and pandemic-related disruptions.
Environmental proceedings relating to a Puerto Rico groundwater contamination site could result in material liability, although the Company cannot currently estimate its share and has not determined that a loss is probable.
A U.S. Customs and Border Protection tariff-classification investigation could result in approximately $3.1 million of additional duties, plus potential penalties of up to $6.2 million for negligence or $12.4 million for gross negligence. The Company considers the potential loss reasonably possible but not probable.
The filing states that disclosure controls were effective and that COVID-19-related remote work had not materially affected internal controls over financial reporting as of March 31, 2020.

Key facts for investors to verify

Subsequent-quarter sales, customer collections and bad-debt allowances as brick-and-mortar customers reopen or remain impaired.
Actual borrowing-base availability, revolver utilization, covenant headroom and the effect of seasonal inventory buildup.
Whether additional goodwill, trade-name or other long-lived-asset impairments are required.
The status and terms of the postponed dividend and any further cost reductions or furloughs.
Progress and ultimate exposure in the EPA environmental matter and CBP tariff investigation.
Whether supply-chain continuity, e-commerce growth and U.S. Kitchenware demand offset weakness in International, Tableware and Home Solutions.