Lifetime Brands, Inc. 10-Q Summary
Business Context and Reporting Period
Lifetime Brands designs, sources and sells branded kitchenware, tableware, home solutions and related products through U.S. Wholesale, International and Retail Direct segments. This report covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017.
On March 2, 2018, the Company acquired Filament Brands, a designer and distributor of precision measurement, kitchen, bath, wine-accessory, hydration and outdoor products. The quarter includes Filament results from March 2 through March 31, 2018.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $118.2 million | $113.4 million | Up 4.2% |
| Gross margin | $45.1 million; 38.2% | $43.9 million; 38.8% | Margin down 60 bps |
| Loss from operations | $(13.3) million | $(1.9) million | Loss increased |
| Net loss | $(11.6) million | $(1.3) million | Loss increased |
| Basic and diluted loss per share | $(0.70) | $(0.09) | Lower |
| Net cash provided by operating activities | $12.5 million | $6.0 million | Up $6.6 million |
| Capital expenditures | $2.4 million | $0.4 million | Higher |
Operating expenses increased materially. Distribution expense rose to $17.8 million from $13.4 million, including approximately $2.4 million associated with relocation of the West Coast distribution facility. Selling, general and administrative expense rose 24.1% to $40.2 million, reflecting Filament-related costs, acquisition-related professional fees, higher employee expenses, intangible amortization and foreign-currency contract losses. Restructuring expense was $0.4 million.
Interest expense increased to $2.1 million from $0.9 million following the acquisition financing. The Company recorded a $0.1 million loss on early retirement of debt. An income tax benefit of $3.8 million reduced the net loss; the effective tax benefit rate was 24.6%, compared with 33.5% in the prior-year quarter.
Balance Sheet, Debt and Liquidity
At March 31, 2018, cash and cash equivalents were $11.9 million, compared with $7.6 million at December 31, 2017. Working capital was $208.1 million, compared with $186.9 million at year-end. Inventory increased to $177.6 million from $132.4 million, principally reflecting the Filament acquisition and seasonal working-capital requirements.
The Company entered into new senior secured credit facilities in connection with the acquisition:
- $275.0 million term loan, with $275.0 million outstanding at March 31, 2018, maturing February 28, 2025 and bearing interest at 5.2% at quarter-end.
- $150.0 million asset-based revolving facility, with $45.0 million outstanding, $3.2 million of letters of credit and approximately $79.5 million of availability at quarter-end. The facility matures March 2, 2023.
- Total reported term-loan and revolving borrowings were approximately $320.0 million before debt issuance-cost offsets. The Company’s liquidity, defined as cash plus ABL availability, was approximately $91.4 million.
The term loan requires quarterly principal payments beginning June 30, 2018. Borrowings are subject to variable interest rates, customary restrictive covenants and collateral requirements. The Company was in compliance with its debt covenants at March 31, 2018.
Material Changes Versus the Prior Comparable Period
- Reported sales increased $4.8 million, including $9.3 million of Filament sales. U.S. Wholesale sales rose 3.9%, International sales rose 2.8% as reported but declined approximately 8.2% in constant currency, and Retail Direct sales increased to $5.5 million from $4.7 million.
- Gross margin declined to 38.2% from 38.8%, primarily due to product mix, including the Fitz and Floyd and Filament acquisitions.
- Operating loss widened substantially because of distribution-facility relocation costs, acquisition and integration expenses, increased amortization, higher corporate expenses and foreign-exchange losses.
- Net cash from operations increased to $12.5 million, while investing cash use increased to $220.3 million because of the $217.9 million cash purchase consideration for Filament.
- Financing activities provided $212.0 million, primarily from the new term loan and revolving facility used to fund the acquisition and refinance the former credit facility.
- Shares outstanding increased materially following the issuance of 5,593,116 shares as acquisition consideration. Reported shares issued and outstanding were 20,605,877 at March 31, 2018.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific revenue, earnings or adjusted EBITDA guidance. Management expects to introduce approximately 4,000 new or redesigned products globally in 2018 and states that newly introduced products generally reach peak sales in 12 to 18 months.
The business is highly seasonal: approximately 60% of 2017 annual sales occurred in the third and fourth quarters. Inventory and borrowing availability may therefore fluctuate significantly during the year. Management expects to continue borrowing and repaying amounts under the ABL facility based on working-capital and other corporate needs.
Management reported consolidated adjusted EBITDA of $(0.5) million for the three months ended March 31, 2018 and $71.9 million for the four quarters ended March 31, 2018. The latter includes $8.1 million of projected synergies and other permitted adjustments under the debt agreements; it is a non-GAAP covenant measure and is not equivalent to reported operating profit.
Key risks include acquisition integration, substantial indebtedness and variable interest rates, seasonality, liquidity, foreign-exchange exposure, customer and competitive pressures, supply-chain and transportation costs, goodwill and intangible-asset impairment, tax-law changes and international operations. The Company has not yet finalized certain Tax Cuts and Jobs Act estimates, including aspects of the transition tax and GILTI accounting.
A Puerto Rico environmental matter involving a leased facility remains unresolved. The Company cannot estimate its potential share of liability, but states that an adverse determination could materially affect results. The EPA estimated the selected remedy’s capital cost at $7.3 million; this is not presented as the Company’s estimated liability.
The Company adopted ASC Topic 606 revenue recognition guidance on January 1, 2018 under the modified retrospective method without a significant financial-statement impact. Disclosure controls were determined to be effective, while internal-control integration work continues following the Filament acquisition.
Investor Verification Points
- Verify the pace and profitability of Filament integration, including realization of projected synergies and the extent of restructuring and acquisition costs.
- Monitor leverage, variable-rate interest expense, required term-loan amortization, ABL availability and compliance with financial covenants.
- Assess whether seasonal inventory growth and the $177.6 million inventory balance convert into expected second-half sales and cash flow.
- Reconcile adjusted EBITDA and covenant calculations to reported GAAP results, particularly projected synergies and other permitted adjustments.
- Evaluate gross-margin recovery after acquisition-related product-mix effects and distribution-facility relocation costs.
- Track unresolved Tax Cuts and Jobs Act accounting, uncertain tax positions and the potential effect on future tax expense or cash taxes.
- Monitor the Puerto Rico environmental investigation and any developments that could establish a material liability.