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 wholesale, international and direct-to-consumer channels. The filing covers the unaudited three and six months ended June 30, 2017, compared with the corresponding 2016 periods. Results are highly seasonal, with 61% of 2016 annual sales generated in the third and fourth quarters.
The company operates through U.S. Wholesale, International and Retail Direct segments. Its approximately 30% investment in Grupo Vasconia is accounted for under the equity method.
Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $117.4 million, compared with $118.1 million | $230.7 million, compared with $229.0 million |
| Gross margin | $42.8 million; 36.5%, compared with 36.4% | $86.7 million; 37.6%, compared with 36.5% |
| Loss from operations | $(3.1) million, compared with $(0.3) million | $(5.0) million, compared with $(5.5) million |
| Net loss | $(2.1) million, or $(0.14) per diluted share | $(3.4) million, or $(0.24) per diluted share |
| Adjusted EBITDA | $1.4 million, compared with $5.2 million | $3.5 million, compared with $5.5 million |
| Cash flow from operations | Not separately provided | $(4.3) million, compared with $(19.6) million |
| Capital expenditures | Not separately provided | $2.7 million, compared with $1.1 million |
Six-month selling, general and administrative expense increased 6.2% to $65.5 million, while distribution expense increased to $26.0 million from $25.7 million. Interest expense declined to $1.9 million from $2.3 million. The company recorded income tax benefits of $2.6 million and $2.7 million in the 2017 and 2016 six-month periods, respectively.
At June 30, 2017, cash and cash equivalents were $4.1 million, compared with $7.9 million at December 31, 2016. Working capital was $180.2 million. Inventory increased to $167.4 million from $135.2 million, reflecting seasonal buildup and acquisitions completed in late 2016. Accounts receivable declined to $67.5 million from $104.6 million.
Revolving credit borrowings were $99.0 million, compared with $86.2 million at year-end. The company repaid its remaining $7.0 million Term Loan in April 2017. Revolving facility availability was approximately $62.8 million, and total reported liquidity was $66.9 million. The credit facility expires in January 2019. Borrowing rates at quarter-end ranged from 2.25% to 5.25%; the company was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Six-month sales increased 0.7%, driven by U.S. Wholesale growth of 4.1%, while International sales declined 10.2% as reported and Retail Direct sales declined 8.0%.
- U.S. Wholesale benefited from Kitchenware and Home Solutions growth, but Tableware sales declined due to department-store weakness and timing of customer programs.
- Six-month gross margin improved to 37.6% from 36.5%, primarily due to product and customer mix and lower ocean freight costs. International gross margin declined to 32.7% from 35.2%.
- International results were pressured by higher customer allowances, product testing and factory-audit costs, a weakened British pound, SAP implementation costs and foreign-exchange contract losses.
- Six-month operating loss improved modestly despite higher SG&A, partly because restructuring expense declined to $0.3 million from $1.7 million and unallocated corporate expenses declined.
- Equity in earnings from Vasconia improved to $1.0 million from an equity loss of $0.3 million. Vasconia’s investment carrying value was $24.9 million at June 30, 2017.
- Operating cash use improved substantially year over year, primarily because of the timing of receivable collections, but inventory growth continued to consume cash.
Outlook, Commentary, Risks and Unusual Items
- Management expects to introduce approximately 4,000 new or redesigned products globally in 2017. Newly introduced products typically reach peak sales within 12 to 18 months.
- The company expects approximately $0.7 million of additional 2017 restructuring charges related to European legal-entity integration.
- No specific revenue, earnings or EBITDA guidance is provided in the filing. Management cautions that interim results are not necessarily indicative of full-year performance because of seasonality.
- The company sells receivables under an uncommitted HSBC agreement. It sold $39.2 million of receivables during the first six months of 2017 and incurred $0.1 million of related expense.
- Foreign-exchange contracts generated $1.6 million of losses in SG&A during the first six months, compared with $0.9 million of gains in the prior-year period.
- The company faces risks related to leverage, liquidity, seasonal working-capital needs, interest rates, foreign exchange, international operations, customer concentration and practices, supply chain conditions, competition, brands and licenses, product liability, regulation and acquisitions.
- An EPA investigation concerns groundwater contamination at a Puerto Rico site leased by a subsidiary. 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 plans to adopt ASC Topic 606 revenue guidance on January 1, 2018 using the modified retrospective method. Management does not expect a significant change in revenue timing or presentation, but its evaluation was not complete at the filing date.
- The quarterly dividend remained $0.0425 per share; the board declared another $0.0425 dividend payable November 15, 2017.
Most Important Facts to Verify
- Whether seasonal third- and fourth-quarter sales offset the first-half operating losses and inventory buildup.
- Revolving-credit availability, borrowing levels and compliance with fixed-charge and other credit covenants as the company enters its peak working-capital season.
- Inventory turnover and potential markdown or net-realizable-value risk, particularly after inventory increased to $167.4 million.
- Whether International segment margins recover from the 2017 decline and whether foreign-exchange losses persist.
- The amount and timing of additional European restructuring charges and the effect of ongoing SAP and other implementation costs.
- The potential financial exposure from the Puerto Rico environmental matter, which remains unquantified.
- The final accounting conclusions and opening-retained-earnings impact from the ASC 606 adoption.