Business Context and Reporting Period
Lifetime Brands, Inc. designs, sources and sells branded kitchenware, tableware and home products through wholesale, international and direct-to-consumer channels. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the corresponding 2016 period. Results are seasonal, with 61% of 2016 sales generated in the third and fourth quarters.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $113.4 million | $110.9 million | +2.3% |
| Gross profit | $43.9 million | $40.6 million | +8.4% |
| Gross margin | 38.8% | 36.6% | +220 basis points |
| Loss from operations | $(1.9) million | $(5.2) million | Improved by $3.3 million |
| Net loss | $(1.3) million | $(4.3) million | Improved by $3.0 million |
| Loss per diluted share | $(0.09) | $(0.31) | Improved |
| Adjusted EBITDA | $2.3 million | $0.3 million | Improved by $2.0 million |
| Operating cash flow | $6.0 million | $(8.8) million | Improved by $14.8 million |
U.S. Wholesale sales increased 6.2% to $87.4 million, supported by acquired brands, a new drugstore home décor program and Built NY hydration programs. International sales declined 10.5% to $21.2 million in reported dollars but increased approximately 3.4% on a constant-currency basis. Retail Direct sales declined to $4.7 million from $5.0 million.
Cash and cash equivalents were $6.3 million at March 31, 2017, compared with $7.9 million at December 31, 2016. Working capital was $161.7 million. Reported liquidity, including cash and revolving-credit availability, was $59.8 million. Revolving borrowings were $81.9 million, term-loan borrowings were $7.0 million, and short-term borrowings were $0.2 million. Revolving availability was approximately $53.5 million, subject to borrowing-base and covenant limitations. The Company repaid the $7.0 million term loan in April 2017.
Capital expenditures were $0.4 million. Financing activities used $7.3 million, including $2.5 million of term-loan repayments and $0.6 million of dividends. The Company sold $21.6 million of receivables under its uncommitted HSBC receivables purchase agreement and incurred a $67,000 related charge.
Material Changes Versus the Prior Comparable Period
- Gross margin expanded primarily because of the timing of customer programs and lower ocean freight rates.
- Operating and net losses narrowed substantially, aided by higher sales, improved U.S. Wholesale profitability, lower interest expense and the absence of the $0.6 million restructuring charge recorded in Q1 2016.
- U.S. Wholesale income from operations improved to $2.2 million from a $1.8 million loss. International operations shifted to a $1.2 million loss from $0.4 million of income, while Retail Direct operating income increased to $0.1 million.
- Operating cash flow turned positive, mainly because of the timing of receivable collections, partially offset by an $18.6 million inventory increase and working-capital outflows.
- Equity in earnings from the approximately 30% Vasconia investment increased to $0.5 million from a $0.2 million loss, reflecting improved aluminum-business margins.
- Accumulated other comprehensive loss improved to $35.0 million from $37.0 million, primarily due to a $2.0 million foreign-currency translation gain.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide quantitative full-year revenue or earnings guidance. Management expects to introduce approximately 4,000 new or redesigned products globally in 2017, with new products generally reaching peak sales 12 to 18 months after introduction.
- Seasonality and increasing inventory ahead of the pre-holiday shipping period are significant working-capital considerations. Inventory turnover declined to 1.9 times, or 190 days, from 2.0 times, or 179 days.
- The Credit Agreement expires in January 2019 and includes restrictions on indebtedness, acquisitions, investments and dividends. The Company was in compliance with its financial covenants at March 31, 2017; its reported senior leverage ratio was 1.87 to 1.00.
- Variable-rate debt and foreign-currency exposure remain material risks. Interest-rate swaps had a $12.3 million notional value, and foreign-exchange contracts had a $58.4 million gross notional value. Foreign-exchange contracts produced a $189,000 loss in SG&A in Q1 2017 versus a $552,000 gain in Q1 2016.
- The Company is involved in an EPA investigation concerning groundwater contamination at a Puerto Rico facility leased by its subsidiary. The EPA’s estimated capital cost for the 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 adopted share-based-payment and inventory accounting updates in 2017. It plans to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective approach; management does not currently expect a significant change in revenue timing or presentation, but the evaluation is incomplete.
- The interim financial statements were reviewed, not audited. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the improved U.S. Wholesale sales and gross margin trends persist through the seasonally more important third and fourth quarters.
- Inventory levels, turnover and liquidity as the Company builds inventory for the holiday shipping season.
- Revolving-credit availability, borrowing-base changes, covenant compliance and the effect of the April 2017 term-loan repayment.
- The sustainability of positive operating cash flow and reliance on receivables sales under the HSBC agreement.
- The potential financial exposure and timing of the Puerto Rico environmental investigation.
- The effect of foreign-currency movements, particularly on International segment sales and margins.
- The final impact of the pending revenue-recognition implementation and other new accounting standards.