Business Context and Reporting Period
Lifetime Brands, Inc. designs, sources and sells branded kitchenware, tableware and other home products through wholesale, international and direct-to-consumer channels. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The business is highly seasonal, with approximately 59% of 2015 sales generated in the third and fourth quarters.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $110.9 million | $117.7 million | Down 5.8% |
| Gross margin | $40.6 million; 36.6% | $44.9 million; 38.2% | Margin down 160 basis points |
| Loss from operations | $(5.2) million | $(2.2) million | Loss increased |
| Net loss | $(4.3) million | $(2.1) million | Loss increased |
| Loss per diluted share | $(0.31) | $(0.15) | Loss increased |
| Operating cash flow | $(8.8) million | $10.2 million | Declined $19.1 million |
| Capital expenditures | $0.8 million | $1.4 million | Down $0.6 million |
| Consolidated EBITDA | $0.3 million | $2.5 million | Down $2.3 million |
Cost of sales increased to 63.4% of sales from 61.8%, while distribution expense increased to 12.0% from 11.5% of sales. SG&A declined 5.4% to $31.8 million, but remained 28.7% of sales. The company recorded a $0.6 million restructuring charge and received a $2.3 million income tax benefit.
At March 31, 2016, cash and cash equivalents were $5.9 million, working capital was $155.3 million, and total assets were $387.3 million. Inventory was $139.7 million and accounts receivable were $74.2 million.
Borrowings included $77.0 million under the revolving credit facility, $32.5 million under the term loan and $0.1 million under the HSBC short-term facility. Revolver availability was approximately $63.3 million, and reported total liquidity was $64.4 million. The Credit Agreement expires in January 2019. The company was in compliance with its financial covenants, including a 2.6-to-1.0 senior leverage ratio versus a maximum of 4.0-to-1.0 for the quarter.
Material Changes Versus the Prior Comparable Period
- U.S. Wholesale sales declined 4.9% to $82.3 million, primarily because a retailer rationalized inventory, reducing Kitchenware sales by 7.5%.
- International sales declined 6.7% to $23.7 million, although the decrease was approximately 2.2% in constant currency.
- Retail Direct sales declined 13.8% to $5.0 million; the prior year benefited from delayed shipments related to the 2014 West Coast dockworkers’ slowdown.
- Gross margin decreased to 36.6%, reflecting customer incentives, product mix and currency effects, partly offset by improved product margins in most divisions.
- Interest expense decreased to $1.2 million from $1.4 million, while the prior-year period included $0.2 million of financing expense that did not recur.
- Equity in earnings from Vasconia changed to a $0.2 million loss from $0.3 million of earnings, reflecting lower sales and margins and a $0.2 million deferred tax expense.
- Operating cash flow turned negative, principally because of payments of accrued expenses and accounts payable and timing of receivable collections.
- In April 2016, after quarter-end, the company prepaid $15.2 million of the term loan.
Outlook, Commentary, Risks and Unusual Items
Management expected to introduce approximately 5,500 new or redesigned products in 2016, consistent with 2015, and stated that new products generally reach peak sales 12 to 18 months after introduction. The filing does not provide quantified revenue or earnings guidance.
The U.S. Wholesale restructuring plan was expanded during 2016. Management expected an additional $1.2 million of restructuring expense in the second quarter for development and execution of the next phase.
In the second quarter of 2016, the company acquired the brands, product portfolio and certain other assets of Wilton Armetale. The filing does not provide purchase price or expected financial contribution in this Form 10-Q.
Key risks include leverage and liquidity, variable interest rates, foreign exchange, seasonality, customer inventory practices, competition, supply-chain and transportation disruptions, international operations, product liability, brand and licensing matters, and acquisitions and investments. Interest-rate swaps had a $18.8 million aggregate notional value, while foreign-exchange contracts had a $14.0 million gross notional value at March 31, 2016.
The company’s Puerto Rico subsidiary remains involved in an EPA Superfund contamination matter. The EPA’s selected remedy has an estimated capital cost of $7.3 million, but the company cannot estimate its potential share of liability. An adverse determination could materially affect results.
The interim financial statements were reviewed, not audited. Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the U.S. Wholesale restructuring improves sales execution, margins and operating costs, and whether the expected $1.2 million second-quarter charge is incurred.
- The effect of the $15.2 million April term-loan prepayment on interest expense, liquidity and covenant headroom.
- Seasonal inventory requirements and the company’s ability to fund working capital as shipments build before the third- and fourth-quarter selling season.
- Progress and financial contribution from the Wilton Armetale acquisition.
- Whether declining Vasconia results, foreign currency movements and the unrecognized GSI losses affect future earnings or investment values.
- Potential liability and remediation developments related to the Puerto Rico environmental matter.
- Reconciliation of non-GAAP Consolidated EBITDA to GAAP results and the sustainability of reported covenant compliance.