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 U.S. Wholesale, International and Retail Direct segments. The filing covers the three and six months ended June 30, 2015; results are unaudited. The business is highly seasonal, with approximately 60% of 2014 sales generated in the third and fourth quarters.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net sales | $120.9 million | $115.3 million | $238.6 million | $233.7 million |
| Gross margin | 36.0% | 35.4% | 37.1% | 36.4% |
| Loss from operations | $(1.0) million | $(3.2) million | $(3.2) million | $(5.4) million |
| Net loss | $(1.7) million | $(3.2) million | $(3.8) million | $(6.1) million |
| Basic and diluted loss per share | $(0.12) | $(0.24) | $(0.28) | $(0.46) |
| Cash flow from operating activities | Not separately provided | Not separately provided | $10.6 million | $(7.4) million |
- Second-quarter sales increased 4.9%; first-half sales increased 2.1% year over year.
- U.S. Wholesale was the primary growth driver, with second-quarter sales up 11.2% and first-half sales up 6.0%. International sales declined 15.5% in the second quarter and 12.6% for the first six months, while Retail Direct sales increased 7.4% and 17.1%, respectively.
- First-half gross profit increased to $88.4 million from $85.2 million. Gross margin benefited from U.S. Wholesale product and customer mix, but International margins were pressured by currency movements and promotional activity.
- Cash and cash equivalents were $5.0 million at June 30, 2015, compared with $5.1 million at December 31, 2014. Working capital was $162.4 million, down from $174.2 million.
- Debt outstanding totaled approximately $131.4 million, consisting primarily of $91.3 million under the revolving facility, $40.0 million under the term loan and $0.1 million under the HSBC short-term facility. Revolver availability was approximately $69.1 million; reported liquidity was $71.0 million.
- Six-month capital expenditures were $2.9 million. Cash used in financing activities was $7.5 million, including $5.0 million of term-loan repayments and $1.0 million of dividends paid.
- Trailing four-quarter Consolidated EBITDA, a non-GAAP covenant measure, was $44.3 million. Second-quarter and first-half Consolidated EBITDA were $4.4 million and $6.9 million, respectively.
Material changes versus the prior comparable period
- Operating and net losses narrowed substantially, reflecting higher sales, improved gross margin, lower corporate expenses and lower interest expense.
- Operating cash flow improved by $18.0 million, from $7.4 million used in the first half of 2014 to $10.6 million provided in the first half of 2015, primarily due to working-capital changes.
- Investing cash outflows fell to $2.9 million from $69.7 million because the prior-year period included the $61.7 million Kitchen Craft acquisition.
- International performance weakened due to lower sales, currency effects and promotional activity. U.S. Wholesale operating income increased to $5.1 million for the first half from $3.2 million.
- The Company recorded approximately $1.5 million of expense in the second quarter related to the revised Kitchen Craft contingent consideration arrangement. Fair value of the contingent consideration was approximately $5.0 million at June 30, 2015, with maximum undiscounted consideration remaining £5.5 million.
- First-half 2015 included $154,000 of financing expense for refinancing costs that were written off; first-half 2014 included a $319,000 loss on early retirement of debt.
- Shares outstanding increased to 14.0 million at June 30, 2015 from 13.7 million at December 31, 2014, primarily reflecting equity compensation and option exercises.
Outlook, risks, contingencies and unusual items
- The filing does not provide specific revenue, earnings or EBITDA guidance. Management expects approximately 4,000 new or redesigned products to be introduced in 2015, but this is not presented as financial guidance.
- Seasonality creates significant working-capital requirements ahead of the holiday shipping season; inventory increased to $154.2 million from $137.9 million at December 31, 2014.
- The Credit Agreement expires in January 2019 and includes leverage, fixed-charge coverage and other restrictive covenants. The Company was in compliance at June 30, 2015; its Senior Leverage Ratio was 3.01 to 1.00 versus a 2015 maximum of 4.50 to 1.00.
- A May 2015 amendment requires a 2016 term-loan prepayment of at least $10.0 million or 50% of 2015 excess cash flow, whichever is greater.
- Variable-rate debt exposes the Company to interest-rate risk. Interest-rate swaps had an aggregate notional amount of $22.8 million, and foreign-exchange contracts had a gross notional amount of $12.0 million at June 30, 2015.
- The EPA identified vapor-intrusion contamination concerns at the Company’s Puerto Rico manufacturing facility. The Company agreed to cooperate under a proposed Consent Order without admitting liability, but cannot determine potential future requirements or liabilities.
- Key disclosed risks include indebtedness and liquidity, seasonality, international operations, foreign exchange, customer and supply-chain conditions, competition, product liability, regulatory matters, acquisitions and investments, and business interruption.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting other than ongoing integration of Kitchen Craft.
Important facts for investors to verify
- Whether the seasonal second-half sales recovery offsets International weakness and supports covenant compliance.
- The sustainability of improved U.S. Wholesale margins and the effect of promotions and foreign exchange on International margins.
- Available revolver capacity after seasonal inventory build and the Company’s ability to fund the 2016 term-loan prepayment.
- The final amount and timing of Kitchen Craft contingent consideration payments.
- The outcome and potential cost of the EPA’s Puerto Rico environmental investigation and Consent Order.
- The extent to which reported Consolidated EBITDA depends on add-backs for contingent consideration, stock compensation and acquisition-related items.