Lifetime Brands, Inc. — Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tabletop and home products through wholesale channels and direct-to-consumer websites. The filing covers the unaudited quarter and six months ended June 30, 2013, compared with the same 2012 periods. Results are highly seasonal, with approximately 58% of 2012 annual sales generated in the third and fourth quarters. The financial statements received an independent accountant review, not an audit.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $97.0 million, versus $94.9 million | $195.6 million, versus $204.0 million |
| Gross margin | $36.4 million; 37.5%, versus 37.3% | $72.7 million; 37.1%, versus 37.2% |
| Income (loss) from operations | $0.01 million, versus $2.2 million | $(0.1) million, versus $5.4 million |
| Net income (loss) | $(0.6) million, or $(0.04) per diluted share, versus $0.6 million, or $0.04 | $(1.2) million, or $(0.09) per diluted share, versus $1.9 million, or $0.15 |
| Cash flow from operations | Not separately reported | $27.3 million, versus $7.0 million |
| Capital expenditures | Not separately reported | $2.0 million, versus $2.0 million |
| Consolidated EBITDA | $4.3 million, versus $5.6 million | $7.4 million, versus $11.8 million |
At June 30, 2013, cash and cash equivalents were $1.2 million, compared with $1.9 million at December 31, 2012. Accounts receivable were $57.5 million and inventory was $112.6 million. Total assets were $315.7 million, compared with $348.8 million at year-end.
Total debt consisted of $41.9 million outstanding under the revolving credit facility and $31.5 million under the senior secured term loan. Revolving-facility availability was approximately $81.9 million, or 46.8% of the commitment, with $1.1 million of open letters of credit. The Company reported compliance with its debt covenants. The interest-rate swap covering a $31.5 million notional amount commenced in March 2013 and resulted in a $0.2 million after-tax comprehensive gain for the six-month period.
The Company paid $0.7 million of dividends during the first six months and declared quarterly dividends of $0.03125 per share. It repurchased 245,575 shares for $3.2 million under a newly authorized $10.0 million program.
Material changes versus the prior comparable period
- Second-quarter sales increased 2.2%, primarily from the Wholesale segment and stronger Kitchenware sales, including $3.9 million from the December 2012 Fred & Friends acquisition.
- Six-month sales declined 4.1%. Kitchenware increased 4.3%, but Tabletop declined 15.6% and Home Solutions declined 8.5%. Tabletop weakness included lower Creative Tops sales in the United Kingdom, economic weakness and higher European Union ceramic duties.
- Second-quarter gross margin improved modestly to 37.5%, helped by the Fred & Friends acquisition and lower promotional discounting. Six-month gross margin was essentially stable at 37.1%.
- Operating profitability deteriorated due principally to higher selling, general and administrative expenses, including Fred & Friends-related costs, compensation, professional fees and trade show expenses. The Company also recorded $0.3 million of restructuring expense for the planned closure of the Fred & Friends distribution center and related employee reductions.
- Interest expense fell to $1.1 million in the quarter and $2.3 million for six months, reflecting lower average rates and borrowings. The 2012 periods included a $0.3 million loss on early debt retirement that did not recur.
- Operating cash flow increased substantially, primarily because of stronger accounts-receivable collections and fewer payments of accounts payable and accrued expenses. Cash was used to repay $22.6 million of debt and repurchase stock during the first six months.
- Equity earnings declined, reflecting weaker results at Vasconia; GSI generated an equity loss of $0.3 million for the six-month period.
Guidance, outlook, risks and unusual items
The filing does not provide explicit full-year revenue or earnings guidance. Management expects continued borrowing and repayment under the revolving facility as working-capital needs change, particularly ahead of the seasonal third- and fourth-quarter shipping period. Inventory increased to $112.6 million at June 30 in anticipation of the holiday season.
- Key disclosed risks include economic and political conditions, liquidity, interest rates, competition, customer concentration and demand, supply-chain disruption, intellectual property, regulatory matters, technology, personnel and business interruption.
- The Company has foreign-currency exposure through foreign operations and equity investments, and variable-rate debt exposure despite the interest-rate swap.
- The EPA is investigating potential groundwater contamination at a Puerto Rico facility leased by a Company subsidiary. No remedial action determination has been made, and the Company cannot estimate potential liability.
- State net operating loss carryforwards of $18.7 million begin expiring in 2014; foreign net operating losses of $2.1 million begin expiring in 2016.
- The Company’s $175.0 million revolving facility matures in July 2017 and the $31.5 million term loan matures in July 2018. Debt agreements contain leverage, fixed-charge coverage, capital-expenditure, dividend and other restrictions.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether second-half seasonal sales offset the 4.1% first-half revenue decline and restore operating profitability.
- The sustainability of the $27.3 million first-half operating cash flow, particularly receivables collections and inventory management.
- Progress and costs associated with the Fred & Friends distribution-center closure and integration of the acquisition.
- Compliance with debt covenants, available revolver capacity and the effect of variable interest rates.
- Tabletop and Home Solutions demand, including United Kingdom weakness and European Union duties.
- Potential EPA remediation obligations and any developments affecting the Puerto Rico facility.
- Future use of the remaining stock-repurchase authorization and the ability to maintain dividends while carrying debt and seasonal inventory.