Lifetime Brands, Inc. — 2013 Q3 Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through wholesale and direct-to-consumer channels. The filing covers the unaudited three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The business is highly seasonal, with most annual sales occurring in the third and fourth quarters and inventory typically building ahead of the holiday shipping season.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $142.2 million | $128.1 million | $337.9 million | $332.0 million |
| Gross profit | $51.3 million | $44.9 million | $123.9 million | $120.7 million |
| Gross margin | 36.0% | 35.1% | 36.7% | 36.4% |
| Income from operations | $11.7 million | $7.4 million | $11.6 million | $12.8 million |
| Net income (loss) | $1.1 million | $3.9 million | $(0.1) million | $5.8 million |
| Diluted EPS | $0.08 | $0.30 | $(0.01) | $0.45 |
| Operating cash flow | Not separately provided | Not separately provided | $5.8 million | $(7.9) million |
Q3 sales increased 11.0%, led by Wholesale sales growth of 11.9%. Kitchenware sales rose 19.1%, including $4.8 million from the Fred & Friends acquisition; Home Solutions increased 22.8%; and Tableware declined 2.8%. Retail Direct sales decreased 14.0% to $3.7 million.
For the first nine months, sales increased 1.8%. Kitchenware rose 10.2%, while Tableware declined 10.8%, including a $4.7 million decline at Creative Tops related to U.K. economic weakness and higher European Union ceramic duties. Retail Direct sales declined 5.1%.
Q3 operating income improved because of higher sales, improved gross margin and lower distribution expense as a percentage of sales. However, nine-month operating income declined because higher selling, general and administrative expenses more than offset the sales and gross-margin gains. Net income was significantly affected by a $5.0 million after-tax reduction in the carrying value of the Vasconia investment.
Balance sheet, cash flow, debt and liquidity
- Cash and cash equivalents were $2.6 million at September 30, 2013, compared with $1.9 million at December 31, 2012.
- Inventory increased to $133.1 million from $104.6 million, reflecting seasonal pre-holiday inventory accumulation.
- Accounts receivable decreased to $93.2 million from $97.4 million.
- Total debt was approximately $96.6 million, consisting of $65.1 million outstanding under the revolving facility and $31.5 million under the senior secured term loan.
- The revolving facility has a $175.0 million commitment, matures in July 2017, and had approximately $102.2 million of availability, or 58.4% of the commitment, after $1.1 million of letters of credit.
- The term loan matures in July 2018. An interest-rate swap covering a $30.6 million notional amount began in March 2013 and resulted in a fixed annual interest rate of 6.05% on the hedged borrowings.
- The Company was in compliance with its debt covenants at September 30, 2013. Four-quarter consolidated EBITDA was $40.3 million, or $42.9 million including permitted credit-agreement adjustments.
- Operating activities provided $5.8 million of cash in the first nine months, compared with $7.9 million used in the prior-year period. Investing activities used $2.8 million, primarily for capital expenditures, and financing activities used $2.8 million.
Material changes versus the prior comparable period
- Fred & Friends, acquired in December 2012, contributed to higher Kitchenware sales and gross margin. Its distribution center was closed, producing distribution efficiencies but also $0.4 million of restructuring expense through September.
- Q3 gross margin increased 90 basis points to 36.0%; nine-month gross margin increased 30 basis points to 36.7%.
- Q3 net income fell despite higher operating income because equity in losses increased to $5.5 million from equity in earnings of $0.7 million, primarily due to the Vasconia fair-value reduction and weaker Vasconia results.
- Nine-month SG&A increased 7.5% to $80.5 million and rose to 23.8% of sales from 22.6%.
- Interest expense declined to $3.6 million from $4.6 million for the nine-month period. The prior-year period included a $1.4 million loss on early debt retirement; no comparable charge was recorded in 2013.
- The Company repurchased 245,575 shares for $3.2 million during the first nine months under a $10.0 million authorization. No shares were repurchased in Q3.
- The quarterly dividend increased to $0.03125 per share from $0.025. On October 31, 2013, the Board declared a $0.0375 per-share dividend payable in February 2014.
Outlook, commentary, risks and unusual items
The filing does not provide specific financial guidance for 2013. Management emphasizes that quarterly results are seasonal and that interim results are not necessarily indicative of full-year performance. The Company expects to continue borrowing and repaying under the revolving facility to fund working capital and other corporate needs, subject to availability.
- Vasconia, in which Lifetime owns approximately 30%, reported weaker sales, margins and earnings. The investment generated a $5.0 million after-tax fair-value reduction in Q3; further operating and market deterioration could affect results.
- Key disclosed risks include liquidity, variable interest rates, foreign-currency exposure, competition, customer concentration and conditions, supply-chain disruptions, acquisitions and investments, intellectual property, regulatory matters, technology, personnel and business interruptions.
- The Company is exposed to variable-rate debt and foreign-currency movements. The interest-rate swap mitigates part of the rate exposure but does not eliminate it.
- The EPA continues to investigate potential groundwater contamination at a Puerto Rico site leased by a subsidiary. The Company cannot estimate any potential liability because no remedial action has been determined.
- The 2013 annual impairment testing of indefinite-lived intangible assets indicated fair values exceeded carrying values, and management identified no goodwill impairment. The 2012 period included a $1.1 million intangible impairment charge that did not recur in 2013.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Vasconia’s operating performance and share price stabilize after the $5.0 million after-tax valuation reduction.
- Whether elevated seasonal inventory converts to sales and cash without increased markdowns or obsolescence.
- Compliance with the term-loan EBITDA, leverage and fixed-charge coverage covenants as fourth-quarter seasonality develops.
- Revolving-facility availability, borrowing levels and interest costs under changing working-capital needs and interest rates.
- The sustainability of Kitchenware growth and whether Tableware, Creative Tops and Retail Direct weakness persists.
- Potential liability or remediation requirements arising from the EPA investigation in Puerto Rico.
- The effect of the Fred & Friends integration and distribution-center closure on margins and operating expenses.