Lifetime Brands, Inc. — Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tabletop and home products primarily through wholesale channels, with limited direct-to-consumer Internet sales. The filing covers the unaudited quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods. Results are highly seasonal, with approximately 59% of 2011 sales generated in the third and fourth quarters.
The November 2011 acquisition of Creative Tops contributed $7.8 million of second-quarter sales and $19.1 million of six-month sales in 2012.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 | ||
|---|---|---|---|---|
| 2012 | 2011 | 2012 | 2011 | |
| Net sales | $94.9 million | $90.4 million | $204.0 million | $182.1 million |
| Gross profit | $35.4 million | $34.0 million | $75.8 million | $67.4 million |
| Gross margin | 37.3% | 37.7% | 37.2% | 37.0% |
| Income from operations | $2.2 million | $4.4 million | $5.4 million | $4.3 million |
| Net income | $0.6 million | $2.1 million | $1.9 million | $1.1 million |
| Diluted EPS | $0.04 | $0.17 | $0.15 | $0.09 |
| Operating cash flow | Not separately reported | Not separately reported | $7.0 million | $(2.3) million |
- Second-quarter sales increased 5.0%, while six-month sales increased 12.0%. Wholesale sales rose 5.6% in the quarter and 13.6% year to date; Retail Direct sales declined 7.3% and 12.8%, respectively.
- Second-quarter operating income declined because SG&A rose 15.7%, including Creative Tops-related costs, higher professional fees and compensation. Six-month operating income increased despite higher SG&A.
- Second-quarter net income declined primarily because of lower operating income and a $0.3 million loss on early debt retirement. Six-month net income benefited from lower interest expense and a substantially lower effective tax rate than in 2011.
- Cash and cash equivalents were $2.8 million at June 30, 2012, compared with $3.0 million at December 31, 2011. Inventory increased to $121.1 million from $110.3 million, consistent with preparation for the holiday shipping season.
- At June 30, revolving-credit borrowings were $63.4 million, the term loan balance was $30.0 million, and open letters of credit were $1.2 million. Revolving-facility availability was approximately $66.0 million, or 44.0% of the $150.0 million commitment.
- The term loan carried a 10.0% interest rate; revolving borrowings carried rates ranging from 2.50% to 4.50%. The company was in compliance with its debt covenants, including a minimum trailing-four-quarter EBITDA requirement of $31.0 million; reported Consolidated EBITDA was $39.7 million.
Material changes versus the prior comparable period
- Kitchenware sales increased 6.4% in the quarter and 16.5% for six months, supported by new programs. Tabletop sales decreased 7.2% and 10.5%, while Home Solutions sales decreased 29.3% and 17.3% because of continued category weakness.
- Quarterly gross margin decreased 40 basis points, mainly from lower Home Solutions margins. Six-month gross margin increased 20 basis points, reflecting product mix and the absence of 2011 excess sterling-silver inventory sales.
- Distribution expense improved as a percentage of sales for the six-month period, to 10.5% from 11.1%, due to improved labor management, lower facility expense and favorable weather.
- In June 2012, the company repaid $10.0 million of its term loan, funded by operating cash flow and $5.8 million of additional revolving borrowings. The repayment generated a $0.3 million debt-retirement charge.
- The company paid $0.6 million of dividends during the first six months, compared with $0.3 million in 2011, and declared quarterly dividends of $0.025 per share.
Guidance, outlook, commentary, risks and unusual items
- No specific revenue, earnings or EBITDA guidance is provided. Management emphasizes seasonality and states that interim results are not necessarily indicative of full-year results.
- On July 27, 2012, after quarter-end, the company amended its revolving facility, increasing the commitment to $175.0 million, extending maturity to July 27, 2017, and permitting a potential increase to $225.0 million subject to conditions. It also refinanced the term loan with a new $35.0 million senior secured term loan maturing July 27, 2018.
- The new term loan includes minimum EBITDA, leverage, fixed-charge coverage and capital-expenditure requirements, as well as restrictions on additional debt, acquisitions, investments and dividends.
- Management identifies risks relating to economic and political conditions, liquidity, supply chain, competition, customers, intellectual property, personnel, regulatory matters and technology. Variable-rate debt exposes the company to interest-rate risk, while foreign operations and investments create foreign-exchange risk.
- The company is evaluating possible impairment of the Elements and Melannco trade names as those brands are replaced by Mikasa and Pfaltzgraff products; any impairment charge would be non-cash and could be material, but no charge was recorded in the reported period.
- The EPA has identified a Puerto Rico groundwater contamination site involving property leased by a company subsidiary. The company is not aware of a determination requiring remedial action and cannot estimate any potential liability.
- The company owns a 30% interest in Grupo Vasconia and a 40% interest in GSI. It paid $2.6 million to GSI in June 2012 for remaining acquisition consideration and expects an approximately $0.5 million initial investment in a China Mikasa distribution joint venture.
Important facts for investors to verify
- Whether the post-quarter-end refinancing reduced revolving borrowings as expected and improved liquidity, while considering the new covenant and collateral terms.
- Holiday-season sales, inventory conversion and working-capital needs, given the high concentration of annual sales in the third and fourth quarters.
- Whether Creative Tops achieves planned growth without continued disproportionate SG&A increases.
- Trends in the weak Home Solutions and Retail Direct businesses and the effect of brand transitions on trade-name impairment risk.
- Exposure to variable interest rates, foreign-exchange movements and the unquantified Puerto Rico environmental contingency.
- The filing was subject to an independent accountant’s review, not a full audit, and the filing text does not provide a clear full-year earnings or revenue outlook.