LIFETIME BRANDS, INC annual report, FY2012

Lifetime Brands, Inc. — FY2012 Form 10-K 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. Key brands include Farberware, KitchenAid, Mikasa, Pfaltzgraff, Kamenstein, Cuisinart and Fred. The company operates primarily through its Wholesale segment and a smaller Retail Direct segment.

The filing covers the fiscal year ended December 31, 2012, with audited comparisons to 2011 and 2010. The business is seasonal, with 58% of 2012 sales generated in the third and fourth quarters. Wal-Mart represented 16% of 2012 net sales.

Financial Performance and Position

Metric	2012	2011	Change
Net sales	$486.8 million	$444.4 million	+9.5%
Gross profit	$176.8 million	$162.4 million	+8.9%
Gross margin	36.3%	36.5%	Down 20 basis points
Income from operations	$27.3 million	$24.6 million	+11.2%
Net income	$20.9 million	$14.1 million	+48.9%
Diluted EPS	$1.64	$1.12	+46.4%
Operating cash flow	$22.7 million	$12.2 million	+86.3%
Consolidated EBITDA	$41.2 million	$38.1 million	+8.2%

Operating margin improved to 5.7% from 5.5%. SG&A increased 11.1% to $104.3 million, principally because of Creative Tops expansion costs and higher employee-related expenses. Distribution expenses were essentially flat in dollars and declined to 9.0% of sales from 9.9%.

Fourth-quarter 2012 sales were $154.8 million, gross profit was $56.0 million, operating income was $14.5 million and net income was $15.2 million. Fourth-quarter net income benefited from a $2.3 million non-cash tax adjustment relating to a prior-year deferred tax liability.

At December 31, 2012, cash and cash equivalents were $1.9 million, working capital was $145.9 million and the current ratio was 3.18 to 1. Total assets were $348.8 million and stockholders’ equity was $172.2 million.

Material Changes Versus the Prior Comparable Period

Wholesale sales increased 10.4% to $464.9 million, including $42.6 million from Creative Tops, acquired in November 2011.
Kitchenware sales increased 18.7% to $256.2 million, supported by brand expansion and new product introductions.
Tabletop sales declined 15.4% to $113.9 million, reflecting the absence of prior-year excess sterling silver sales and a major dinnerware rollout, as well as retail weakness.
Home Solutions sales declined 18.6% to $52.2 million because of weak consumer demand.
Retail Direct sales declined 5.6% to $22.0 million, primarily because of reduced promotional activity. Its operating results improved from a $0.5 million loss to $0.5 million of income.
The company acquired Fred & Friends on December 20, 2012, for total consideration of $21.4 million, including $14.5 million of cash, $1.5 million of stock and $5.4 million of contingent consideration. The acquisition had little effect on 2012 results because it closed near year-end.
Equity in earnings increased to $6.1 million from $3.4 million, primarily due to a bargain purchase gain and tax benefit recognized through the company’s investment in Grupo Vasconia. This included $4.1 million of bargain purchase gain and a $1.1 million tax benefit, partly offset by a $1.3 million reduction in the investment to fair value.
Interest expense declined to $5.9 million from $7.8 million. The company replaced its $40.0 million second-lien Term Loan with a $35.0 million Senior Secured Term Loan and recorded a $1.4 million loss from debt issuance cost write-offs.
A $1.1 million impairment charge was recorded on the Elements trade name because of declining home décor sales and reduced retail space.

Cash Flow, Debt and Liquidity

Operating activities provided $22.7 million of cash; investing activities used $22.2 million, including $14.5 million for the Fred & Friends acquisition and $5.0 million of capital expenditures; financing activities used $2.2 million.
The revolving credit facility was increased to $175.0 million and extended to July 2017. Borrowings outstanding were $61.0 million, with approximately $77.7 million of availability and $1.2 million of open letters of credit at year-end.
The Senior Secured Term Loan had $35.0 million of original principal, $30.6 million outstanding at year-end, a July 2018 maturity and a 5.25% interest rate at December 31, 2012.
Total short-term borrowings were $11.4 million and long-term debt was $84.6 million. The company was in compliance with its debt covenants at year-end.
Management stated that available revolver capacity and operating cash flow were sufficient to fund operations for the next twelve months, although adverse conditions could require alternative financing.
The company entered into a $35.0 million interest-rate swap beginning in March 2013 to manage exposure to variable-rate borrowings.

Outlook, Commentary, Risks and Unusual Items

Management emphasized continued investment in brands, innovation and acquisitions. The company launched more than 3,600 new or redesigned products in 2012 and expected to launch more than 4,000 in 2013. No quantitative revenue or earnings guidance is provided in the filing.

Major risks include dependence on large retailers, particularly Wal-Mart; retail inventory destocking; intense competition; changing consumer preferences; and the absence of long-term customer purchase commitments.
The company sources almost all products internationally, primarily from China, creating exposure to supplier concentration, labor-cost inflation, transportation disruptions, tariffs, foreign exchange and geopolitical conditions.
Variable-rate debt creates interest-rate risk despite the interest-rate swap.
International investments and joint ventures expose the company to currency, partner-credit, liquidity and execution risks. GSI generated a $0.7 million equity-method loss in 2012.
Home Solutions and home décor weakness led to the Elements impairment and a planned rebranding under Mikasa and Pfaltzgraff.
The EPA continued investigating potential groundwater contamination at the company’s leased San Germán, Puerto Rico facility. The company could not estimate any potential liability because no remedial action had been determined.
Contractual obligations totaled $230.2 million, including $91.3 million of operating leases, $95.97 million of short- and long-term debt, $21.8 million of minimum royalties and $15.2 million of interest on debt.
The company resumed dividends in 2011 and declared $0.125 per share for 2012. The board stated that it intended to continue dividends but could modify or eliminate them.

Investor Verification Checklist

Verify whether Creative Tops and Fred & Friends achieve expected sales and profitability, and whether acquisition-related costs and contingent consideration increase.
Monitor Kitchenware growth against continued weakness in Tabletop and Home Solutions.
Reconcile reported net income and EPS for the $2.3 million non-cash tax benefit, Vasconia-related gains and the $1.1 million impairment charge.
Track revolver availability, seasonal working-capital needs, variable interest rates and compliance with leverage and fixed-charge covenants.
Assess customer concentration and the effect of any change in Wal-Mart purchasing, pricing or payment practices.
Review the EPA investigation and any subsequent determination of remediation obligations or environmental liability.
Evaluate exposure to Chinese sourcing, transportation costs, foreign exchange and overseas joint-venture performance.