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 wholesale retailers, distributors, e-commerce channels and limited direct-to-consumer channels. Reported segments are U.S. and International. This unaudited filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The business is highly seasonal, with approximately 60%–62% of annual sales historically occurring in the third and fourth quarters.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Net sales | $142.5 million | $148.7 million | $292.5 million | $266.8 million |
| Gross profit / margin | $44.0 million / 30.9% | $52.1 million / 35.0% | $98.3 million / 33.6% | $97.2 million / 36.4% |
| Loss from operations | $(12.5) million | $(3.3) million | $(14.8) million | $(16.6) million |
| Net loss | $(11.5) million | $(6.1) million | $(16.4) million | $(17.7) million |
| Diluted loss per share | $(0.56) | $(0.30) | $(0.80) | $(0.96) |
| Operating cash flow | Not separately provided | Not separately provided | $7.1 million | $(5.8) million |
- Six-month U.S. sales increased 11.2% to $250.1 million, while International sales increased 1.0% to $42.3 million. Second-quarter consolidated sales declined 4.2%, primarily due to lower U.S. sales.
- Second-quarter and year-to-date operating losses include an $8.5 million SKU Rationalization charge recorded in cost of sales. Excluding this charge and the 2018 Filament inventory step-up charge, second-quarter gross margin would have been 36.7% versus 36.0%, and six-month gross margin would have been 36.6% versus 37.4%.
- Cash and cash equivalents were $10.5 million at June 30, 2019, compared with $7.6 million at December 31, 2018. Reported liquidity, including ABL availability, was approximately $112.4 million.
- Inventory was $205.6 million, up from $173.6 million at year-end, reflecting seasonal pre-holiday buildup. The company reported adjusted inventory turnover of 1.8 times, or 203 days, versus 2.1 times, or 177 days, in the prior-year quarter.
- Total assets were $822.7 million and stockholders’ equity was $263.1 million at June 30, 2019. Adoption of ASC 842 added $109.8 million of operating lease right-of-use assets and $125.8 million of operating lease liabilities at the reporting date.
- Debt consisted principally of a term loan with $271.6 million outstanding and an ABL facility with reported borrowings of $44.9 million on the balance sheet; the MD&A separately reports ABL borrowings of $39.8 million. ABL availability was approximately $101.9 million. The term loan interest rate was 5.9%.
- Interest expense increased to $9.6 million for the first six months from $6.8 million, principally because of higher interest rates, partly offset by lower debt balances.
- Consolidated adjusted EBITDA for the four quarters ended June 30, 2019 was $60.8 million after permitted limitations. This is a lender-defined non-GAAP measure and includes projected synergies and other adjustments.
Material changes versus the prior comparable period
- Second-quarter sales decreased $6.2 million, or 4.2%, while six-month sales increased $25.7 million, or 9.6%. The six-month comparison benefited from a full six months of Filament operations in 2019 versus approximately four months in 2018.
- Second-quarter U.S. sales declined 4.6%; Tableware fell 18.4% and Kitchenware fell 4.1%, partly offset by a 13.4% increase in Home Solutions. Management cited retailer program timing, lower brick-and-mortar volume and higher sales allowances, partly offset by e-commerce growth.
- Six-month Tableware sales declined 9.4%, while Kitchenware increased 7.5% and Home Solutions increased 55.8%, with Filament contributing substantially to the latter two categories.
- Second-quarter operating loss worsened by $9.2 million, primarily due to the SKU Rationalization charge, lower sales and lower reported gross margin. Six-month operating loss improved by $1.8 million, supported by higher sales and lower distribution costs.
- Six-month operating cash flow improved by $12.9 million to $7.1 million, primarily due to timing of accounts payable and accrued expense payments and additional cash generated by Filament.
- SG&A as a percentage of sales improved for the first six months to 27.7% from 30.1%, reflecting Filament-related synergies, while distribution expenses declined to 10.7% from 12.3%.
- The company adopted ASC 842 on January 1, 2019, materially increasing reported assets and liabilities without a material initial effect on earnings or cash flow.
Guidance, outlook, commentary, risks and unusual items
- Management expects the SKU Rationalization program to generate liquidity through inventory sales in the third and fourth quarters of 2019 and to improve inventory turnover and carrying costs. The initiative affected approximately 8% of consolidated inventory.
- The company expects approximately $1.1 million of additional European restructuring and integration charges in 2019. It also expects to prepay approximately $12.0 million of term-loan principal in the first quarter of 2020 based on estimated 2019 excess cash flow.
- Tariff increases raised inventory carrying costs. Key risks include tariffs, supply chain and transportation costs, foreign exchange, interest rates, retailer practices, seasonality, leverage and covenant compliance, acquisition integration, competition, international operations, goodwill and SKU Rationalization execution.
- The company sold $49.2 million of receivables to HSBC during the first six months, incurring $0.3 million of related expense. The arrangement is uncommitted and may not provide liquidity on demand.
- Interest-rate swaps had aggregate notional amounts of $100.0 million, with an additional $25.0 million of swaps entered into in June 2019. Foreign exchange contracts had aggregate gross notional value of $9.0 million.
- The company owned approximately 30% of Grupo Vasconia and recorded equity in losses of $0.2 million for the first six months, versus equity in earnings of $0.2 million in the prior-year period.
- A Puerto Rico environmental matter remains unresolved. The EPA proposed a second-operable-unit remedy estimated at $17.3 million, but the company stated that it cannot estimate its potential share of liability. An adverse determination could materially affect results.
- The company declared a quarterly dividend of $0.0425 per share and remained in compliance with debt covenants at June 30, 2019. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile the ABL borrowing figures: $44.9 million on the balance sheet versus $39.8 million in MD&A, and confirm the effect of debt issuance costs or presentation differences.
- Assess whether the $8.5 million SKU Rationalization charge is genuinely nonrecurring and whether the expected inventory liquidation produces the projected liquidity benefits without excessive margin pressure.
- Monitor seasonal inventory levels, retailer demand, e-commerce growth, sales allowances and the substantial concentration of annual sales in the second half.
- Evaluate leverage, interest-rate exposure, the expected $12.0 million excess-cash-flow prepayment and available ABL capacity under changing borrowing-base conditions.
- Review the potential exposure from the Puerto Rico environmental matter and any developments in the EPA’s proposed remedy.
- Separate reported adjusted EBITDA from GAAP operating performance, particularly the effects of projected synergies, restructuring charges and other permitted adjustments.