Lifetime Brands, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products primarily through wholesale channels, with limited direct-to-consumer sales. The filing covers the unaudited three and six months ended June 30, 2014, compared with the corresponding 2013 periods. The business is highly seasonal, with most sales occurring in the third and fourth quarters and inventory building ahead of the holiday shipping season.
During the second quarter, the Company realigned its reportable segments into U.S. Wholesale, International and Retail Direct. The January 2014 acquisition of Kitchen Craft materially expanded the International segment.
Financial Highlights
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Net sales | $115.3 million | $97.0 million | $233.7 million | $195.6 million |
| Gross margin | 35.4% | 37.5% | 36.4% | 37.1% |
| Income (loss) from operations | $(3.2) million | $0.0 million | $(5.4) million | $(0.1) million |
| Net loss | $(3.2) million | $(0.6) million | $(6.1) million | $(1.2) million |
| Loss per diluted share | $(0.24) | $(0.04) | $(0.46) | $(0.09) |
| Operating cash flow | Not separately presented | Not separately presented | $(7.4) million | $27.3 million |
Second-quarter sales increased 18.9%, while six-month sales increased 19.5%. The increase was driven primarily by Kitchen Craft and other acquisitions in the International segment. Gross profit increased in dollars but declined as a percentage of sales because U.S. Wholesale pricing and promotional actions reduced margins.
- U.S. Wholesale sales declined 0.8% in the quarter and 0.3% for six months. Six-month operating income declined to $3.2 million from $8.4 million.
- International sales increased to $26.6 million in the quarter and $54.7 million for six months, largely reflecting Kitchen Craft and La Cafetiere.
- Retail Direct sales declined 2.7% in the quarter and 10.9% for six months.
- Six-month selling, general and administrative expense increased 27.1% to $65.6 million, while interest expense increased to $3.1 million from $2.3 million.
- Six-month Consolidated EBITDA, a non-GAAP measure, was $5.2 million versus $7.4 million in 2013. Last-four-quarter Consolidated EBITDA was $41.2 million.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | June 30, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $5.2 million | $4.9 million |
| Inventory | $153.2 million | $112.8 million |
| Total assets | $422.5 million | $336.7 million |
| Revolving credit facility outstanding | $97.5 million | $49.2 million |
| Term loan outstanding | $50.0 million | None under the new facility |
| Total stockholders’ equity | $186.7 million | $180.9 million |
Cash used in operations and $69.7 million of acquisition-related investing cash outflows were funded primarily through borrowings. The Company had approximately $52.6 million of availability under its $175.0 million revolving facility, plus $4.2 million of open letters of credit. A Chinese subsidiary had $868,000 outstanding under a separate facility at 6.44%.
In January 2014, the Company refinanced its prior debt, extended revolving facility maturity to January 11, 2019, and added a $50.0 million term loan. Outstanding borrowings under the revolving facility carried rates ranging from 2.125% to 4.25% at June 30, 2014. The Company reported compliance with its financial covenants, including the applicable senior leverage and fixed-charge coverage requirements.
Material Changes Versus the Prior Comparable Period
- Kitchen Craft was acquired on January 15, 2014 for total preliminary consideration of $72.5 million, including cash, shares and contingent consideration of up to approximately $9.0 million undiscounted. It contributed $13.5 million of second-quarter sales and $30.4 million of six-month sales.
- The Company also acquired Built NY, Empire Silver and La Cafetiere for aggregate consideration of approximately $5.3 million.
- Intangible assets increased to $110.8 million from $55.1 million, primarily from acquisitions; total assets increased 25.5% from year-end.
- Inventory increased $40.5 million, consistent with seasonal pre-holiday stocking and acquisition activity.
- Operating cash flow shifted from $27.3 million provided in the first six months of 2013 to $7.4 million used in 2014, primarily because of higher inventory and payments of accounts payable and accrued expenses.
- Gross margin declined 210 basis points in the quarter and 70 basis points for six months. Management attributed the U.S. Wholesale decline to actions intended to expand market share.
- Restructuring expense declined to $125,000 from $288,000, reflecting consolidation of customer service and call-center functions versus the prior-year Fred & Friends distribution-center closure.
- No stock repurchases occurred in 2014; the Company continued paying quarterly dividends, increased to $0.0375 per share from $0.03125.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide specific annual revenue, earnings or EBITDA guidance. Management expects continued borrowing and repayment under the revolving facility to fund seasonal working capital and other corporate needs. Results for the first six months are not necessarily indicative of full-year results because of pronounced seasonality.
- Key risks include indebtedness, liquidity, covenant compliance, interest rates, foreign exchange, acquisitions and integration, international operations, customer and retail practices, supply chain and transportation conditions, competition, product liability, intellectual property, regulatory matters and general economic conditions.
- The Company uses interest-rate swaps with a $28.0 million aggregate notional amount and foreign-exchange contracts with a $9.1 million aggregate notional amount. Derivative liabilities were recorded at June 30, 2014.
- The Puerto Rico manufacturing facility remains subject to an EPA investigation concerning groundwater contamination. The Company cannot estimate any potential liability because no remedial action determination has been made.
- Kitchen Craft included $55.4 million of goodwill and other intangibles in the preliminary purchase-price allocation. Acquisition integration and contingent consideration remain important execution and valuation considerations.
- The six-month results include a $319,000 loss on early retirement of debt and $125,000 of restructuring expense.
- The Company’s independent registered public accounting firm performed a review, not an audit, of the interim financial statements and reported no material modifications were necessary.
Investor Verification Checklist
- Verify the sustainability of International segment growth and the operating performance and integration costs of Kitchen Craft and the other acquisitions.
- Monitor U.S. Wholesale volume, pricing actions and whether gross-margin pressure reverses.
- Assess seasonal inventory levels, operating cash conversion and the need for additional revolver borrowings in the second half.
- Recalculate leverage and fixed-charge coverage under the credit agreement, including the tighter covenant thresholds applicable after 2014.
- Review contingent consideration obligations, goodwill and acquired-intangible valuation assumptions.
- Track Retail Direct sales trends and the status of the Puerto Rico environmental investigation.
- Confirm future dividend capacity given reported losses, negative first-half operating cash flow and debt service requirements.