Lifetime Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The filing is unaudited and compares results with the corresponding 2018 periods. Lifetime Brands designs, sources and sells branded kitchenware, tableware, home products and private-label products, primarily through wholesale channels. Results are highly seasonal, with most annual sales occurring in the third and fourth quarters.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $215.5 million | $209.4 million | $508.0 million | $476.3 million |
| Gross margin | $72.9 million; 33.8% | $73.8 million; 35.2% | $171.3 million; 33.7% | $171.0 million; 35.9% |
| Income (loss) from operations | $6.9 million | $12.3 million | $(7.9) million | $(4.3) million |
| Net income (loss) | $(13.5) million | $5.9 million | $(29.9) million | $(11.7) million |
| Basic and diluted EPS | $(0.66) | $0.29 | $(1.46) | $(0.61) |
- Q3 sales increased 2.9%; constant-currency sales increased 3.5%. Nine-month sales increased 6.7%; constant-currency sales increased 7.5%.
- Q3 operating margin declined to 3.0% from 5.9%. The nine-month operating margin was negative 1.6%, compared with negative 0.9% in 2018.
- Q3 net loss included a $9.7 million non-cash goodwill impairment charge and a $15.1 million income tax provision. The resulting effective tax rate was 857.5%, primarily because the goodwill impairment was not tax deductible.
- For the nine months, cost of sales included an $8.5 million SKU rationalization inventory charge. Excluding that charge and the $1.5 million 2018 inventory step-up adjustment, reported gross margins were 31.2% in 2019 and 31.5% in 2018.
Segment and operating trends
- U.S. segment sales increased 4.9% in Q3 to $195.2 million and 8.3% for the nine months to $445.3 million. U.S. operating income increased to $24.3 million in Q3 and $24.0 million for the nine months.
- International sales decreased 13.2% in Q3 to $20.3 million and 3.9% for the nine months to $62.6 million. International operating losses widened to $12.9 million in Q3 and $16.8 million for the nine months.
- International performance was affected by slower order fulfillment and labor inefficiencies associated with the U.K. warehouse consolidation. Management stated that expected operational improvements had not yet been fully realized at September 30, 2019.
- Q3 U.S. Home Solutions sales increased 19.5%, while Kitchenware sales increased 2.5% and Tableware sales were broadly unchanged. Nine-month Home Solutions sales increased 39.3%, partly reflecting a full-period contribution from the Filament acquisition.
- Selling, general and administrative expense declined 11.2% in Q3 and 3.1% for the nine months, reflecting Filament-related synergies, labor efficiencies and lower rent expense. Tariffs on products imported from China negatively affected U.S. gross margin, partially offset by currency effects, vendor concessions, packaging changes and price increases.
Cash flow, liquidity and capital structure
| Balance sheet or cash flow item | September 30, 2019 | December 31, 2018 or 9M 2018 |
|---|---|---|
| Cash and cash equivalents | $4.8 million | $7.6 million |
| Accounts receivable | $161.9 million | $125.3 million at December 31, 2018 |
| Inventory | $229.9 million | $173.6 million at December 31, 2018 |
| Total assets | $883.7 million | $708.6 million at December 31, 2018 |
| Revolving credit borrowings | $91.2 million | $42.1 million at December 31, 2018 |
| Term loan, net of debt costs | $263.0 million | $264.0 million at December 31, 2018 |
| Net cash used in operating activities | $(40.0) million | $(30.4) million in 9M 2018 |
| Capital expenditures | $7.6 million | $5.4 million in 9M 2018 |
- Working capital was $261.0 million versus $233.9 million at December 31, 2018. Liquidity, defined as cash plus ABL availability, was approximately $60.4 million, including approximately $55.6 million of ABL availability.
- Operating cash use increased primarily because of timing of accounts receivable collections and higher seasonal inventory. The company expects SKU rationalization to generate liquidity through inventory sales in the fourth quarter.
- The ABL facility has a maximum commitment of $150.0 million and matures March 2, 2023. The senior secured term loan had an original principal amount of $275.0 million and matures February 28, 2025. The company was in compliance with debt covenants at September 30, 2019.
- Interest rates at September 30, 2019 ranged from 2.60% to 6.00% on ABL borrowings; the term loan rate was 5.60%. The company had $100.0 million of designated interest-rate swaps and $25.0 million of additional swaps.
- The company sold $81.7 million of receivables under its uncommitted receivables purchase agreement during the first nine months, with $17.8 million of sold receivables outstanding at September 30, 2019.
Material changes and unusual items
- Goodwill impairment increased to $9.7 million from $2.2 million in Q3 2018. The charge related to the European kitchenware reporting unit, which was affected by Brexit uncertainty, declining operating performance and warehouse integration issues. The related European kitchenware and tableware goodwill balances were written down to zero.
- The company adopted ASC 842 leases on January 1, 2019, recognizing operating lease right-of-use assets of approximately $90.9 million and lease liabilities of approximately $104.4 million at adoption. September 30, 2019 operating lease liabilities totaled $124.2 million on a present-value basis.
- The company recorded $1.1 million of restructuring expense during the first nine months, including Filament integration and European legal-entity consolidation costs. It expected approximately $0.7 million of additional European restructuring and integration charges in 2019.
- Vasconia, in which Lifetime owns approximately 30%, produced a $0.2 million Q3 equity loss and a $0.4 million nine-month equity loss, compared with equity earnings in the 2018 periods.
- Quarterly dividends remained $0.0425 per share. On November 7, 2019, the board declared a $0.0425 per share dividend payable February 14, 2020.
Outlook, risks and contingencies
The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued seasonal borrowing under the ABL facility and expects the SKU rationalization program to improve inventory liquidity and carrying costs. The company cautions that tariffs, customer and vendor responses, foreign exchange, interest rates, Brexit and international operating conditions may materially affect future results.
- Liquidity risk is heightened by negative operating cash flow, seasonal inventory requirements, increased revolver borrowings and reliance on borrowing-base availability.
- Debt agreements impose restrictions on additional indebtedness, acquisitions, investments and dividends. A minimum fixed-charge coverage ratio of 1.10 to 1.00 applies if ABL availability falls below specified thresholds.
- The EPA issued a September 30, 2019 remedy decision for the second operable unit of the San Germán, Puerto Rico groundwater contamination site, with an estimated net present-worth remedy cost of $17.3 million. The company cannot estimate its potential share of liability; an adverse determination could be material.
- Other stated risks include competition, customer practices, supply-chain and product risks, tariffs and trade restrictions, international operations, foreign currency, goodwill impairment, acquisition integration, restructuring, technology and personnel.
Important facts to verify
- Whether fourth-quarter inventory liquidation and SKU rationalization generate the expected liquidity and margin benefits.
- Progress and cost of the U.K. warehouse consolidation, including whether order fulfillment and labor efficiency improve.
- ABL borrowing-base availability, revolver utilization, covenant headroom and compliance with the term loan’s excess-cash-flow repayment requirement.
- Effects of tariffs, pricing actions, vendor concessions and product mix on gross margin.
- Potential additional impairment in European operations or other reporting units.
- Developments in the EPA Superfund matter and whether the company becomes subject to a definitive claim.
- The sustainability of quarterly dividends given operating cash usage and debt levels.