Lifetime Brands, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2012. Lifetime Brands designs, sources and sells branded kitchenware, tabletop, home solutions and related products primarily to retailers and distributors, with a smaller direct-to-consumer Internet business. Results are highly seasonal, with most sales occurring in the third and fourth quarters. The filing was reviewed, not audited, by Ernst & Young LLP.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $128.1 million | $124.7 million | $332.0 million | $306.8 million |
| Gross margin | $44.9 million; 35.1% | $44.2 million; 35.5% | $120.7 million; 36.4% | $111.7 million; 36.4% |
| Income from operations | $7.4 million; 5.8% | $10.3 million; 8.3% | $12.8 million; 3.8% | $14.6 million; 4.7% |
| Net income | $3.9 million | $7.5 million | $5.8 million | $8.6 million |
| Diluted EPS | $0.30 | $0.60 | $0.45 | $0.69 |
| Operating cash flow | Not separately reported for the quarter | $(7.9) million | $(27.1) million |
Q3 sales increased 2.7%, while nine-month sales increased 8.2%, primarily from the November 2011 acquisition of Creative Tops. The Kitchenware category grew strongly, but Tabletop and Home Solutions declined. Q3 SG&A rose 9.7% to $25.9 million, including Creative Tops expenses. Interest expense declined to $1.3 million in Q3 and $4.6 million for nine months, but earnings included a $1.0 million Q3 and $1.4 million nine-month loss on early debt retirement.
Consolidated EBITDA, a non-GAAP measure, was $11.6 million in Q3 and $23.4 million for the nine months, compared with $13.5 million and $23.8 million, respectively, in the prior-year periods. EBITDA for the four quarters ended September 30, 2012 was $37.7 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1.7 million at September 30, 2012, down from $3.0 million at December 31, 2011.
- Accounts receivable were $91.3 million and inventory was $129.0 million, compared with $77.7 million and $110.3 million, respectively, at year-end 2011.
- Total debt was approximately $108.7 million, consisting of $73.7 million drawn under the revolving facility and $35.0 million under the Senior Secured Term Loan. The balance sheet classified $37.8 million of revolver borrowings and $3.5 million of term debt as current.
- The revolving facility was amended in July 2012: commitment increased to $175.0 million, maturity extended to July 27, 2017, and potential expansion increased to $225.0 million. Availability was approximately $90.1 million, with $1.2 million of letters of credit outstanding.
- The new $35.0 million Senior Secured Term Loan matures July 27, 2018 and bore interest at 5.25% at quarter-end. The Company was in compliance with its debt covenants; fixed-charge coverage was 2.62x versus a required minimum of 1.10x.
- Capital expenditures were $3.4 million for the nine months. Cash dividends declared were $0.025 per common share per quarter; a further $0.025 dividend was declared on November 2, 2012.
Material changes versus the prior comparable period
- Creative Tops contributed $10.9 million of Q3 sales and $30.1 million of nine-month sales, but increased SG&A and contributed to margin pressure.
- Q3 Kitchenware sales rose 15.4%; Tabletop sales fell 25.2%; Home Solutions sales fell 32.8%. For nine months, Kitchenware rose 16.1%, while Tabletop and Home Solutions declined 17.0% and 23.7%, respectively.
- Operating margin declined from 8.3% to 5.8% in Q3 and from 4.7% to 3.8% for nine months. Net margin declined from 6.0% to 3.0% in Q3 and from 2.8% to 1.7% for nine months.
- The Company refinanced its former term loan in July 2012, repaying the remaining $30.0 million and recording a $1.4 million write-off of unamortized debt issuance costs.
- Operating cash use improved year over year but remained negative, reflecting increases in receivables and inventory. Financing activities provided $10.5 million, compared with $27.9 million in the prior-year period.
- Retail Direct sales increased 10.3% in Q3 but declined 7.4% for nine months, partly because the Company terminated its consumer print catalog and reduced promotional activity.
Outlook, commentary, risks and unusual items
- Management stated that the home décor category experienced significant sales and profit declines, which it attributed primarily to reduced retail space and pricing pressure. The Company is re-branding some products from Elements and Melannco under Mikasa and Pfaltzgraff.
- A $1.1 million non-cash impairment charge was recorded against the Elements trade name. Management stated that additional impairment charges could be required if negative trends continue.
- An interest-rate swap with a $35.0 million notional amount was entered into to hedge variable-rate debt exposure. The swap produced a $258,000 after-tax unrealized loss in accumulated other comprehensive loss.
- The Company expects continued borrowing and repayment under the revolver to support seasonal working-capital requirements. Inventory and receivables typically increase before the holiday shipping season.
- Key disclosed risks include liquidity, general economic conditions, supply chain disruptions, competition, customer concentration or changes, intellectual property, personnel, regulatory matters, technology, foreign currency exposure and risks associated with acquisitions and investments.
- An EPA investigation concerns potential groundwater contamination at a leased manufacturing facility in Puerto Rico. The Company could not estimate any possible liability and was unaware of a determination requiring remedial action. Other litigation was described as routine and not expected to be material.
- The filing provides no formal revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether declines in Tabletop and Home Solutions continue and whether the Elements re-branding improves sales and profitability.
- Inventory levels, receivables and seasonal revolver borrowings after the holiday selling period.
- Compliance with the Senior Secured Term Loan’s EBITDA, leverage, fixed-charge coverage, capital-expenditure and dividend restrictions.
- Exposure to variable interest rates despite the interest-rate swap and the effect of foreign currency movements on international operations and equity investments.
- Potential additional intangible-asset impairment charges and the ultimate outcome of the Puerto Rico EPA matter.
- The sustainability of operating cash flow, dividend payments and liquidity given the Company’s seasonal working-capital needs.