Lifetime Brands, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Lifetime Brands designs, sources and sells branded kitchenware, tableware and home products through retailers, distributors and direct-to-consumer websites. The filing covers the unaudited three and nine months ended September 30, 2021. The business is highly seasonal, with most sales occurring in the third and fourth quarters and inventory typically building from June through October.
Financial performance and liquidity
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 |
|---|---|---|---|---|
| Net sales | $224.8 million | $224.8 million | $607.1 million | $520.0 million |
| Gross margin | $83.1 million; 37.0% | $78.8 million; 35.1% | $215.3 million; 35.5% | $185.9 million; 35.8% |
| Income from operations | $21.7 million; 9.6% | $21.5 million; 9.6% | $41.9 million; 6.9% | $0.6 million; 0.1% |
| Net income (loss) | $12.6 million | $13.9 million | $21.4 million | $(18.2) million |
| Diluted EPS | $0.57 | $0.65 | $0.98 | $(0.87) |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $14.6 million | $49.2 million |
- Third-quarter sales were essentially flat year over year, while nine-month sales increased 16.8%. Nine-month constant-currency sales increased 15.7%.
- Third-quarter gross margin improved 190 basis points, primarily from price increases and product and channel mix. Nine-month gross margin declined 30 basis points because of higher inbound freight costs, product mix and a prior-year duty exclusion benefit.
- Third-quarter net income declined despite higher operating income, principally because of a higher effective tax rate of 31.1% versus 21.2% and lower equity-related benefits. The nine-month comparison improved substantially because 2020 included a $20.1 million goodwill and intangible-asset impairment charge and $0.3 million of restructuring expense.
- Cash and cash equivalents were $8.7 million at September 30, 2021, compared with $36.0 million at December 31, 2020. Working capital was $251.5 million.
- Total ABL availability was $145.1 million, producing reported liquidity of approximately $153.8 million when combined with cash. The ABL carried $1.6 million of borrowings and $3.3 million of standby letters of credit.
- Debt consisted primarily of a $238.7 million net term loan and the ABL facility. The term loan interest rate was 4.5% and the ABL interest rate was 3.5% at September 30, 2021. The company paid $10.5 million of term-loan excess-cash-flow principal during the period.
- Inventory increased to $256.9 million from $203.2 million at year-end 2020. Management reported nine-month inventory turnover of 2.4 times, or 154 days, versus 3.1 times, or 119 days, in the prior-year quarter.
- Adjusted EBITDA, as defined in the debt agreements, was $96.7 million for the twelve months ended September 30, 2021. This is a non-GAAP measure and should not be viewed as a substitute for GAAP earnings or cash flow.
Material changes versus the prior comparable period
- U.S. nine-month sales increased 16.7% to $540.5 million, led by Kitchenware and Tableware. International sales increased 17.7% to $66.6 million.
- Third-quarter U.S. sales decreased 1.9%, mainly because supply-chain constraints reduced Kitchenware sales by 5.2%. International sales increased 16.8%.
- U.S. operating income increased to $66.3 million for the nine months from $28.4 million, while International operating losses improved to $6.2 million from $11.9 million.
- Operating cash flow fell $34.6 million year over year to $14.6 million, primarily because of increased inventory investment and timing of accounts-payable and accrued-expense payments.
- Financing activities used $41.5 million of cash, including $42.5 million of ABL repayments and $10.5 million of term-loan repayments. The company used $16.2 million in financing cash in the prior-year period.
- The company acquired the Year & Day business and certain assets for approximately $0.2 million; management stated the acquisition was not material to reported results.
- The company’s ownership in Grupo Vasconia declined from approximately 30% to 25% through dilution and the sale of 2.2 million shares. The company received approximately $3.1 million in proceeds and recognized net losses related to the dilution and sale in equity in earnings.
Outlook, risks, contingencies and unusual items
- Management expects higher inbound freight, product costs, container constraints, port backlogs, longer lead times and trucking shortages to continue affecting results into the fourth quarter of fiscal 2021.
- Management believes cash on hand, operating cash flow and ABL availability are sufficient to fund operations for the next twelve months, but notes that adverse conditions could require additional debt or equity financing.
- The company was in compliance with its debt covenants at September 30, 2021. The ABL matures in March 2023 and the term loan matures in February 2025.
- The Wallace environmental matter resulted in a $0.5 million reserve for testing and remedial-design liabilities. The company cannot currently estimate its ultimate share of liability, which could be material after adverse determinations.
- A U.S. Customs and Border Protection tariff-classification investigation could result in approximately $2.2 million of additional duties and potential penalties of up to $4.4 million for negligence or $8.8 million for gross negligence. The company considers the potential loss reasonably possible but not probable.
- The company has $75.0 million of interest-rate swap notional value and $31.3 million of foreign-exchange contract notional value. Hedging provides limited protection against interest-rate, currency and counterparty risks.
- The board declared a quarterly dividend of $0.0425 per share on November 2, 2021, payable February 14, 2022.
- No material changes were reported to previously disclosed risk factors or internal controls. Disclosure controls were determined to be effective.
Important facts for investors to verify
- Whether supply-chain disruption, freight inflation and product-cost increases continue to pressure gross margin and fourth-quarter fulfillment.
- Whether elevated inventory and slower turnover convert into holiday-season sales and operating cash flow without material markdowns or write-downs.
- ABL borrowing-base availability, term-loan amortization and compliance with fixed-charge and leverage-related covenants.
- The ultimate outcome and financial exposure from the Wallace environmental matter and the CBP tariff investigation.
- The sustainability of reported liquidity given only $8.7 million of cash, seasonal working-capital requirements and reliance on the ABL facility.
- The effect of the reduced Vasconia ownership and any additional planned sales of that investment on future earnings and liquidity.