LIFETIME BRANDS, INC quarterly report, Q2 FY2023

Lifetime Brands, Inc. — Q2 2023 Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2023. The unaudited filing covers the U.S. and International segments. Lifetime designs, sources and sells branded kitchenware, tableware and home products. Sales are seasonal, with most revenue historically generated in the third and fourth quarters.

Financial performance

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Net sales	$146.4 million	$151.3 million	$291.9 million	$334.0 million
Gross margin	$56.0 million; 38.2%	$55.2 million; 36.5%	$109.8 million; 37.6%	$118.2 million; 35.4%
Income (loss) from operations	$4.4 million	$(0.5) million	$2.6 million	$3.9 million
Net loss	$(6.5) million	$(3.5) million	$(15.3) million	$(3.1) million
Loss per diluted share	$(0.31)	$(0.16)	$(0.72)	$(0.14)
Net cash provided by operating activities	Not separately provided	Not separately provided	$29.0 million	$(8.9) million

Q2 sales declined 3.2%; six-month sales declined 12.6%. On a constant-currency basis, declines were 3.5% and 12.1%, respectively.
Gross margin percentage improved because of lower inbound freight costs and favorable product mix. Q2 gross margin increased 170 basis points; six-month margin increased 220 basis points.
Operating results improved in Q2 despite lower sales, reflecting reduced distribution and selling, general and administrative expenses. Six-month operating income declined because of lower sales and $0.9 million of restructuring expense.
Interest expense increased to $5.5 million in Q2 and $10.9 million year-to-date, primarily because of higher borrowing rates.
Six-month net loss included $8.6 million of equity-method losses from Grupo Vasconia, including a $6.5 million non-cash impairment charge. The Q2 impairment charge was $4.4 million.

Segment and operating trends

U.S. segment: Q2 sales declined 1.6% to $135.0 million; six-month sales declined 11.5% to $268.5 million. Q2 operating income increased to $11.7 million from $7.5 million, while six-month operating income declined to $17.7 million from $21.9 million.
International segment: Q2 sales declined 19.1% to $11.5 million; six-month sales declined 23.5% to $23.4 million. The segment remained unprofitable, with Q2 operating loss of $2.8 million and six-month operating loss of $4.7 million.
Kitchenware and Tableware sales were pressured by retailer inventory rightsizing, lower replenishment orders and the absence of a prior-year warehouse club program. Home Solutions sales were comparatively resilient.
International demand was affected by weaker U.K. end-market conditions, lower consumer confidence and reduced e-commerce sales.

Cash flow, liquidity and debt

Cash and cash equivalents were $15.1 million at June 30, 2023, down from $23.6 million at December 31, 2022. Working capital was $222.4 million, compared with $270.4 million at year-end.
Operating cash flow was $29.0 million, driven mainly by lower inventory and working-capital changes. Capital expenditures were $1.0 million.
Financing activities used $36.5 million, including $44.9 million of term-loan repayments, $2.5 million of share repurchases and $1.9 million of dividends.
The Company repurchased $47.2 million of term-loan principal in June for $95 per $100 of principal, recognizing a $1.5 million gain. Term-loan debt was $196.8 million including the current portion; revolving borrowings were $25.2 million.
ABL availability was $152.1 million at June 30, 2023. Management reported total liquidity of approximately $190.5 million, including cash, ABL availability and available receivables-purchase capacity.
The Term Loan matures February 28, 2025. The ABL facility generally matures August 26, 2027, subject to a springing maturity provision if the Term Loan is not refinanced or repaid. Interest rates at June 30 were 8.72% on the Term Loan and 4.93% on ABL borrowings.
The Company was in compliance with its debt covenants at June 30, 2023. Trailing-twelve-month pro forma Adjusted EBITDA, as defined in the debt agreements, was $52.9 million.

Guidance, outlook, risks and unusual items

No specific revenue or earnings guidance is provided in the filing. Management expects cash, operating cash flow and ABL availability to fund operations for the next twelve months, but notes that adverse changes could require additional debt or equity financing.
Management continues to cite inflation, supply-chain and transportation costs, tariffs, retailer inventory reductions, weaker consumer demand, U.K. economic conditions, foreign exchange, competition, third-party manufacturing, cybersecurity and geopolitical conditions as key risks.
Inventory strategy has changed in response to market conditions, and 2023 inventory patterns may differ from historical seasonality. Inventory turnover improved to 1.7 times, or 213 days, in Q2 versus 1.4 times, or 270 days, in Q2 2022.
The Company recorded a $6.5 million year-to-date non-cash impairment of its Vasconia investment, reducing its carrying value to $5.3 million. Vasconia owns 24.7% of its outstanding capital stock and reported substantially weaker results.
The Company incurred $0.8 million of restructuring expense related to the Executive Chairman’s termination payment. A $1.5 million debt-retirement gain partially offset higher interest expense.
In the Wallace EPA matter, the Company has reserved $5.6 million for probable and estimable remediation liabilities. A consent decree was signed in July 2023 but remained subject to court approval and other procedural steps. The ultimate liability cannot currently be estimated and could be material.
In the CBP tariff-classification matter, potential additional duties were estimated at $0.9 million, with possible penalties of up to $1.7 million for negligence or $3.4 million for gross negligence. The Company considers the potential loss reasonably possible but not probable.
The quarterly dividend remained $0.0425 per share. The Board declared another $0.0425 per share dividend on August 2, 2023, payable November 15, 2023.

Most important facts to verify

Whether the sharp first-half sales decline stabilizes during the seasonally important third and fourth quarters.
Retailer inventory levels, replenishment orders and demand trends in Kitchenware, Tableware and the U.K.
The Company’s ability to refinance or repay the $182.0 million non-current Term Loan before its February 2025 maturity and manage higher variable interest costs.
Actual cash generation, ABL borrowing-base availability and the effect of any required $16.0 million estimated 2024 excess-cash-flow payment.
Further deterioration or recovery in Vasconia’s operating results and share price, including potential additional investment impairments.
Final court approval and implementation of the Wallace EPA consent decree, related financial-assurance requirements and ultimate remediation exposure.
Resolution of the CBP investigation and any resulting duties or penalties.