Business Context and Reporting Period
Lifetime Brands, Inc. filed its Form 10-Q for the quarterly period ended June 30, 2009. The Company designs, markets, and distributes consumer products for the home, including food preparation, tabletop, and home décor items under brands such as Pfaltzgraff, Mikasa, Farberware, and KitchenAid. Operations are divided into Wholesale and Direct-to-Consumer segments. The Company ceased operating its retail factory and clearance stores by December 31, 2008. The business is highly seasonal, with the majority of sales occurring in the third and fourth quarters.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|
| Net Sales | $85.3 million | $175.5 million | $190.6 million |
| Net Loss | $(1.3) million | $(7.2) million | $(9.9) million |
| Loss Per Share (Basic/Diluted) | $(0.10) | $(0.60) | $(0.83) |
| Gross Margin % | 37.7% | 36.6% | 39.7% |
| Operating Income (Loss) | $1.4 million | $(1.9) million | $(15.7) million |
| Consolidated EBITDA | $3.9 million | $4.9 million | $(5.2) million |
| Cash and Equivalents | $3.8 million | $3.8 million | $1.2 million (end of period) |
| Bank Borrowings | $57.8 million | $57.8 million | $89.3 million (Dec 31, 2008) |
| Convertible Notes | $69.2 million (carrying value) | $69.2 million | $67.9 million (Dec 31, 2008) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 7.7% for the quarter and 7.9% for the six months compared to 2008. The Wholesale segment saw a slight increase on a reported basis but a 6.6% decrease on a comparable basis (excluding Mikasa acquisition timing). The Direct-to-Consumer segment declined significantly due to the closure of retail stores and a weak retail environment.
- Improved Profitability: The Company reported an operating profit of $1.4 million for the quarter, a significant improvement from an operating loss of $6.9 million in the same period in 2008. The six-month operating loss narrowed to $1.9 million from $15.7 million in 2008.
- Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 29.5% for the quarter and 27.0% for the six months, driven by the elimination of retail store costs and expense reduction initiatives. Distribution expenses also declined due to the closure of the York, PA distribution center and improved labor efficiencies.
- Restructuring Adjustments: The Company recorded a net restructuring benefit of $0.7 million for the quarter and a charge of $0.2 million for the six months. These figures include adjustments to previously recorded accruals and asset impairments related to the decision not to vacate certain leased spaces.
- Cash Flow: Net cash provided by operating activities was $33.2 million for the six months ended June 30, 2009, compared to a use of $11.2 million in the prior year period. This improvement was driven by a reduction in inventory and accounts receivable.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects continued negative effects from unfavorable global economic conditions, which may impact sales volumes and pricing. The Company anticipates that cash flows from operations and availability under its Credit Facility will be sufficient to fund operations, though liquidity sources are currently limited.
- Credit Facility: The Company has a $150 million secured credit facility. It was not in compliance with covenants at December 31, 2008, but obtained a waiver and amendment in March 2009. As of June 30, 2009, the Company was in compliance. Borrowings were $57.8 million, with $44.3 million in availability (net of minimum required availability).
- Convertible Notes: The Company has $75 million in 4.75% Convertible Senior Notes due July 15, 2011. Effective January 1, 2009, the Company adopted FSP APB 14-1, resulting in a retrospective adjustment that increased interest expense and accumulated deficit.
- Risks: Key risks include the economic downturn affecting consumer spending, customer credit risks (including potential bankruptcies of retail partners), and the 2009 influenza pandemic. The Company is also subject to environmental liability regarding the San German Ground Water Contamination site in Puerto Rico and a breach of contract lawsuit by Syratech Corporation alleging damages of approximately $2.1 million.
- Unusual Items: The Company received a $11.3 million federal income tax refund in the second quarter of 2009, which was used to pay down debt. The Company also recorded a non-cash asset impairment reduction of $0.8 million related to restructuring.
Investor Verification Checklist
- Covenant Compliance: Verify continued compliance with the amended Credit Facility covenants, specifically minimum EBITDA, net sales, and capital expenditure limits.
- Inventory Levels: Monitor inventory levels and gross margins, as the Company is executing an inventory reduction plan that may impact margins in the future.
- Customer Concentration: Assess the impact of the liquidation of significant customers and the changing relationship with the Canadian distributor (Accent-Fairchild Group).
- Debt Maturity: Review the status of the $75 million Convertible Notes maturing in July 2011 and the Company's ability to refinance or convert them.
- Legal Contingencies: Track the progress of the Syratech Corporation lawsuit and the EPA investigation regarding the Puerto Rico environmental site.