Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q of Lifetime Brands, Inc. (the Company and, unless the context otherwise requires,
references to the Company shall include its consolidated subsidiaries), contains
forward-looking
statements as defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking
statements include information concerning the Companys plans, objectives, goals, strategies, future events, future revenues, performance, capital expenditures, financing needs and other
information that is not historical information. Many of these statements appear, in particular, in
Managements Discussion and Analysis of Financial Condition and Results of Operations.
When used in this Quarterly Report on Form 10-Q,
the words estimates, expects, anticipates, projects, plans, intends, believes, may, should, seeks, and variations of such words
or similar expressions are intended to identify
forward-looking
statements. All
forward-looking
statements, including, without limitation, the Companys examination
of historical operating trends, are based upon the Companys current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company
will realize its expectations or that the Companys assumptions will prove correct.
There are a number of risks and uncertainties that could cause
the Companys actual results to differ materially from the
forward-looking
statements contained in this Quarterly Report. Important factors that could cause the Companys actual results to differ
materially from those expressed as
forward-looking
statements are set forth in the Companys 2016 Annual Report on Form 10-K in Part I, Item 1A under the heading
Risk Factors
. Such risks,
uncertainties and other important factors include, among others, risks related to:
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General economic factors and political conditions;
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Intellectual property, brands and licenses;
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International operations;
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Foreign exchange rates;
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International trade and transportation;
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Business interruptions;
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- 23 -
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Acquisitions and investments;
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There may be other factors that may cause the Companys actual results to
differ materially from the
forward-looking
statements. Except as may be required by law, the Company undertakes no obligation to publicly update or revise
forward-looking
statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.
ABOUT THE COMPANY
The Company designs, sources and sells
branded kitchenware, tableware and other products used in the home. The Companys product categories include two categories of products used to prepare, serve and consume foods: Kitchenware (kitchen tools and gadgets, cutlery, cutting boards,
shears, cookware, pantryware, spice racks, and bakeware); and Tableware (dinnerware, stemware, flatware and giftware); and one category, Home Solutions, which comprises other products used in the home (thermal beverageware, food storage, neoprene
travel products and home décor). In 2016, Kitchenware products and Tableware products accounted for approximately 90% of the Companys U.S. Wholesale net sales and 88% of the Companys consolidated net sales.
At the heart of the Company is a culture of innovation. The Company employs over 120 artists, engineers, industrial designers and graphics specialists, who
create new products, packaging and merchandising concepts. The Company expects to introduce approximately 4,000 new or redesigned products globally in 2017. Newly introduced products typically reach their peak sales in 12 to 18 months.
The Company markets several product lines within each of its product categories and under most of the Companys brands, primarily targeting moderate
price points through virtually every major level of trade. The Company believes it possesses certain competitive advantages based on its brands, its emphasis on innovation and new product development and its sourcing capabilities. The Company owns
or licenses a number of leading brands in its industry, including Farberware
®
, Mikasa
®
, KitchenAid
®
, Pfaltzgraff
®
, KitchenCraft
®
, Sabatier
®
, Mossy Oak
®
, Kamenstein
®
,
Copco
®
, masterclass
®
, Towle
®
,
Fred
®
and La Cafetière
®
. Historically, the Companys sales growth has come from expanding product offerings within its
product categories, by developing existing brands, acquiring new brands, including complementary brands in markets outside the United States, and establishing new product categories. Key factors in the Companys growth strategy have been the
selective use and management of the Companys brands and the Companys ability to provide a stream of new products and designs. A significant element of this strategy is the Companys in-house design and development teams that create
new products, packaging and merchandising concepts.
BUSINESS SEGMENTS
The Company operates in three reportable segments: U.S. Wholesale, International and Retail Direct. The U.S. Wholesale segment, is the Companys primary
domestic business that designs, markets and distributes its products to retailers and distributors. The International segment consists of certain business operations conducted outside the U.S. The Retail Direct segment is that in which the Company
markets and sells a limited selection of its products directly to consumers through its Pfaltzgraff, Mikasa, Fred and Friends, Built NY and Lifetime Sterling internet websites. The Company has segmented its operations to reflect the manner in which
management reviews and evaluates its results of operations.
EQUITY INVESTMENTS
The Company owns approximately 30% of the outstanding capital stock of Grupo Vasconia, S.A.B. (Vasconia), an integrated manufacturer of aluminum
products and one of Mexicos largest housewares companies. Shares of Vasconias capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange. The Quotation Key is VASCONI.
- 24 -
The Company accounts for its investment in Vasconia using the equity method of accounting and has recorded its
proportionate share of Vasconias net income, net of taxes, as equity in earnings (losses) in the Companys condensed consolidated statements of operations. Pursuant to a Shares Subscription Agreement (the Agreement), the
Company may designate four persons to be nominated as members of Vasconias Board of Directors. As of June 30, 2017, Vasconias Board of Directors is comprised of ten members of whom the Company has designated three members.
SEASONALITY
The Companys business and working
capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters. In 2016 and 2015, net sales for the third and fourth quarters accounted for 61% and 59% of total annual net sales, respectively. In anticipation
of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period. Consistent with the seasonality of the Companys net sales and inventory levels, the Company also experiences seasonality in its
inventory turnover and turnover days from one quarter to the next.
RESTRUCTURING
In 2016, to reduce costs and achieve synergies, the Company began the process of integrating its legal entities operating in Europe. During the three and six
months ended June 30, 2017, the Company recorded $254,000 of restructuring expense related to the execution of this plan, primarily related to severance. The Company expects to incur approximately $0.7 million of additional restructuring
charges in 2017 related to this integration.
In 2015 the Company commenced an in-depth review of its U.S. Wholesale business segment, which included the
evaluation of the segments efficiency and effectiveness, with the objective of developing a plan to restructure its operations as appropriate. During 2016 the Company expanded this restructuring plan to focus on specific actions required to
achieve the plans objectives. The restructuring plan included the realignment of product categories to best achieve the Companys strategic plan and implementation of cost reduction initiatives. During the three and six months ended
June 30, 2016, the Company recorded $1.1 million and $1.7 million of restructuring expense related to the U.S. Wholesale restructuring.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The following is an update to the corresponding accounting policy set forth in the Companys 2016 Annual Report
on Form 10-K. Except as modified below, there have been no material changes to the Companys critical accounting policies and estimates discussed in Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and Estimates included in the Companys Annual Report on Form 10-K for the year ended December 31, 2016.
Inventory
Inventory consists principally of finished
goods sourced from third-party suppliers. Inventory also includes finished goods, work in process and raw materials related to the Companys manufacture of sterling silver products. Inventory is priced using the lower of cost (first-in,
first-out basis) or net realizable value. The Company estimates the selling price of its inventory on a product by product basis based on the current selling environment. If the estimated selling price is lower than the inventorys cost, the
Company reduces the value of the inventory to its net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predicable cost of completion, disposal and transportation.
Share-based compensation
The Company accounts for its
share-based compensation arrangements in accordance with ASC Topic 718, Stock Compensation, which requires the measurement of compensation expense for all share-based compensation granted to employees and non-employee directors at fair
value on the date of grant and recognition of compensation expense over the related service period for awards expected to vest.
The Company uses the
Black-Scholes option valuation model to estimate the fair value of its stock options. The Black-Scholes option valuation model requires the input of highly subjective assumptions including the expected stock price volatility of the Companys
common stock and the risk-free interest rate. Changes in these subjective input assumptions can materially affect the fair value estimate of the Companys stock options on the date of the option grant.
- 25 -
Performance share awards are initially valued at the Companys closing stock price on the date of grant.
Each performance award represents the right to receive up to 150% of the target number of shares of common stock. The number of shares of common stock earned will be determined based on the attainment of specified performance goals by the end of the
performance period, as determined by the Compensation Committee. Compensation expense for performance awards is recognized over the vesting period, and will vary based on remeasurement during the performance period. If the performance metrics are
not probable of achievement during the performance period, compensation expense would be reversed. The awards are forfeited if the performance metrics are not achieved as of the end of the performance period. The performance share awards vest in
full at the end of a three year period.
The Company bases the estimated fair value of restricted stock awards on the fair value of its common stock on
the date of grant. The estimated fair value of an award is determined based on the closing price of the Companys common stock on the date of grant multiplied by the number of shares awarded. Compensation expense is recognized on a
straight-line basis over the vesting period. Forfeitures are accounted for as they occur.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of the Company as a percentage of net sales for the periods indicated:
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Three Months Ended
June 30,
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Six Months
Ended June 30,
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2017
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2016
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2017
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2016
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Net sales
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Cost of sales
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63.5
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63.6
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62.4
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63.5
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Gross margin
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36.5
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36.4
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37.6
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36.5
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Distribution expenses
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10.7
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10.5
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11.3
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11.2
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Selling, general and administrative expenses
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28.2
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25.3
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28.4
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26.9
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Restructuring expenses
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0.2
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0.9
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0.1
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0.7
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Loss from operations
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(2.6
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)
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(0.3
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)
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(2.2
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)
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(2.3
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)
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Interest expense
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(0.9
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)
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(1.0
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)
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(0.8
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)
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(1.0
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)
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Loss on early retirement of debt
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(0.1
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)
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(0.2
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)
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(0.1
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)
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Loss before income taxes and equity in earnings
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(3.6
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)
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(1.5
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)
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(3.0
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)
|
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(3.4
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)
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Income tax benefit
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1.4
|
|
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0.4
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1.1
|
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1.2
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Equity in earnings (losses), net of taxes
|
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0.4
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0.4
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(0.1
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)
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Net loss
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(1.8
|
)%
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(1.1
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)%
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(1.5
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)%
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(2.3
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)%
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- 26 -
MANAGEMENTS DISCUSSION AND ANALYSIS
THREE MONTHS ENDED JUNE 30, 2017 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2016
Net Sales
Net sales for the three months ended June 30, 2017 were $117.4 million, a decrease of $0.7 million, or 0.6%, as compared to net sales of $118.1 million
for the corresponding period in 2016.
Net sales for the U.S. Wholesale segment for the three months ended June 30, 2017 were $94.8 million, an
increase of $2.1 million, or 2.3%, as compared to net sales of $92.7 million for the corresponding period in 2016.
Net sales for the U.S. Wholesale
segments Kitchenware product category were $61.5 million for the three months ended June 30, 2017, an increase of $2.9 million, or 4.9%, as compared to $58.6 million for the corresponding period in 2016. The increase in the U.S. Wholesale
segments Kitchenware product category was attributable to increases in the kitchen tools and gadgets, cookware and bakeware product lines.
Net
sales for the U.S. Wholesale segments Tableware product category were $22.3 million for the three months ended June 30, 2017, a decrease of $4.4 million, or 16.5%, as compared to $26.7 million for the corresponding period in 2016. The
decrease was attributable to the sales decline at department stores and a club promotion not repeated.
Net sales for the U.S. Wholesale segments
Home Solutions product category were $11.0 million for the three months ended June 30, 2017, an increase of $3.5 million, or 46.7%, as compared to $7.5 million for the corresponding period in 2016. The increase reflects the continued growth in
hydration programs, including products under the Built brand. This increase was partially offset by a decline in the home decór product lines.
Net
sales for the International segment were $19.4 million for the three months ended June 30, 2017, a decrease of $2.2 million, or 10.2%, as compared to net sales of $21.6 million for the corresponding period in 2016. In constant currency, net
sales increased approximately 0.8%. The increase, in constant currency, was due to an increase in kitchenware sales to online retailers and export sales. This increase was partially offset by a decrease in tableware sales.
Net sales for the Retail Direct segment were $3.3 million for the three months ended June 30, 2017, a decrease of $0.5 million, or 13.2%, as compared to
net sales of $3.8 million for the corresponding period in 2016. The decrease was attributable to more emphasis on the wholesale online sales channel and a decrease in promotions.
Gross margin
Gross margin for the three months ended
June 30, 2017 was $42.8 million, or 36.5%, as compared to $43.0 million, or 36.4%, for the corresponding period in 2016.
Gross margin for the U.S.
Wholesale segment was $34.6 million, or 36.5%, for the three months ended June 30, 2017, as compared to $33.0 million, or 35.6%, for the corresponding period in 2016. Gross margin fluctuates from period to period based on a number of factors,
including product and customer mix. The increase reflects a change in customer and product mix, in part from the timing of customer programs.
Gross
margin for the International segment was $6.0 million, or 31.1%, for the three months ended June 30, 2017, as compared to $7.5 million, or 34.8% for the corresponding period in 2016. The decrease in margin is the result of tableware product
lines
de-emphasized,
higher customer allowances and increases in product testing and factory audit expenses.
Gross margin for the Retail Direct segment was $2.2 million, or 67.4%, for the three months ended June 30, 2017, as compared to $2.5 million, or 65.9%,
for the corresponding period in 2016. The increase in gross margin percentage in the Retail Direct segment reflects a decrease in promotions.
- 27 -
Distribution expenses
Distribution expenses for the three months ended June 30, 2017 were $12.6 million as compared to $12.4 million for the corresponding period in 2016.
Distribution expenses as a percentage of net sales were 10.7% for the three months ended June 30, 2017, as compared to 10.5% for the three months ended June 30, 2016.
Distribution expenses as a percentage of net sales for the U.S. Wholesale segment were approximately 9.8% and 9.4% for the three months ended June 30,
2017 and 2016, respectively. As a percentage of sales shipped from the Companys warehouses, distribution expenses for the U.S. Wholesale segment were 10.8% for the three months ended June 30, 2017 and 10.3% for the three months ended
June 30, 2016. The increases reflect the effect of an increase in facility costs, labor costs and higher prepaid freight sales.
Distribution
expenses as a percentage of net sales for the International segment were approximately 11.3% and 12.0% for the three months ended June 30, 2017 and 2016, respectively. Distribution expenses as a percentage of sales shipped from the
Companys U.K. warehouses were 12.9% and 13.4% for the three months ended June 30, 2017 and 2016, respectively. The improvement reflects an improvement in labor management, freight rates and the decrease in the use of third party
warehousing.
Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 33.3% and 28.9% for the three months
ended June 30, 2017 and 2016, respectively. The increase was from an increase in freight rates.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended June 30, 2017 were $33.1 million, an increase of $3.3 million, or 11.1%,
as compared to $29.8 million for the corresponding period in 2016.
Selling, general and administrative expenses for the three months ended June 30,
2017, for the U.S. Wholesale segment were $21.6 million, an increase of $1.6 million, or 8.0%, from $20.0 million for the corresponding period in 2016. The 2017 period reflects an increase in employee related expenses (including severance),
intangible amortization related to the Companys 2016 acquisitions, customer credit insurance and an increase in marketing expense. As a percentage of net sales, selling, general and administrative expenses were 22.8% and 21.6% for the three
months ended June 30, 2017 and 2016, respectively.
Selling, general and administrative expenses for the three months ended June 30, 2017 for
the International segment were $7.3 million, an increase of $2.0 million, from $5.3 million for the corresponding period in 2016. The increase in expenses was primarily due to unrealized losses on foreign currency contracts in the current period, as
compared to unrealized gains on foreign currency contracts in the corresponding 2016 period, resulting from the Companys hedging activity. In addition, the increase in expenses is attributable to SAP implementation costs.
Selling, general and administrative expenses for the Retail Direct segment were $1.4 million for the three months ended June 30, 2017, as compared to
$1.3 million for the three months ended June 30, 2016. The increase in expenses was primarily due to an increase in employee headcount.
Unallocated
corporate expenses for the three months ended June 30, 2017 were $2.8 million as compared to $3.2 million for the corresponding period in 2016. The decrease was primarily attributable to a decrease in professional fees and acquisition related
expenses.
Restructuring expenses
During the three
months ended June 30, 2017, the Company recorded $0.3 million of restructuring expense, primarily for severance related to the integration of legal entities operating in Europe.
During the three months ended June 30, 2016, the Company recorded $1.1 million of restructuring expense, primarily for consulting fees related to the
execution of the U.S. Wholesale restructuring plan.
Interest expense
Interest expense for the three months ended June 30, 2017 was $1.0 million, a decrease of $0.1 million, from $1.1 million for the three months ended
June 30, 2016. The decrease in expense was attributable to a decrease in average borrowings outstanding.
- 28 -
Loss on early retirement of debt
In April 2017, the Company prepaid the remaining outstanding balance under the Companys Term Loan. In connection therewith, the Company wrote-off debt
issuance costs of $0.1 million.
In April 2016, the Company made a prepayment of $15.2 million in accordance with the amended terms of the Companys
Term Loan. In connection therewith, the Company wrote-off debt issuance costs of $0.3 million.
Income tax benefit
The income tax benefit for the three months ended June 30, 2017 was $1.7 million as compared to $0.5 million for the corresponding period in
2016. The Companys effective tax rate for the three months ended June 30, 2017 was 39.9% as compared to 28.1% for the corresponding 2016 period. The effective tax rate for the three months ended June 30, 2017, as a percentage of
quarterly losses, increased due to a change in the jurisdictional mix in forecasted earnings for the year, as well as the benefit generated on share based compensation. This was partially offset by foreign losses for which no benefit was recorded.
Equity in earnings (losses)
Equity in earnings of
Vasconia was $0.5 million, net of taxes, for the three months ended June 30, 2017, as compared to equity in losses of $0.2 million, net of tax, for the corresponding 2016 period. Equity in earnings (losses) for the three months ended
June 30, 2017 and 2016 includes a deferred tax benefit (expense) of $0.1 million and ($0.3) million, respectively, due to the requirement to record tax benefits for foreign currency translation losses through other comprehensive income (loss),
with a corresponding adjustment to deferred tax liabilities. Vasconia reported net income of $1.2 million and $0.5 million for the three months ended June 30, 2017 and 2016, respectively.
During the three months ended June 30, 2016, the Company sold its 40% equity interest in GS Internacional S/A (GSI), a wholesale distributor
of branded housewares products in Brazil. Upon the sale of its equity interest in GSI, the Company recognized a net gain of $189,000. This gain represents the net consideration received of R$2.3 million (approximately $567,000) reduced by currency
translation losses of $378,000 that were recognized when the equity interest was sold.
- 29 -
MANAGEMENTS DISCUSSION AND ANALYSIS
SIX MONTHS ENDED JUNE 30, 2017 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2016
Net Sales
Net sales for the six months ended June 30, 2017 were $230.7 million, an increase of $1.7 million, or 0.7%, as compared to net sales of $229.0 million for
the corresponding period in 2016.
Net sales for the U.S. Wholesale segment for the six months ended June 30, 2017 were $182.1 million, an increase
of $7.1 million, or 4.1%, as compared to net sales of $175.0 million for the corresponding period in 2016.
Net sales for the U.S. Wholesales
Kitchenware product category were $117.9 million for the six months ended June 30, 2017, an increase of $3.7 million, or 3.2%, as compared to $114.2 million for the corresponding period in 2016. The increase in the U.S. Wholesale segments
Kitchenware product category was primarily attributable to the cookware and bakeware product lines, partially offset by a decrease in cutlery sales due to the timing of programs with certain retailers.
Net sales for the U.S. Wholesales Tableware product category were $42.1 million for the six months ended June 30, 2017, a decrease of $4.3 million,
or 9.3%, as compared to $46.4 million for the corresponding period in 2016. The decrease was attributable to the sales decline at department stores and, in part, due to the timing of programs with certain retailers.
Net sales for the U.S. Wholesales Home Solutions product category were $22.1 million for the six months ended June 30, 2017, an increase of $7.7
million, or 53.5%, as compared to $14.4 million for the corresponding period in 2016. The increase reflects the continued growth in hydration programs, including products under the Built brand, as well as a new drug store program.
Net sales for the International segment for the six months ended June 30, 2017 were $40.6 million, a decrease of $4.6 million, as compared to net sales
of $45.2 million for the corresponding period in 2016. In constant currency, net sales increased approximately 2.2%. The increase, in constant currency, was due to an increase in sales to U.K. national retailers and kitchenware export sales.
Net sales for the Retail Direct segment for the six months ended June 30, 2017 were $8.0 million, a decrease of $0.7 million, or 8.0%, as compared to
$8.7 million for the corresponding period in 2016. The decrease was attributable to more emphasis on the wholesale online sales channel and a decrease in promotions.
Gross margin
Gross margin for the six months ended
June 30, 2017 was $86.7 million, or 37.6%, as compared to $83.5 million, or 36.5%, for the corresponding period in 2016.
Gross margin for the U.S.
Wholesale segment was $68.1 million, or 37.4% for the six months ended June 30, 2017, as compared to $61.8 million, or 35.3%, for the corresponding period in 2016. Gross margin fluctuates from period to period based on a number of factors,
including product and customer mix. The increase reflects a change in customer and product mix, in part from the timing of customer programs and a decrease in ocean freight rates.
Gross margin for the International segment was $13.3 million, or 32.7%, for the six months ended June 30, 2017, as compared to $15.9 million, or 35.2%,
for the corresponding period in 2016. The decrease in margin is the result of a change in customer mix, tableware product lines de-emphasized, higher customer allowances and the weakened British Pound.
Gross margin for the Retail Direct segment was $5.3 million, or 67.0%, for the six months ended June 30, 2017, as compared to $5.8 million, or 66.7%, for
the corresponding period in 2016. The increase in gross margin percentage in Retail Direct reflects a reduction in promotional expenses in the 2017 period.
- 30 -
Distribution expenses
Distribution expenses for the six months ended June 30, 2017 were $26.0 million as compared to $25.7 million for the corresponding period in 2016.
Distribution expenses as a percentage of net sales were 11.3% and 11.2% for the six months ended June 30, 2017 and 2016, respectively.
Distribution
expenses as a percentage of net sales for the U.S. Wholesale segment were approximately 10.4% and 10.2% for the six months ended June 30, 2017 and 2016, respectively. Distribution expenses as a percentage of sales shipped from the
Companys warehouses for the U.S. Wholesale segment were 11.0% and 10.8% for the six months ended June 30, 2017 and 2016, respectively. The increases reflect a decrease in labor efficiencies and an increase in facility costs.
Distribution expenses as a percentage of net sales for the International segment were approximately 11.1% for the six months ended June 30, 2017, as
compared to 11.5% for the corresponding period in 2016. As a percentage of sales shipped from the Companys U.K. warehouses, distribution expenses for the International segment were 12.4% and 13.0% for the six months ended June 30, 2017
and 2016, respectively. The improvement reflects a reduction in facility expenses due to a reduction in third party warehousing and improvements in labor management.
Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 32.5% and 29.9% for the six months ended June 30,
2017 and 2016, respectively. The increase was from an increase in freight rates.
Selling, general and administrative expenses
Selling, general and administrative expenses for the six months ended June 30, 2017 were $65.5 million, an increase of $3.8 million, or 6.2%, as compared
to $61.7 million for the corresponding period in 2016.
Selling, general and administrative expenses for the six months ended June 30, 2016 for the
U.S. Wholesale segment were $43.2 million, an increase of $2.3 million, or 5.6%, as compared to $40.9 million for the corresponding period in 2016. The 2017 period reflects an increase in employee related expenses (including severance), IT software
to improve efficiencies, intangible amortization related to the Companys 2016 acquisitions, customer credit insurance and an increase in marketing expenses. As a percentage of net sales, selling, general and administrative expenses increased
to 23.7% for the six months ended June 30, 2017 compared to 23.4% for the corresponding period in 2016.
Selling, general and administrative expenses
for the six months ended June 30, 2017 for the International segment were $13.4 million, an increase of $2.7 million, or 25.2%, as compared to $10.7 million for the corresponding period in 2016. The increase in expenses in the 2017 period was
primarily due to unrealized loss on foreign currency contracts in the current period, as compared to unrealized gains on foreign currency contracts in the corresponding 2016 period, resulting from the Companys hedging activity. In addition,
the increase in expenses is attributable to SAP implementation costs.
Selling, general and administrative expenses for the six months ended June 30,
2017 and 2016 for the Retail Direct segment were $3.0 million and $3.1 million, respectively. The decrease in expenses was primarily due to a reduction in headcount and selling expenses.
Unallocated corporate expenses for the six months ended June 30, 2017 and 2016 were $5.9 million and $7.0 million, respectively. The decrease was
primarily attributable to decrease in professional fees and acquisition related expenses.
Restructuring expenses
During the six months ended June 30, 2017, the Company recorded $0.3 million of restructuring expense, primarily for severance. These charges are related
to the integration of legal entities operating in Europe.
During the six months ended June 30, 2016, the Company recorded $1.7 million of
restructuring expense. The expense for the period includes severance of approximately $0.6 million and consulting expenses of approximately $1.1 million. These charges are related to the execution of the U.S. Wholesale restructuring plan.
- 31 -
Interest expense
Interest expense for the six months ended June 30, 2017 was $1.9 million as compared to $2.3 million for the corresponding period in 2016. The decrease in
expense was attributable to a decrease in average borrowings and a decrease in average borrowing rate due to Term Loan repayments.
Loss on early
retirement of debt
In April 2017, the Company repaid the outstanding balance under its Term Loan. In connection therewith, the Company wrote-off debt
issuance costs of $0.1 million.
In April 2016, the Company made a prepayment of $15.2 million in accordance with the amended terms of the Companys
Term Loan. In connection therewith, the Company wrote-off debt issuance costs of $0.3 million.
Income tax benefit
The income tax benefit for the six months ended June 30, 2017 was $2.6 million as compared to $2.7 million for the corresponding period in 2016. The
Companys effective tax rate for the six months ended June 30, 2017 was 37.4% as compared to 33.9% for the corresponding 2016 period. The effective tax rate for the six months ended June 30, 2017, as a percentage of quarterly losses,
increased due to a change in the jurisdictional mix in forecasted earnings for the year, as well as the benefit generated on share based compensation. This was partially offset by foreign losses for which no benefit was recorded.
Equity in earnings (losses)
Equity in earnings of
Vasconia was $1.0 million, net of taxes, for the six months ended June 30, 2017, as compared to equity in losses of $0.3 million, net of taxes, for the corresponding 2016 period. Equity in earnings (losses) for the six months ended
June 30, 2017 and 2016 includes a deferred tax benefit (expense) of $0.4 million and ($0.5) million, respectively, due to the requirement to record tax benefits for foreign currency translation losses through other comprehensive income (loss),
with a corresponding adjustment to deferred tax liabilities. Vasconia reported income from operations of $4.1 million and $2.9 million for the six months ended June 30, 2017 and 2016, respectively, and net income of $2.4 million and $0.7
million for the six months ended June 30, 2017 and 2016, respectively.
During the six months ended June 30, 2016, the Company sold its 40%
equity interest in GSI. Upon the sale of its equity interest in GSI the Company recognized a net gain of $189,000. This gain represents the net consideration received of R$2.3 million (approximately $567,000) reduced by currency translation losses
of $378,000 that were recognized when the equity interest was sold.
- 32 -
LIQUIDITY AND CAPITAL RESOURCES
The Companys principal sources of cash to fund liquidity needs are: (i) cash provided by operating activities and (ii) borrowings available
under its Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A, as Administrative Agent and Co-Collateral Agent, and HSBC Bank USA, National Association, as Syndication Agent and Co-Collateral Agent, and the other Lenders and
Loan Parties party thereto, as amended, (the Credit Agreement), which provides for, among other things, a revolving credit facility commitment totaling $175.0 million (the Revolving Credit Facility) and a term loan facility
(the Term Loan). The Companys primary uses of funds consist of working capital requirements, capital expenditures and payments of principal and interest on its debt.
At June 30, 2017, the Company had cash and cash equivalents of $4.1 million, compared to $7.9 million at December 31, 2016. Working capital was
$180.2 million at June 30, 2017 compared to $165.2 million at December 31, 2016. Liquidity, which includes cash and cash equivalents and availability under its credit facilities (subject to the financial covenants of the Credit Agreement),
was $66.9 million.
Inventory, a large component of the Companys working capital, is expected to fluctuate from period to period, with inventory
levels higher primarily in the June through October time period. The Company also expects inventory turnover to fluctuate from period to period based on product and customer mix. Certain product categories have lower inventory turnover rates as a
result of minimum order quantities from the Companys vendors or customer replenishment needs. Certain other product categories experience higher inventory turnover due to lower minimum order quantities or trending sale demands. For the three
months ended June 30, 2017, inventory turnover was 1.9 times, or 196 days, as compared to 2.1 times, or 174 days, for the three months ended June 30, 2016. The decrease in turnover and increase in turnover days is, in part, the result of
an increase in average inventory in the U.S. Wholesale segment due to an increase in inventory as the result of the Companys acquisitions in the fourth quarter of 2016.
The Companys Credit Agreement, which expires in January 2019, provides for, among other things, a Revolving Credit Facility commitment totaling $175.0
million ($40.0 million of which is available for multi-currency borrowings) and a Term Loan facility.
At June 30, 2017, borrowings outstanding under
the Revolving Credit Facility were $99.0 million and open letters of credit were $2.8 million. At June 30, 2017, availability under the Revolving Credit Facility was approximately $62.8 million. The borrowing capacity under the Revolving Credit
Facility depends, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly, and certain trademark values based upon periodic appraisals, and may be lower in the first and second quarters when the Companys
inventory level is lower due to seasonality.
In April 2017, the Company repaid its $7.0 million outstanding balance under the Term Loan. As of
December 31, 2016, $9.5 million was outstanding under the Term Loan. At December 31, 2016, unamortized debt issuance costs were $157,000. In connection with the repayment of the Term Loan, the Company wrote off the unamortized debt
issuance costs of $110,000 during the six months ended June 30, 2017.
The Companys payment obligations under the Revolving Credit Facility are
unconditionally guaranteed by each of its existing U.S. subsidiaries and will be unconditionally guaranteed by each of its future U.S. subsidiaries. Certain payment obligations under the Revolving Credit Facility are also direct obligations of its
foreign subsidiary borrowers designated as such under the Credit Agreement and, subject to limitations on such guaranties, are guaranteed by the foreign subsidiary borrowers, as well as by the Company. The obligations of the Company under the
Revolving Credit Facility and any hedging arrangements and cash management services and the guarantees by its domestic subsidiaries in respect of those obligations are secured by substantially all of the assets and stock (but in the case of foreign
subsidiaries, limited to 65% of the capital stock in first-tier foreign subsidiaries and not including the stock of subsidiaries of such first-tier foreign subsidiaries) owned by the Company and the U.S. subsidiary guarantors, subject to certain
exceptions. Such security interests consist of a first-priority lien, subject to certain permitted liens, with respect to the assets of the Company and its domestic subsidiaries pledged as collateral in favor of lenders under the Revolving Credit
Facility.
Interest rates on outstanding borrowings at June 30, 2017 ranged from 2.25% to 5.25%. In addition, the Company pays a commitment fee of
0.375% on the unused portion of the Revolving Credit Facility.
- 33 -
The Credit Agreement provides for customary restrictions and events of default. Restrictions include limitations
on additional indebtedness, acquisitions, investments and payment of dividends, among other things. Further, the Credit Agreement provides that at any time any Term Loan is outstanding or at any time no Term Loan is outstanding and availability
under the Revolving Credit Facility is less than $17.5 million and continuing until availability of at least $20.0 million is maintained for three consecutive months, the Company is required to maintain a minimum fixed charge coverage ratio of 1.20
to 1.00 for each of four consecutive fiscal quarter periods. The Company was in compliance with the financial covenants of the Credit Agreement as of June 30, 2017.
Covenant Calculations
Consolidated adjusted EBITDA, as
provided below, is used in the calculation of covenants provided for in the Companys Credit Agreement. The following is the Companys consolidated adjusted EBITDA for the last four fiscal quarters:
|
|
|
|
|
|
|
Consolidated adjusted
EBITDA for the Four
Quarters Ended June
30, 2017
|
|
|
|
(in thousands)
|
|
Three months ended June 30, 2017
|
|
$
|
1,361
|
|
Three months ended March 31, 2017
|
|
|
2,251
|
|
Three months ended December 31, 2016
|
|
|
25,100
|
|
Three months ended September 30, 2016
|
|
|
16,652
|
|
|
|
|
|
|
Total for the four quarters
|
|
$
|
45,364
|
|
|
|
|
|
|
Capital expenditures for the three months ended June 30, 2017 were $2.7 million.
Non-GAAP financial measure
Consolidated adjusted EBITDA
is a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The following is a reconciliation of the net loss, as reported, to consolidated adjusted EBITDA, for the three and six months
ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Net loss as reported
|
|
$
|
(2,096
|
)
|
|
$
|
(1,191
|
)
|
|
$
|
(3,427
|
)
|
|
$
|
(5,479
|
)
|
Subtract out:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed equity in (earnings) losses, net
|
|
|
(430
|
)
|
|
|
(18
|
)
|
|
|
(970
|
)
|
|
|
132
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
(1,698
|
)
|
|
|
(473
|
)
|
|
|
(2,642
|
)
|
|
|
(2,743
|
)
|
Interest expense
|
|
|
1,001
|
|
|
|
1,122
|
|
|
|
1,942
|
|
|
|
2,315
|
|
Loss on early retirement of debt
|
|
|
110
|
|
|
|
272
|
|
|
|
110
|
|
|
|
272
|
|
Depreciation and amortization
|
|
|
3,348
|
|
|
|
3,578
|
|
|
|
6,634
|
|
|
|
7,062
|
|
Stock compensation expense
|
|
|
726
|
|
|
|
487
|
|
|
|
1,530
|
|
|
|
1,290
|
|
Permitted acquisition related expenses
|
|
|
(9
|
)
|
|
|
369
|
|
|
|
26
|
|
|
|
924
|
|
Restructuring expenses
(1)
|
|
|
254
|
|
|
|
1,060
|
|
|
|
254
|
|
|
|
1,701
|
|
Severance expenses
(1)
|
|
|
155
|
|
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated adjusted EBITDA
|
|
$
|
1,361
|
|
|
$
|
5,206
|
|
|
$
|
3,457
|
|
|
$
|
5,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restructuring expenses and severance expenses represent non-recurring charges incurred during such periods and are permitted exclusions from the Companys
consolidated adjusted EBITDA, pursuant to the Companys Credit Agreement.
|
- 34 -
Accounts Receivable Purchase Agreement
In order to improve its liquidity during seasonally high working capital periods, in 2016 the Company entered into an uncommitted Receivables Purchase
Agreement with HSBC Bank USA, National Association (HSBC), as Purchaser (the Receivables Purchase Agreement). Under the Receivables Purchase Agreement, the Company may offer to sell certain eligible accounts receivable (the
Receivables) to HSBC, which may accept such offer, and purchase the offered Receivables. Under the Receivables Purchase Agreement, following each purchase of Receivables, the outstanding aggregate purchased Receivables shall not exceed
$25.0 million. HSBC will assume the credit risk of the Receivables purchased; and the Company will continue to be responsible for all non-credit risk matters. The Company will service the Receivables, and as such servicer, collect and otherwise
enforce the Receivables on behalf of HSBC. The term of the agreement is for 364 days and shall automatically be extended for annual successive terms unless terminated. Either party may terminate the agreement at any time upon sixty days prior
written notice to the other party. Pursuant to this agreement, the Company sold to HSBC $17.6 million and $39.2 million of Receivables during the three and six months ended June 30, 2017, respectively. A charge of $63,000 and $130,000 related
to the sale of the Receivables is included in selling, general and administrative expenses in the condensed consolidated statement of operations for the three and six months ended June 30, 2017, respectively.
Derivatives
The Company is a party to interest rate swap
agreements with an aggregate notional amount of $10.5 million to manage interest rate exposure in connection with its variable interest rate borrowings. The hedge periods in these agreements commenced in March 2013 and will expire in September 2018,
and the notional amounts amortize over this period. The hedge provides for a fixed payment of interest at an annual rate of 1.05% in exchange for the Adjusted LIBO Rate.
The Company has also entered into certain foreign exchange contracts, to primarily offset the earnings impact related to fluctuations in foreign currency
exchange rates associated with sales and inventory purchases denominated in foreign currencies. These foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting. The changes in the fair value of
these contracts are recorded in the condensed consolidated statement of operations.
Operating activities
Net cash used in operating activities was $4.3 million for the six months ended June 30, 2017 as compared to $19.6 million for the corresponding 2016
period. The change in operating cash flow was primarily due to the timing of the collection of receivables in the current period, as compared to the 2016 period, partially offset by an increase in inventory in the current period, as compared to the
2016 period.
Investing activities
Net cash used in
investing activities was $2.7 million for the six months ended June 30, 2017, as compared to $1.1 million for the corresponding 2016 period.
Financing activities
Net cash provided by financing
activities was $3.0 million for the six months ended June 30, 2017 as compared to $20.4 million for the corresponding 2016 period. The change in financing activities was attributable to the change in borrowings under the Companys
Revolving Credit Facility and the prepayment of borrowings under the Companys Term Loan.
- 35 -