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LCUT > SEC Filings for LCUT > Form 10-Q on 3-May-2013All Recent SEC Filings

Show all filings for LIFETIME BRANDS, INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LIFETIME BRANDS, INC


3-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include information concerning Lifetime Brands, Inc. and its subsidiaries' (the "Company's") 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 Management's 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," and "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, the Company's examination of historical operating trends, are based upon the Company's 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 Company's assumptions will prove correct.

There are a number of risks and uncertainties that could cause the Company's actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Important factors that could cause the Company's actual results to differ materially from those expressed as forward-looking statements are set forth in the Company's 2012 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:

• General economic factors and political conditions, including risks related to recent acquisitions and investments;

• Liquidity;

• Interest;

• Competition;

• Customers;

• Supply chain;

• Intellectual property;

• Regulatory matters;

• Technology;

• Personnel; and

• Business interruptions.

There may be other factors that may cause the Company's 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.

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ABOUT THE COMPANY

The Company designs, sources and sells branded kitchenware, tabletop and other products used in the home. The Company's product categories include two categories of products that people use to prepare, serve and consume foods, Kitchenware (kitchen tools and gadgets, cutlery, cutting boards, cookware, bakeware and novelty housewares) and Tabletop (dinnerware, flatware and glassware); and one category, Home Solutions, which comprises other products used in the home (food storage, pantryware, spices and home décor). In 2012, Kitchenware products and Tabletop products accounted for approximately 80% of the Company's wholesale net sales and 76% of its consolidated net sales.

The Company markets several product lines within each of its product categories and under most of the Company's brands, primarily targeting moderate to premium price points through 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 the leading brands in its industry including Farberware®, KitchenAid®, Mikasa®, Pfaltzgraff ®, Cuisinart®, Fred®, Elements ®, Melannco® and V&A®. Historically, the Company's sales growth has come from expanding product offerings within its product categories, by developing existing brands, acquiring new brands and establishing new product categories. Key factors in the Company's growth strategy have been the selective use and management of the Company's brands and the Company's ability to provide a stream of new products and designs. A significant element of this strategy is the Company's in-house design and development teams that create new products, packaging and merchandising concepts.

BUSINESS SEGMENTS

The Company operates in two reportable business segments: the Wholesale segment, which is the Company's primary business that designs, markets and distributes its products to retailers and distributors, and the Retail Direct segment, in which the Company markets and sells a limited selection of its products to consumers through its Pfaltzgraff ®, Mikasa®, Housewares Deals® and Lifetime Sterling® Internet websites. The operating results of Fred ® & Friends are included in the Wholesale segment from December 20, 2012, the date it was acquired by the Company.

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 Mexico's largest housewares companies. Shares of Vasconia's capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange (www.bmv.com.mx). The Quotation Key is VASCONI.

The Company accounts for its investment in Vasconia using the equity method of accounting and has recorded its proportionate share of Vasconia's net income, net of taxes, as equity in earnings in the Company's consolidated statements of operations. Pursuant to a Shares Subscription Agreement (the "Agreement"), the Company may designate four persons to be nominated as members of Vasconia's Board of Directors. As of March 31, 2013, Vasconia's Board of Directors is comprised of ten members of which the Company has designated three members.

The Company owns approximately 40% of the outstanding capital stock of GS Internacional S/A ("GSI"). GSI is a leading wholesale distributor of branded housewares products in Brazil. The Company accounts for its investment in GSI using the equity method of accounting and has recorded its proportionate share of GSI's net income, net of taxes, as equity in earnings in the Company's consolidated statements of operations. Pursuant to a Shareholders' Agreement, the Company has the right to designate three persons (including one independent person, as defined) to be nominated as members of GSI's Board of Directors which shall be comprised of a maximum of seven members. As of March 31, 2013, GSI's Board of Directors is comprised of six members (including two independent members) of which the Company has designated three members (including one independent member).

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SEASONALITY

The Company's business and working capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters. In 2012 and 2011 net sales for the third and fourth quarters accounted for 58% 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to the Company's critical accounting policies and estimates discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

RESULTS OF OPERATIONS

The following table sets forth statements of operations data of the Company as a
percentage of net sales for the periods indicated:



                                                              Three Months Ended
                                                                   March 31,
                                                              2013           2012
 Net sales                                                      100.0 %       100.0 %

 Cost of sales                                                   63.2          62.9


 Gross margin                                                    36.8          37.1

 Distribution expenses                                           10.9          10.8
 Selling, general and administrative expenses                    26.0          23.4


 Income from operations                                          (0.1 )         2.9

 Interest expense                                                (1.2 )        (1.6 )


 Income (loss) before income taxes and equity in earnings        (1.3 )         1.3

 Income tax (provision) benefit                                   0.4          (0.5 )
 Equity in earnings, net of taxes                                 0.3           0.4


 Net income (loss)                                               (0.6 )%        1.2 %

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MANAGEMENT'S DISCUSSION AND ANALYSIS

THREE MONTHS ENDED MARCH 31, 2013 AS COMPARED TO THE THREE MONTHS ENDED

MARCH 31, 2012

Net Sales

Net sales for the three months ended March 31, 2013 were $98.7 million, a decrease of $10.3 million, or 9.4%, as compared to net sales of $109.0 million for the corresponding period in 2012.

Net sales for the Wholesale segment for the three months ended March 31, 2013 were $93.1 million, a decrease of $10.2 million or 9.9%, as compared to net sales of $103.3 million for the corresponding period in 2012. Net sales for the Company's Kitchenware product category were $52.7 million for the three months ended March 31, 2013, a decrease of $2.9 million, or 5.2%, as compared to $55.6 million for the corresponding period in 2012. Net sales for the Company's Kitchenware product category included $3.4 million of net sales in 2013 from Fred® & Friends, which was acquired by the Company in December 2012. The decrease in the Company's Kitchenware product category reflects lower volumes due, in part, to certain sales programs in the 2012 period which were not repeated in the 2013 period. Net sales for the Company's Tabletop product category were $29.3 million for the three months ended March 31, 2013, a decrease of $5.4 million, or 15.6%, as compared to $34.7 million for the corresponding period in 2012. The Tabletop product category sales decrease reflects a decline in dinnerware sales which principally resulted from a $3.8 million decrease in net sales at Creative Tops due to weakness in the economy in the United Kingdom and the impact of higher duties on ceramic products imposed by the European Union. Net sales for the Company's Home Solutions product category were $11.1 million for the three months ended March 31, 2013, a decrease of $1.9 million, or 14.6%, as compared to $13.0 million for the corresponding period in 2012. The decrease in sales for the Company's Home Solutions product category was due to a decline in close out activity and lower volume at a major warehouse club.

Net sales for the Retail Direct segment for the three months ended March 31, 2013 were $5.6 million, a decrease of $0.1 million, or 1.8%, as compared to $5.7 million for the corresponding period in 2012.

Gross margin

Gross margin for the three months ended March 31, 2013 was $36.3 million, or 36.8%, as compared to $40.5 million, 37.1%, for the corresponding period in 2012.

Gross margin for the Wholesale segment was 34.9% for the three months ended March 31, 2013 as compared to 35.4% for the corresponding period in 2012. The decrease in gross margin primarily reflects changes in product mix and pricing pressure in the European economy. The decline was partially offset by the inclusion of Fred® & Friends.

Gross margin for the Retail Direct segment was 68.6% for the three months ended March 31, 2013 and the corresponding period in 2012.

Distribution expenses

Distribution expenses for the three months ended March 31, 2013 were $10.8 million as compared to $11.7 million for the corresponding period in 2012. Distribution expenses as a percentage of net sales were 10.9% for the three months ended March 31, 2013 as compared to 10.8% for the corresponding period in 2012.

Distribution expenses as a percentage of sales for the Wholesale segment shipped from the Company's warehouses were 10.2% as compared to 10.5% for the corresponding period in 2012. The decrease reflects improved labor management and other expense efficiencies which more than offset the effect of lower shipments.

Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 30.4% for the three months ended March 31, 2013 as compared to 30.6% for the corresponding period in 2012.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 31, 2013 were $25.6 million, an increase of 0.4%, as compared to $25.5 million for the corresponding period in 2012.

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Selling, general and administrative expenses for the three months ended March 31, 2013 for the Wholesale segment were $20.8 million, an increase of $0.4 million, or 2.0%, from $20.4 million for the corresponding period in 2012. The increase was primarily due to the inclusion of Fred® & Friends offset by a decrease in employee related expenses. As a percentage of net sales, selling, general and administrative expenses increased to 22.3% for the three months ended March 31, 2013 compared to 19.7% for the corresponding period in 2012.

Selling, general and administrative expenses for the Retail Direct segment were $2.1 million and $2.2 million for the three months ended March 31, 2013 and 2012, respectively. The decrease was primarily attributable to lower paid search expense in the 2013 period.

Unallocated corporate expenses for the three months ended March 31, 2013 and 2012 were $2.7 million and $2.9 million, respectively. The decrease was primarily attributable to a decrease in employee related expenses and a reduction in acquisition related expenses, partially offset by higher professional fees in the 2013 period.

Interest expense

Interest expense for the three months ended March 31, 2013 was $1.2 million as compared to $1.7 million for the corresponding period in 2012. The decrease in interest expense was attributable to lower average interest rates and lower average borrowings in 2013 compared to 2012.

Income tax benefit (provision)

The income tax benefit for the three months ended March 31, 2013 was $0.4 million as compared to a $0.6 million income tax provision for the corresponding period in 2012. The Company's effective tax rate for the three months ended March 31, 2013 was 31.2% as compared to a tax rate of 38.3% for the 2012 period. The lower effective tax rate for the three months ended March 31, 2013 reflects the impact of a reduction in certain state tax rate factors on deferred tax assets, which partially offset the current period income tax benefit.

Equity in earnings

Equity in the earnings of Vasconia, net of taxes, was $0.3 million for the three months ended March 31, 2013 and $0.5 million for the three months ended March 31, 2012. Vasconia reported income from operations for the three months ended March 31, 2013 and 2012 of $2.1 million and $3.3 million, respectively, and net income of $1.2 million for the three months ended March 31, 2013 as compared to $2.0 million for the three months ended March 31, 2012. The reduction in income is the result of a decline in margins of aluminum products.

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LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of cash to fund liquidity needs are: (i) cash provided by operating activities and (ii) borrowings available under its revolving credit facility. The Company's primary uses of funds consist of working capital requirements, capital expenditures and payments of principal and interest on its debt.

Revolving Credit Facility

The Company has a $175.0 million secured credit agreement (the "Revolving Credit Facility"), maturing on July 27, 2017, with a bank group led by JPMorgan Chase Bank, N.A.

At March 31, 2013, borrowings outstanding under the Revolving Credit Facility were $38.3 million and open letters of credit were $1.1 million. Availability under the Revolving Credit Facility was approximately $75.0 million, or 42.9% of the total loan commitment at March 31, 2013.

Borrowings under the Revolving Credit Facility bear interest, at the Company's option, at one of the following rates: (i) the Alternate Base Rate, defined as the greater of the Prime Rate, Federal Funds Rate plus 0.5% or the Adjusted LIBO Rate plus 1.0%, plus a margin of 1.0% to 1.75%, or (ii) the Eurodollar Rate, defined as the Adjusted LIBO Rate plus a margin of 2.0% to 2.75%. The respective margins are based upon availability. Interest rates on outstanding borrowings at March 31, 2013 ranged from 2.50% to 4.50%. In addition, the Company pays a commitment fee of 0.375% to 0.50% on the unused portion of the Revolving Credit Facility.

The Revolving Credit Facility provides for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, acquisitions, investments and payment of dividends, among others.

The Company classifies a portion of the Revolving Credit Facility as a current liability if the Company's intent and ability is to repay the loan from cash flows from operations which are expected to occur within the year. Repayments and borrowings under the facility can vary significantly from planned levels based on cash flow needs and general economic conditions. The Company expects that it will continue to borrow and repay funds, subject to availability, under the facility based on working capital and other corporate needs.

Senior Secured Term Loan

The Company has a $35.0 million second lien credit agreement (the "Senior Secured Term Loan"), which matures on July 27, 2018, with JPMorgan Chase Bank, N.A.

The Senior Secured Term Loan bears interest, at the Company's option, at the Alternate Base Rate (as defined) plus 4.00%, or the Adjusted LIBOR Rate (as defined) plus 5.00%. The interest rate on outstanding borrowings at March 31, 2013 was 5.25%. The Company is a party to an interest rate swap agreement with a notional amount of $35.0 million to manage interest rate exposure in connection with its variable interest rate borrowings. The hedge period in the agreement commenced in March 2013 and expires in June 2018, and the notional amount amortizes over this period. The hedge provides for a fixed payment of interest at an annual rate of 1.05% in exchange for the Adjusted LIBOR Rate. Beginning in March 2013, based on the interest rate swap agreement, the Company will pay interest at a fixed annual rate of 6.05%.

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The Senior Secured Term Loan provides that for any four consecutive fiscal quarters, (x) if EBITDA (as defined) is less than $34.0 million but equal to or greater than $30.0 million, the ratio of Indebtedness (as defined) to EBITDA shall not exceed 3.0 to 1.0 and (y) EBITDA shall not be less than $30.0 million. Capital expenditures are limited and for the year ended December 31, 2013, such limit is $9.0 million. The Senior Secured Term Loan provides for other customary restrictions and events of default. Restrictions include limitations on additional indebtedness, acquisitions, investments and payment of dividends, among others. Further, the Senior Secured Term Loan provides that the Company shall maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for any four consecutive fiscal quarters. The Company was in compliance with the financial covenants of the Senior Secured Term Loan and Revolving Credit Facility at March 31, 2013.

The Company's Consolidated EBITDA for the four quarters ended March 31, 2013 was $38.1 million, as follows:

                                                   Consolidated EBITDA
                                              for  the four quarters ended
                                                     March 31, 2013
                                                     (in thousands)

      Three months ended March 31, 2013                               3,079
      Three months ended December 31, 2012                           17,868
      Three months ended September 30, 2012                          11,568
      Three months ended June 30, 2012                                5,584

      Total for the four quarters             $                      38,099

Capital expenditures for the three months ended March 31, 2013 were $1.2 million.

Non-GAAP financial measure

Consolidated EBITDA is a non-GAAP financial measure within the meaning of Regulation G promulgated by the U.S. Securities and Exchange Commission. The following is a reconciliation of the net income (loss) as reported to Consolidated EBITDA for the three months ended March 31, 2013 and 2012:

                                                     Three Months Ended
                                                          March 31,
                                                     2013           2012
                                                       (in thousands)
          Net income (loss) as reported            $    (632 )     $ 1,344
          Subtract out:
          Undistributed equity earnings, net            (246 )        (398 )
          Add back:
          Income tax provision (benefit)                (399 )         588
          Interest expense                             1,162         1,698
          Depreciation and amortization                2,523         2,207
          Stock compensation expense                     671           698
          Permitted acquisition related expenses          -             85

          Consolidated EBITDA                      $   3,079       $ 6,222

Operating activities

Cash provided by operating activities was $25.0 million for the three months ended March 31, 2013 as compared to $3.3 million for the corresponding period in 2012. The increase was primarily attributable to a decrease in accounts receivable offset in part by a decrease in accounts payable, accrued expenses, other liabilities and income taxes payable.

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Investing activities

Cash used in investing activities was $1.2 million for the three months ended March 31, 2013 as compared to $0.5 million for the corresponding period in 2012. The increase in investing activities primarily related to the purchase of a new product quality management system implemented by the Company and computer equipment.

Financing activities

Cash used in financing activities was $22.6 million for the three months ended March 31, 2013 as compared to $1.4 million for the 2012 period. The Company used cash flows from operations to repay $22.6 million of debt in the 2013 period compared to $1.1 million in the corresponding period in 2012.

Stock repurchase program

On April 30, 2013, Lifetime's Board of Directors authorized the repurchase of up to $10 million of the Company's common stock. The repurchase authorization permits the Company to effect the repurchases from time to time through open market purchases and privately negotiated transactions.

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