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LCUT > SEC Filings for LCUT > Form 10-Q on 8-Nov-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


8-Nov-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-lookingstatements 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-lookingstatements 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, tableware 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 Tableware (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 Tableware 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 KitchenAid®, Farberware®, Mikasa®, Pfaltzgraff®, Fred®, Kamenstein®, Towle®, 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
(loss), net of taxes, as equity in earnings (losses) 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 September 30, 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 (losses) 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 September 30, 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 of the two independent members).

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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           Nine Months Ended
                                                      September 30,               September 30,
                                                   2013           2012          2013          2012
Net sales                                            100.0 %       100.0 %       100.0 %       100.0 %

Cost of sales                                         64.0          64.9          63.3          63.6


Gross margin                                          36.0          35.1          36.7          36.4

Distribution expenses                                  7.5           8.2           9.3           9.6
Selling, general and administrative expenses          20.2          20.2          23.8          22.6
Restructuring Expense                                  0.1            -            0.1            -
Intangible asset impairment                             -            0.9            -            0.4


Income from operations                                 8.2           5.8           3.5           3.8

Interest expense                                      (0.9 )        (1.0 )        (1.1 )        (1.4 )
Loss on early retirement of debt                        -           (0.8 )          -           (0.4 )


Income before income taxes and equity in
earnings (losses)                                      7.3           4.0           2.4           2.0

Income tax provision                                  (2.6 )        (1.5 )        (1.0 )        (0.8 )
Equity in earnings (losses), net of taxes             (3.9 )         0.5          (1.5 )         0.5


Net income (loss)                                      0.8 %         3.0 %        (0.1 )%        1.7 %

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MANAGEMENT'S DISCUSSION AND ANALYSIS

THREE MONTHS ENDED SEPTEMBER 30, 2013 AS COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2012

Net Sales

Net sales for the three months ended September 30, 2013 were $142.2 million, an increase of $14.1 million, or 11.0%, as compared to net sales of $128.1 million for the corresponding period in 2012.

Net sales for the Wholesale segment for the three months ended September 30, 2013 were $138.5 million, an increase of $14.7 million, or 11.9%, as compared to net sales of $123.8 million for the corresponding period in 2012. Net sales for the Company's Kitchenware product category were $81.2 million for the three months ended September 30, 2013, an increase of $13.0 million, or 19.1%, as compared to $68.2 million for the corresponding period in 2012. Net sales for the Company's Kitchenware product category included $4.8 million of net sales for the three months ended September 30, 2013 from Fred® & Friends, which was acquired by the Company in December 2012. The increase in the Company's Kitchenware product category was primarily attributable to successful new kitchen tools and gadgets programs during the third quarter of 2013. Net sales for the Company's Tableware product category were $41.7 million for the three months ended September 30, 2013, a decrease of $1.2 million, or 2.8%, as compared to $42.9 million for the corresponding period in 2012. The Tableware product category sales decrease was attributable to a decline in sales of luxury tableware related products and a decline in sales at Creative Tops. Net sales for the Company's Home Solutions product category were $15.6 million, an increase of $2.9 million, or 22.8%, as compared to $12.7 million for the three months ended September 30, 2013 and 2012. The Home Solutions product category sales increase was the result of larger seasonal programs related to wall décor and lighting products in the 2013 quarter.

Net sales for the Retail Direct segment for the three months ended September 30, 2013 were $3.7 million, a decrease of $0.6 million, or 14.0%, as compared to $4.3 million for the corresponding period in 2012. The decrease in Retail Direct sales resulted from reduced promotional activity in the current period.

Gross margin

Gross margin for the three months ended September 30, 2013 was $51.3 million, or 36.0%, as compared to $44.9 million, or 35.1%, for the corresponding period in 2012.

Gross margin for the Wholesale segment was 35.1% for the three months ended September 30, 2013 as compared to 33.9% for the corresponding period in 2012. The increase in gross margin primarily reflects the inclusion of Fred® & Friends which was acquired in December 2012 and a change in product mix.

Gross margin for the Retail Direct segment was 70.8% for the three months ended September 30, 2013 as compared to 67.8% for the corresponding period in 2012. Gross margin increased for the three months ended September 30, 2013 as a result of reduced discounting of dinnerware in 2013 principally from the elimination of the use of multiple coupons for one transaction.

Distribution expenses

Distribution expenses for the three months ended September 30, 2013 were $10.6 million as compared to $10.5 million for the corresponding period in 2012. Distribution expenses as a percentage of net sales were 7.5% for the three months ended September 30, 2013 as compared to 8.2% for the three months ended September 30, 2012.

As a percentage of sales shipped from the Company's warehouses, distribution expenses for the Wholesale segment were 8.6% for the three months ended September 30, 2013 as compared to 9.1% for the corresponding period in 2012. The decrease primarily reflects favorable absorption of fixed expenses due to the closure of the Fred® & Friends distribution center and corresponding distribution of the Fred® & Friends products through the Company's existing warehouses and other expense efficiencies.

Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 29.5% for the three months ended September 30, 2013 as compared to 29.4% for the corresponding period in 2012.

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Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended September 30, 2013 were $28.9 million, an increase of $3.0 million, or 11.6%, as compared to $25.9 million for the corresponding period in 2012.

Selling, general and administrative expenses for the three months ended September 30, 2013 for the Wholesale segment were $23.6 million, an increase of $2.8 million, or 13.5%, from $20.8 million for the corresponding period in 2012. The increase was due to the inclusion of Fred® & Friends and an increase in selling expenses, employee related expenses and trade show expenses. As a percentage of net sales, selling, general and administrative expenses increased to 17.0% for the three months ended September 30, 2013 compared to 16.8% for the corresponding period in 2012.

Selling, general and administrative expenses for the Retail Direct segment were $1.8 million for the three months ended September 30, 2013 as compared to $1.9 for the corresponding period in 2012.

Unallocated corporate expenses for the three months ended September 30, 2013 were $3.5 million as compared to $3.2 million for the corresponding period in 2012. The increase was primarily attributable to an increase in professional fees and employee related expenses.

Restructuring expenses

Restructuring expenses for the three months ended September 30, 2013 were $0.1 million. The expenses resulted from the planned closure of the Fred® & Friends distribution center which included the elimination of certain employee positions in the third quarter.

Intangible asset impairment

In 2012, the Company's home décor products category experienced a significant decline in sales and profit. The Company believed the most significant factor was the reduction in retail space allocated to the category which also contributed to pricing pressure. While the Company believed this market condition was not permanent, following a strategic review of the business, it decided to re-brand a portion of the home décor products under the Mikasa®and Pfaltzgraff® trade names. As a result of these factors, the Company recorded an impairment charge of $1.1 million in its statement of operations in the third quarter of 2012 which reduced the book value of its Elements® trade name.

Interest expense

Interest expense for the three months ended September 30, 2013 was $1.3 million for the three months ended September 30, 2012 and 2013.

Loss on early retirement of debt

In July 2012, the Company repaid the remaining $30.0 million of the Term Loan. In connection therewith, the Company wrote off debt issuance costs of $1.0 million.

Income tax provision

The income tax provision for the three months ended September 30, 2013 was $3.9 million as compared to $1.9 million for the corresponding period in 2012. The Company's effective tax rate for the three months ended September 30, 2013 was 37.2% as compared to 37.7% for the 2012 period. The decrease in the effective tax rate for the three months ended September 30, 2013 reflects the benefit of a reduced tax rate in the United Kingdom and certain favorable adjustments resulting from state tax return filings in the United States.

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Equity in earnings (losses)

Equity in losses of Vasconia, net of taxes, was $5.3 million (including a charge of $5.0 million, net of tax for the reduction in the fair value of the Company's investment in Vasconia) for the three months ended September 30, 2013 as compared to equity in earnings of $0.8 million for the three months ended September 30, 2012. The reduction in the fair value was based upon a decline in the quoted stock price of Vasconia and the 2013 quarterly decline in the operating results of Vasconia. Vasconia reported a loss from operations of $0.1 million for the three months ended September 30, 2013 as compared income from operations of $3.8 million for the three months ended September 30, 2012. Vasconia reported a net loss of $0.9 million for the three months ended September 30, 2013 as compared to net income of $2.7 million for the three months ended September 30, 2012. The net loss in the third quarter is the result of a decline in kitchenware and aluminum sales and reduced margins on aluminum sales. Equity in losses of GSI was $132,000 and $45,000 for the three months ended September 30, 2013 and 2012, respectively.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

NINE MONTHS ENDED SEPTEMBER 30, 2013 AS COMPARED TO THE NINE MONTHS ENDED

SEPTEMBER 30, 2012

Net Sales

Net sales for the nine months ended September 30, 2013 were $337.9 million, an increase of $5.9 million, or 1.8%, as compared to net sales of $332.0 million for the corresponding period in 2012.

Net sales for the Wholesale segment for the nine months ended September 30, 2013 were $324.9 million, an increase of $6.6 million, or 2.1%, as compared to net sales of $318.3 million for the corresponding period in 2012. Net sales for the Company's Kitchenware product category were $189.4 million for the nine months ended September 30, 2013, an increase of $17.6 million, or 10.2%, as compared to $171.8 million for the corresponding period in 2012. Net sales for the Company's Kitchenware product category included $12.1 million of net sales for the nine months ended September 30, 2013 from Fred® & Friends, which was acquired by the Company in December 2012. The increase in the Company's Kitchenware product category was primarily attributable to successful new cutlery programs in the first half of the year and new kitchen tools and gadgets programs during the third quarter of 2013. Net sales for the Company's Tableware product category were $99.4 million for the nine months ended September 30, 2013, a decrease of $12.0 million, or 10.8%, as compared to $111.4 million for the corresponding period in 2012. The Tableware product category sales decrease reflects a decline in luxury tableware sales and a $4.7 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 $36.1 million for the nine months ended September 30, 2013, an increase of $1.0 million, or 2.8%, as compared to $35.1 million for the corresponding period in 2012. The increase in sales for the Company's Home Solutions product category was primarily due to larger seasonal programs related to wall décor and lighting products in the third quarter of 2013, which offset reduced sales in the first half of the year resulting from a decline in close out activity and lower volume at a major warehouse club in the first quarter.

Net sales for the Retail Direct segment for the nine months ended September 30, 2013 were $13.0 million, a decrease of $0.7 million, or 5.1%, as compared to $13.7 million for the corresponding period in 2012. The decrease in Retail Direct sales resulted from reduced promotional activity in the current period.

Gross margin

Gross margin for the nine months ended September 30, 2013 was $123.9 million, or 36.7%, as compared to $120.7 million, or 36.4%, for the corresponding period in 2012.

Gross margin for the Wholesale segment was 35.4% for the nine months ended September 30, 2013 as compared to 35.0% for the corresponding period in 2012. The increase in gross margin primarily reflects the inclusion of Fred® & Friends which was acquired in December 2012.

Gross margin for the Retail Direct segment was 70.0% for the nine months ended September 30, 2013 as compared to 68.4% for the corresponding period in 2012. Gross margin increased for the nine months ended September 30, 2013 as a result of reduced discounting of dinnerware in 2013 principally from the elimination of the use of multiple coupons for one transaction.

Distribution expenses

Distribution expenses for the nine months ended September 30, 2013 were $31.5 million as compared to $31.9 million for the corresponding period in 2012. Distribution expenses as a percentage of net sales were 9.3% for the nine months ended September 30, 2013 as compared to 9.6% for the corresponding period in 2012.

Distribution expenses as a percentage of sales shipped from the Company's warehouses for the Wholesale segment were 9.7% for the nine months ended September 30, 2013 as compared to 10.0% for the corresponding period in 2012. The decrease primarily reflects favorable absorption of fixed expenses due to the closure of the Fred® & Friends distribution center and corresponding distribution of Fred® & Friends products through the Company's existing warehouses.

Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 29.8% for the nine months ended September 30, 2013 as compared to 29.9% for the corresponding period in 2012.

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Selling, general and administrative expenses

Selling, general and administrative expenses for the nine months ended September 30, 2013 were $80.5 million, an increase of $5.6 million, or 7.5%, as compared to $74.9 million for the corresponding period in 2012.

Selling, general and administrative expenses for the nine months ended September 30, 2013 for the Wholesale segment were $65.4 million, an increase of $5.4 million, or 9.0%, as compared to $60.0 million for the corresponding period in 2012. The increase was due to the inclusion of Fred® & Friends and an increase in trade show expenses, selling expenses and employee related expenses. As a percentage of net sales, selling, general and administrative expenses increased to 20.1% for the nine months ended September 30, 2013 compared to 18.9% for the corresponding period in 2012.

Selling, general and administrative expenses for the nine months ended September 30, 2013 and 2012 for the Retail Direct segment were $5.7 million and $5.8 million, respectively.

Unallocated corporate expenses for the nine months ended September 30, 2013 and 2012 were $9.4 million and $9.1 million. The increase was primarily attributable to an increase in professional fees.

Restructuring expenses

Restructuring expenses for the nine months ended September 30, 2013 were $0.4 million. The expenses resulted from the planned closure of the Fred® & Friends distribution center which included the elimination of certain employee positions.

Intangible asset impairment

In 2012, the Company's home décor products category experienced a significant decline in sales and profit. The Company believed the most significant factor was the reduction in retail space allocated to the category which also contributed to pricing pressure. While the Company believed this market condition was not permanent, following a strategic review of the business, it decided to re-brand a portion of the home décor products under the Mikasa®and Pfaltzgraff® trade names. As a result of these factors, the Company recorded an impairment charge of $1.1 million in its statement of operations in the third quarter of 2012 which reduced the book value of its Elements® trade name.

Interest expense

Interest expense for the nine months ended September 30, 2013 was $3.6 million as compared to $4.6 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 as compared to 2012.

Loss on early retirement of debt

In June and July 2012, the Company repaid its Term Loan. In connection therewith, the Company wrote off debt issuance costs of $1.4 million.

Income tax provision

The income tax provision for the nine months ended September 30, 2013 was $3.0 million as compared to an income tax provision of $2.6 million for the corresponding period in 2012. The Company's effective tax rate for the nine months ended September 30, 2013 was 37.4% as compared to 38.5% for the 2012 period. The decrease in the effective tax rate for the nine months ended September 30, 2013 primarily reflects the benefit of a reduced tax rate in the United Kingdom.

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Equity in earnings (losses)

Equity in losses of Vasconia, net of taxes, was $4.7 million (including a charge of $5.0 million, net of tax, for the reduction in the fair value of the Company's investment in Vasconia) for the nine months ended September 30, 2013 as compared to equity in earnings of $1.9 million for the nine months ended September 30, 2012. The reduction in the fair value was based upon a decline in the quoted stock price of Vasconia and the 2013 quarterly decline in the operating results of Vasconia. Vasconia reported income from operations of $1.4 million and $10.2 million for the nine months ended September 30, 2013 and 2012, respectively, and net income of $1.8 million and $6.9 million for the nine months ended September 30, 2013 and 2012, respectively. The reduction of net . . .

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