LIFETIME BRANDS, INC. Management’s Discussion and Analysis of Financial Position and Operating Results (Form 10-Q)

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. All statements other
than statements of historical facts contained in this Quarterly Report on Form
10-Q are forward-looking statements. These forward-looking statements include
information concerning 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," "intends," "predicts,"
"plans," "believes," "may," "should," "would," and variations of such words or
similar expressions are intended to identify forward-looking statements. All
forward-looking statements, including, without limitation, those based on 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 on Form 10-Q. Important factors that could
cause the Company's actual results to differ materially from those expressed as
forward-looking statements include, without limitation, those set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020
(the "2020 Annual Report on Form 10-K") in Part I, Item 1A under the heading
Risk Factors, and in the Company's subsequent filings with the U.S. Securities
and Exchange Commission (the "SEC"). Such risks, uncertainties and other
important factors include, among others, risks related to:
•General economic factors and political conditions;
•Exit of the United Kingdom from the European Union;
•Tariffs;
•Port disruptions and higher transportation costs;
•Indebtedness and compliance with credit agreements;
•Access to the capital markets and credit markets;
•The credit-worthiness of the Company's customers and the counterparties to its
derivatives;
•Seasonality;
•Liquidity;
•Interest rates;
•Competition;
•Customer practices;
•Intellectual property, brands and licenses;
•Goodwill;
•International operations;
•Supply chain;
•Foreign exchange rates;
•International trade, including trade negotiations;
•Transportation;
•Product liability;
•Regulatory matters;
•Product development;
•Reputation;
•Technology;
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•Cyber security;
•Personnel;
•Price fluctuations;
•Business interruptions;
•Projections;
•Fixed costs;
•Governance;
•Acquisition integration;
•Acquisitions and investments;
•Public health pandemics and related effects, such as the COVID-19 pandemic; and
•Social unrest, including related protests or disturbances.
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.
The Company is required to file its Annual Reports on Forms 10-K, Quarterly
Reports on Forms 10-Q, Current Reports on Form 8-K, and other reports and
documents as required from time to time with the SEC. The Company also maintains
a website at http://www.lifetimebrands.com. Information contained on this
website is not a part of or incorporated by reference into this Quarterly Report
on Form 10-Q. The Company makes available on its website the Company's Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and any amendments to these reports as soon as reasonably practicable after
these reports are filed with or furnished to the SEC. Users can access these
reports free of charge on the Company's website. The SEC also maintains a
website that contains reports, proxy and information statements, and other
information regarding the Company's electronic filings with the SEC at
http://www.sec.gov.
The Company intends to use its website as a means of disclosing material
non-public information and for complying with its disclosure obligations under
Regulation FD. Such disclosures will be included on the Company's website in the
'Investor Relations' section. Accordingly, investors should monitor such portion
of the Company's website, in addition to following the Company's press releases,
SEC filings and public conference calls and webcasts.
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 used to prepare, serve, and consume foods: Kitchenware
(kitchen tools and gadgets, cutlery, kitchen scales, thermometers, 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, bath scales, weather and outdoor household products, food storage,
neoprene travel products and home décor). In 2020, Kitchenware products and
Tableware products accounted for approximately 83% of the Company's U.S.
segment's net sales and 85% of the Company's 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 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®, Taylor®, KitchenAid®, KitchenCraft®, Pfaltzgraff®, Built
NY®, Rabbit®, Kamenstein®, and MasterClass®. Historically, the Company's sales
growth has come from expanding product offerings within its product categories,
developing existing brands, acquiring new brands (including complementary brands
in markets outside the U.S.), 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.


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BUSINESS SEGMENTS
The Company has two reportable segments, U.S. and International. The Company has
segmented its operations to reflect the manner in which management reviews and
evaluates the results of its operations. The U.S. segment includes the Company's
primary domestic business that designs, markets and distributes its products to
retailers, distributors and directly to consumers through its own websites. The
International segment consists of certain business operations conducted outside
the U.S. Management evaluates the performance of the U.S. and International
segments based on net sales and income from operations. Such measures give
recognition to specifically identifiable operating costs such as cost of sales,
distribution expenses and selling, general and administrative expenses. Certain
general and administrative expenses, such as senior executive salaries and
benefits, stock compensation, director fees, and accounting, legal and
consulting fees, are not allocated to the specific segments and are reflected as
unallocated corporate expenses.
EQUITY INVESTMENTS
As of September 30, 2021, the Company owned approximately 25% 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. The Quotation Key is VASCONI. The Company accounts for
its investment in Vasconia using the equity method of accounting and records its
proportionate share of Vasconia's net income in the Company's condensed
consolidated statements of operations. Accordingly, the Company has recorded its
proportionate share of Vasconia's net income (reduced for amortization expense
related to the customer relationships acquired) for the three and nine months
ended September 30, 2021 and 2020 in the accompanying unaudited condensed
consolidated statements of operations. Pursuant to a Shares Subscription
Agreement, the Company may designate four persons to be nominated as members of
Vasconia's Board of Directors. As of September 30, 2021, Vasconia's Board of
Directors is comprised of eleven members, of whom the Company has designated two
members.
On June 30, 2021, Vasconia sold shares, which diluted the Company's investment
ownership from approximately 30% to approximately 27%. The Company recorded a
non-cash gain of $1.7 million, increasing the Company's investment balance.
Additionally, a loss of $2.0 million was recognized for the proportionate share
of the diluted ownership for amounts previously recognized in accumulated other
comprehensive loss. The net loss of $0.3 million was included in equity in
earnings (losses), net of taxes, in the accompanying unaudited condensed
consolidated statements of operations for the nine months ended September 30,
2021.
On July 29, 2021, the Company sold 2.2 million shares further reducing its
ownership from approximately 27% to approximately 25% in Vasconia for net cash
proceeds of approximately $3.1 million, as a result the Company recorded a gain
of $1.0 million, after decreasing the Company's investment balance. The gain on
the sale resulted in a tax expense of $0.1 million. Additionally, a loss of $1.4
million was recognized for the proportionate share of the reduced ownership for
amounts previously recognized in accumulated other comprehensive loss. The net
loss, including taxes, of $0.5 million was included in equity in earnings
(losses), net of taxes, in the accompanying unaudited condensed consolidated
statements of operations for the three and nine months ended September 30, 2021.
The Company continues to apply the equity method of accounting.
The Company continues to explore opportunities to sell additional shares of its
investment in Vasconia.
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 2020 and 2019,
net sales for the third and fourth quarters accounted for 62% and 60% 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 Company's net sales and inventory levels,
the Company also experiences seasonality in its inventory turnover and turnover
days from one quarter to the next.
The COVID-19 pandemic has caused, and may continue to cause, shifts in some of
the Company's selling and purchasing cycles as customers deviate from their
historical ordering patterns.
RESTRUCTURING
During the three and nine months ended September 30, 2021, the Company did not
incur any restructuring expenses.
During the nine months ended September 30, 2020, the Company's international
segment incurred $0.3 million of restructuring expenses related to severance
associated with the strategic reorganization of the international segment's
product development
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and sales workforce. The strategic reorganization is the result of the Company's
efforts to achieve product development efficiencies and a country tailored
international sales approach.
RECENT DEVELOPMENTS
The COVID-19 pandemic, as well as other factors including, increased demand and
shifts in consumer shopping patterns, have caused disruption in the global
supply chain. The increased demand for containers, limited container capacity,
and backlog at U.S. ports have resulted in increased market costs of inbound
freight, container shortages, and longer lead times. The disruption in the
global supply chain has also caused increased input costs used to manufacture
the Company's product. The Company has been impacted by these disruptions and
has experienced higher inbound freight cost, delays in importing inventory due
to limited availability of containers, and an increase in product costs. The
increasing costs trend is expected to impact the Company into the fourth quarter
of fiscal year 2021. There have also been instances of limited trucking
availability. The Company has experienced instances of trucking shortages, which
has resulted in delays of shipments to certain of its customers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to the Company's critical accounting
policies and estimates discussed in the 2020 Annual Report on Form 10-K in
Item 7 under the heading Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies and
Estimates.
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,
                                                        2021                    2020                   2021                    2020
Net sales                                                  100.0  %               100.0  %                100.0  %               100.0  %
Cost of sales                                               63.0                   64.9                    64.5                   64.2
Gross margin                                                37.0                   35.1                    35.5                   35.8
Distribution expenses                                        8.4                    8.4                     9.3                    9.8
Selling, general and administrative expenses                19.0                   17.1                    19.3                   22.0
Restructuring expenses                                         -                      -                       -                    0.0
Goodwill and other impairments                                 -                      -                       -                    3.9
Income from operations                                       9.6                    9.6                     6.9                    0.1
Interest expense                                            (1.7)                  (1.8)                   (1.9)                  (2.5)
Mark to market gain (loss) on interest rate
derivatives                                                  0.1                    0.0                     0.1                   (0.4)

Income (loss) before income taxes and equity in
earnings (losses)                                            8.0                    7.8                     5.1                   (2.9)
Income tax provision                                        (2.5)                  (1.7)                   (1.7)                  (0.6)
Equity in earnings (losses), net of taxes                    0.1                    0.1                     0.1                   (0.1)
Net income (loss)                                            5.6  %                 6.2  %                  3.5  %                (3.5) %



                      MANAGEMENT'S DISCUSSION AND ANALYSIS

THREE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THREE MONTHS ENDED

                               SEPTEMBER 30, 2020
Net Sales
Consolidated net sales were $224.8 million for both the three months ended
September 30, 2021 and 2020. In constant currency, a non-GAAP financial measure,
which excludes the impact of foreign exchange fluctuations and was determined by
applying 2021 average rates to 2020 local currency amounts, consolidated net
sales decreased by $1.4 million, or 0.6%, as compared to consolidated net sales
in the corresponding period in 2020.
Net sales for the U.S. segment for the three months ended September 30, 2021
were $197.7 million, a decrease of $3.8 million, or 1.9%, as compared to net
sales of $201.5 million for the corresponding period in 2020.
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Net sales for the U.S. segment's Kitchenware product category were $113.4
million for the three months ended September 30, 2021, a decrease of $6.2
million, or 5.2%, as compared to $119.6 million for the corresponding period in
2020. The decrease was mainly driven by lower sales due to supply chain
constraints for kitchen tools and gadgets and cutlery and board products,
partially offset by higher selling prices.
Net sales for the U.S. segment's Tableware product category were $51.7 million
for the three months ended September 30, 2021, an increase of $0.4 million, or
0.8%, as compared to $51.3 million for the corresponding period in 2020. The
increase came from higher dinnerware e-commerce sales, partially offset by lower
sales of flatware which was impacted by supply chain constraints.
Net sales for the U.S. segment's Home Solutions product category were $32.6
million for the three months ended September 30, 2021, an increase of $1.9
million, or 6.2%, as compared to $30.7 million for the corresponding period in
2020. The increase was primarily driven by a new private label hydration program
and sales in the back-to-school lunch box category, offset by lower sales in the
hydration product category due to a warehouse club program not repeating in
2021.
Net sales for the International segment were $27.1 million for the three months
ended September 30, 2021, an increase of $3.9 million, or 16.8%, as compared to
net sales of $23.2 million for the corresponding period in 2020. In constant
currency, which excludes the impact of foreign exchange fluctuations, net sales
increased $2.5 million, or 10.0%, as compared to consolidated net sales in the
corresponding period in 2020. The increase was primarily attributable to
increased sales in the Company's global trading business in Asia, higher
e-commerce sales, continued recovery of sales to brick-and-mortar retailers, and
higher selling prices.
Gross margin
Gross margin for the three months ended September 30, 2021 was $83.1 million, or
37.0%, as compared to $78.8 million, or 35.1%, for the corresponding period in
2020.
Gross margin for the U.S. segment was $74.5 million, or 37.7%, for the three
months ended September 30, 2021, as compared to $71.7 million, or 35.6%, for the
corresponding period in 2020.
Gross margin for the International segment was $8.6 million, or 31.7%, for the
three months ended September 30, 2021, as compared to $7.0 million, or 30.2%,
for the corresponding period in 2020.
The improvement in gross margin for the U.S. and International segments was
primarily driven by price increases, channel and product mix, partially offset
by higher inventory cost.
Distribution expenses
Distribution expenses for the three months ended September 30, 2021 were $18.9
million, as compared to $19.0 million for the corresponding period in 2020.
Distribution expenses as a percentage of net sales were 8.4% for the three
months ended September 30, 2021, as compared to 8.4% for the three months ended
September 30, 2020.
Distribution expenses as a percentage of net sales for the U.S. segment were
approximately 7.2% and 7.6% for the three months ended September 30, 2021 and
2020, respectively. As a percentage of sales shipped from the Company's U.S.
warehouses, distribution expenses were 8.4% and 8.4% for the three months ended
September 30, 2021 and 2020, respectively. The improvement in expenses as a
percentage of net sales was attributable to improved labor management, lower
warehouse supply expenses in the current period, partially offset by higher
hourly labor rates.
Distribution expenses as a percentage of net sales for the International segment
were 17.5% for the three months ended September 30, 2021, compared to 15.5% for
the corresponding period in 2020. As a percentage of sales shipped from the
Company's U.K. warehouse distribution expenses were 14.5% and 13.6% for the
three months ended September 30, 2021 and 2020, respectively. The increase was
primarily attributed to increased shipping cost for products shipped from the
U.K. warehouse to continental Europe and higher cost due to transportation
shortages.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended
September 30, 2021 were $42.5 million, an increase of $4.2 million, or 11.0%, as
compared to $38.3 million for the corresponding period in 2020.
Selling, general and administrative expenses for the U.S. segment were $29.3
million for the three months ended September 30, 2021, as compared to $27.3
million for the corresponding period in 2020. As a percentage of net sales,
selling, general and administrative expenses were 14.8% and 13.5% for the three
months ended September 30, 2021 and 2020, respectively. The increase was
primarily attributable to lower expenses in the prior period due to the
Company's savings initiative in response to the COVID-19 pandemic.
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Selling, general and administrative expenses for the International segment were
$6.3 million for the three months ended September 30, 2021, as compared to $4.8
million for the corresponding period in 2020. The increase was primarily
attributable to foreign currency exchange losses and increased professional
fees.
Unallocated corporate expenses for the three months ended September 30, 2021
were $6.9 million, as compared to $6.3 million for the corresponding period in
2020. The increase was driven by higher incentive compensation expense,
partially offset by lower professional fees.
Interest expense
Interest expense was $3.8 million for the three months ended September 30, 2021
and $4.1 million for the three months ended September 30, 2020. The decrease in
expense was a result of less debt outstanding.
Mark to market gain (loss) on interest rate derivatives
Mark to market gain on interest rate derivatives was $0.1 million for both the
three months ended September 30, 2021 and 2020. The mark to market amount
represents the change in fair value on the Company's interest rate derivatives
that have not been designated as hedging instruments. These derivatives were
entered into for purposes of locking-in a fixed interest rate on a portion of
the Company's variable interest rate debt. As of September 30, 2021, the intent
of the Company is to hold these derivative contracts until their maturity.
Income taxes
Income tax provision of $5.6 million and $3.7 million for the three months ended
September 30, 2021 and 2020, respectively, represent taxes on both U.S. and
foreign earnings at combined effective income tax provision rates of 31.1% and
21.2%, respectively. The effective tax rate for the three months ended
September 30, 2021 differs from the federal statutory income tax rate of 21%
primarily due to state and local tax expense, and foreign losses for which no
tax benefit is recognized as such amounts are fully offset with a valuation
allowance. The effective tax rate for the three months ended September 30, 2020
is consistent with the federal statutory income tax rate of 21.0% and includes
an increase for state and local tax expense offset by other items that are not
material.
Equity in earnings (losses)
Equity in earnings of Vasconia, net of taxes, was $0.7 million for the three
months ended September 30, 2021, as compared to equity in earnings of Vasconia,
net of taxes, of $0.1 million for the three months ended September 30, 2020.
Vasconia reported income from operations of $3.9 million for the three months
ended September 30, 2021, as compared to income from operations of $3.0 million
for the three months ended September 30, 2020. The increase in income from
operations was primarily attributable to improved operating results in the
current period in both Vasconia's kitchenware and aluminum divisions.
For the three months ended September 30, 2021, the Company recognized a net
loss, including taxes, of $0.5 million related to a partial sale of the
Company's ownership in its Vasconia investment. The net loss was comprised of a
gain of $1.0 million, for the difference between the selling price and the
Company's basis in the sale of shares, offset by tax expense of $0.1 million and
a loss of $1.4 million, related to amounts previously recognized in accumulated
other comprehensive loss.
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
     NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO THE NINE MONTHS ENDED
                               SEPTEMBER 30, 2020
Net Sales
Consolidated net sales for the nine months ended September 30, 2021 were $607.1
million, an increase of $87.1 million, or 16.8%, as compared to net sales of
$520.0 million for the corresponding period in 2020. In constant currency, a
non-GAAP financial measure, which excludes the impact of foreign exchange
fluctuations and was determined by applying 2021 average rates to 2020 local
currency amounts, consolidated net sales increased by $82.5 million, or 15.7%,
as compared to consolidated net sales in the corresponding period in 2020.
Net sales for the U.S. segment for the nine months ended September 30, 2021 were
$540.5 million, an increase of $77.2 million, or 16.7%, as compared to net sales
of $463.3 million for the corresponding period in 2020.
Net sales for the U.S. segment's Kitchenware product category were $337.1
million for the nine months ended September 30, 2021, an increase of $53.8
million, or 19.0%, as compared to $283.3 million for the corresponding period in
2020. The increase was mainly driven by higher consumer demand, in both
e-commerce and wholesale channels, for essential kitchen tools and
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gadgets, cutlery and board and bakeware products, and higher selling prices. The
increase was partially offset by lower sales due to supply chain constraints for
kitchen tools and gadgets and cutlery and board products. The strong demand for
these products has been a result of shifts in consumer purchasing patterns as
consumers continue to spend more time at home.
Net sales for the U.S. segment's Tableware product category were $119.2 million
for the nine months ended September 30, 2021, an increase of $20.7 million, or
21.0%, as compared to $98.5 million for the corresponding period in 2020. The
increase came from all product lines, most notably on sales from a new flatware
warehouse club program, continued recovery of sales to brick-and-mortar
customers and higher dinnerware e-commerce sales.
Net sales for the U.S. segment's Home Solutions product category were $84.2
million for the nine months ended September 30, 2021, an increase of $2.7
million, or 3.3%, as compared to $81.5 million for the corresponding period in
2020. The increase was primarily driven by home décor, a new private label
hydration program and sales in the back-to-school lunch box category. The
increase was partially offset by lower sales in the hydration product category
due to a warehouse club program not repeating in 2021.
Net sales for the International segment were $66.6 million for the nine months
ended September 30, 2021, an increase of $10.0 million, or 17.7%, as compared to
net sales of $56.6 million for the corresponding period in 2020. In constant
currency, which excludes the impact of foreign exchange fluctuations, net sales
increased $5.5 million, or 9.1%, as compared to consolidated net sales in the
corresponding period in 2020. The increase in sales was primarily attributable
to sales in the Company's global trading business in Asia, continued recovery of
sales to brick-and-mortar retailers, and higher selling prices, partially offset
by lower e-commerce sales.
Gross margin
Gross margin for the nine months ended September 30, 2021 was $215.3 million, or
35.5%, as compared to $185.9 million, or 35.8%, for the corresponding period in
2020.
Gross margin for the U.S. segment was $193.9 million, or 35.9%, for the nine
months ended September 30, 2021, as compared to $170.9 million, or 36.9%, for
the corresponding period in 2020. The decrease in gross margin was primarily due
to higher inbound freight costs, product mix and the inclusion in the 2020
period of a benefit from a duty exclusion on certain products. The decrease was
partially offset by higher prices.
Gross margin for the International segment was $21.4 million, or 32.1%, for the
nine months ended September 30, 2021, as compared to $15.0 million, or 26.5%,
for the corresponding period in 2020. The increase was driven by the comparable
prior period being negatively impacted by higher sales allowances and inventory
reserves, and customer mix. In addition, higher prices, partially offset by
increased inbound freight costs contributed to the improvement.
Distribution expenses
Distribution expenses for the nine months ended September 30, 2021 were $56.5
million, as compared to $50.7 million for the corresponding period in 2020.
Distribution expenses as a percentage of net sales were 9.3% for the nine months
ended September 30, 2021, as compared to 9.8% for the nine months ended
September 30, 2020.
Distribution expenses as a percentage of net sales for the U.S. segment were
approximately 8.2% and 8.6% for the nine months ended September 30, 2021 and
2020, respectively. As a percentage of sales shipped from the Company's U.S.
warehouses, distribution expenses were 8.9% and 9.0% for the nine months ended
September 30, 2021 and 2020, respectively. The improvement was a result of the
leverage benefit of fixed costs on higher sales volume, improved labor
management, partially offset by higher hourly labor rates and warehouse supply
expenses.
Distribution expenses as a percentage of net sales for the International segment
were 18.1% for the nine months ended September 30, 2021, compared to 19.5% for
the corresponding period in 2020. Distribution expenses during the nine months
ended September 30, 2020 include $1.1 million for the Company's facility
relocation costs. As a percentage of sales shipped from the Company's U.K.
warehouse, excluding the moving and relocation costs for U.K. operations,
distribution expenses were 15.4% and 14.7% for the nine months ended
September 30, 2021 and 2020, respectively. The increase was primarily attributed
to increased shipping cost for products shipped from the U.K. warehouse to
continental Europe and higher cost due to transportation shortages.
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months ended
September 30, 2021 were $116.9 million, an increase of $2.6 million, or 2.3%, as
compared to $114.3 million for the corresponding period in 2020.
Selling, general and administrative expenses for the U.S. segment were $83.2
million for the nine months ended September 30, 2021, as compared to $82.7
million for the corresponding period in 2020. As a percentage of net sales,
selling, general and
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administrative expenses were 15.4% and 17.8% for the nine months ended
September 30, 2021 and 2020, respectively. The increase was primarily
attributable to higher incentive compensation, and lower expenses in the prior
period due to the Company's savings initiative in response to the COVID-19
pandemic. The increase was partially offset by lower estimates for bad debt
expense and facility expenses recorded in the current period. The improvement in
selling, general and administrative expense as a percentage of net sales is due
to the leverage benefit of fixed costs on higher sales volume.
Selling, general and administrative expenses for the International segment were
$15.5 million for the nine months ended September 30, 2021, as compared to $15.7
million for the corresponding period in 2020. The decrease was primarily
attributable to lower selling expenses related to advertising and lower
estimates for bad debt expense. The decrease was partially offset by unfavorable
foreign currency exchange losses.
Unallocated corporate expenses for the nine months ended September 30, 2021 were
$18.2 million, as compared to $15.9 million for the corresponding period in
2020. The increase was driven by higher incentive compensation expense,
partially offset by lower professional fees.
Restructuring expenses
During the nine months ended September 30, 2020, the Company's international
segment incurred $0.3 million of restructuring expenses related to severance
associated with the strategic reorganization of the international segment's
product development and sales workforce. The strategic reorganization is the
result of the Company's efforts for product development efficiencies and a
country tailored international sales approach.
Goodwill and infinite-lived intangible asset impairment
During the nine months ended September 30, 2020, the Company recorded a $20.1
million non-cash goodwill and intangible asset impairment charge related to the
U.S. reporting unit. The impairment charge resulted from, among other factors,
more conservative estimated future cash flows in light of the uncertain market
conditions arising from the COVID-19 pandemic.
Interest expense
Interest expense was $11.7 million for the nine months ended September 30, 2021
and $13.1 million for the nine months ended September 30, 2020. The decrease in
expense was a result of less debt outstanding.
Mark to market gain (loss) on interest rate derivatives
Mark to market gain on interest rate derivatives was $0.7 million for the nine
months ended September 30, 2021, as compared to a mark to market loss on
interest rate derivatives of $2.3 million for the nine months ended
September 30, 2020. The mark to market amount represents the change in fair
value on the Company's interest rate derivatives that have not been designated
as hedging instruments. These derivatives were entered into for purposes of
locking-in a fixed interest rate on a portion of the Company's variable interest
rate debt. The prior period loss was a result of declines in interest rates
during that period. As of September 30, 2021, the intent of the Company is to
hold these derivative contracts until their maturity.
Income taxes
Income tax provision of $9.8 million and $3.0 million for the nine months ended
September 30, 2021 and 2020, respectively, represent taxes on both US and
foreign earnings at combined effective income tax provision rates of 31.8% and
(20.3)%, respectively. The negative rate for the nine months ended September 30,
2020 reflects tax expense on a pretax financial reporting loss. The effective
tax rate for the nine months ended September 30, 2021 differs from the federal
statutory income tax rate of 21% primarily due to state and local tax expense,
and foreign losses for which no tax benefit is recognized as such amounts are
fully offset with a valuation allowance. The effective tax rate for the nine
months ended September 30, 2020 differs from the federal statutory income tax
rate of 21% primarily due to state and local tax expense, equity based awards,
and the non-deductible portion of the goodwill impairment recorded in the three
months ended March 31, 2020.
Equity in earnings (losses)
Equity in earnings of Vasconia, net of taxes, was $1.2 million for the nine
months ended September 30, 2021, as compared to equity in losses of Vasconia,
net of taxes, of $0.2 million for the nine months ended September 30, 2020.
Vasconia reported income from operations of $14.2 million for the nine months
ended September 30, 2021, as compared to income from operations of $3.8 million
for the nine months ended September 30, 2020. The increase in income from
operations was primarily attributable to improved operating results in the
current period in both Vasconia's kitchenware and aluminum divisions.
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During the nine months ended September 30, 2021, the Company's ownership in its
equity method investment decreased as a result of a dilution of its investment
in Vasconia and a subsequent partial sale of its investment. The Company
recognized a net loss of $0.3 million related to the dilution of the Company's
ownership in its Vasconia investment. The net loss was comprised of a loss of
$2.0 million, related to amounts that were previously recognized in accumulated
other comprehensive loss, net of a non-cash gain of $1.7 million for the
difference between the selling price and the Company's basis in the diluted
shares.
Additionally, the Company recognized a net loss of $0.5 million related to a
partial sale of the Company's ownership in its Vasconia investment. The net loss
was comprised of a gain of $1.0 million, for the difference between the selling
price and the Company's basis in the sale of shares, offset by tax expense of
$0.1 million and a loss of $1.4 million, related to amounts previously
recognized in accumulated other comprehensive loss.
During the nine months ended September 30, 2020, the Company recognized a loss
of $0.2 million, relating to cumulative translation foreign currency losses that
were recognized to earnings upon the dissolution of Lifetime Brands Do Brasil
Participacoes Ltda., a 100% owned foreign subsidiary. The foreign currency
translation losses related to the notes receivable due to the Company from the
2016 sale of its equity interest in GS International S/A.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal sources of cash to fund liquidity needs
were: (i) cash provided by operating activities and (ii) borrowings available
under its revolving credit facility under the ABL Agreement, as defined below.
The Company's primary uses of funds consist of working capital requirements,
capital expenditures, acquisitions and investments, and payments of principal
and interest on its debt.
At September 30, 2021, the Company had cash and cash equivalents of $8.7
million, compared to $36.0 million at December 31, 2020. Working capital was
$251.5 million at September 30, 2021, compared to $241.2 million at December 31,
2020. Liquidity, which includes cash and cash equivalents and availability under
the ABL Agreement, was approximately $153.8 million at September 30, 2021.
Inventory, a large component of the Company's 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 Company's vendors or customer replenishment needs.
Certain other product categories experience higher inventory turns due to lower
minimum order quantities or trending sale demands. For the three months ended
September 30, 2021, inventory turnover was 2.4 times, or 154 days, as compared
to 3.1 times, or 119 days, for the three months ended September 30, 2020. The
decrease in inventory turnover was attributable to higher inventory costs and
increased inventory investment in the current period.
The Company believes that availability under the revolving credit facility under
its ABL Agreement, cash on hand and cash flows from operations are sufficient to
fund the Company's operations for the next twelve months. However, if
circumstances were to adversely change, the Company may seek alternative sources
of liquidity including debt and/or equity financing. However, there can be no
assurance that any such alternative sources would be available or sufficient or
on terms favorable to the Company.
The Company closely monitors the creditworthiness of its customers. Based upon
its evaluation of changes in customers' creditworthiness, the Company may modify
credit limits and/or terms of sale. However, notwithstanding the Company's
efforts to monitor its customers' financial condition, the Company could be
materially adversely affected by changes in customers' creditworthiness in the
future. Some of the Company's customers may be adversely and materially affected
by the COVID-19 pandemic.
Credit Facilities
The Company's credit agreement, dated as of March 2, 2018 (the "ABL Agreement")
with JPMorgan Chase Bank, N.A. ("JPMorgan"), includes a senior secured
asset-based revolving credit facility in the maximum aggregate principal amount
of $150.0 million, which facility will mature on March 2, 2023, and a loan
agreement (the "Term Loan" and together with the ABL Agreement, the "Debt
Agreements") that provides for a senior secured term loan credit facility in the
original principal amount of $275.0 million, which matures on February 28, 2025.
The Term Loan requires the Company to make an annual prepayment of principal
based upon a percentage of the Company's excess cash flow, ("Excess Cash Flow"),
if any. The percentage applied to the Company's excess cash flow is based on the
Company's Total Net Leverage Ratio (as defined in the Debt Agreements). When an
Excess Cash Flow payment is required, lenders have the option to decline a
portion or all of the prepayment amount. This estimated amount is recorded in
current maturity of term loan on the unaudited condensed consolidated balance
sheets. Additionally, the Term Loan facility requires quarterly payments, which
commenced on June 30, 2018, of principal equal to 0.25% of the original
aggregate principal amount of the Term Loan facility. Per the Debt
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Agreements, when the Company makes an Excess Cash Flow payment, the payment is
first applied to satisfy the future quarterly required payments in order of
maturity. The quarterly principal payments have been satisfied through maturity
of the Term Loan by the annual Excess Cash Flow payments.
The maximum borrowing amount under the ABL Agreement may be increased to up to
$200.0 million if certain conditions are met. One or more tranches of additional
term loans (the "Incremental Facilities") may be added under the Term Loan if
certain conditions are met. The Incremental Facilities may not exceed the sum of
(i) $50.0 million plus (ii) an unlimited amount so long as, in the case of
(ii) only, the Company's secured net leverage ratio, as defined in and computed
pursuant to the Term Loan, is no greater than 3.75 to 1.00, subject to certain
limitations and for the period defined pursuant to the Term Loan.
As of September 30, 2021 and December 31, 2020, the total availability under the
ABL Agreement was as follows (in thousands):
                                                                 September 30, 2021           December 31, 2020
Maximum aggregate principal allowed                             $          150,000          $          150,000
Outstanding borrowings under the ABL Agreement                              (1,600)                    (27,302)
Standby letters of credit                                                   (3,311)                     (2,698)
Total availability under the ABL Agreement                      $          

145,089 $ 120,000

Availability under the ABL Agreement depends on the valuation of certain current
assets comprising the borrowing base. The borrowing capacity under the ABL
Agreement will depend, in part, on eligible levels of accounts receivable and
inventory that fluctuate regularly. Due to the seasonality of the Company's
business, this may mean that the Company will have greater borrowing
availability during the third and fourth quarters of each year. Consequently,
the $150.0 million commitment thereunder may not represent actual borrowing
capacity.
The current and non-current portions of the Company's Term Loan facility
included in the condensed consolidated balance sheets were as follows (in
thousands):
                                                                September 30, 2021           December 31, 2020

Current portion of the term loan facility:

Estimated Excess Cash Flow principal payment                   $           10,000          $           19,120
Estimated unamortized debt issuance costs                                  (1,451)                     (1,463)
Total Current portion of Term Loan facility                    $            8,549          $           17,657

Non-current portion of Term Loan facility:
Term Loan facility, net of current portion                     $          242,127          $          243,485
Estimated unamortized debt issuance costs                                  (3,398)                     (4,508)
Total Non-current portion of Term Loan facility                $          

$ 238,729 $ 238,977

The estimated Excess Cash Flow principal payment recorded at September 30, 2021
represents the Company's estimate for the 2022 Excess Cash Flow payment. The
2021 Excess Cash Flow payment, paid on March 30, 2021, totaled $10.5 million.
The Excess Cash Flow payment differs from the estimated amount at December 31,
2020 of $19.1 million as certain lenders opted to not require payment per the
terms of the Debt Agreements.
The Company's payment obligations under its Debt Agreements are unconditionally
guaranteed by its existing and future U.S. subsidiaries with certain minor
exceptions. Certain payment obligations under the ABL Agreement are also direct
obligations of its foreign subsidiary borrowers designated as such under the ABL
Agreement and, subject to limitations on such guaranty, are guaranteed by the
foreign subsidiary borrowers, as well as by the Company. The obligations of the
Company under the Debt Agreements 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 interest
consists of (1) a first-priority lien, subject to certain permitted liens, with
respect to certain assets of the Company and its domestic subsidiaries (the "ABL
Collateral") pledged as collateral in favor of lenders under the ABL Agreement
and a second-priority lien in the ABL Collateral in favor of the lenders under
the Term Loan and (2) a first-priority lien, subject to certain permitted liens,
with respect to certain assets of the Company and its domestic subsidiaries (the
"Term Loan Collateral")
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pledged as collateral in favor of lenders under the Term Loan and a
second-priority lien in the Term Loan Collateral in favor of the lenders under
the ABL Agreement.
Borrowings under the ABL Agreement bear interest, at the Company's option, at
one of the following rates: (i) alternate base rate, defined, for any day, as
the greater of the prime rate, a federal funds and overnight bank funding based
rate plus 0.5% or one-month LIBOR plus 1.0%, plus a margin of 0.25% to 0.75%, or
(ii) LIBOR plus a margin of 1.25% to 1.75%. The respective margins are based
upon the Company's total leverage ratio, as defined in and computed pursuant to
the ABL Agreement. The interest rate on outstanding borrowings under the ABL
Agreement at September 30, 2021 was 3.5%. In addition, the Company pays a
commitment fee of 0.375% on the unused portion of the ABL Agreement.
The Term Loan facility bears interest, at the Company's option, at one of the
following rates: (i) alternate base rate, defined, for any day, as the greater
of (x) the prime rate, (y) a federal funds and overnight bank funding based rate
plus 0.5% or (z) one-month LIBOR, but not less than 1.0%, plus 1.0%, which
alternate base rate shall not be less than 2%, plus a margin of 2.5% or
(ii) LIBOR, but not less than 1%, plus a margin of 3.5%. The interest rate on
outstanding borrowings under the Term Loan at September 30, 2021 was 4.5%.
The Debt Agreements provide for customary restrictions and events of default.
Restrictions include limitations on additional indebtedness, acquisitions,
investments and payment of dividends, among other things. Further, the ABL
Agreement provides that during any period (a) commencing on the last day of the
most recently ended four consecutive fiscal quarters on or prior to the date
availability under the ABL Agreement is less than the greater of $15.0 million
and 10% of the aggregate commitment under the ABL Agreement at any time and
(b) ending on the day after such availability has exceeded the greater of $15.0
million and 10% of the aggregate commitment under the ABL Agreement for 45
consecutive days, the Company is required to maintain a minimum fixed charge
coverage ratio of 1.10 to 1.00 as of the last day of any period of four
consecutive fiscal quarters.
The Company was in compliance with the covenants of the Debt Agreements at
September 30, 2021.
The Company expects that it will continue to borrow, subject to availability,
and repay funds under the ABL Agreement based on working capital and other
corporate needs
Covenant Calculations
Adjusted EBITDA (a non-GAAP financial measure), which is defined in the
Company's Debt Agreements, is used in the calculation of the Fixed Charge
Coverage Ratio, Secured Net Leverage Ratio, Total Leverage Ratio and Total Net
Leverage Ratio, which are required to be provided to the Company's lenders
pursuant to its Debt Agreements.
The Company's adjusted EBITDA, for the last twelve months ended September 30,
2021 was $96.7 million.
Capital expenditures for the nine months ended September 30, 2021 were $3.4
million.
Non-GAAP financial measure
Adjusted EBITDA is a non-GAAP financial measure within the meaning of Regulation
G and Item 10(e) of Regulation S-K, each promulgated by the SEC. This measure is
provided because management of the Company uses this financial measure in
evaluating the Company's on-going financial results and trends, and management
believes that exclusion of certain items allows for more accurate
period-to-period comparison of the Company's operating performance by investors
and analysts. Management also uses this non-GAAP information as an indicator of
business performance. Adjusted EBITDA, as discussed above, is also one of the
measures used to calculate financial covenants required to be provided to the
Company's lenders pursuant to its Debt Agreements.
Investors should consider this non-GAAP financial measure in addition to, and
not as a substitute for, the Company's financial performance measures prepared
in accordance with U.S. GAAP. Further, the Company's non-GAAP information may be
different from the non-GAAP information provided by other companies including
other companies within the home retail industry.
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The following is a reconciliation of the net income, as reported, to adjusted
EBITDA, for each of the last four quarters and the 12 months ended September 30,
2021:

                                                                       Quarter Ended                                       Twelve Months
                                         December 31,         March 31,          June 30,           September 30,         Ended September
                                             2020                2021              2021                 2021                 30, 2021
                                                                                  (in thousands)
Net income as reported                   $   15,221          $   3,067          $  5,789          $       12,571          $     36,648
Undistributed equity (losses) earnings,
net                                          (1,620)               247              (393)                   (195)               (1,961)
Income tax provision                          6,853              2,416             1,832                   5,589                16,690
Interest expense                              4,183              4,014             3,819                   3,835                15,851
Mark to market gain on interest rate
derivatives                                    (172)              (498)              (46)                   (120)                 (836)
Depreciation and amortization                 6,279              5,958             5,765                   5,837                23,839

Stock compensation expense                    1,630              1,444             1,328                   1,201                 5,603

Acquisition related expenses                    126                182                72                      41                   421
Restructuring benefit                           (42)                 -                 -                       -                   (42)

Wallace facility remedial design expense          -                  -                 -                     500                   500
Adjusted EBITDA                          $   32,458          $  16,830          $ 18,166          $       29,259          $     96,713


Adjusted EBITDA is a non-GAAP financial measure which is defined in the
Company's debt agreements. Adjusted EBITDA is defined as net income, adjusted to
exclude undistributed equity in (losses) earnings, income tax provision,
interest expense, mark to market gain on interest rate derivatives, depreciation
and amortization, stock compensation expense, and other items detailed in the
table above that are consistent with exclusions permitted by our debt
agreements.
Accounts Receivable Purchase Agreement
To improve its liquidity during seasonally high working capital periods, the
Company has 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 $30.0 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 the Receivable Purchase Agreement, the Company sold to HSBC
$33.7 million and $113.2 million of receivables during the three and nine months
ended September 30, 2021, respectively, and $43.0 million and $116.9 million of
receivables during the three and nine months ended September 30, 2020,
respectively. Charges of $0.1 million and $0.3 million related to the sale of
the receivables are included in selling, general and administrative expenses in
the unaudited condensed consolidated statements of operations for the three and
nine months ended September 30, 2021, respectively. Charges of $0.1 million and
$0.4 million related to the sale of the receivables are included in selling,
general and administrative expenses in the unaudited condensed consolidated
statements of operations for the three and nine months ended September 30, 2020,
respectively. At September 30, 2021 and 2020, $15.8 million and $26.7 million,
respectively, of receivables sold were outstanding and due to HSBC from
customers.
Derivatives
Interest Rate Swaps
The Company's total outstanding notional value of interest rate swaps was $75.0
million at September 30, 2021.
The Company designated a portion of these interest rate swaps as cash flow
hedges of the Company's exposure to the variability of the payment of interest
on a portion of its Term Loan borrowings. The hedge periods of these agreements
commenced in April 2018 and expire in March 2023. The original notional values
are reduced over these periods. The aggregate notional value of designated
interest rate swaps was $50.0 million at September 30, 2021.
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In June 2019, the Company entered into additional interest rate swap agreements,
with an aggregate notional value of $25.0 million at September 30, 2021. These
non-designated interest rate swaps serve as cash flow hedges of the Company's
exposure to the variability of the payment of interest on a portion of its Term
Loan borrowings and expire in February 2025.
Foreign Exchange Contracts
The Company is party from time to time to certain foreign exchange contracts,
primarily to offset the earnings impact related to fluctuations in foreign
currency exchange rates associated with inventory purchases denominated in
foreign currencies. Fluctuations in the value of certain foreign currencies as
compared to the USD may positively or negatively affect the Company's revenues,
gross margins, operating expenses, and retained earnings, all of which are
expressed in USD. Where the Company deems it prudent, the Company engages in
hedging programs using foreign currency forward contracts aimed at limiting the
impact of foreign currency exchange rate fluctuations on earnings. The Company
purchases foreign currency forward contracts with terms less than 18 months to
protect against currency exchange risks associated with the payment of
merchandise purchases to foreign suppliers. The Company does not hedge the
translation of foreign currency profits into USD, as the Company regards this as
an accounting exposure rather than an economic exposure.
The aggregate gross notional values of foreign exchange contracts at
September 30, 2021 was $31.3 million. These foreign exchange contracts have been
designated as hedges in order to apply hedge accounting.
The Company is exposed to market risks as well as changes in foreign currency
exchange rates as measured against the USD and each other, and to changes to the
credit risk of derivative counterparties. The Company attempts to minimize these
risks primarily by using foreign currency forward contracts and by maintaining
counterparty credit limits. These hedging activities provide only limited
protection against currency exchange and credit risk. Factors that could
influence the effectiveness of the Company's hedging programs include those
impacting currency markets and the availability of hedging instruments and
liquidity of the credit markets. All foreign currency forward contracts that the
Company enters into are components of hedging programs and are entered into for
the sole purpose of hedging an existing or anticipated currency exposure. The
Company does not enter into such contracts for speculative purposes, and as of
September 30, 2021, the Company did not have any foreign currency forward
contract derivatives that are not designated as hedges.
Operating activities
Net cash provided by operating activities was $14.6 million for the nine months
ended September 30, 2021, as compared to net cash provided by operating
activities of $49.2 million for the nine months ended September 30, 2020. The
decrease from 2021 compared to 2020 was attributable to an increased investment
in inventory and timing of payment for accounts payable and accrued expenses.
The timing of payment for accounts payable and accrued expenses in the
comparable period reflected cost savings initiatives and payment deferral
strategies utilized in response to the COVID-19 pandemic. The decrease in net
cash provided by operating actives was partially offset by timing of collections
related to the Company's accounts receivables.
Investing activities
Net cash used in investing activities was $0.5 million and $1.6 million for the
nine months ended September 30, 2021 and 2020, respectively. The nine months
ended September 30, 2021 included $3.1 million of proceeds received from a
partial sale of the Company's investment in its equity method investment, offset
by cash used for purchases of property and equity of $3.4 million.
Financing activities
Net cash used in financing activities was $41.5 million for the nine months
ended September 30, 2021, as compared to net cash used in financing activities
of $16.2 million for the nine months ended September 30, 2020. The change was
mainly attributable to repayments on the Company's revolving credit facility
under its ABL Agreement in the 2021 period compared to proceeds received in the
2020 period.
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