LIFETIME BRANDS, INC - Annual Report: 2011 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2011

or

For the transition period from              to             

Commission file number: 0-19254

LIFETIME BRANDS, INC.

(Exact name of registrant as specified in its charter)

1000 Stewart Avenue, Garden City, New York 11530

(Address of principal executive offices, including Zip Code)

(516) 683-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of 9,557,190 shares of the voting common equity held by non-affiliates of the registrant as of June 30, 2011 was approximately $112,201,411. Directors, executive officers, and trusts controlled by said individuals are considered affiliates for the purpose of this calculation and should not necessarily be considered affiliates for any other purpose.

The number of shares of common stock, par value $.01 per share, outstanding as of March 9, 2012 was 12,430,893.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the registrant’s definitive proxy statement for the 2012 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 are incorporated by reference in Part III of this Annual Report.

Table of Contents

LIFETIME BRANDS, INC.

FORM 10-K

TABLE OF CONTENTS

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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, under the headings Business and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 1 of Part I and Item 7 of Part II, respectively. When used in this Annual Report on Form 10-K, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “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 Annual 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 this Annual Report, including the risk factors discussed in Part I, Item 1A under the heading Risk Factors.

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.

OTHER INFORMATION

The Company is required to file its annual reports on Forms 10-K and quarterly reports on Forms 10-Q, and other reports and documents as required from time to time with the United States Securities and Exchange Commission (the “SEC”). The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information may be obtained with respect to the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site 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 also maintains a website at http://www.lifetimebrands.com where users can access the Company’s electronic filings free of charge.

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PART I

Item 1. Business

OVERVIEW

The Company designs, sources and sells branded kitchenware, tabletop and other products used in the home. The Company either owns or licenses its brands. The Company’s licenses generally only permit the Company to sell certain products using the licensed brand name. The Company sells its products to retailers and distributors and sells a limited selection of its products directly to consumers through its Internet websites. The Company markets its products under well-respected and widely-recognized brand names in the housewares industry. According to the Home Furnishing News Brand Survey issued in 2009, three of the Company’s brands, KitchenAid^®, Cuisinart^® and Farberware^®, are among the four most recognized brands in the “Kitchen Tool, Cutlery and Gadgets” category. In addition, the Company also sells products under private-label brand names controlled by certain of its retailer customers. The Company primarily targets moderate to premium price points through every major level of trade and generally markets several lines within each of its product categories under more than one brand. At the heart of the Company is a culture of innovation. The Company brought over 4,200 new or redesigned products to market in 2011 and expects to introduce approximately 4,200 new or redesigned products in the U.S. and an additional 3,750 in the United Kingdom and other countries in 2012.

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, bakeware and cookware) 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).

The Company sources almost all of its products from suppliers located outside the United States, primarily in the People’s Republic of China. The Company manufactures its sterling silver products at a leased facility in San Germán, Puerto Rico and fills spices and assembles spice racks at its owned Winchendon, Massachusetts distribution facility.

The Company has expanded its presence in international markets through investments in various companies that operate outside of the United States. In 2007, the Company acquired a 30% equity interest in Grupo Vasconia, S.A.B. (“Vasconia”), a housewares company based in Mexico. In January 2008, the Company entered into a strategic alliance to distribute products in Canada. In January 2011, the Company, together with Vasconia and unaffiliated partners, formed Housewares Corporation of Asia Limited, a Hong Kong-based company that supplies direct import kitchenware products to retailers in North, Central and South America. In November 2011, the Company acquired 100% of the share capital of each of Creative Tops Holdings Limited and Creative Tops Far East Limited (collectively, “Creative Tops”). Creative Tops is a UK-based supplier of private label and branded tabletop and kitchenware products. In December 2011, the Company acquired a 40% equity interest in GS Internacional S/A (“GSI”). GSI is a wholesale distributor of branded housewares products in Brazil. GSI markets dinnerware, glassware, home décor, kitchenware and barware to customers, including major department stores, housewares retailers and independent shops throughout Brazil. In February 2012, the Company entered into a joint venture to distribute Mikasa^® products in China.

In addition, the Company licenses certain of its brands to other companies in various foreign markets, including Vasconia in Mexico and through a strategic alliance in Canada. The Company will continue to seek opportunities to license certain brands in other foreign markets.

The Company continues to evaluate opportunities to expand the recognition of its brands and to invest in other companies that operate principally outside the United States. These opportunities involve risks as the industry and foreign markets may not evolve as anticipated and the Company’s objectives may not be achieved.

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The Company’s top brands and their respective product categories are:

The Company’s wholesale customers include mass merchants, specialty stores, national chains, department stores, warehouse clubs, supermarkets, off-price retailers and Internet retailers.

BUSINESS SEGMENTS

The Company operates in two 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 through its Pfaltzgraff^®, Mikasa^®, Lifetime Sterling^TM and Housewares Deals^TM Internet websites. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations.

Additional information regarding the Company’s reportable segments is included in Note J of the Notes to the Consolidated Financial Statements included in Item 15.

CUSTOMERS

The Company’s products are sold globally to a diverse customer base including mass merchants (such as Wal-Mart and Target), specialty stores (such as Bed Bath & Beyond and Dunelm), national chains (such as Kohl’s, JC Penney and Sears), department stores (such as Macy’s), warehouse clubs (such as Costco, BJ’s Wholesale Club and Sam’s Club), supermarkets (such as Stop & Shop, Kroger, Tesco and Sainsbury’s), off-price retailers (such as Marshalls, T.J. Maxx and Ross Stores), and Internet retailers (such as Amazon.com).

The Company also operates its own Internet sites that provide information about the Company’s products and offer consumers the opportunity to purchase a limited selection of the Company’s products directly from the Company.

During the years ended December 31, 2011, 2010 and 2009, Wal-Mart Stores, Inc. (including Sam’s Club and Asda Superstore) accounted for 15%, 15%, and 18% of net sales, respectively. No other customer accounted for 10% or more of the Company’s net sales during these periods.

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DISTRIBUTION

The Company operates the following distribution centers:

SALES AND MARKETING

The Company’s sales and marketing staff coordinates directly with its wholesale customers to devise marketing strategies and merchandising concepts and to furnish advice on advertising and product promotion. The Company has developed many promotional programs for use in the ordinary course of business to promote sales throughout the year.

The Company’s sales and marketing efforts are supported from its principal offices and showroom in Garden City, New York; as well as showrooms in New York, New York; Medford, Massachusetts; Atlanta, Georgia; Bentonville, Arkansas; Menomonee Falls, Wisconsin and Corby, United Kingdom.

The Company generally collaborates with its largest wholesale customers and in many instances produces specific versions of the Company’s product lines with exclusive designs and/or packaging for their stores.

DESIGN AND INNOVATION

At the heart of the Company is a culture of innovation and new product development. The Company’s in-house design and development teams currently consist of 105 professional designers, artists and engineers. Utilizing the latest available design tools, technology and materials, these teams create new products, redesign products and create packaging and merchandising concepts.

SOURCES OF SUPPLY

The Company sources its products from over 400 suppliers. Most of the Company’s suppliers are located in the People’s Republic of China. The Company also sources products from suppliers in the United States, India, Japan, United Kingdom, Indonesia, Korea, Italy, Thailand, Germany, Slovakia, Vietnam, Czech Republic, Canada, Poland, Portugal, Switzerland, Malaysia, Slovenia, Mexico, Taiwan, and Singapore. The Company orders products substantially in advance of the anticipated time of their sale. The Company does not have any formal long-term arrangements with any of its suppliers and its arrangements with most manufacturers allow for flexibility in modifying the quantity, composition and delivery dates of orders.

MANUFACTURING

The Company manufactures its sterling silver products at its leased manufacturing facility in San Germán, Puerto Rico and fills spices and assembles spice racks at its owned Winchendon, Massachusetts distribution facility.

COMPETITION

The markets for kitchenware, tabletop and other products used in the home including home décor products are highly competitive and include numerous domestic and foreign competitors, some of which are larger than the Company. The primary competitive factors in selling such products to retailers are innovative products, brand, quality, aesthetic appeal to consumers, packaging, breadth of product line, distribution capability, prompt delivery and selling price.

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PATENTS

The Company owns 138 design and utility patents. The Company believes that the expiration of any of its patents would not have a material adverse effect on the Company’s business.

BACKLOG

Backlog is not material to the Company’s business because actual confirmed orders from the Company’s customers are typically not received until close to the required shipment dates.

EMPLOYEES

At December 31, 2011, the Company had a total of 1,150 full-time employees, of whom 185 are located in Asia and 113 in Europe. In addition, the Company employed 59 people on a part-time basis, predominately in customer service. None of the Company’s employees are represented by a labor union. The Company considers its employee relations to be good.

REGULATORY MATTERS

The Company, its subsidiaries and affiliates are subject to significant regulation by various governmental, regulatory and other administrative authorities.

As a manufacturer and distributor of consumer products, the Company is subject to the Consumer Products Safety Act. Additionally, laws regulating certain consumer products exist in some cities and states, as well as in other countries in which the Company or its subsidiaries and affiliates sell products.

The Company’s spice container filling operation is regulated by the Food and Drug Administration.

The Company’s operations also are subject to federal, state and local environmental and health and safety laws and regulations, including those that impose workplace standards and regulate the discharge of pollutants into the environment and establish standards for the handling, generation, emission, release, discharge, treatment, storage and disposal of materials and substances including solid and hazardous wastes.

Item 1A. Risk Factors

The Company’s businesses, operations and financial condition are subject to various risks. The risks and uncertainties described below are those that the Company considers material.

General Economic Factors and Political Conditions

The Company’s performance is affected by general economic factors, strength of retail economies and political conditions that are beyond its control. Retail economies are impacted by factors such as consumer demand and the condition of the retail industry, which in turn, is effected by general economic factors. These general economic factors include, among other factors, recession, inflation, deflation, housing markets, consumer credit availability, consumer debt levels, fuel and energy costs, material input costs, foreign currency translation, labor cost inflation, interest rates, government policies including tax policies and social compliance standards, unemployment trends, the impact of natural disasters and terrorist activities, conditions affecting the retail environment for the home and other matters that influence consumer spending. Unfavorable economic conditions in the United States adversely affected the Company’s performance in 2008 and 2009 and global economic conditions could adversely affect the Company’s performance in the future. Unstable economic and political conditions, civil unrest and political activism, particularly in Asia, could adversely impact the Company’s businesses. Any substantial deterioration in general economic conditions could also adversely affect consumer spending patterns which tend to be highly correlated with the levels of disposable income of consumers. If the global economy experiences significant disruptions or a slowdown, the Company’s business could be negatively impacted by reduced demand for its products.

The Company conducts business outside of the United States through subsidiaries, affiliates and joint ventures. These entities have operations in the United Kingdom, Mexico, Canada, Brazil, Hong Kong and China; therefore, the Company is subject to increases and decreases in its investments resulting from the impact of fluctuations in foreign currency exchange rates. These entities also bear risks similar to those risks of the Company; however, there are specific additional risks related to these organizations such as the failure of the Company’s partners or other investors to meet their obligations and higher credit and liquidity risks related to thinly capitalized entities. Failure of these entities or the Company’s vendors to adhere to required regulatory or other standards, including social compliance standards, can impact the Company’s reputation and adversely impact the Company’s business.

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The Company has achieved growth through investments and acquisitions. There can be no assurance that the Company will continue to be able to successfully integrate these businesses or identify and integrate future acquisitions into its existing business without substantial costs, delays or other operational or financial difficulties. Additionally, the failure of these businesses to achieve expected results, diversion of the Company’s management’s attention and failure to retain key personnel at these businesses could have a material adverse effect on the Company’s business, results of operations and financial condition.

Liquidity

The Company has substantial indebtedness and depends upon its bank lenders to finance its liquidity needs. In October 2011, the Company entered into a new $150.0 million secured credit agreement (the “Revolving Credit Facility”) and amended its $40.0 million second lien credit agreement (the “Term Loan”). Amounts loaned under these agreements bear interest at floating rates. An increase in interest rates would adversely affect the Company’s profitability. To the extent that the Company’s access to credit was to be restricted because of its own performance, its bank lenders’ performances or conditions in the capital markets generally, the Company would not be able to operate normally.

Competition

The markets for the Company’s products are intensely competitive. The Company competes with many other suppliers, some of which are larger than the Company, have greater financial and other resources or employ brands that are more established, have greater consumer recognition or are more favorably perceived by consumers or retailers than the Company’s brands.

Customers

The Company’s wholesale customers include mass merchants, specialty stores, national chains, department stores, warehouse clubs, supermarkets, off-price retailers and Internet retailers. Unanticipated changes in purchasing and other practices by the Company’s customers, including a customer’s pricing and payment terms, inventory destocking, limitations on shelf space, use of private label brands and other practices, could adversely affect the Company’s profitability. In addition, as a result of the desire of retailers to more closely manage inventory levels, there is a growing trend among retailers to make purchases on a “just-in-time” basis. This requires the Company to shorten its lead time for production in certain cases and more closely anticipate demand, which could in the future require the Company to carry additional inventories. The Company’s annual earnings and cash flows also depend to a great extent on the results of operations in the latter half of the year due to the seasonality of its sales. The Company’s success and sales growth is also dependent on its evaluation of consumer preferences and changing trends. The Company also sells a limited quantity of the Company’s products to individual consumers and smaller retailers through its own Internet sites.

Many of the Company’s wholesale customers are significantly larger than the Company, have greater financial and other resources and also purchase goods directly from vendors in Asia and elsewhere. Decisions by large customers to increase their purchases directly from overseas vendors could have a materially adverse affect on the Company. Significant changes or financial difficulties, including consolidations of ownership, restructurings, bankruptcies, liquidations or other events that affect retailers, could result in fewer stores selling the Company’s products, the Company having to rely on a smaller group of customers, an increase in the risk of extending credit to these customers or limitations on the Company’s ability to collect amounts due from these customers. Although the Company has long-established relationships with many of its customers, the Company does not have any long-term supply or binding contracts or guarantees of minimum purchases. Purchases by the Company’s customers are generally made using individual purchase orders. As a result, these customers may cancel their orders, change purchase quantities from forecast volumes, delay purchases for a number of reasons beyond the Company’s control or change other terms of their business relationship with the Company. Significant or numerous cancellations, reductions, delays in purchases or changes in business practices by customers could have a material adverse effect on the Company’s business.

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In 2011, Wal-Mart Stores, Inc. (including Sam’s Club and Asda Superstore) accounted for 15% of the Company’s net sales. A material reduction in purchases by Wal-Mart Stores, Inc. could have a significant adverse effect on the Company’s business and operating results. In addition, pressures by Wal-Mart Stores, Inc. that would cause the Company to materially reduce the price of the Company’s products could result in reductions of the Company’s operating margin. The concentration of the Company’s business with Wal-Mart extends to its international businesses, including Vasconia in Mexico and its strategic alliance in Canada, due to the market presence of Wal-Mart in these foreign countries.

Supply Chain

The Company sources its products from suppliers located in Asia, Europe and the United States. The Company’s Asia vendors are located primarily in the People’s Republic of China, which subjects the Company to various risks within the region including regulatory, political, economic and foreign currency changes. The Company’s ability to select and retain reliable vendors and suppliers who provide timely deliveries of quality parts and products efficiently will impact its success in meeting customer demand for timely delivery of quality products. The Company’s sourcing operations and its vendors are impacted by labor costs in China. Labor historically has been readily available at relatively low cost as compared to labor costs in North America. However, as China is experiencing rapid social, political and economic changes, labor costs have risen in some regions and there can be no assurance that labor will continue to be available to the Company in China at costs consistent with historical levels or that changes in labor or other laws will not be enacted which would have a material adverse effect on the Company’s operations in China. Interruption of supplies from any of the Company’s vendors, or the loss of one or more key vendors, could have a negative effect on the Company’s business and operating results.

Changes in currency exchange rates might negatively affect the profitability and business prospects of the Company and its overseas vendors. The Company does not have access to its vendors’ financial information and is unable to assess its vendors’ financial conditions including their liquidity.

The Company is subject to risks and uncertainties associated with economic and political conditions in foreign countries, including but not limited to, foreign government regulations, taxes including value-added taxes, import and export duties and quotas, anti-dumping regulations, incidents and fears involving security, terrorism and wars, political unrest and other restrictions on trade and travel.

The Company imports its products for delivery to its distribution centers, as well as arranges for its customers to import goods to which title has passed overseas or at port of entry. For purchases that are to be delivered to its distribution centers, the Company arranges for transportation, primarily by sea, from ports in Asia and Europe to ports in the United States, principally New York/Newark/Elizabeth and Los Angeles/Long Beach. Accordingly, the Company is subject to risks incidental to such transportation. These risks include, but are not limited to, increases in fuel costs, the availability of ships, increased security restrictions, work stoppages and carriers’ ability to provide delivery services to meet the Company’s shipping needs. Transportation disruptions and increased transportation costs could adversely affect the Company’s business.

The Company delivers its products to its customers or makes such products available for customer pickup from its distribution centers. Prolonged domestic transportation disruptions, as well as workforce or systems issues related to the Company’s distribution centers, could have a negative effect on the Company’s ability to deliver goods to its customers.

Intellectual Property

Significant portions of the Company’s business are dependent on trade names, trademarks and patents, some of which are licensed from third-parties. Several of these license agreements are subject to termination by the licensor. The loss of certain licenses or a material increase in the royalty rates the Company pays under such licenses upon renewal could result in a reduction of the Company’s operating margin.

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Regulatory

The Company is subject in the ordinary course of its business, in the United States and elsewhere, to many statutes, ordinances, rules and regulations that if violated by the Company or its affiliates, partners or vendors could have a material adverse effect on the Company’s business.

The marketing of certain of the Company’s consumer products involve an inherent risk of product liability claims or recalls or other regulatory or enforcement actions initiated by the U.S. Consumer Product Safety Commission, by other regulatory authorities or through private causes of action. Any defects in products the Company markets could harm the Company’s credibility, adversely affect its relationship with its customers and decrease market acceptance of the Company’s products and the strength of the brand names under which the Company markets such products. Potential product liability claims may exceed the amount of the Company’s insurance coverage and could materially damage the Company’s business and its financial condition.

The Company is subject to significant regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Sarbanes-Oxley Act of 2002. The Company cannot assure strict adherence to these regulations nor that it will not find material weaknesses in the future or that the Company’s independent registered public accounting firm will conclude that the Company’s internal control over financial reporting is operating effectively.

The Company is subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet and e-commerce. Such existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts and other communications, consumer protection, the provision of online payment services, broadband residential Internet access and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and personal privacy apply to the Internet and e-commerce. Unfavorable resolutions of these issues would harm the Company’s business. This could, in turn, diminish the demand for the Company’s products on the Internet and increase the Company’s cost of doing business.

Technology

The Company relies on many information technology systems for the operation of its principal business functions, including the Company’s enterprise, warehouse management, inventory forecast and re-ordering and call center systems. In the case of the Company’s inventory forecast and re-ordering system, most of the Company’s orders are received directly through electronic connections with the Company’s largest customers. The failure of any of these systems could have a material adverse effect on the Company’s business and results of operations. To keep pace within a competitive retail environment, the Company uses and will continue to evaluate new technologies to improve the efficiency of designing new innovative products. The success of certain product categories can be dependent upon the creation and launch of new innovative products in a competitive marketplace.

Availability of information on the Internet and, in particular, on social media websites subjects the Company to reputational risks related to its brands and the perceived quality of its products.

The Company has made significant efforts to secure its computer network to mitigate the risk of possible cyber attacks. However, the Company’s computer network could be compromised and confidential information such as customer credit card information could be misappropriated. This could lead to adverse publicity, loss of sales and profits or cause the Company to incur significant costs to reimburse third-parties for damages which could adversely impact profits.

In addition, although the Company’s systems and procedures comply with Payment Card Industry (“PCI”) data security standards, failure by the Company to maintain compliance with the PCI requirements or rectify a security issue could result in fines and the imposition of restrictions on the Company’s ability to accept credit cards.

Personnel

The Company’s success depends on its ability to identify, hire and retain skilled personnel. The Company’s industry is characterized by a high level of employee mobility and aggressive recruiting among competitors for personnel with successful track records. The Company may not be able to attract and retain skilled personnel or may incur significant costs in order to do so.

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Increases in the cost of employee benefits could impact the Company’s financial results and cash flows. The Company self insures a substantial portion of the costs of employee healthcare and workers compensation. This could result in higher volatility in the Company’s earnings and exposes the Company to higher financial risks. Healthcare costs in the United States and other countries have risen significantly over the past several years and increases may continue in the future.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

The following table lists the principal properties at which the Company operates its business at December 31, 2011:

Item 3. Legal Proceedings

Wallace Silversmiths de Puerto Rico, Ltd. (“Wallace de Puerto Rico”), a wholly-owned subsidiary of the Company, operates a manufacturing facility in San Germán, Puerto Rico that is leased from the Puerto Rico Industrial Development Company (“PRIDCO”). In March 2008, the United States Environmental Protection Agency (the “EPA”) announced that the San Germán Ground Water Contamination site in Puerto Rico (the “Site”) had been added to the Superfund National Priorities List due to contamination present in the local drinking water supply.

In May 2008, Wallace de Puerto Rico received from the EPA a Notice of Potential Liability and Request for Information Pursuant to 42 U.S.C. Sections 9607(a) and 9604(e) of the Comprehensive Environmental Response, Compensation, Liability Act. The Company responded to the EPA’s Request for Information on behalf of Wallace de Puerto Rico. In July 2011, Wallace de Puerto Rico received a letter from the EPA requesting access to the property that it leases from PRIDCO, and the Company granted such access.

The Company is not aware of any determination by the EPA that any remedial action is warranted for the Site and, accordingly, is not able to estimate the extent of any possible liability.

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The Company is, from time to time, involved in other legal proceedings. The Company believes that such other current litigation is routine in nature and incidental to the conduct of the Company’s business and that none of this litigation, individually or collectively, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosure

Not applicable

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The following table sets forth the quarterly high and low sales prices for the common stock of the Company for the fiscal periods indicated as reported by NASDAQ.

At December 31, 2011, the Company estimates that there were approximately 2,675 beneficial holders of the Company’s common stock.

The Company is authorized to issue 100 shares of Series A Preferred stock and 2,000,000 shares of Series B Preferred stock, none of which were issued or outstanding at December 31, 2011.

In March 2011, the Company determined that it would resume paying cash dividends on its outstanding shares of common stock, which was suspended in February 2009. The Board of Directors declared a dividend of $0.025 per share payable on May 16, 2011, August 16, 2011, November 29, 2011, February 15, 2012 and May 15, 2012. The Board of Directors currently intends to continue paying cash dividends for the foreseeable future, although the Board of Directors may in its discretion determine to modify or eliminate such dividends at any time.

The following table summarizes the Company’s equity compensation plan as of December 31, 2011:

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PERFORMANCE GRAPH

The following chart compares the cumulative total return on the Company’s common stock with the NASDAQ Market Index and the Hemscott Group Index for Housewares & Accessories. The comparisons in this chart are required by the SEC and are not intended to forecast or be indicative of the possible future performance of the Company’s common stock.

Note:

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Item 6. Selected Financial Data

The selected consolidated statement of operations data for the years ended December 31, 2011, 2010 and 2009 and the selected consolidated balance sheet data as of December 31, 2011 and 2010 has been derived from the Company’s audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the years ended December 31, 2008 and 2007 and the selected consolidated balance sheet data at December 31, 2009, 2008 and 2007 have been derived from the Company’s audited consolidated financial statements included in the Company’s Annual Reports on Form 10-K for those respective years, which are not included in this Annual Report on Form 10-K.

This information should be read together with the discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K.

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Notes:

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements for the Company and notes thereto set forth in Item 15. This discussion contains forward-looking statements relating to future events and the future performance of the Company based on the Company’s current expectations, assumptions, estimates and projections about it and the Company’s industry. These forward-looking statements involve risks and uncertainties. The Company’s actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section and elsewhere in this Annual Report. The Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

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, bakeware and cookware) 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). Net sales of Kitchenware products and Tabletop products accounted for approximately 83% of the Company’s net wholesale sales and 79% of the Company’s consolidated net sales in 2011. Creative Tops, acquired in November 2011, is a UK-based company from which the Company will manage its European business. These product categories, which include a change to establish a Home Solutions product category and incorporate the additional revenue source from Creative Tops acquired in 2011, reflect a refined alignment of the Company’s products into the sources of revenue which the Company analyzes. 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^®, Mikasa^®, KitchenAid^®, Pfaltzgraff^®, Elements^®, Cuisinart^®, 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.

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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 Creative Tops, which was acquired by the Company on November 4, 2011, for the post acquisition period are included within the Wholesale segment.

EQUITY INVESTMENTS

The Company owns approximately 30% of the outstanding capital stock of Vasconia, a leading Mexican housewares company. 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. The Agreement also provides a mechanism whereby, through December 2012, the Company is able to acquire from certain shareholders of Vasconia a controlling interest in Vasconia; subject to such shareholders electing not to sell their interest and, instead, acquiring the Company’s shares or Vasconia repurchasing the Company’s shares. 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 has a 50% joint venture investment in World Alliance Enterprises Limited (“World Alliance”), a Hong-Kong based company that primarily sells kitchenware and cutlery products to retailers other than in North and South America. The Company accounts for its investment in World Alliance using the equity method of accounting and has recorded its proportionate share of World Alliance’s net income, net of taxes, as equity in earnings in the Company’s consolidated statements of operations.

In January 2011, the Company, together with Vasconia and unaffiliated partners, formed Housewares Corporation of Asia Limited, a Hong Kong-based company that supplies direct import kitchenware products to retailers in North, Central and South America. During 2011, the results of the operations were immaterial.

In December 2011, the Company acquired a 40% equity interest in GS Internacional S/A (“GSI”). GSI is a leading wholesale distributor of branded housewares products in Brazil. The company markets dinnerware, glassware, home décor, kitchenware and barware to customers including: major department stores, housewares retailers and independent shops throughout 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. GSI’s Board of Directors is comprised of seven members (including two independent members).

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 2011, 2010 and 2009, net sales for the third and fourth quarters accounted for 59%, 60%, and 58% 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.

EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLE

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income, which amends Accounting Standards Codification (“ASC”) Topic No. 220, Comprehensive Income. The updated guidance requires that all changes in stockholders’ equity be presented either as a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued Accounting Standards Update No. 2011-12 (“ASU 2011-12”) which defers certain reclassification requirements within ASU 2011-05. This guidance is effective for interim and annual periods beginning after December 15, 2011. The guidance is limited to the form and content of the financial statements and disclosures, and the Company has determined that the adoption of this guidance does not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

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In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing for Goodwill Impairment, which permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic No. 350, Intangibles – Goodwill and Other. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company has determined that the adoption of this guidance does not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

RESULTS OF OPERATIONS

The following table sets forth statement of operations data of the Company as a percentage of net sales for the periods indicated below.

MANAGEMENT’S DISCUSSION AND ANALYSIS

2011 COMPARED TO 2010

Net Sales

Net sales for the year were $444.4 million, an increase of 0.3% compared to net sales of $443.2 million in 2010.

Net sales for the Wholesale segment in 2011 were $421.1 million, an increase of $7.3 million, or 1.8%, as compared to net sales of $413.8 million in 2010. Net sales for the Company’s Kitchenware product category in 2011 were $215.7 million, an increase of $7.2 million, or 3.5%, as compared to net sales of $208.5 million in 2010. The increase in the Company’s Kitchenware product category was primarily attributable to increased volumes due, in part, to successful new programs and promotions during the year as compared to 2010. Net sales for the Company’s Tabletop product category in 2011 were $134.6 million, an increase of $11.2 million, or 9.1%, as compared to net sales of $123.4 million for 2010. The Tabletop product category sales increase was primarily attributable to higher volumes related to new programs and the successful promotion of certain tabletop lines which increased sales by $7.7 million. The Tabletop product category also benefited from an increase of $3.5 million in net sales of excess silver finished goods and from silver products produced under manufacturing contracts. Net sales for the Company’s Home Solutions products category in 2011 were $64.1 million, a decrease of $17.8 million, or 21.7%, as compared to net sales of $81.9 million in 2010. The decrease in sales for the Company’s Home Solutions product category reflects lower volumes due, in part, to certain sales programs in 2010 not repeated in the 2011 period. Net sales for the Wholesale segment also include $6.7 million of net sales in 2011 from Creative Tops, which was acquired by the Company in November 2011.

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Net sales for the Retail Direct segment in 2011 were $23.3 million, a decrease of $6.1 million, or 20.7%, as compared to $29.4 million for 2010. The decrease in net sales was primarily attributable to a reduction in promotional activities and the Company’s decision to terminate its print consumer catalog during the second quarter of 2011.

Cost of sales

Cost of sales for 2011 was $282.1 million as compared to $273.8 million for 2010. Cost of sales as a percentage of net sales was 63.5% for 2011 as compared to 61.8% for 2010.

Cost of sales as a percentage of net sales for the Wholesale segment was 65.1% for 2011 compared to 63.7% for 2010. The decrease in gross margin primarily reflected promotional allowances and changes in product mix. Wholesale gross profit declined by $3.5 million. This was primarily due to the weakness of our Home Solutions category for which net sales and gross margin declined in 2011. The decline was partially offset in other product categories and from the inclusion of Creative Tops, since its acquisition.

Cost of sales as a percentage of net sales for the Retail Direct segment decreased to 33.1% in 2011 from 34.9% in 2010. The increase in gross margin primarily reflected reduced promotional activities which favorably affected margins during the 2011 period.

Distribution expenses

Distribution expenses for 2011 were $43.9 million as compared to $44.6 million for 2010. Distribution expenses as a percentage of net sales were 9.9% in 2011 and 10.1% for 2010.

Distribution expenses as a percentage of sales for the Wholesale segment shipped from the Company’s warehouses located in the United States were 9.4% as compared to 9.6% for the corresponding period in 2010. The decrease resulted from reduced labor costs in the 2011 period from efficiencies associated with an inventory management system upgrade put in place in the 2010 period.

Distribution expenses as a percentage of net sales for the Retail Direct segment were 29.8% for 2011 compared to 29.2% for 2010. A substantial portion of distribution expenses are fixed and, therefore, cannot be reduced to offset a reduction in sales volumes.

Selling, general and administrative expenses

Selling, general and administrative expenses (“SG&A”) for 2011 were $93.9 million, a decrease of 1.2% compared to $95.0 million for 2010.

SG&A for 2011 for the Wholesale segment were $71.4 million, an increase of $0.1 million or 0.1%, as compared to $71.3 million in 2010. As a percentage of net sales, SG&A expenses were 17.0% for 2011, as compared to 17.2 % for 2010. Excluding the expenses of Creative Tops, SG&A declined by $1.0 million. This decline in SG&A is the result of reductions of bad debt expense and certain office related expenses which substantially offset an increase in employee related and selling expenses.

SG&A expenses for 2011 for the Retail Direct segment were $9.2 million compared to $11.5 million for 2010. The decrease was primarily attributable to a decrease in employee, selling and office related expenses associated with the Company’s decision to terminate its print consumer catalog.

Unallocated corporate expenses for 2011 and 2010 were $13.3 million and $12.2 million, respectively. The increase was primarily attributable to acquisition related expenses of $2.0 million, which was partially offset by a reduction in other professional fees.

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Interest expense

Interest expense for 2011 was $7.8 million as compared to $9.4 million for 2010. The decrease in interest expense was primarily attributable to lower average interest rates and lower average borrowings. The most significant factor in the rate reduction related to the retirement of the Notes.

Loss on early retirement of debt

During 2010, the Company entered into a new revolving credit facility and term loan and repurchased $50.9 million principal amount of its convertible senior notes. In connection with these activities, the Company incurred a non-cash pre-tax charge of approximately $764,000 consisting primarily of the write-off of deferred financing costs and unamortized debt discount related to the Company’s prior revolving credit facility and the Notes that were repurchased.

Income tax provision

The income tax provision was $6.1 million in 2011 and $4.6 million in 2010. The effective tax rates for the years ended December 31, 2011 and 2010 reflects taxes on income derived from U.S. sources and a reduction in valuation allowances related to the utilization of certain deferred tax assets during each year, for which a tax benefit was not previously recognized. The valuation allowance reversal in 2011 related to deferred tax assets for net operating losses which became realizable and deferred taxes for stock options, deferred rent and other temporary differences. The valuation allowance reversal reduced the effective tax rate by 8.2% and 19.8% in 2011 and 2010, respectively. The effective tax rates for 2011 and 2010 were 36.4% and 23.4% respectively.

Equity in earnings

Equity in earnings of Vasconia, net of taxes, was $2.9 million for 2011 and $2.7 million for 2010. Vasconia reported net income of $11.4 million in 2011 compared to $9.9 million in 2010. This increase in income from operations in 2011 compared to 2010 was primarily attributable to higher sales volumes in both the kitchenware products and aluminum products divisions.

Equity in earnings for 2011 also included equity income of $447,000 derived from the Company’s 50% joint venture investment in World Alliance Enterprises Limited and equity income of $20,000 earned since December 9, 2011, the date of the Company’s acquisition of a 40% equity interest in GSI.

2010 COMPARED TO 2009

Net Sales

Net sales for the year were $443.2 million, an increase of 6.8% compared to net sales of $415.0 million in 2009.

Net sales for the Wholesale segment in 2010 were $413.8 million, an increase of $24.8 million, or 6.4%, compared to net sales of $389.0 million in 2009. Net sales in 2009 included approximately $4.7 million of net sales in the going-out-of-business sales of a customer that was liquidated. Excluding the impact of the customer’s 2009 going-out-of business sales, net sales for the Wholesale segment in 2010 increased approximately $29.5 million, or 7.7%, compared to 2009. More specifically, excluding the impact of the customer’s 2009 going-out-of business sales, net sales in the Company’s Kitchenware product category were $208.5 million in 2010, an increase of $10.3 million, or 5.2%, as compared to $198.2 million of net sales in 2009, net sales for the Company’s Tabletop product category were $123.4 million in 2010, an increase of $12.6 million, or 11.4%, as compared to $110.8 million net sales in 2009, and net sales for the Company’s Home Solutions product category were $81.9 million in 2010, an increase of $6.6 million, or 8.8%, compared to $75.3 million net sales in 2009. Net sales to Wal-Mart Stores Inc. decreased $8.5 million in 2010 as compared to 2009, principally due to changes in Wal-Mart’s inventory management strategy, which have resulted in the maintenance of fewer product offerings in its stores during the first half of 2010. The decrease in net sales to Wal-Mart Stores Inc., within the Kitchenware, Tabletop and Home Solutions product categories, was substantially offset by an increase in sales to other retailers attributable to higher volume and the introduction of new products.

Net sales for the Retail Direct segment in 2010 were $29.4 million, an increase of $3.4 million, or 13.1%, compared to $26.0 million for 2009. The increase in net sales was primarily attributable to targeted sales promotions on the Company’s Pfaltzgraff^® and Mikasa^® websites and additional net sales from the Company’s new Lifetime Sterling™ and Housewares Deals™ websites. The increase was partially offset by lower shipping income due to free shipping promotions.

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Cost of sales

Cost of sales for 2010 was $273.8 million compared to $257.8 million for 2009. Cost of sales as a percentage of net sales was 61.8% for 2010 compared to 62.1% for 2009.

Cost of sales as a percentage of net sales for the Wholesale segment was 63.7% for 2010 compared to 64.3% for 2009. Gross margin in 2010 increased as a result of favorable product mix. Gross margin in 2009 was negatively affected by lower margin sales in the going-out-of-business sales of a customer that was liquidated.

Cost of sales as a percentage of net sales for the Retail Direct segment increased to 34.9% in 2010 from 29.4% in 2009. The decrease in gross margin was principally due to an increase in free shipping promotions.

Distribution expenses

Distribution expenses for 2010 were $44.6 million compared to $43.3 million for 2009. Distribution expenses as a percentage of net sales were 10.1% in 2010 and 10.4% for 2009.

Distribution expenses as a percentage of net sales for the Wholesale segment was unchanged at 8.7% in both 2010 and 2009.

Distribution expenses as a percentage of net sales for the Retail Direct segment were 29.2% for 2010 compared to 35.3% for 2009. The decrease is primarily attributable to improved labor efficiencies due to the Company’s exit from its York, Pennsylvania distribution center in July 2009.

Selling, general and administrative expenses

SG&A expenses for 2010 were $95.0 million, a decrease of 0.6% compared to $95.6 million for 2009.

SG&A expenses for 2010 for the Wholesale segment were $71.3 million, a decrease of $2.2 million or 3.0% compared to $73.5 million for 2009. As a percentage of net sales, SG&A expenses were 17.2% for 2010 compared to 18.9% for 2009. The decrease of 3.0% was attributable to the benefit of the 2009 restructuring activities and lower depreciation and amortization resulting from the write-off of fixed assets at exited facilities and a reduction of occupancy expenses primarily from consolidating showrooms and the Company’s continued expense reduction efforts. The decrease was offset by higher incentive compensation.

SG&A expenses for 2010 for the Retail Direct segment were $11.5 million compared to $10.8 million for 2009. The increase was in support of sales growth and was attributable to higher employee expenses and an increase in web related search expenses. This increase was partially offset by lower catalog related expenses.

Unallocated corporate expenses for 2010 and 2009 were $12.2 million and $11.3 million, respectively. The increase was primarily attributable to higher compensation expense, including incentive compensation and stock options.

Interest expense

Interest expense for 2010 was $9.4 million compared to $13.2 million for 2009. The decrease in interest expense was primarily attributable to lower average borrowings and lower interest rates resulting from the Company’s debt refinancing in 2010.

Loss on early retirement of debt

During 2010, the Company entered into a new revolving credit facility and term loan and repurchased $50.9 million principal amount of its Notes. In connection with these activities, the Company incurred a non-cash pre-tax charge of approximately $764,000 consisting primarily of the write-off of deferred financing costs and unamortized debt discount related to the Company’s prior revolving credit facility and the 4.75% convertible senior notes that were repurchased.

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Income tax provision

The income tax provision for 2010 was $4.6 million compared to $1.9 million for 2009. The effective tax rates in 2010 and 2009 reflect a reduction in the valuation allowance related to certain deferred tax assets. The increase in the income tax provision resulted from higher income before income taxes offset by the effect of the valuation allowance reduction.

Equity in earnings of Vasconia

Equity in earnings of Vasconia, net of taxes, was $2.7 million for 2010 compared to $2.2 million for 2009. Vasconia reported net income of $9.9 million in 2010 compared to $8.3 million in 2009. The increase in net income in 2010 compared to 2009 was primarily attributable to the growth in sales of aluminum products during 2010. Increased margins from kitchenware sales during 2010 were offset by increases in selling and distribution expenses.

Extraordinary item

In 2010, the Company recorded an extraordinary gain of $2.5 million to eliminate the negative goodwill recorded in conjunction with the purchase of the business and certain assets of Mikasa, Inc.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements which have been prepared in accordance with U.S. generally accepted accounting principles and with the instructions to Form 10-K and Article 10 of Regulation S-X. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates these estimates including those related to revenue recognition, allowances for doubtful accounts, reserves for sales returns and allowances and customer chargebacks, inventory mark-down provisions, health insurance reserves, impairment of goodwill, tangible and intangible assets, stock option expense, accruals related to the Company’s tax positions and tax valuation allowances. Actual results may differ from these estimates using different assumptions and under different conditions. The Company’s significant accounting policies are more fully described in Note A of the Notes to the Consolidated Financial Statements included in Item 15. The Company believes that the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the Company’s consolidated financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

Inventory

Inventory consists principally of finished goods sourced from third-party suppliers. Inventory also includes finished goods, work in process and raw materials related to the Company’s manufacture of sterling silver products. Inventory is priced using the lower of cost (first-in, first-out basis) or market method. The Company estimates the selling price of its inventory on a product by product basis based on the current selling environment. If the estimated selling price is lower than the inventory’s cost, the Company reduces the value of the inventory to its net realizable value.

Accounts Receivable

The Company periodically reviews the collectibility of its accounts receivable and establishes allowances for estimated losses that could result from the inability of its customers to make required payments. A considerable amount of judgment is required to assess the ultimate realization of these receivables including assessing the initial and on-going creditworthiness of the Company’s customers. The Company also maintains an allowance for anticipated customer deductions. The allowances for deductions are primarily based on contracts with customers. However, in certain cases the Company does not have a formal contract and, therefore, customer deductions are non-contractual. To evaluate the reasonableness of non-contractual customer deductions, the Company analyzes currently available information and historical trends of deductions. If the financial conditions of the Company’s customers or general economic conditions were to deteriorate, resulting in an impairment of their ability to make payments or sell the Company’s products at reasonable sales prices, or the Company’s estimate of non-contractual deductions varied from actual deductions, revisions to allowances would be required, which could adversely affect the Company’s financial condition. Historically, the Company’s allowances have been appropriate and have not resulted in material unexpected charges.

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Goodwill, intangible assets and long-lived assets

Goodwill and intangible assets deemed to have indefinite lives are not amortized but instead are subject to an annual impairment assessment.

Long-lived assets, including intangible assets deemed to have finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that such assets may have been impaired. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit or material adverse changes in the business climate that indicate that the carrying amount of an asset may be impaired. When impairment indicators are present, the Company compares the carrying value of the assets to the estimated discounted future cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company considered indicators of impairment of its long-lived assets and determined that no such indicators were present at December 31, 2011.

Revenue recognition

The Company sells products wholesale, to retailers and distributors, and retail, directly to the consumer through the Company’s Retail Direct operations. Wholesale sales and Retail Direct sales are recognized when title passes to the customer, which is primarily at the shipping point for Wholesale sales and upon delivery to the customer for Retail Direct sales. Shipping and handling fees that are billed to customers in sales transactions are recorded in net sales. Net sales exclude taxes that are collected from customers and remitted to the taxing authorities. Allowances and accruals for various sales incentives and promotions, which include cooperative advertising, buydowns, volume rebates and discounts, are reflected as reductions in net sales.

Employee stock options

The Company accounts for its stock options through measurement of compensation expense for all share-based compensation granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service period for awards expected to vest. The Company uses the Black-Scholes option valuation model to estimate the fair value of its stock options. The Black-Scholes option valuation model requires the input of highly subjective assumptions including the expected stock price volatility of the Company’s common stock and the risk-free interest rate. Changes in these subjective input assumptions can materially affect the fair value estimate of the Company’s stock options on the date of the option grant. The Company historically has not issued options which would be variable awards.

Employee healthcare

In 2011, the Company commenced self-insuring certain portions of its health insurance plan. The Company maintains an estimated accrual for unpaid claims and claims incurred but not yet reported (“IBNR”). Although management believes that it uses the best information available to estimate IBNR, actual claims may vary significantly from estimated claims.

Income taxes

The Company applies the required provisions for financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the Company’s financial statements. Tax positions must meet a more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken. The valuation allowance is also calculated, established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized.

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Derivatives

The Company accounts for all derivative instruments on the balance sheet at fair value as either an asset or a liability. Changes in the fair value of derivatives that qualify as hedges and have been designated as part of a hedging relationship for accounting purposes have no net impact on earnings to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings. For derivatives that do not qualify or are not designated as hedging instruments for accounting purposes, changes in fair value are recorded in operations.

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.

At December 31, 2011, the Company had cash and cash equivalents of $3.0 million as compared to $3.4 million at December 31, 2010, working capital was $128.8 million at December 31, 2011 compared to $121.7 million at December 31, 2010 and the current ratio was 2.84 to 1 at December 31, 2011 compared to 3.01 to 1 at December 31, 2010.

Borrowings under the Company’s revolving credit facility increased to $57.6 million at December 31, 2011 compared to $14.1 million at December 31, 2010. The increase in borrowings was primarily attributable to the acquisition of Creative Tops and the retirement of the Notes.

The Company believes that availability under the Revolving Credit Facility and cash flows from operations is 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 equity financing. However, there can be no assurance that any such alternative sources would be available or sufficient. The Company closely monitors the creditworthiness of its customers. Based upon the 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 may be materially affected in the future.

In 2011, Wal-Mart Stores, Inc. (including Sam’s Club and Asda Superstore) accounted for 15% of the Company’s net sales. A material reduction of product orders by Wal-Mart Stores, Inc. could have significant adverse effects on the Company’s business and operating results and ultimately the Company’s liquidity, including the loss of predictability and volume production efficiencies associated with such a large customer.

Revolving Credit Facility

The Company had a $125.0 million secured credit agreement (the “Revolving Credit Facility”), which matured on June 9, 2015, with a bank group led by JPMorgan Chase Bank, N.A. On October 28, 2011, the Company amended the Revolving Credit Facility to increase the commitment of the lenders to $150.0 million and to, among other things, (i) increase the borrowing base limit for eligible trademarks to $25.0 million, (ii) revise the pricing grid margins for Alternative Base Rate loans to 1.0% to 1.75% and for Adjusted LIBO Rate and Overnight LIBO Rate loans to 2.0% to 2.75%, (iii) permit borrowings in multi-currencies, primarily U.S Dollars, Euros and Pounds Sterling, (iv) extend, subject to certain conditions, the maturity date to October 28, 2016, (v) increase the expansion option which permits the Company, subject to certain conditions including the consent of the Term Loan lender, to increase the maximum borrowing up to $200.0 million, (vi) revise EBITDA (as defined) to provide for the add back of acquisition related expenses, (vii) limit the domestic and foreign borrowing base, (viii) increase limitations on foreign debt and (ix) increase the limit for investments.

At December 31, 2011, borrowings outstanding under the Revolving Credit Facility were $57.6 million and open letters of credit were $1.4 million.

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 LIBOR rate plus 1.0%, plus a margin of 1.0% to 1.75%, or (ii) the Eurodollar Rate, defined as the Adjusted LIBOR Rate plus a margin of 2.0% to 2.75%. The respective margins are based upon availability. Interest rates on outstanding borrowings at December 31, 2011 ranged from 2.5% to 4.5%. In addition, the Company pays a commitment fee of 0.375% on the unused portion of the Revolving Credit Facility. Availability under the Revolving Credit Facility was approximately $67.8 million, or 45%, of the total loan commitment at December 31, 2011. On July 15, 2011, the Company retired the outstanding $24.1 million aggregate principal amount of the Notes with borrowings from the Revolving Credit Facility.

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The Company classified a portion of the Revolving Credit Facility as a current liability based on the Company’s intent and ability to repay the loan from cash flows from operations for which the payments 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.

Term Loan

The Company has a $40.0 million second lien credit agreement (the “Term Loan”), which matures on June 8, 2015, with Citibank, N.A.

The Term Loan bears interest, at the Company’s option, at one of the following rates: (i) the Alternate Base Rate, defined as the greater of the corporate rate published by the lender and the Federal Funds Rate plus 0.50% provided that such calculated rate is a minimum of 2.50%, plus a margin of 7.50%, or (ii) the Adjusted LIBOR rate which shall be a minimum of 1.50%, plus a margin of 8.50%. The interest rate on the outstanding borrowings at December 31, 2011 was 10.0%.

On October 28, 2011, the Company amended the Term Loan to, among other things, (i) revise Permitted Acquisitions (as defined), for which the lender gives prior written consent, to (a) allow Permitted Non-Control Acquisitions and (b) reduce the limit on Permitted Acquisitions, (ii) increase the minimum consolidated EBITDA covenant for the trailing twelve month periods ending March 31, 2012, June 30, 2012, September 30, 2012 and December 31, 2012 and thereafter to $31.0 million, $31.0 million, $33.0 million and $34.0 million, respectively, (iii) increase the limit for other investments, (iv) increase limitations on foreign subsidiary debt, (v) revise EBITDA (as defined) to provide for the add back of acquisition related expenses, and (vi) revise the limitation on indebtedness incurred to finance acquisitions.

The Term Loan requires the Company to have EBITDA, as defined, of not less than $30.0 million for the trailing four fiscal quarters through December 31, 2011 and limits capital expenditures to $7.5 million for the year ended December 31, 2011. The Company was in compliance with these financial covenants at December 31, 2011.

The Company’s Consolidated EBITDA for the four quarters ended December 31, 2011 was $38.1 million, as follows:

Consolidated EBITDA for the four quarters ended

December 31, 2011

(in thousands)

Capital expenditures for the year ended December 31, 2011 were $5.0 million.

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Non-GAAP financial measure

Consolidated EBITDA is a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The following is a reconciliation of net income as reported to Consolidated EBITDA for the three and twelve months ended December 31, 2011 and 2010:

Convertible Notes

The Company had outstanding $24.1 million aggregate principal amount of 4.75% Convertible Senior Notes (“the Notes”) at December 31, 2010. The Company had classified the Notes as a long-term liability based on the Company’s intent and ability to refinance the Notes using proceeds from the Revolving Credit Facility.

In June 2010, the Company purchased $50.9 million principal amount of the Notes in privately negotiated transactions for $51.0 million, reducing the aggregate principal amount to $24.1 million. On July 15, 2011, the Company retired its convertible senior notes with borrowings from the Revolving Credit Facility.

Dividends

In March 2011, the Company determined that it would resume paying cash dividends on its outstanding shares of common stock which were suspended in February 2009. The Board of Directors declared a dividend of $0.025 per share payable on May 16, 2011, August 16, 2011, November 29, 2011, February 15, 2012 and May 15, 2012.

Operating activities

Net cash provided by operating activities was $12.2 million in 2011 as compared to net cash provided by operating activities of $30.1 million in 2010. The decrease was primarily attributable to an increase in inventory, payments of accounts payable and accrued expenses and a reduction in net income.

Investing activities

Net cash used in investing activities was $30.6 million in 2011 as compared to $2.8 million in 2010. The increase in cash used in investing activities related to: i) cash consideration of $20.6 million paid for the November 2011 acquisition of Creative Tops, ii) cash consideration of $5.0 million paid for the investment in GSI (does not include contingent consideration payable in 2012), iii) an investment in Housewares Corporation of Asia of $0.1 million and iv) purchase of computer software and hardware, as well as, equipment purchases for the Company’s distribution facilities.

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Financing activities

Net cash provided by financing activities was $17.9 million in 2011 as compared to net cash used in financing activities of $24.6 million in 2010. The Company borrowed $43.5 million from its Revolving Credit Facility in 2011 as compared to net borrowings of $29.5 million in 2010. The proceeds from the 2011 borrowings were principally used to: i) finance the Creative Tops acquisition, ii) finance the Company’s investment in GSI, iii) retire the Notes and iv) pay acquisition related costs of $2.0 million. In the year ended December 31, 2010, the Company entered into the Revolving Credit Facility and Term Loan and utilized funds from these new facilities to repay amounts outstanding under the Company’s prior credit facility and repurchase $50.9 million principal amount of the Notes for $51.0 million.

Contractual obligations

As of December 31, 2011, the Company’s contractual obligations were as follows (in thousands):

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact the consolidated financial position, results of operations or cash flows of the Company. The Company is exposed to market risk associated with changes in interest rates and foreign currency exchange rates. The Company’s Revolving Credit Facility and Term Loan bear interest at variable rates; and, therefore, the Company is subject to increases and decreases in interest expense resulting from fluctuations in interest rates. The Company has foreign operations through its acquisitions, investments and strategic alliances which have operations in the United Kingdom, Mexico, Canada, Brazil, Hong Kong and China; therefore, the Company is subject to increases and decreases in its investments resulting from the impact of fluctuations in foreign currency exchange rates.

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Item 8. Financial Statements and Supplementary Data

The Company’s Consolidated Financial Statements as of and for the year ended December 31, 2011 in Item 15 commencing on page F-1 are incorporated herein by reference.

The following tables set forth certain unaudited consolidated quarterly statement of operations data for the eight quarters ended December 31, 2011. This information is unaudited, but in the opinion of management, it has been prepared substantially on the same basis as the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited consolidated quarterly results of operations. The consolidated quarterly data should be read in conjunction with the Company’s audited consolidated financial statements and the notes to such statements appearing elsewhere in this Annual Report. The results of operations for any quarter are not necessarily indicative of the results of operations for any future period:

Notes:

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

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Item 9A. Controls and Procedures

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of December 31, 2011, that the Company’s controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed by it under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2011. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principle executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 using the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2011 is effective.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Lifetime Brands, Inc.

We have audited Lifetime Brands Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Lifetime Brands Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Lifetime Brands, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011 based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lifetime Brands, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 of Lifetime Brands, Inc. and our report dated March 9, 2012 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Jericho, New York

March 9, 2012

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Item 9B. Other Information

Not applicable

PART III

Items 10, 11, 12, 13 and 14

The information required under these items is contained in the Company’s 2012 Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days after the close of the Company’s fiscal year covered by this Annual Report on Form 10-K and is herein incorporated by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

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