LIFETIME BRANDS, INC - Quarter Report: 2018 June (Form 10-Q)

LIFETIME BRANDS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

INDEX

 

				Page No.
Part I. Financial Information
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets – June 30, 2018 (unaudited) and December 31, 2017			2
		Condensed Consolidated Statements of Operations (unaudited) – Three and Six Months Ended June 30, 2018 and 2017			3
		Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Three and Six Months Ended June 30, 2018 and 2017			4
		Condensed Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2018 and 2017			5
		Notes to Condensed Consolidated Financial Statements (unaudited)			6
		Report of Independent Registered Public Accounting Firm			27
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			43
Item 4.		Controls and Procedures			43
Part II. Other Information
Item 1.		Legal Proceedings			43
Item 1A.		Risk Factors			44
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 6.		Exhibits			47
Signatures					48

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

		June 30, 2018				December 31, 2017
		(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	5,999			$	7,600
Accounts receivable, less allowances of $6,037 at June 30, 2018 and $6,190 at December 31, 2017			93,100				108,033
Inventory			197,879				132,436
Prepaid expenses and other current assets			14,712				10,354
Income taxes receivable			4,095				—
TOTAL CURRENT ASSETS			315,785				258,423
PROPERTY AND EQUIPMENT, net			25,643				23,065
INVESTMENTS			23,501				23,978
INTANGIBLE ASSETS, net			366,198				88,479
DEFERRED INCOME TAXES			8,957				5,826
OTHER ASSETS			1,962				1,750
TOTAL ASSETS		$	742,046			$	401,521
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Current maturity of term loan		$	1,247			$	—
Short term loan			76				69
Accounts payable			43,915				25,461
Accrued expenses			52,937				44,121
Income taxes payable			—				1,864
TOTAL CURRENT LIABILITIES			98,175				71,515
DEFERRED RENT & OTHER LONG-TERM LIABILITIES			20,847				20,249
DEFERRED INCOME TAXES			33,968				4,423
INCOME TAXES PAYABLE, LONG-TERM			311				311
REVOLVING CREDIT FACILITY			59,577				94,744
TERM LOAN			263,329				—
STOCKHOLDERS’ EQUITY
Preferred stock, $1.00 par value, shares authorized: 100 shares of Series A and 2,000,000 shares of Series B; none issued and outstanding			—				—
Common stock, $.01 par value, shares authorized: 50,000,000 at June 30, 2018 and December 31, 2017; shares issued and outstanding: 20,740,997 at June 30, 2018 and 14,902,527 at December 31, 2017			207				149
Paid-in capital			256,182				178,909
Retained earnings			41,126				60,546
Accumulated other comprehensive loss			(31,676	)			(29,325	)
TOTAL STOCKHOLDERS’ EQUITY			265,839				210,279
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	742,046			$	401,521

See accompanying independent registered public accounting firm review report and notes to unaudited condensed

consolidated financial statements.

 

- 2 -

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
Net sales		$	148,651			$	117,393			$	266,820			$	230,749
Cost of sales			96,573				74,596				169,655				144,011
Gross margin			52,078				42,797				97,165				86,738
Distribution expenses			14,942				12,582				32,764				26,015
Selling, general and administrative expenses			40,042				33,102				80,217				65,484
Restructuring expenses			395				254				801				254
Loss from operations			(3,301	)			(3,141	)			(16,617	)			(5,015	)
Interest expense			(4,676	)			(1,001	)			(6,779	)			(1,942	)
Loss on early retirement of debt			—				(110	)			(66	)			(110	)
Loss before income taxes and equity in earnings			(7,977	)			(4,252	)			(23,462	)			(7,067	)
Income tax benefit			1,765				1,698				5,575				2,642
Equity in earnings, net of taxes			155				458				232				998
NET LOSS		$	(6,057	)		$	(2,096	)		$	(17,655	)		$	(3,427	)
BASIC LOSS PER COMMON SHARE		$	(0.30	)		$	(0.14	)		$	(0.96	)		$	(0.24	)
DILUTED LOSS PER COMMON SHARE		$	(0.30	)		$	(0.14	)		$	(0.96	)		$	(0.24	)
Cash dividends declared per common share		$	0.0425			$	0.0425			$	0.085			$	0.085

See accompanying independent registered public accounting firm review report and notes to unaudited condensed

consolidated financial statements.

 

- 3 -

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
Net loss		$	(6,057	)		$	(2,096	)		$	(17,655	)		$	(3,427	)
Other comprehensive income (loss), net of taxes:
Translation adjustment			(5,489	)			3,312				(2,109	)			5,288
Derivative fair value adjustment			(263	)			1				(277	)			14
Effect of retirement benefit obligations			17				16				35				31
Other comprehensive income (loss), net of taxes			(5,735	)			3,329				(2,351	)			5,333
Comprehensive income (loss)		$	(11,792	)		$	1,233			$	(20,006	)		$	1,906

See accompanying independent registered public accounting firm review report and notes to unaudited condensed

consolidated financial statements.

 

- 4 -

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

		Six Months Ended June 30,
		2018				2017
OPERATING ACTIVITIES
Net loss		$	(17,655	)		$	(3,427	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			10,731				6,634
Amortization of financing costs			663				282
Deferred rent			368				(304	)
Stock compensation expense			1,759				1,530
Undistributed equity in earnings, net of taxes			(232	)			(970	)
Loss on early retirement of debt			66				110
Changes in operating assets and liabilities (excluding the effects of business acquisitions)
Accounts receivable			41,441				37,950
Inventory			(39,555	)			(30,769	)
Prepaid expenses, other current assets and other assets			(185	)			1,107
Accounts payable, accrued expenses and other liabilities			5,170				(5,291	)
Income taxes receivable			(4,095	)			(4,279	)
Income taxes payable			(4,242	)			(6,858	)
NET CASH USED IN OPERATING ACTIVITIES			(5,766	)			(4,285	)
INVESTING ACTIVITIES
Purchases of property and equipment			(3,168	)			(2,710	)
Filament acquisition, net of cash acquired			(217,932	)			—
NET CASH USED IN INVESTING ACTIVITIES			(221,100	)			(2,710	)
FINANCING ACTIVITIES
Proceeds from revolving credit facility			126,283				123,534
Repayments of revolving credit facility			(161,173	)			(110,937	)
Proceeds from Term Loan			275,000				—
Repayment of Term Loan			(688	)			—
Repayment of Credit Agreement term loan			—				(9,500	)
Proceeds from short term loan			79				119
Payments on short term loan			(71	)			(114	)
Payment of financing costs			(11,154	)			(30	)
Payment of equity issuance costs			(936	)			—
Payments for capital leases			(24	)			(49	)
Payments of tax withholding for stock based compensation			(398	)			(176	)
Proceeds from exercise of stock options			—				1,425
Cash dividends paid			(1,535	)			(1,235	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			225,383				3,037
Effect of foreign exchange on cash			(118	)			197
DECREASE IN CASH AND CASH EQUIVALENTS			(1,601	)			(3,761	)
Cash and cash equivalents at beginning of period			7,600				7,883
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	5,999			$	4,122

See accompanying independent registered public accounting firm review report and notes to unaudited condensed

consolidated financial statements.

 

- 5 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

NOTE A — BASIS OF PRESENTATION AND SUMMARY ACCOUNTING POLICIES

Organization and business

Lifetime Brands, Inc. (the “Company”) designs, sources and sells branded kitchenware, tableware and other products used in the home and markets its products under a number of brand names and trademarks, which are either owned or licensed by the Company, or through retailers’ private labels. The Company markets and sells its products principally on a wholesale basis to retailers. The Company also markets and sells a limited selection of its products directly to consumers through third parties and its own internet websites.

On March 2, 2018, the Company expanded its portfolio of products and brands through the acquisition of Taylor Holdco LLC and its subsidiaries (doing business as Filament Brands) (“Filament”). Filament primarily designs, markets, and distributes consumer and food service precision measurement products, including kitchen scales, thermometers and timers, bath scales, wine accessories, kitchen tools, hydration products, and select outdoor products. The six months ended June 30, 2018 includes the operations of Filament for the period from March 2, 2018 to June 30, 2018. See Note C– Acquisition to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all estimates and adjustments, which consist only of normal recurring accruals, considered necessary for a fair presentation of the financial position have been included. These condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

The Company’s business and working capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters. In 2017 and 2016, net sales for the third and fourth quarters accounted for 60% and 61% 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.

Revenue recognition

The Company sells products wholesale, to retailers and distributors, and retail, directly to the consumer. Wholesale sales and retail sales are recognized at the point in time the customer obtains control of the products, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products.

The Company offers various sales incentives and promotional programs to its customers in the normal course of business. These incentives and promotions typically include arrangements such as cooperative advertising, buydowns, volume rebates and discounts. These arrangements and returns are reflected as reductions of revenue at the time of sale. See Note B – Revenue to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.

 

- 6 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

Cost of sales

Cost of sales consists primarily of costs associated with the production and procurement of product, inbound freight costs, purchasing costs, royalties and other product procurement related charges.

Distribution expenses

Distribution expenses consist primarily of warehousing expenses and freight-out expenses.

Accounts receivable

The Company periodically reviews the collectability of its accounts receivable and establishes allowances for estimated losses that could result from the inability of its customers to make required payments. 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.

Receivable purchase agreement

The Company has an uncommitted Receivables Purchase Agreement with HSBC Bank USA, National Association (“HSBC”), as Purchaser (the “Receivables Purchase Agreement”). The sale of accounts receivable, under the Company’s Receivable Purchase Agreement with HSBC, are reflected as a reduction of accounts receivable in the Company’s condensed consolidated balance sheet at the time of sale and any related expense is included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. Pursuant to this agreement, the Company sold to HSBC $19.1 million and $38.7 million of receivables during the three and six months ended June 30, 2018, respectively, and $17.6 million and $39.2 million of receivables during the three and six months ended June 30, 2017, respectively. Charges of $99,000 and $189,000 related to the sale of the receivables are included in selling, general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2018, respectively. Charges of $63,000 and $130,000 related to the sale of the receivables are included in selling, general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2017, respectively.

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 net realizable value. The Company estimates the selling price of its inventory on a product-by-product basis based on the current selling environment. If the estimated selling price is lower than the inventory’s cost, the Company reduces the value of the inventory to its net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predicable cost of completion, disposal and transportation.

 

- 7 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

The components of inventory are as follows:

 

		June 30,				December 31,
		2018				2017
		(in thousands)
Finished goods		$	188,813			$	125,355
Work in process			93				86
Raw materials			8,973				6,995
Total		$	197,879			$	132,436

Fair value of financial instruments

The Company determined that the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair values because of their short-term nature. The Company determined that the carrying amounts of borrowings outstanding under its revolving credit facility, term loan and short term loan approximate fair value since such borrowings bear interest at variable market rates, based on a recognized index rate.

Derivatives

The Company accounts for derivative instruments in accordance with Accounting Standard Codification (“ASC”) Topic No. 815, Derivatives and Hedging, (“ASC Topic No. 815”). ASC Topic No. 815 requires that all derivative instruments be recognized on the balance sheet at fair value as either an asset or 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 until the hedged item is recognized in earnings. The change in the fair value of hedges are included in accumulated other comprehensive income (loss) and is subsequently recognized in the Company’s condensed consolidated statements of operations to mirror the location of the hedged items impacting 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.

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. Additionally, if events or conditions were to indicate the carrying value of a reporting unit may not be recoverable, the Company would evaluate goodwill and other intangible assets for impairment at that time. As it relates to the goodwill assessment, the Company first assesses 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 testing described in ASU Topic No. 350, Intangibles – Goodwill and Other. If, after assessing qualitative factors, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary and the Company’s goodwill is considered to be unimpaired. However, if based on the Company’s qualitative assessment it concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if the Company elects to bypass the qualitative assessment, the Company will proceed with performing the two-step process. The first step in the two-step process compares the carrying value of each reporting unit that has goodwill with the estimated fair value of the respective reporting unit. Should the carrying value of a reporting unit be in excess of the estimated fair value of that reporting unit, the second step must be performed. The second step represents a hypothetical purchase price allocation as if the Company had acquired the reporting unit on that date. The Company also evaluates qualitative factors to determine whether or not its indefinite lived intangibles have been impaired and then performs quantitative tests if required. These tests can include the relief from royalty model or other valuation models.

 

- 8 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

Long-lived assets, including intangible assets deemed to have finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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 recoverability of the asset is measured by comparing the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Employee healthcare

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

Restructuring expenses

Costs associated with restructuring activities are recorded at fair value when a liability has been incurred. A liability has been incurred at the point of closure for any remaining operating lease obligations and at the communication date for severance.

In connection with the Company’s March 2018 acquisition of Filament, the Company commenced a restructuring plan to integrate the operations of Filament with the Company’s operations and realize the savings expected from the synergies of the acquisition. During the three and six months ended June 30, 2018 the Company incurred $0.4 million and $0.8 million, respectively, of severance restructuring charges. At June 30, 2018, $0.4 million of restructuring changes were accrued.

In 2016, to reduce costs and achieve synergies, the Company began the process of integrating its legal entities operating in Europe. During the three and six months ended June 30, 2017, the Company recorded $254,000, of restructuring expense related to the execution of this plan, primarily related to severance.

Adoption of new accounting pronouncements

Effective January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2017-01, Clarifying the Definition of a Business. This standard assists with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard will be applied prospectively to acquisitions and has not had an impact on the Company’s condensed consolidated financial statements.

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The standard supersedes existing revenue recognition guidance and replaces it with a five step revenue model with a core principle that an entity recognizes revenue to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted the new guidance under the modified retrospective approach. The adoption of this guidance did not have a significant impact on the Company’s condensed consolidated financial statements. The adoption resulted in the recognition of right of a return asset related to certain product returns by increasing the returns liability; this gross up had no corresponding impact on the Condensed Consolidated Statement of Operations.

 

- 9 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

Effective January 1, 2018, the Company adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The guidance also makes certain improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. The Company applied the new guidance to existing cash flow hedge relationships using a modified retrospective approach. No adjustment was recorded to opening retained earnings on the date of adoption, as there was no ineffectiveness previously recorded in retained earnings that would have been included in other comprehensive income if the new guidance had been applied since hedge inception. The adoption of this ASU did not have a material impact on the Company’s financial condition, results of operations or cash flows.

Accounting pronouncements to be adopted in future periods

Updates not listed below were assessed and either determined to not be applicable or are expected to have a minimal effect on the Company’s financial position, results of operations, and disclosures.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, Income Statement- Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which addresses the effect on items within accumulated other comprehensive income (loss) of the change in the U.S. federal corporate tax rate due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the effect of adopting this pronouncement.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, to simplify the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. Under this standard, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the effect of adopting this pronouncement.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which reduces the diversity in practice on how certain transactions are classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the effect of adopting this pronouncement.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee, in most leases, to initially recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within with those years. Early adoption is permitted. The Company is in the process of evaluating the effect the guidance will have on its existing accounting policies and its consolidated financial statements, but expects there will be an increase in assets and liabilities on the consolidated balance sheets at adoption due to the recording of the right-of-use assets and corresponding lease liabilities, which the Company estimates be material.

 

- 10 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

NOTE B —REVENUE

The Company sells products wholesale, to retailers and distributors, and sells products retail, directly to consumers. Wholesale sales and retail sales are recognized at the point in time the customer obtains control of the products in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is not a formality, the customer must have accepted the product or service. The Company’s principal terms of sale are FOB Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB Shipping Point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. Shipping and handling fees that are billed to customers in sales transactions are included in net sales and amounted to $0.8 million and $1.3 million for the three and six months ended June 30, 2018, respectively and $0.6 million and $1.2 million for the three and six months ended June 30, 2017, respectively. Net sales exclude taxes that are collected from customers and remitted to the taxing authorities.

The Company offers various sales incentives and promotional programs to its wholesale customers from time to time in the normal course of business. These incentives and promotions typically include arrangements such as cooperative advertising, buydowns, volume rebates and discounts. These arrangements represent forms of variable consideration, and an estimate of sales returns are reflected as reductions in net sales in the Company’s condensed consolidated statements of operations. These estimates are based on historical experience and other known factors or as the most likely amount in a range of possible outcomes. On a quarterly basis, variable consideration is assessed on a portfolio approach in estimating the extent to which the components of variable consideration are constrained.

Payment terms with customers vary by customer, but generally range from 30 to 90 days or at the point of sale for the Company’s retail direct sales. The Company incurs certain direct incremental costs to obtain contracts with customers, such as sales-related commissions, where the recognition period for the related revenue is less than one year. These costs are expensed as incurred and recorded within selling, general and administrative expenses in the condensed consolidated statement of operations. Incidental items that are immaterial in the context of the contract are expensed as incurred.

 

- 11 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

The following tables present the Company’s net sales disaggregated by segment, product category and geographic region for the three and six months ended June 30, 2018 (in thousands).

 

		Three Months Ended				Six Months Ended
		June 30, 2018				June 30, 2018
U.S. Wholesale
Kitchenware		$	67,633			$	124,598
Tableware			32,214				53,119
Home Solutions			24,501				37,426
International
Kitchenware			11,939				24,939
Tableware			7,144				15,990
Retail Direct			5,220				10,748
Total net sales		$	148,651			$	266,820
United States		$	119,659			$	211,373
United Kingdom			14,354				29,977
Rest of World			14,638				25,470
Total net sales		$	148,651			$	266,820

NOTE C —ACQUISITION

On December 22, 2017, the Company entered into an agreement providing for the acquisition of Filament by the Company. The acquisition was completed on March 2, 2018. The aggregate consideration for Filament, after taking into account certain adjustments, was $295.4 million, consisting of $218.5 million of cash consideration and 5,593,116 newly issued shares of the Company’s common stock, with a value equal to $76.9 million based on the market value of the Company’s common stock as of March 2, 2018. The cash portion of the consideration was revised for certain adjustments as defined in the agreement.

The purchase price, as adjusted, has been determined to be as follows (in thousands):

 

Cash		$	218,506
Share consideration			76,905
Total purchase price		$	295,411

 

- 12 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

The purchase price was allocated based on the Company’s preliminary estimate of the fair value of the assets acquired and liabilities assumed, as follows (in thousands):

 

Accounts receivable		$	26,453
Inventory			26,696
Other assets			9,093
Other liabilities			(25,176	)
Deferred income tax			(26,633	)
Goodwill and other intangibles			284,978
Total allocated value		$	295,411

The acquisition is being accounted for as a business combination using the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations (“ASC Topic 815”), which established a new basis of accounting for all identifiable assets acquired and liabilities assumed at fair value. ASC Topic 805 allows the acquiring Company to adjust preliminary amounts recognized at the acquisition date to their subsequently determined final fair values during a measurement period, generally up to one year from the date of acquisition. The fair values of net assets acquired are based on the Company’s preliminary estimate of the respective fair values. The final valuation of net assets may result in material adjustments to the respective fair values and resulting goodwill. During the six months ended June 30, 2018, the Company increased goodwill by approximately $1.4 million, net, due to certain adjustments primarily related to the opening balance sheet income tax provision and unrecorded accruals. Goodwill results from such factors as an assembled workforce. The total amount of goodwill is not expected to be deductible for tax purposes. The goodwill and other intangible assets are primarily included in the U.S. Wholesale segment. Customer relationships, which are included in intangible assets, net, are amortized on a straight-line basis over their estimated useful lives (see Note E– Intangible Assets to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q).

The six months ended June 30, 2018 includes the operations of Filament for the period from March 2, 2018, the date of acquisition, to June 30, 2018. The condensed consolidated statement of operations for the three months ended June 30, 2018, includes $29.3 million of net sales and $0.4 million of net loss from operations contributed by Filament. The condensed consolidated statement of operations for the six months ended June 30, 2018, includes $38.6 million of net sales and $1.5 million of net loss from operations contributed by Filament.

Unaudited Pro forma Results

The following table presents the Company’s pro forma consolidated net sales, loss before income taxes and equity in earnings and net loss for the three and six months ended June 30, 2018 and June 30, 2017. The unaudited pro forma results include the historical statement of operations information of the Company and of Filament, giving effect to the Filament acquisition and related financing as if they had occurred at the beginning of the periods presented.

 

		Unaudited pro forma results
		Three Months Ended								Six Months Ended
		June 30, 2018				June 30, 2017				June 30, 2018				June 30, 2017
		(In thousands, except per share data)								(In thousands, except per share data)
Net sales		$	148,651			$	149,043			$	292,631			$	307,313
Loss before income taxes and equity in earnings			(6,694	)			(6,193	)			(22,904	)			(11,245	)
Net loss			(5,092	)			(3,295	)			(17,235	)			(5,935	)
Basic and diluted loss per common share			(0.25	)			(0.16	)			(0.85	)			(0.30	)

The unaudited pro forma results do not include any revenue or cost reductions that may be achieved through the business combination or the impact of non-recurring items directly related to the business combination.

The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Filament acquisition had been completed as of the date for which the pro forma financial information is presented. In addition, the unaudited pro forma results do not purport to project the future condensed consolidated operating results of the combined company.

 

- 13 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

NOTE D — INVESTMENTS

The Company owns approximately a 30% interest in Grupo Vasconia S.A.B. (“Vasconia”), an integrated manufacturer of aluminum products and one of Mexico’s largest housewares companies. Shares of Vasconia’s capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange. The Quotation Key is VASCONI. The Company accounts for its investment in Vasconia using the equity method of accounting and records its proportionate share of Vasconia’s net income in the Company’s statement of operations. Accordingly, the Company has recorded its proportionate share of Vasconia’s net income (reduced for amortization expense related to the customer relationships acquired) for the three and six months ended June 30, 2018 and 2017 in the accompanying condensed consolidated statements of operations. The value of the Company’s investment balance has been translated from Mexican Pesos (“MXN”) to U.S. Dollars (“USD”) using the spot rates of MXN 19.88 and MXN 19.68 at June 30, 2018 and December 31, 2017, respectively. The Company’s proportionate share of Vasconia’s net income has been translated from MXN to USD using the average exchange rates of MXN 19.38 and MXN 18.54 during the three months ended June 30, 2018 and 2017, respectively, and MXN 18.71 to MXN 19.38 and MXN 18.54 to MXN 20.30 during the six months ended June 30, 2018 and 2017, respectively. The effect of the translation of the Company’s investment resulted in a decrease to the investment of $1.1 million during the six months ended June 30, 2018 and an increase to the investment of $1.8 million during the six months ended 2017. These translation effects are recorded in accumulated other comprehensive income (loss). Included within prepaid expenses and other current assets at June 30, 2018 and December 31, 2017 are amounts due from Vasconia of $100,000 and $64,000, respectively. No amounts were due to Vasconia at June 30, 2018 or December 31, 2017.

Summarized statement of income information for Vasconia in USD and MXN is as follows:

 

		Three Months Ended
		June 30,
		2018								2017
		(in thousands)
		USD				MXN				USD				MXN
Net sales		$	48,061			$	931,329			$	41,736			$	773,825
Gross profit			9,986				193,517				7,755				143,790
Income from operations			3,655				70,827				1,686				31,258
Net income			2,457				47,621				1,168				21,663
		Six Months Ended
		June 30,
		2018								2017
		(in thousands)
		USD				MXN				USD				MXN
Net Sales		$	87,630			$	1,671,735			$	78,558			$	1,521,320
Gross Profit			17,105				326,724				15,609				303,211
Income from operations			4,804				92,330				4,116				80,587
Net Income			2,095				40,845				2,402				46,706

 

- 14 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

The Company recorded equity in earnings of Vasconia, net of taxes, of $155,000 and $232,000, for the three and six months ended June 30, 2018, respectively. The Company recorded equity in earnings of Vasconia of $458,000 and $998,000 for the three and six months ended June 30, 2017, respectively. Equity in earnings for the three and six months ended June 30, 2018, includes deferred tax expense of $501,000 and $306,000, respectively, due to the requirement to record tax benefits for foreign currency translation gains and losses through other comprehensive income (loss), with a corresponding adjustment to deferred tax liabilities. Equity in earnings for the three and six months ended June 30, 2017, includes deferred tax benefit of $140,000 and $365,000, respectively

As of June 30, 2018 and December 31, 2017, the fair value (based upon Vasconia’s quoted stock price) of the Company’s investment in Vasconia was $32.2 million and $31.8 million, respectively. The carrying value of the Company’s investment in Vasconia was $23.3 million and $23.8 million as of June 30, 2018 and December 31, 2017, respectively.

NOTE E — INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

 

		June 30, 2018												December 31, 2017
		Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization				Net
Goodwill		$	99,483			$	—			$	99,483			$	15,772			$	—			$	15,772
Indefinite-lived intangible assets:
Trade names			64,816				—				64,816				7,616				—				7,616
Finite-lived intangible assets:
Licenses			15,847				(9,603	)			6,244				15,847				(9,375	)			6,472
Trade names			33,115				(12,319	)			20,796				33,368				(11,109	)			22,259
Customer relationships			191,450				(22,036	)			169,414				52,961				(16,966	)			35,995
Other			6,418				(973	)			5,445				1,165				(800	)			365
Total		$	411,129			$	(44,931	)		$	366,198			$	126,729			$	(38,250	)		$	88,479

A summary of the activities related to the Company’s intangible assets for the six months ended June 30, 2018 consists of the following (in thousands):

 

Goodwill and Intangible Assets, December 31, 2017		$	88,479
Goodwill acquired			83,978
Trade names acquired			57,200
Customer relationships acquired			139,200
Other intangibles acquired			5,278
Foreign currency translation adjustment			(841	)
Amortization			(7,096	)
Goodwill and Intangible Assets, June 30, 2018		$	366,198

 

- 15 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

NOTE F—DEBT

In connection with the Company’s acquisition of Filament, on March 2, 2018, the Company entered into a credit agreement (the “ABL Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and the lenders and issuing banks party thereto, evidencing a senior secured asset-based revolving credit facility provided to the Company in the maximum aggregate principal amount of $150.0 million, which facility will mature on March 2, 2023, and a new loan agreement (the “Term Loan” and together with the ABL Agreement, the “Debt Agreements”) with the Company, as the borrower and a guarantor, the other guarantors, JPMorgan, as administrative agent, Golub Capital LLC, as syndication agent, and the lenders party thereto, providing for a senior secured term loan credit facility to the Company in the original principal amount of $275.0 million, which will mature on February 28, 2025. The Term Loan facility requires quarterly payments of principal equal to 0.25% of the original aggregate principal amount of the term loan facility beginning June 30, 2018. The maximum borrowing under the ABL Agreement may be increased to up to $200.0 million if certain conditions are met. One or more tranches of additional term loans (the “Incremental Facilities”) may be added under the Term Loan if certain conditions are met. The Incremental Facilities may not exceed the sum of (i) $50.0 million, plus (ii) an unlimited amount so long as, in the case of (ii) only, the Company’s secured net leverage ratio, as defined in and computed pursuant to the Term Loan, is no greater than 3.75 to 1.00 subject to certain limitations and for the period defined pursuant to the Term Loan.

At June 30, 2018, borrowings outstanding under the ABL Agreement were $59.6 million, and open letters of credit were $3.1 million. At June 30, 2018, availability under the ABL Agreement was approximately $87.3 million. Availability under the ABL Agreement depends on the valuation of certain current assets comprising the borrowing base. Due to the seasonality of the Company’s business, this may mean that the Company will have greater borrowing availability during the third and fourth quarters of each year. The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly. Consequently, the $150.0 million commitment thereunder may not represent actual borrowing capacity at any given time.

At June 30, 2018, $274.3 million was outstanding under the Term Loan. At June 30, 2018, unamortized debt issuance costs of $1.5 million and $8.2 million offset the short-term and long-term outstanding balances, respectively, of the Term Loan.

The Company’s payment obligations under its Debt Agreements are unconditionally guaranteed by its existing and future U.S. subsidiaries, with certain minor exceptions. Certain payment obligations under the ABL Agreement are also direct obligations of its foreign subsidiary borrowers designated as such under the ABL Agreement and, subject to limitations on such guaranty, are guaranteed by the foreign subsidiary borrowers, as well as by the Company. The obligations of the Company under the Debt Agreements and any hedging arrangements and cash management services and the guarantees by its domestic subsidiaries in respect of those obligations are secured by substantially all of the assets and stock (but in the case of foreign subsidiaries, limited to 65% of the capital stock in first-tier foreign subsidiaries and not including the stock of subsidiaries of such first-tier foreign subsidiaries) owned by the Company and the U.S. subsidiary guarantors, subject to certain exceptions. Such security interest consists of (1) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and its domestic subsidiaries (the “ABL Collateral”) pledged as collateral in favor of lenders under the ABL Agreement and a second-priority lien in the ABL Collateral in favor of the lenders under the Term Loan and (2) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and its domestic subsidiaries (the “Term Loan Collateral”) pledged as collateral in favor of lenders under the Term Loan and a second-priority lien in the Term Loan Collateral in favor of the lenders under the ABL Agreement.

 

- 16 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

Borrowings under the revolving credit facility bear interest, at the Company’s option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate plus 0.5% or one-month LIBOR, plus 1.0%, plus a margin of 0.25% to 0.75%, or (ii) LIBOR plus a margin of 1.25% to 1.75%. The respective margins are based upon the Company’s total leverage ratio, as defined in and computed pursuant to the ABL Agreement. Interest rates on outstanding borrowings under the ABL Agreement at June 30, 2018 ranged from 2.0% to 5.5%. In addition, the Company paid a commitment fee of 0.375% on the unused portion of the ABL Agreement during the three months ended June 30, 2018.

The Term Loan facility bears interest, at the Company’s option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate, plus 0.5% or one-month LIBOR (at the Company’s option), plus 1.0%, plus a margin of 2.50% or (ii) LIBOR plus a margin of 3.50%. The interest rate on outstanding borrowings under the Term Loan at June 30, 2018 ranged from 5.5% to 5.6%.

The Debt Agreements provide for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, acquisitions, investments and payment of dividends, among other things. Further, the ABL Agreement provides that during any period (a) commencing on the last day of the most recently-ended four consecutive fiscal quarters on or prior to the date that availability under the ABL Agreement is less than the greater of $15.0 million and 10% of the aggregate commitment under the ABL Agreement at any time and (b) ending on the day after such availability has exceeded the greater of $15.0 million and 10% of the aggregate commitment under the ABL Agreement for forty-five (45) consecutive days, the Company is required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 as of the last day of any period of four consecutive fiscal quarters.

The Company was in compliance with the covenants of the Debt Agreements at June 30, 2018.

At December 31, 2017, borrowings outstanding under the Company’s former credit facility were $94.7 million and open letters of credit were $3.2 million. Availability under the former credit agreement was approximately $58.0 million at December 31, 2017. Upon entering into the Debt Agreements in March 2018 the Company repaid its outstanding borrowings under its former credit agreement. In connection therewith, debt issuance costs of $66,000 were written off.

NOTE G- DERIVATIVES

The Company is a party to interest rate swap agreements, with an aggregate notional value of $125.0 million at June 30, 2018. The Company designated the interest rate swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The hedge periods of these agreements commenced in April 2018 and will expire in March 2023. The notional amounts are reduced over these periods.

The Company has also entered into certain foreign exchange contracts, primarily to offset the earnings impact related to fluctuations in foreign currency exchange rates associated with inventory purchases denominated in foreign currencies. The aggregate gross notional values of foreign exchange contracts at June 30, 2018 and December 31, 2017 were $21.5 million and $34.9 million, respectively. These foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting. The changes in the fair values of these contracts are recorded in earnings immediately.

 

- 17 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

The fair values of the Company’s derivative financial instruments included in the condensed consolidated balance sheets are presented as follows (in thousands):

 

Derivatives designated as hedging instruments		Balance Sheet Location		June 30, 2018				December 31, 2017
Interest rate swaps		Prepaid Expenses		$	—			$	11
		Accrued Expenses			66				—
		Deferred rent & other long-term liabilities			286				—
Derivatives not designated as hedging instruments		Balance Sheet Location		June 30, 2018				December 31, 2017
Foreign exchange contracts		Accrued expenses		$	196			$	1,951

The fair values of the derivative financial instruments have been obtained from the counterparties to the agreements and were based on Level 2 observable inputs using proprietary models and estimates about relevant future market conditions.

The counterparties to the derivative financial instruments are major international financial institutions. The Company is exposed to credit risk for the net exchanges under these agreements, but not for the notional amounts. The Company does not anticipate non-performance by any of its counterparties.

The amounts of gains and losses related to the Company’s derivative financial instruments designated as hedging instruments are recognized in other comprehensive income (loss) as follows (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
Derivatives designated as hedging instruments		2018				2017				2018				2017
Interest rate swaps		$	(263	)		$	1			$	(277	)		$	14

During the three and six months ended June 30, 2018 the Company recognized $0.2 million of interest expense related to the interest rate swaps. Gains or losses on the interest rate swaps will be reclassified into earnings as interest expense as the interest expense on the debt is recognized in earnings.

In connection with the financing transaction described in Note F– Debt to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, in March 2018 the Company settled its outstanding interest rate swaps, which had been accounted for as hedges and had an aggregate notional value of $5.3 million. The net gain at such time in accumulated other comprehensive income at December 31, 2017 related to the interest rate swaps was reclassified into interest expense during the three months ended March 31, 2018.

 

- 18 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are recognized in earnings as follows (in thousands):

 

				Three Months Ended June 30,								Six Months Ended June 30,
Derivatives not designated as hedging instruments		Location of gain (loss)		2018				2017				2018				2017
Foreign exchange contracts		Selling, general and administrative expense		$	1,468			$	(1,377	)		$	(47	)		$	(1,566	)

NOTE H— STOCK COMPENSATION

On June 28, 2018, the shareholders of the Company approved an amendment and restatement of the Company’s Amended and Restated 2000 Long-Term Incentive Plan (the “Plan”). The amendment and restatement of the Plan revised the terms and conditions of the Plan to, among other things, increase the shares available for grant under the Plan by 900,000 shares. As of June 30, 2018, there were 944,419 shares available for the grant of awards under the Plan.

Option Awards

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2018 is as follows:

 

		Options				Weighted- average exercise price				Weighted- average remaining contractual life (years)				Aggregate intrinsic value
Options outstanding, January 1, 2018			1,456,200			$	13.64
Grants			205,750				13.56
Cancellations			(9,250	)			17.95
Expirations			(13,875	)			17.43
Options outstanding, June 30, 2018			1,638,825				13.57				4.7			$	1,512,990
Options exercisable, June 30, 2018			1,312,395			$	13.32				3.7			$	1,512,990

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been received by the option holders had all option holders exercised their stock options on June 30, 2018. The intrinsic value is calculated for each in-the-money stock option as the difference between the closing price of the Company’s common stock on June 30, 2018 and the exercise price.

Total unrecognized stock option compensation expense at June 30, 2018, before the effect of income taxes, was $1.4 million and is expected to be recognized over a weighted-average period of 2.6 years.

 

- 19 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

Restricted Stock

A summary of the Company’s restricted stock activity and related information for the six months ended June 30, 2018 is as follows:

 

		Restricted Shares				Weighted- average grant date fair value
Non-vested restricted shares, January 1, 2018			219,317			$	17.12
Grants			223,759				13.25
Vested			(85,177	)			17.23
Cancellations			(6,188	)			16.87
Non-vested restricted shares, June 30, 2018			351,711			$	14.64
Total unrecognized compensation expense remaining		$	4,935,000
Weighted-average years expected to be recognized over			2.5

The fair value of restricted stock that vested during the six months ended June 30, 2018 was $1.0 million.

Performance shares

Each performance award represents the right to receive up to 150% of the target number of shares of common stock. The number of shares of common stock earned will be determined based on the attainment of specified performance goals, as determined by the Compensation Committee, by the end of the performance period. The shares are subject to the terms and conditions of the Plan.

A summary of the Company’s performance-based award activity and related information for the six months ended June 30, 2018 is as follows:

 

		Performance- based stock awards (1)				Weighted- average grant date fair value
Non-vested performance-based awards, January 1, 2018			228,892			$	16.49
Grants			144,175				13.05
Vested			(58,888	)			14.84
Cancellations			(8,043	)			16.05
Non-vested performance-based awards, June 30, 2018			306,136			$	15.20
Total unrecognized compensation expense remaining		$	3,036,000
Weighted-average years expected to be recognized over			2.0

 

(1)	Represents the target number of shares to be issued for each performance-based award.

The total fair value of performance-based awards that vested during the six months ended June 30, 2018 was $792,000.

The Company recognized total stock compensation expense of $0.9 million for the three months ended June 30, 2018, of which $0.2 million represents stock option compensation expense and $0.7 million represents restricted stock and performance based stock compensation expense. For the six months ended June 30, 2018, the Company recognized total stock compensation expense of $1.8 million, of which $0.4 million represents stock option compensation expense and $1.4 million represents restricted stock and performance based stock compensation expense. The Company recognized total stock compensation expense of $0.7 million for the three months ended June 30, 2017, of which $0.2 million represents stock option compensation expense and $0.5 million represents restricted stock and performance based stock compensation expense. For the six months ended June 30, 2017, the Company recognized total stock compensation expense of $1.5 million, of which $0.6 million represents stock option compensation expense and $0.9 million represents restricted stock and performance based stock compensation expense.

 

- 20 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

NOTE I—LOSS PER COMMON SHARE

Basic loss per common share has been computed by dividing net loss by the weighted-average number of shares of the Company’s common stock outstanding during the relevant period. Diluted loss per common share adjusts net loss and basic loss per common share for the effect of all potentially dilutive shares of the Company’s common stock. The calculations of basic and diluted loss per common share for the three and six months ended June 30, 2018 and 2017 are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
		(in thousands, except per share amounts)								(in thousands, except per share amounts)
Net loss– basic and diluted		$	(6,057	)		$	(2,096	)		$	(17,655	)		$	(3,427	)
Weighted-average shares outstanding – basic and diluted			20,327				14,456				18,474				14,426
Basic and diluted loss per common share		$	(0.30	)		$	(0.14	)		$	(0.96	)		$	(0.24	)

The computation of diluted loss per common share for the three and six months ended June 30, 2018 excludes 1,990,536 shares and 1,938,124 shares, respectively, related to options to purchase shares and other stock awards. The computation of diluted loss per common share for the three and six months ended June 30, 2017 excludes 1,990,982 shares and 1,997,072 shares, respectively, related to options to purchase shares and other stock awards. These shares were excluded due to their antidilutive effects.

NOTE J — INCOME TAXES

On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act revised the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%, adopting a quasi-territorial income tax system and imposing a one-time transition tax on foreign unremitted earnings, and setting limitations on deductibility of certain costs (e.g., interest expense).

The Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”) to provide guidance to companies that have not yet completed their accounting for the Tax Act in the period of enactment. SAB 118 provides that the Company include in its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Accordingly, in the year ended December 31, 2017, the Company recorded a provisional income tax expense of $3.3 million associated with the re-measurement of the Company’s deferred tax assets stemming from the reduction of the U.S. federal income tax rate and one-time transition tax on the Company’s material wholly owned foreign subsidiaries’ accumulated, unremitted earnings, based on the reasonable estimate guidance provided by SAB 118.

As of June 30, 2018 the Company has not changed the provisional estimates recognized in 2017, and the Company is not yet able to calculate a reasonable estimate for the impact of the one-time transition tax on the Company’s equity investment due to the complexity of calculating accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for applicable years after 1986.

 

- 21 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

Since January 1, 2018, the Tax Act has subjected the Company to a tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries, base erosion anti-abuse tax (“BEAT”), foreign derived intangible income tax (“FDII”), and IRC Section 163(j) interest limitation (“Interest Limitation”). Entities can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Given the complexity of the GILTI provisions, the Company is still evaluating the tax impact and has not yet made the accounting policy election. As of June 30, 2018, the Company was able to reasonably estimate provisional adjustments, based on current year operations only, related to GILTI and FDII that have been recognized in the Company’s financial statements. For the BEAT and Interest Limitation impact of the Tax Act, the Company has not recorded a provisional estimate in its effective tax rate for the six months ended June 30, 2018 because the Company does not currently estimate that these provisions of the Tax Act will apply in 2018.

Pursuant to SAB 118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The Company will continue to calculate the impact of the Tax Act and will record any resulting tax adjustments during 2018.

Income tax benefit of $1.8 million and $5.6 million for the three and six months ended June 30, 2018, respectively, represent taxes on both U.S. and foreign earnings at a combined effective income tax benefit rate of 22.1% and 23.8%, respectively. The effective rates for the three and six months ended June 30, 2018 reflects the reduced U.S. corporate income tax rate, partially offset by non-deductible expenses.

Income tax benefit of $1.7 million and $2.6 million for the three and six months ended June 30, 2017, respectively, represent taxes on both U.S. and foreign earnings at a combined effective income tax benefit rates of 39.9% and 37.4%, respectively.

On a quarterly basis, the Company evaluates its tax positions and revises its estimates accordingly. The estimated value of the Company’s uncertain tax positions at June 30, 2018 is a gross liability of $3.7 million. The Company believes that $3.0 million of its tax positions will be resolved within the next twelve months.

The Company has identified the following jurisdictions as “major” tax jurisdictions: U.S. Federal, California, Massachusetts, New York, New Jersey, Illinois and the United Kingdom. The Company is no longer subject to U.S. Federal income tax examinations for the years prior to 2014. At June 30, 2018, the periods subject to examination for the Company’s major state jurisdictions are the years ended 2013 through 2017.

The Company’s policy for recording interest and penalties is to record such items as a component of income taxes. Interest and penalties were not material to the Company’s results of operations or cash flows as of and for the three and six months ended June 30, 2018 and 2017. At June 30, 2018, interest and penalties included in the Company’s uncertain tax position gross liability was approximately $1.1 million.

NOTE K– BUSINESS SEGMENTS

The Company has three reportable business segments: U.S. Wholesale, International and Retail Direct. The U.S. Wholesale segment is the Company’s primary domestic business that designs, markets and distributes its products to retailers and distributors. The International segment consists of certain business operations conducted outside the U.S. The Retail Direct segment is where the Company markets and sells a limited selection of its products directly to consumers through third party and its own internet websites.

The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. While the three segments distribute similar products, the segments are distinct due to the different methods the Company uses to sell, market, and distribute the products. Management evaluates the performance of the U.S. Wholesale, International and Retail Direct segments based on net sales and income (loss) from operations. Such measures give recognition to specifically identifiable operating costs such as cost of sales,

 

- 22 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

distribution expenses and selling, general and administrative expenses. Certain general and administrative expenses, such as senior executive salaries and benefits, stock compensation, director fees and accounting, legal and consulting fees, are not allocated to the specific segments and are reflected as unallocated corporate expenses.

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
		(in thousands)
Net sales
U.S. Wholesale		$	124,348			$	94,770			$	215,143			$	182,162
International			19,083				19,365				40,929				40,593
Retail Direct			5,220				3,258				10,748				7,994
Total net sales		$	148,651			$	117,393			$	266,820			$	230,749
Income (Loss) from operations
U.S. Wholesale		$	2,101			$	3,712			$	(3,427	)		$	5,947
International			(204	)			(3,743	)			(3,424	)			(4,900	)
Retail Direct			(133	)			(277	)			(145	)			(161	)
Unallocated corporate expenses			(5,065	)			(2,833	)			(9,621	)			(5,901	)
Loss from operations		$	(3,301	)		$	(3,141	)		$	(16,617	)		$	(5,015	)
Depreciation and amortization
U.S. Wholesale		$	5,287			$	2,301			$	8,429			$	4,603
International			1,130				1,014				2,292				1,965
Retail Direct			5				33				10				66
Total depreciation and amortization		$	6,422			$	3,348			$	10,731			$	6,634

 

		June 30, 2018				December 31, 2017
		(in thousands)
Assets
U.S. Wholesale		$	619,288			$	281,398
International			102,584				105,984
Retail Direct			1,099				613
Unallocated/ Corporate/ Other			19,075				13,526
Total assets		$	742,046			$	401,521

NOTE L— CONTINGENCIES

Wallace Silversmiths de Puerto Rico, Ltd. (“WSPR”), 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.

 

 

- 23 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

In May 2008, WSPR 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, and Liability Act (“CERCLA”). In July 2011, WSPR received a letter from the EPA requesting access to the property that it leases from PRIDCO to conduct an environmental investigation, and the Company granted such access. In February 2013, the EPA requested access to conduct a further environmental investigation at the property. PRIDCO agreed to such access and the Company consented. The EPA conducted a further investigation during 2013 and, in April 2015, notified the Company and PRIDCO that the results from vapor intrusion sampling may warrant implementation of measures to mitigate potential exposure to sub-slab soil gas. The Company reviewed the information provided by the EPA and requested that PRIDCO, as the property owner, find and implement a solution acceptable to the EPA. While WSPR did not cause the sub-surface condition that resulted in the potential for vapor intrusion, in order to protect the health of its employees and continue its business operations, it has nevertheless implemented corrective action measures to prevent vapor intrusion, such as sealing floors of the building and conducting periodic air monitoring to address potential exposure. On August 13, 2015, the EPA released its remedial investigation and feasibility study (“RI/FS”) for the Site. On December 11, 2015, the EPA issued the Record of Decision (“ROD”) for an initial operable unit, electing to implement its preferred remedy which consists of soil vapor extraction and dual-phase extraction/in-situ treatment. This selected remedy includes soil vapor extraction (“SVE”) to address soil (vadose zone) source areas at the Site, impermeable cover as necessary for the implementation of SVE, dual phase extraction in the shallow saprolite zone, and in-situ treatment as needed to address residual sources. The EPA’s estimated capital cost for its selected remedy is $7.3 million. The EPA also designated a second operable unit under which the EPA has and will continue to conduct further investigations to determine the nature and extent of groundwater contamination, as well as a determination by the EPA on the necessity of any further response actions to address groundwater contamination. In February 2017, the EPA indicated that it plans to expand its field investigation for the RI/FS for the second operable unit to further determine the nature and extent of the groundwater contamination at and from the Site and to determine the nature of the remedial action needed to address the contamination. The EPA has requested access to the property occupied by WSPR to install monitoring wells and to undertake groundwater sampling as part of this expanded investigation. WSPR has consented to the EPA’s access request, provided that the EPA receives PRIDCO’s consent, as the property owner. WSPR never used the primary contaminant of concern and did not take up its tenancy at the Site until after the EPA had discovered the contamination in the local water supply. The EPA has also issued notices of potential liability to a number of other entities affiliated with the Site, which used the contaminants of concern.

Accordingly, based on the above uncertainties and variables, it is not possible at this time for the Company to estimate its share of liability, if any, related to this matter. However, in the event of one or more adverse determinations related to this matter, it is possible that the ultimate liability resulting from this matter and the impact on the Company’s results of operations could be material.

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

 

- 24 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

NOTE M—OTHER

Cash dividends

Dividends declared in the six months ended June 30, 2018 are as follows:

 

Dividend per share		Date declared		Date of record		Payment date
$            0.0425		March 8, 2018		May 1, 2018		May 15, 2018
$            0.0425		June 28, 2018		August 1, 2018		August 15, 2018

On February 15, 2018 and May 15, 2018, the Company paid dividends of $0.6 million and $0.9 million, respectively, to shareholders of record on February 1, 2018 and May 1, 2018, respectively. In the six months ended June 30, 2018, the Company reduced retained earnings for the accrual of $0.9 million relating to the dividend payable on August 15, 2018.

On July 31, 2018 the Board of Directors declared a quarterly dividend of $0.0425 per share payable on November 15, 2018 to shareholders of record on November 1, 2018.

Supplemental cash flow information

 

		Six Months Ended June 30,
		2018				2017
		(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest		$	5,614			$	1,704
Cash paid for taxes			2,763				8,753
Non-cash investing activities:
Translation gain (loss) adjustment		$	(2,109	)		$	5,288

 

- 25 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

 

Components of accumulated other comprehensive loss, net

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
		(in thousands)
Accumulated translation adjustment:
Balance at beginning of period		$	(24,441	)		$	(33,668	)		$	(27,821	)		$	(35,644	)
Translation gain (loss) during period			(5,489	)			3,312				(2,109	)			5,288
Balance at end of period		$	(29,930	)		$	(30,356	)		$	(29,930	)		$	(30,356	)
Accumulated deferred gains (losses) on cash flow hedges:
Balance at beginning of period		$	—			$	10			$	14			$	(3	)
Amounts reclassified from accumulated other comprehensive loss: (1)
Settlement of cash flow hedge			—				—				(14	)			—
Derivative fair value adjustment, net of taxes of $88 and $1 for the three month periods ended June 30, 2018 and 2017, respectively and $88 and $9 for the six months ended June 30, 2018 and 2017, respectively.			(263	)			1				(263	)			14
Balance at end of period		$	(263	)		$	11			$	(263	)		$	11
Accumulated effect of retirement benefit obligations:
Balance at beginning of period		$	(1,500	)		$	(1,337	)		$	(1,518	)		$	(1,352	)
Amounts reclassified from accumulated other comprehensive loss: (2)
Amortization of actuarial losses, net of taxes of $12 and $10 for the three month periods ended June 30, 2018 and 2017, respectively and $24 and $20 for the six months ended June 30, 2018 and 2017, respectively.			17				16				35				31
Balance at end of period		$	(1,483	)		$	(1,321	)		$	(1,483	)		$	(1,321	)
Total accumulated other comprehensive loss at end of period		$	(31,676	)		$	(31,666	)		$	(31,676	)		$	(31,666	)

 

(1)	Amount is recorded as interest expense on the condensed consolidated statements of operations.

(2)	Amounts are recorded in selling, general and administrative expense on the condensed consolidated statements of operations.

 

 

- 26 -

Report of Independent Registered Public Accounting Firm

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

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of Lifetime Brands, Inc. (the Company) as of June 30, 2018, the related condensed consolidated statements of operations and comprehensive income (loss) for the three and six-month periods ended June 30, 2018 and 2017, the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2018 and 2017 and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the year then ended, and the related notes and schedules (not presented herein); and in our report dated March 16, 2018, we expressed an unqualified audit opinion on those consolidated financial statements and included an explanatory paragraph for reference to other auditors. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Ernst & Young LLP

Jericho, New York

August 7, 2018

 

- 27 -

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

This Quarterly Report on Form 10-Q of Lifetime Brands, Inc. (the “Company” and, unless the context otherwise requires, references to the “Company” shall include its consolidated subsidiaries), contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include information concerning the Company’s plans, objectives, goals, strategies, future events, future revenues, performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, in Management’s Discussion and Analysis of Financial Condition and Results of Operations. When used in this Quarterly Report on Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “may,” “should,” “assumes,” “seeks,” and variations of such words or similar expressions, and the negatives thereof, are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, those based on the Company’s examination of historical operating trends, are based upon the Company’s current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company’s assumptions will prove correct.

There are a number of risks and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report. 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 Quarterly Report on Form 10-Q in Part II, Item 1A Risk Factors and in Part I, Item 1A. Risk Factors included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Such risks, uncertainties and other important factors include, among others, risks related to:

 

•

Tax reform;

 

•

General economic factors and political conditions;

 

•

Indebtedness;

 

•

Seasonality;

 

•

Liquidity;

 

•

Interest;

 

•

Acquisition integration;

 

•

Competition;

 

•

Customer practices;

 

•

Intellectual property, brands and licenses;

 

•

Goodwill;

 

•

International operations;

 

•

Supply chain;

 

•

Foreign exchange rates;

 

•

International trade and transportation;

 

•

Product liability;

 

•

Regulatory matters;

 

•

Product development;

 

•

Reputation;

 

•

Technology;

 

•

Personnel;

 

- 28 -

•

Price fluctuations;

 

•

Business interruptions;

 

•

Projections;

 

•

Fixed costs;

 

•

Governance; and

 

•

Acquisitions and investments.

There may be other factors that may cause the Company’s actual results to differ materially from the forward-looking statements. Except as may be required by law, the Company undertakes no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. The Company, however, reserves the right to update such statements, or any portion thereof, at any time for any reason.

ABOUT THE COMPANY

The Company designs, sources and sells branded kitchenware, tableware and other products used in the home. The Company’s product categories include two categories of products used to prepare, serve, and consume foods: Kitchenware (kitchen tools and gadgets, cutlery, cutting boards, shears, kitchen scales, thermometers, timers, cookware, pantryware, spice racks, wine accessories and bakeware) and Tableware (dinnerware, stemware, flatware, and giftware); and one category, Home Solutions, which comprises other products used in the home (thermal beverageware, food storage, neoprene travel products, bath scales, and home décor). In 2017, Kitchenware products and Tableware products accounted for approximately 89% of the Company’s U.S. Wholesale segment’s net sales and 88% of the Company’s consolidated net sales.

On March 2, 2018, the Company completed the acquisition of Taylor Holdco LLC and its subsidiaries (doing business as Filament Brands) (“Filament”). Filament primarily designs, markets and distributes consumer and food service precision measurement products, including kitchen scales, thermometers and timers, bath scales, wine accessories, kitchen tools, hydration products, and select outdoor products. The six months ended June 30, 2018 includes the operations of Filament for the period from March 2, 2018 to June 30, 2018.

At the heart of the Company is a culture of innovation. The Company employs over 120 artists, engineers, industrial designers and graphics specialists, who create new products, packaging and merchandising concepts. The Company expects to introduce approximately 4,000 new or redesigned products globally in 2018. Newly introduced products generally reach their peak sales in 12 to 18 months.

The Company markets several product lines within each of its product categories and under most of the Company’s brands, primarily targeting moderate price points through virtually every major level of trade. The Company believes it possesses certain competitive advantages based on its brands, its emphasis on innovation and new product development, and its sourcing capabilities. The Company owns or licenses a number of leading brands in its industry, including Farberware^®, Mikasa^®, Taylor^®, KitchenAid^®, Pfaltzgraff^®, KitchenCraft^®, Fitz and Floyd^®, Sabatier^®, Kamenstein^®, Built NY^®, MasterClass^®, Fred^®, Rabbit^® and LaCafetière^®. Historically, the Company’s sales growth has come from expanding product offerings within its product categories, by developing existing brands, acquiring new brands, including complementary brands in markets outside the United States, and establishing new product categories. Key factors in the Company’s growth strategy have been the selective use and management of the Company’s brands and the Company’s ability to provide a stream of new products and designs. A significant element of this strategy is the Company’s in-house design and development teams that create new products, packaging and merchandising concepts.

BUSINESS SEGMENTS

The Company operates in three reportable segments: U.S. Wholesale, International and Retail Direct. The U.S. Wholesale segment is the Company’s primary domestic business that designs, markets and distributes its products to retailers and distributors. The International segment consists of certain business operations conducted outside the U.S. The Retail Direct segment is that in which the Company markets and sells a limited selection of its products directly to consumers through third party and its own internet websites. The Company has segmented its operations to reflect the manner in which management reviews and evaluates its results of operations.

 

- 29 -

EQUITY INVESTMENTS

The Company owns approximately 30% of the outstanding capital stock of Grupo Vasconia, S.A.B. (“Vasconia”), an integrated manufacturer of aluminum products and one of Mexico’s largest housewares companies. Shares of Vasconia’s capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange. The Quotation Key is VASCONI.

The Company accounts for its investment in Vasconia using the equity method of accounting and has recorded its proportionate share of Vasconia’s net income, net of taxes, as equity in earnings in the Company’s consolidated statements of operations. Pursuant to a Shares Subscription Agreement (the “Agreement”), the Company may designate four persons to be nominated as members of Vasconia’s Board of Directors. As of June 30, 2018, Vasconia’s Board of Directors was comprised of eleven members of whom the Company has designated three 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 2017 and 2016, net sales for the third and fourth quarters accounted for 60% and 61% of total annual net sales, respectively. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period. Consistent with the seasonality of the Company’s net sales and inventory levels, the Company also experiences seasonality in its inventory turnover and turnover days from one quarter to the next.

RESTRUCTURING

In connection with the Company’s March 2018 acquisition of Filament, the Company commenced a restructuring plan to integrate the operations of Filament with the Company’s operations and realize the savings expected from the synergies of the acquisition. During the three and six months ended June 30, 2018, the Company incurred $0.4 million and $0.8 million, respectively, of restructuring charges primarily related to severance.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following is an update to the corresponding critical accounting policies and estimates set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Except as modified below, there have been no material changes to the Company’s critical accounting policies and estimates discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Revenue recognition

The Company sells products:

 

•

Wholesale, to retailers and distributors, and

 

•

Retail, directly to consumers.

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, discussed in Note A — Basis of Presentation and Summary Accounting Policies to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, regarding revenue recognition. Wholesale sales and retail sales are recognized at the point in time the customer obtains control of the products in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products. The Company primarily transfers control and records revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB Shipping Point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. Shipping and handling fees that are billed to customers in sales transactions are included in net sales. Net sales exclude taxes that are collected from customers and remitted to the taxing authorities.

 

- 30 -

The Company offers various sales incentives and promotional programs to its wholesale customers in the normal course of business. These incentives and promotions typically include arrangements such as cooperative advertising, buydowns, volume rebates and discounts. These arrangements represent forms of variable consideration, and an estimate of sales returns are reflected as reductions in net sales in the Company’s condensed consolidated statements of operations. These estimates are based on historical experience and other known factors or as the most likely amount in a range of possible outcomes. On a quarterly basis, variable consideration is assessed on a portfolio approach in estimating the extent to which the components of variable consideration are constrained.

Payment terms with customers vary by customer, but generally range from 30 to 90 days or at the point of sale for the Company’s retail direct sales. The Company incurs certain direct incremental costs to obtain contracts with customers, such as sales-related commissions, where the recognition period for the related revenue is less than one year. These costs are expensed as incurred and recorded within selling, general and administrative expenses in the condensed consolidated statement of operations. Incidental items that are immaterial in the context of the contract are expensed as incurred.

Derivatives

The Company accounts for derivative instruments in accordance with ASC Topic No. 815, Derivatives and Hedging, discussed in Note A — Basis of Presentation and Summary Accounting Policies to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. ASC Topic No. 815 requires that all derivative instruments be recognized on the balance sheet at fair value as either an asset or 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 until the hedged item is recognized in earnings. The change in the fair value of hedges are included in accumulated other comprehensive income (loss) and is subsequently recognized in the Company’s condensed consolidated statements of operations to mirror the location of the hedged items impacting 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.

 

- 31 -

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:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2018				2017				2018				2017
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			65.0				63.5				63.6				62.4
Gross margin			35.0				36.5				36.4				37.6
Distribution expenses			10.1				10.7				12.3				11.3
Selling, general and administrative expenses			26.9				28.2				30.1				28.4
Restructuring expenses			0.3				0.2				0.3				0.1
Loss from operations			(2.2	)			(2.7	)			(6.2	)			(2.2	)
Interest expense			(3.1	)			(0.9	)			(2.5	)			(0.8	)
Loss on early retirement of debt			—				(0.1	)			—				—
Loss before income taxes and equity in earnings			(5.3	)			(3.6	)			(8.7	)			(3.0	)
Income tax benefit			1.2				1.4				2.1				1.1
Equity in earnings, net of taxes			0.1				0.4				0.1				0.4
Net loss			(4.0	)%			(1.8	)%			(6.5	)%			(1.5	)%

 

- 32 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

THREE MONTHS ENDED JUNE 30, 2018 COMPARED TO THE THREE MONTHS ENDED

JUNE 30, 2017

Net Sales

Net sales for the three months ended June 30, 2018 were $148.7 million, an increase of $31.3 million, or 26.7%, as compared to net sales of $117.4 million for the corresponding period in 2017. The three months ended June 30, 2018 includes net sales of $29.3 million from Filament.

Net sales for the U.S. Wholesale segment for the three months ended June 30, 2018 were $124.3 million, an increase of $29.5 million, or 31.1%, as compared to net sales of $94.8 million for the corresponding period in 2017.

Net sales for the U.S. Wholesale segment’s Kitchenware product category were $67.6 million for the three months ended June 30, 2018, an increase of $6.1 million, or 9.9%, as compared to $61.5 million for the corresponding period in 2017. The increase in the U.S. Wholesale segment’s Kitchenware product category was primarily attributable to contributions from Filament, partially offset by a decrease in tools and gadget and cutlery sales reflecting the Company’s decision not to pursue certain low margin business that was done in 2017 and the planned timing of pantryware sales.

Net sales for the U.S. Wholesale segment’s Tableware product category were $32.2 million for the three months ended June 30, 2018, an increase of $9.9 million, or 44.4%, as compared to $22.3 million for the corresponding period in 2017. The increase was mainly attributable to new houseware programs and contributions from the Fitz and Floyd product line.

Net sales for the U.S. Wholesale segment’s Home Solutions product category were $24.5 million for the three months ended June 30, 2018, an increase of $13.5 million, as compared to $11.0 million for the corresponding period in 2017. The increase primarily reflects contributions from Filament and BuiltNY product launches.

Net sales for the International segment were $19.1 million for the three months ended June 30, 2018, a decrease of $0.3 million, or 1.6%, as compared to net sales of $19.4 million for the corresponding period in 2017. In constant currency, net sales decreased approximately 7.2%. The decrease, in constant currency, was in part due to the closing of the Netherlands operations, partially offset by an increase in ecommerce sales.

Net sales for the Retail Direct segment were $5.2 million for the three months ended June 30, 2018, as compared to net sales of $3.3 million for the corresponding period in 2017. The increase reflects contributions from Filament’s retail websites.

Gross margin

Gross margin for the three months ended June 30, 2018 was $52.1 million, or 35.0%, as compared to $42.8 million, or 36.5%, for the corresponding period in 2017.

Gross margin for the U.S. Wholesale segment was $42.5 million, or 34.2%, for the three months ended June 30, 2018, as compared to $34.6 million, or 36.5%, for the corresponding period in 2017. Gross margin may fluctuate from period to period based on a number of factors, including product and customer mix. The decrease in margin primarily reflects the sale of excess inventory at lower margins, as well as strategic promotions for certain customers.

Gross margin for the International segment was $6.3 million, or 33.3%, for the three months ended June 30, 2018, as compared to $6.0 million, or 31.1%, for the corresponding period in 2017. The increase in margin is mainly attributable to favorable customer and product mix. The 2017 period reflects the establishment of inventory reserves, not repeated in 2018.

Gross margin for the Retail Direct segment was $3.2 million, or 61.2%, for the three months ended June 30, 2018, as compared to $2.2 million, or 67.4%, for the corresponding period in 2017. The decrease in gross margin in the Retail Direct segment primarily reflects an increase in promotions.

 

- 33 -

Distribution expenses

Distribution expenses for the three months ended June 30, 2018 were $14.9 million, as compared to $12.6 million for the corresponding period in 2017. Distribution expenses as a percentage of net sales were 10.1% for the three months ended June 30, 2018, as compared to 10.7% for the three months ended June 30, 2017.

Distribution expenses as a percentage of net sales for the U.S. Wholesale segment was approximately 8.6% and 9.8% for the three months ended June 30, 2018 and 2017, respectively. As a percentage of sales shipped from the Company’s warehouses, distribution expenses were 9.8% for the three months ended June 30, 2018 and 10.8% for the three months ended June 30, 2017. Excluding the Company’s west coast distribution facility relocation and Filament, distribution expense as a percentage of sales shipped decrease to 10.7%. This decrease reflects a decrease in prepaid freight sales and improved labor efficiency, partially offset by lower shipments from the Company’s managed warehouses.

Distribution expenses as a percentage of net sales for the International segment were approximately 14.1% and 11.3% for the three months ended June 30, 2018 and 2017, respectively. Distribution expenses as a percentage of sales shipped from the Company’s U.K. warehouses were 14.5% and 12.9% for the three months ended June 30, 2018 and 2017, respectively. The increase in distribution expenses as a percentage of net sales reflects higher labor and facility expenses, as well as higher freight expenses on increased sales to continental Europe.

Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 28.8% and 33.3% for the three months ended June 30, 2018 and 2017, respectively. The decrease primarily reflects the addition of Filament, which has less distribution expense as a percentage of net sales than the Company’s historical operations.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 30, 2018 were $40.0 million, an increase of $6.9 million, or 20.9%, as compared to $33.1 million for the corresponding period in 2017.

Selling, general and administrative expenses for the U.S. Wholesale segment were $29.3 million for the three months ended June 30, 2018, as compared to $21.6 million for the three months ended June 30, 2017. The 2018 period reflects an increase related to the Company’s acquisition of Filament and increases in intangible amortization expense related to the Company’s acquisitions of Fitz and Floyd in 2017 and Filament in 2018. The acquisition related increases offset a decrease in legacy U.S. Wholesale employee and office expenses. As a percentage of net sales, selling, general and administrative expenses were 23.7% and 22.8% for the three months ended June 30, 2018 and 2017, respectively.

Selling, general and administrative expenses for the three months ended June 30, 2018 for the International segment were $3.9 million, a decrease of $3.4 million, from $7.3 million for the corresponding period in 2017. The decrease in selling, general and administrative expenses in the 2018 quarter was primarily due to the change in mark to market valuation of foreign currency contracts.

Selling, general and administrative expenses for the Retail Direct segment were $1.8 million for the three months ended June 30, 2018, as compared to $1.4 million for the three months ended June 30, 2017. The increase in expenses was primarily due to the acquisition of Filament’s retail direct operations. As a percentage of net sales, selling, general and administrative expenses were 34.3% and 34.6% for the three months ended June 30, 2018 and 2017, respectively.

Unallocated corporate expenses for the three months ended June 30, 2018 were $5.1 million, as compared to $2.8 million for the corresponding period in 2017. The increase reflects an increase in acquisition related expenses, professional fees and insurance expenses.

 

- 34 -

Restructuring expense

During the three months ended June 30, 2018, the Company incurred $0.4 million of restructuring expense, primarily for severance, related to the Company’s Filament integration.

During the three months ended June 30, 2017, the Company incurred $0.3 million of restructuring expense, primarily for severance, related to the integration of legal entities operating in Europe.

Interest expense

Interest expense for the three months ended June 30, 2018 was $4.7 million, an increase of $3.7 million, from $1.0 million for the three months ended June 30, 2017. The increase in expense was attributable to the financing obtained in connection with the acquisition of Filament.

Income tax benefit

Income tax benefit for the three months ended June 30, 2018 was $1.8 million, as compared to $1.7 million for the corresponding period in 2017. The Company’s effective tax rate for the three months ended June 30, 2018 was 22.1%, as compared to 39.9% for the corresponding 2017 period. The effective tax rate for the three months ended June 30, 2018 reflects the reduced statutory U.S. corporate income tax rate, partially offset by non-deductible expenses. The effective tax rate for the three months ended June 30, 2017 reflects the jurisdictional mix in forecasted earnings for the year, as well as the benefit generated on share based compensation. This was partially offset by foreign losses for which no benefit was recorded.

Equity in earnings

Equity in earnings of Vasconia, net of taxes, was $0.2 million, for the three months ended June 30, 2018, as compared to $0.5 million for the three months ended June 30, 2017. Equity in earnings for the three months ended June 30, 2018 and 2017 includes a deferred tax (expense) benefit of $(0.5) million and $0.1 million, respectively, due to the requirement to record tax benefits for foreign currency translation losses and gains through other comprehensive income (loss), with a corresponding adjustment to deferred tax liabilities. Vasconia reported income from operations of $3.7 million for the three months ended June 30, 2018, as compared to income from operations of $1.7 million for the three months ended June 30, 2017. The increase in income from operations is primarily due to an increase in gross profit in the aluminum business.

 

- 35 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

SIX MONTHS ENDED JUNE 30, 2018 COMPARED TO THE SIX MONTHS ENDED

JUNE 30, 2017

Net Sales

Net sales for the six months ended June 30, 2018 were $266.8 million, an increase of $36.1 million, or 15.7%, as compared to net sales of $230.7 million for the corresponding period in 2017. The six months ended June 30, 2018 includes net sales of $38.6 million from Filament for the period from March 2, 2018, the date of acquisition.

Net sales for the U.S. Wholesale segment for the six months ended June 30, 2018 were $215.1 million, an increase of $32.9 million, or 18.1%, as compared to net sales of $182.2 million for the corresponding period in 2017.

Net sales for the U.S. Wholesale segment’s Kitchenware product category were $124.6 million for the six months ended June 30, 2018, an increase of $6.7 million, or 5.7%, as compared to $117.9 million for the corresponding period in 2017. The increase in the U.S. Wholesale segment’s Kitchenware product category was primarily attributable to contributions from Filament, partially offset by a decrease in tools and gadget sales with certain retailers and a decrease due to the timing of pantryware sales.

Net sales for the U.S. Wholesale segment’s Tableware product category were $53.1 million for the six months ended June 30, 2018, an increase of $11.0 million, or 26.1%, as compared to $42.1 million for the corresponding period in 2017. The increase was primarily attributable to new houseware programs and contributions from the Fitz and Floyd product line.

Net sales for the U.S. Wholesale segment’s Home Solutions product category were $37.4 million for the six months ended June 30, 2018, an increase of $15.3 million, or 69.2%, as compared to $22.1 million for the corresponding period in 2017. The increase primarily reflects contributions from Filament and BuiltNY product launches, partially offset by a decrease due to a home decor program not repeated in 2018.

Net sales for the International segment were $40.9 million for the six months ended June 30, 2018, an increase of $0.3 million, or 0.7%, as compared to net sales of $40.6 million for the corresponding period in 2017. In constant currency, net sales decreased approximately 7.7%. The decrease, in constant currency, was in part due to the closing of the Netherlands operations, offset by an increase in ecommerce sales.

Net sales for the Retail Direct segment were $10.7 million for the six months ended June 30, 2018, as compared to net sales of $8.0 million for the corresponding period in 2017. The increase primarily reflects contributions from Filament’s retail websites.

Gross margin

Gross margin for the six months ended June 30, 2018 was $97.2 million, or 36.4%, as compared to $86.7 million, or 37.6%, for the corresponding period in 2017.

Gross margin for the U.S. Wholesale segment was $76.4 million, or 35.5%, for the six months ended June 30, 2018, as compared to $68.1 million, or 37.4%, for the corresponding period in 2017. Gross margin may fluctuate from period to period based on a number of factors, including product and customer mix. The decrease in margin is primarily attributable to the sale of excess inventory at lower margins, as well as strategic promotions for certain customers.

Gross margin for the International segment was $14.0 million, or 34.1%, for the six months ended June 30, 2018, as compared to $13.3 million, or 32.7%, for the corresponding period in 2017. The increase in margin is mainly attributable to favorable customer and product mix. The 2017 period reflects the establishment of inventory reserves not repeated in 2018.

Gross margin for the Retail Direct segment was $6.8 million, or 63.0%, for the six months ended June 30, 2018, as compared to $5.3 million, or 67.0%, for the corresponding period in 2017. The decrease in gross margin in the Retail Direct segment reflects an increase in promotions.

 

- 36 -

Distribution expenses

Distribution expenses for the six months ended June 30, 2018 were $32.8 million, as compared to $26.0 million for the corresponding period in 2017. Distribution expenses as a percentage of net sales were 12.3% for the six months ended June 30, 2018, as compared to 11.3% for the six months ended June 30, 2017.

Distribution expenses as a percentage of net sales for the U.S. Wholesale segment was approximately 11.1% and 10.4% for the six months ended June 30, 2018 and 2017, respectively. The increase reflects expenses associated with the Company’s west coast distribution facility relocation of approximately $2.6 million. As a percentage of sales shipped from the Company’s warehouses, distribution expenses excluding the relocation costs for the U.S. Wholesale segment, were 10.8% for the six months ended June 30, 2018 and 11.0% for the six months ended June 30, 2017.

Distribution expenses as a percentage of net sales for the International segment were approximately 13.4% and 11.1% for the six months ended June 30, 2018 and 2017, respectively. Distribution expenses as a percentage of sales shipped from the Company’s U.K. warehouses were 14.4% and 12.4% for the six months ended June 30, 2018 and 2017, respectively. The increase in distribution expenses as a percentage of net sales reflects higher labor and facility expenses, as well as higher freight expenses on increased sales to continental Europe.

Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 31.8% and 32.5% for the six months ended June 30, 2018 and 2017, respectively. The decrease primarily reflects the addition of Filament, which has less distribution expenses as a percentage of net sales than the Company’s historical operations.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 30, 2018 were $80.2 million, an increase of $14.7 million, or 22.5%, as compared to $65.5 million for the corresponding period in 2017.

Selling, general and administrative expenses for the U.S. Wholesale segment were $55.1 million for the six months ended June 30, 2018, as compared to $43.2 million for the six months ended June 30, 2017. The 2018 period reflects an increase related to the Company’s acquisition of Filament and increases in employee expenses and intangible amortization expense related to the Company’s acquisitions of Fitz and Floyd in 2017 and Filament in 2018. As a percentage of net sales, selling, general and administrative expenses were 25.7% and 23.7% for the six months ended June 30, 2018 and 2017, respectively.

Selling, general and administrative expenses for the six months ended June 30, 2018 for the International segment were $12.0 million, a decrease of $1.4 million, from $13.4 million for the corresponding period in 2017. The decrease in selling, general and administrative expenses in the 2018 period was primarily due to the change in mark to market valuation of foreign currency contracts.

Selling, general and administrative expenses for the Retail Direct segment were $3.5 million for the six months ended June 30, 2018, as compared to $3.0 million for the six months ended June 30, 2017. The increase in expenses was primarily due to the acquisition of Filament’s retail direct operations. As a percentage of net sales, selling, general and administrative expenses were 32.6% and 32.7% for the six months ended June 30, 2018 and 2017, respectively.

Unallocated corporate expenses for the six months ended June 30, 2018 were $9.6 million, as compared to $5.9 million for the corresponding period in 2017. The increase was primarily attributable to an increase in acquisition related expenses, professional fees and insurance expense.

Restructuring expense

During the six months ended June 30, 2018, the Company incurred $0.8 million of restructuring expense, primarily for severance, related to the Company’s Filament integration.

During the six months ended June 30, 2017, the Company incurred $0.3 million of restructuring expense, primarily for severance, related to the integration of legal entities operating in Europe.

 

- 37 -

Interest expense

Interest expense for the six months ended June 30, 2018 was $6.8 million, an increase of $4.9 million, from $1.9 million for the six months ended June 30, 2017. The increase in expense was primarily attributable to the financing obtained in connection with the acquisition of Filament.

Loss on early retirement of debt

In connection with the financing obtained for the acquisition of Filament, the Company wrote-off $0.1 million of the debt issuance costs.

Income tax benefit

Income tax benefit for the six months ended June 30, 2018 was $5.6 million as compared to $2.6 million for the corresponding period in 2017. The Company’s effective tax rate for the six months ended June 30, 2018 was 23.8%, as compared to 37.4% for the corresponding 2017 period. The effective tax rate for the six months ended June 30, 2018 reflects the reduced statutory U.S. corporate income tax rate, partially offset by non-deductible expenses. The effective tax rate for the six months ended June 30, 2017, reflects the jurisdictional mix in forecasted earnings for the year, as well as the benefit generated on share based compensation. This was partially offset by foreign losses for which no benefit was recorded.

Equity in earnings

Equity in earnings of Vasconia, net of taxes, was $ 0.2 million for the six months ended June 30, 2018, as compared to $1.0 million for the six months ended June 30, 2017. Equity in earnings for the six months ended June 30, 2018 and 2017 includes a deferred tax (expense) benefit of ($0.3) million and $0.4 million, respectively, due to the requirement to record tax benefits for foreign currency translation gains and losses through other comprehensive income (loss), with a corresponding adjustment to deferred tax liabilities. Vasconia reported income from operations of $4.8 million for the six months ended June 30, 2018, as compared to income from operations of $4.1 million for the six months ended June 30, 2017. The increase in income from operations is primarily due to an increase in operating income from the aluminum and kitchenware divisions.

 

- 38 -

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 under the ABL Agreement, as defined below. The Company’s primary uses of funds consist of working capital requirements, capital expenditures, acquisitions and investments and payments of principal and interest on its debt.

At June 30, 2018, the Company had cash and cash equivalents of $6.0 million, compared to $7.6 million at December 31, 2017. Working capital was $217.6 million at June 30, 2018, compared to $186.9 million at December 31, 2017. Liquidity, which includes cash and cash equivalents and availability under the ABL Agreement was $93.3 million at June 30, 2018.

Inventory, a large component of the Company’s working capital, is expected to fluctuate from period to period, with inventory levels higher primarily in the June through October time period. The Company also expects inventory turnover to fluctuate from period to period based on product and customer mix. Certain product categories have lower inventory turnover rates as a result of minimum order quantities from the Company’s vendors or customer replenishment needs. Certain other product categories experience higher inventory turns due to lower minimum order quantities or trending sale demands. For the three months ended June 30, 2018 inventory turnover was 2.1 times, or 177 days, as compared to 1.9 times, or 196 days, for the three months ended June 30, 2017. The increase in turnover and decrease in turnover days primarily reflects the inclusion of Filament, partially offset by an increase in international inventory due to timing.

Credit Facilities

On March 2, 2018, the Company entered into a new credit agreement (the “ABL Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and the lenders and issuing banks party thereto, evidencing a senior secured asset-based revolving credit facility provided to the Company in the maximum aggregate principal amount of $150.0 million, which facility will mature on March 2, 2023, and the Company entered into a new loan agreement (the “Term Loan” and together with the ABL Agreement, the “Debt Agreements”) with the Company, as the borrower and a guarantor, the other guarantors, JPMorgan, as administrative agent, Golub Capital LLC, as syndication agent, and the lenders party thereto, providing for a senior secured term loan credit facility to the Company in the principal amount of $275.0 million, which will mature on February 28, 2025. The Term Loan facility will be repaid, commencing June 30, 2018, in quarterly payments of principal equal to 0.25% of the original aggregate principal amount of the term loan facility. The maximum borrowing under the ABL Agreement may be increased to up to $200.0 million if certain conditions are met. One or more tranches of additional term loans (the “Incremental Facilities”) may be added under the Term Loan if certain conditions are met. The Incremental Facilities may not exceed the sum of (i) $50.0 million plus (ii) an unlimited amount so long as, in the case of (ii) only, the Company’s secured net leverage ratio, as defined in and computed pursuant to the Term Loan, is no greater than 3.75 to 1.00 subject to certain limitations and for the period defined pursuant to the Term Loan.

At June 30, 2018, borrowings outstanding under the ABL Agreement were $59.6 million and open letters of credit were $3.1 million. At June 30, 2018, availability under the ABL Agreement was approximately $87.3 million. The borrowing capacity under the ABL Agreement depends, in part, on eligible levels of certain current assets comprising the borrowing base and the Company’s ability to meet and maintain a financial ratio, if and when applicable. Due to the seasonality of the Company’s business, this may mean that the Company will have greater borrowing availability during the third and fourth quarters of each year. The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly. Consequently, the $150.0 million commitment thereunder may not represent actual borrowing capacity.

At June 30, 2018, $274.3 million was outstanding under the Term Loan. At June 30, 2018, unamortized debt issuance costs of $1.5 million and $8.2 million offset the short-term and long-term outstanding balances, respectively, of the Term Loan.

The Company’s payment obligations under its Debt Agreements are unconditionally guaranteed by its existing and future U.S. subsidiaries with certain minor exceptions. Certain payment obligations under the ABL Agreement are also direct obligations of its foreign subsidiary borrowers designated as such under the ABL Agreement and, subject to limitations on such guaranty, are guaranteed by the foreign subsidiary borrowers, as

 

- 39 -

well as by the Company. The obligations of the Company under the Debt Agreements and any hedging arrangements and cash management services and the guarantees by its domestic subsidiaries in respect of those obligations are secured by substantially all of the assets and stock (but in the case of foreign subsidiaries, limited to 65% of the capital stock in first-tier foreign subsidiaries and not including the stock of subsidiaries of such first-tier foreign subsidiaries) owned by the Company and the U.S. subsidiary guarantors, subject to certain exceptions. Such security interest consists of (1) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and its domestic subsidiaries (the “ABL Collateral”) pledged as collateral in favor of lenders under the ABL Agreement and a second-priority lien in the ABL Collateral in favor of the lenders under the Term Loan and (2) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and its domestic subsidiaries (the “Term Loan Collateral”) pledged as collateral in favor of lenders under the Term Loan and a second-priority lien in the Term Loan Collateral in favor of the lenders under the ABL Agreement.

Borrowings under the revolving credit facility bear interest, at the Company’s option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate plus 0.5% or one-month LIBOR plus 1.0%, plus a margin of 0.25% to 0.75%, or (ii) LIBOR plus a margin of 1.25% to 1.75%. The respective margins are based upon the Company’s total leverage ratio, as defined in and computed pursuant to the ABL Agreement. Interest rates on outstanding borrowings under the ABL Agreement at June 30, 2018 ranged from 2.0% to 5.0%. In addition, the Company paid a commitment fee of 0.375% on the unused portion of the ABL Agreement during the six months ended June 30, 2018.

The Term Loan facility bears interest, at the Company’s option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate plus 0.5% or one-month LIBOR plus 1.0%, plus a margin of 2.50% or (ii) LIBOR plus a margin of 3.50%. The interest rate on outstanding borrowings under the Term Loan at June 30, 2018 ranged from 5.5% to 5.6%.

The Debt Agreements provides for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, acquisitions, investments and payment of dividends, among other things. Further, the ABL Agreement provides that during any period (a) commencing on the last day of the most recently ended four consecutive fiscal quarters on or prior to the date availability under the ABL Agreement is less than the greater of $15.0 million and 10% of the aggregate commitment under the ABL Agreement at any time and (b) ending on the day after such availability has exceeded the greater of $15.0 million and 10% of the aggregate commitment under the ABL Agreement for forty-five (45) consecutive days, the Company is required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 as of the last day of any period of four consecutive fiscal quarters.

The Company was in compliance with the covenants of the Debt Agreements at June 30, 2018.

The Company expects that it will continue to borrow, subject to availability, and repay funds under the ABL Agreement based on working capital and other corporate needs.

Covenant Calculations

Consolidated adjusted EBITDA (a non-GAAP financial measure), which is defined in the Company’s Debt Agreements, is used in the calculation of the Fixed Charge Coverage Ratio, Secured Net Leverage Ratio, Total Leverage Ratio and Total Net Leverage Ratio, which are required to be provided to the Company’s lenders pursuant to its Debt Agreements.

 

- 40 -

The following is the Company’s consolidated adjusted EBITDA, for the last four fiscal quarters:

 

		Consolidated adjusted EBITDA for the Four Quarters Ended June 30, 2018
		(in thousands)
Three months ended June 30, 2018		$	3,910
Three months ended March 31, 2018			(529	)
Three months ended December 31, 2017			29,767
Three months ended September 30, 2017			26,500
Pro forma projected synergies			9,595
Total for the four quarters		$	69,243

Capital expenditures for the six months ended June 30, 2018 were $3.2 million.

Non-GAAP financial measure

Consolidated adjusted EBITDA is a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The following is a reconciliation of the net income (loss), as reported, to consolidated adjusted EBITDA, for the four quarters ended June 30, 2018:

 

		June 30, 2018				March 31, 2018				December 31, 2017				September 30, 2017				Twelve Months ended June 30, 2018
Net income (loss) as reported		$	(6,057	)		$	(11,598	)		$	1,251			$	4,330			$	(12,074	)
Subtract out:
Undistributed equity in (earnings) losses, net			(155	)			(77	)			265				326				359
Add back:
Income tax expense (benefit)			(1,765	)			(3,810	)			8,169				3,505				6,099
Interest expense			4,676				2,103				1,177				1,172				9,128
Loss on early retirement of debt			—				66				—				—				66
Depreciation and amortization			6,422				4,309				3,468				4,063				18,262
Stock compensation expense			921				838				908				952				3,619
Unrealized (gain) loss on foreign currency contracts			(2,112	)			393				169				897				(653	)
Other permitted non-cash charges (1)			916				287				—				—				1,203
Permitted acquisition related expenses			391				809				2,424				166				3,790
Permitted non-recurring charges (2)			673				2,825				1,331				272				5,101
Pro forma Filament adjustment (3)			—				3,326				10,605				10,817				24,748
Twelve Months ended June 30, 2018, Pro forma projected synergies (4)			—				—				—				—				9,595
Consolidated adjusted EBITDA		$	3,910			$	(529	)		$	29,767			$	26,500			$	69,243

 

(1)	Other permitted non-cash charges includes non-cash purchase accounting adjustment to step-up the fair value of acquired inventory, a permitted exclusion from the Company’s Consolidated adjusted EBITDA, pursuant to the Company’s Debt Agreements.

(2)	Permitted non-recurring charges include severance expense, warehouse relocation costs, transition expenses and restructuring expenses. These are permitted exclusions from the Company’s consolidated adjusted EBITDA, subject to limitations, pursuant to the Company’s Debt Agreements.

(3)	Pro forma Filament adjustment represents permitted adjustment to the Company’s consolidated adjusted EBITDA for the acquisition of Filament on March 2, 2018 pursuant to the Company’s Debt Agreements.

(4)

Pro forma projected synergies represents the amount of projected cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies projected by the Company as a result of actions taken through June 30, 2018 or expected to be taken as of June 30, 2018, net of the benefits realized during the six months ended June 30, 2018. Pro forma projected synergies is a permitted exclusion from the Company’s consolidated adjusted EBITDA, subject to limitations, pursuant to the Company’s Debt Agreements.

 

- 41 -