10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 0-19254

 

 

LIFETIME BRANDS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   11-2682486

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1000 Stewart Avenue, Garden City, New York, 11530

(Address of principal executive offices) (Zip Code)

(516) 683-6000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No   ¨

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

 

Large accelerated filer   ¨    Accelerated filer    x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

The number of shares of the registrant’s common stock outstanding as of August 8, 2011 was 12,082,943.

 

 

 


Table of Contents

LIFETIME BRANDS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2011

INDEX

 

          Page No.

Part I.

  

Financial Information

  

Item 1.

  

Financial Statements

  
  

Condensed Consolidated Balance Sheets – June 30, 2011 (unaudited) and December 31, 2010

   2
  

Unaudited Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2011 and 2010

   3
  

Unaudited Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 and 2010

   4
  

Notes to Unaudited Condensed Consolidated Financial Statements

   5
  

Report of Independent Registered Public Accounting Firm

   15

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   16

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   24

Item 4.

  

Controls and Procedures

   24

Part II.

  

Other Information

  

Item 1.

  

Legal Proceedings

   25

Item 1A.

  

Risk Factors

   25

Item 6.

  

Exhibits

   25

Signatures

   26


Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

     June 30,
2011
    December 31,
2010
 
     (unaudited)        

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 1,940      $ 3,351   

Accounts receivable, less allowances of $5,504 at 2011
and $12,611 at 2010

     58,924        72,795   

Inventory (Note A)

     110,506        99,935   

Deferred income taxes (Note G)

     1,124        1,124   

Prepaid expenses and other current assets

     4,729        5,048   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     177,223        182,253   

PROPERTY AND EQUIPMENT, net

     34,458        36,093   

INTANGIBLE ASSETS, net (Note C)

     30,504        30,818   

INVESTMENT IN GRUPO VASCONIA, S.A.B. (Note B)

     25,708        24,068   

OTHER ASSETS

     4,469        4,354   
  

 

 

   

 

 

 

TOTAL ASSETS

   $         272,362      $ 277,586   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES

    

Revolving Credit Facility (Note D)

   $ —        $ 4,100   

Accounts payable

     20,807        19,414   

Accrued expenses

     23,375        31,962   

Income taxes payable (Note G)

     182        5,036   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     44,364        60,512   

DEFERRED RENT & OTHER LONG-TERM LIABILITIES

     14,416        14,482   

DEFERRED INCOME TAXES (Note G)

     1,603        1,429   

REVOLVING CREDIT FACILITY (Note D)

     17,354        10,000   

TERM LOAN (Note D)

     40,000        40,000   

4.75% CONVERTIBLE SENIOR NOTES (Note D)

     24,021        23,557   

STOCKHOLDERS’ EQUITY

    

Preferred stock, $.01 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: 25,000,000; shares issued and outstanding: 12,082,943 in 2011 and 12,064,543 in 2010

     121        121   

Paid-in capital

     132,789        131,350   

Retained earnings

     1,823        1,312   

Accumulated other comprehensive (loss)

     (4,129     (5,177
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     130,604        127,606   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 272,362      $ 277,586   
  

 

 

   

 

 

 

See accompanying independent registered public accounting firm review report and notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

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,
 
     2011     2010     2011     2010  

Net sales

   $ 90,371      $ 86,889      $ 182,144      $ 175,625   

Cost of sales

     56,325        52,942        114,708        106,894   

Distribution expenses

     9,306        9,597        20,246        19,730   

Selling, general and administrative expenses

     20,389        21,828        42,862        43,952   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     4,351        2,522        4,328        5,049   

Interest expense (Note D)

     (2,039     (2,644     (4,018     (5,073

Loss on early retirement of debt (Note D)

     —          (764     —          (764
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in earnings

     2,312        (886     310        (788

Income tax provision (Note G)

     (1,108     (573     (520     (612

Equity in earnings, net of taxes (Note B)

     859        478        1,324        1,148   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 2,063      $ (981   $ 1,114      $ (252
  

 

 

   

 

 

   

 

 

   

 

 

 

BASIC INCOME (LOSS) PER COMMON SHARE (Note F)

   $ 0.17      $ (0.08   $ 0.09      $ (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

DILUTED INCOME (LOSS) PER COMMON SHARE (Note F)

   $ 0.17      $ (0.08   $ 0.09      $ (0.02
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.025        —        $ 0.050        —     

See accompanying independent registered public accounting firm review report and notes to unaudited condensed consolidated financial statements.

 

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LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

     Six Months Ended
June 30,
 
     2011     2010  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 1,114      $ (252

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     4,015        5,000   

Amortization of debt discount

     464        1,357   

Deferred rent

     (21     286   

Stock compensation expense

     1,423        1,400   

Undistributed equity earnings

     (858     (750

Loss on early retirement of debt (Note D)

     —          764   

Changes in operating assets and liabilities:

    

Accounts receivable, net

     13,871        8,943   

Inventory

     (10,571     (10,762

Prepaid expenses, other current assets and other assets

     643        99   

Accounts payable, accrued expenses and other liabilities

     (7,485     6,892   

Prepaid income taxes

     —          (951

Income taxes payable

     (4,854     (906
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

     (2,259     11,120   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Purchases of property and equipment, net

     (2,066     (1,251
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (2,066     (1,251
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Proceeds from revolving credit facility (Note D)

     3,254        58,828   

Proceeds from term loan (Note D)

     —          10,000   

Repayments of prior credit facility, net (Note D)

     —          (24,601

Repurchase of 4.75% convertible senior notes (Note D)

     —          (51,028

Financing costs

     —          (3,058

Proceeds from the exercise of stock options

     15        57   

Excess tax benefits from the exercise of stock options

     6        226   

Payment of capital lease obligations

     (59     (89

Cash dividend paid (Note J)

     (302     —     
  

 

 

   

 

 

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

     2,914        (9,665
  

 

 

   

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (1,411     204   

Cash and cash equivalents at beginning of period

     3,351        682   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 1,940      $ 886   
  

 

 

   

 

 

 

See accompanying independent registered public accounting firm review report and notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

NOTE A — BASIS OF PRESENTATION AND SUMMARY ACCOUNTING POLICIES

Organization and business

Lifetime Brands, Inc. (the “Company”) designs, markets and distributes a broad range of consumer products used in the home, including kitchenware, tabletop, home décor and lifestyle products, and markets its products under a number of brand names and trademarks, which are either owned or licensed. The Company markets and sells its products principally on a wholesale basis to retailers throughout North America. The Company also markets and sells certain products directly to the consumer through its Pfaltzgraff®, Mikasa®, Housewares Deals™ and Lifetime Sterling™ Internet websites.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Operating results for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

The Company’s business and working capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters. In 2010, 2009 and 2008, net sales for the third and fourth quarters accounted for 60%, 58%, 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

Wholesale sales and Retail Direct sales are recognized when title passes to the customer. Wholesale sales are recognized at shipping point and Retail Direct sales are recognized upon delivery to the customer. Shipping and handling fees that are billed to customers in sales transactions are included in net sales and amounted to $274,000 and $386,000 for the three months ended June 30, 2011 and 2010, respectively, and $729,000 and $904,000 for the six months ended June 30, 2011 and 2010, respectively. Net sales exclude taxes that are collected from customers and remitted to the taxing authorities.

Distribution expenses

Distribution expenses consist primarily of warehousing expenses, handling costs of products sold and freight-out expenses.

 

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LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE A — BASIS OF PRESENTATION AND SUMMARY ACCOUNTING POLICIES (continued)

 

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 by the lower of cost (first-in, first-out basis) or market method. The Company estimates the selling price of its inventory on a product by product basis based on the current selling environment. If the estimated selling price is lower than the inventory’s cost, the Company reduces the value of the inventory to its net realizable value.

The components of inventory are as follows:

 

     June 30,
2011
     December 31,
2010
 
     (in thousands)  

Finished goods

   $ 106,730       $ 96,375   

Work in process

     2,066         1,890   

Raw materials

     1,710         1,670   
  

 

 

    

 

 

 

Total

   $ 110,506       $ 99,935   
  

 

 

    

 

 

 

Fair value measurements

ASC Topic No. 820, Fair Value Measurements and Disclosures, provides enhanced guidance for using fair value to measure assets and liabilities and establishes a common definition of fair value, provides a framework for measuring fair value under U.S. generally accepted accounting principles and expands disclosure requirements about fair value measurements. Fair value measurements included in the Company’s condensed consolidated financial statements relate to the Company’s convertible senior notes described in Note D.

Fair value of financial instruments

The Company determined 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 approximate fair value since such borrowings bear interest at variable market rates. The fair value of the Company’s $24.1 million 4.75% Convertible Senior Notes (the “Notes”) at June 30, 2011 was $24.1 million and was determined based on Level 2 observable inputs consisting of the most recent quoted price for the Notes obtained from the FINRA Trade Reporting and Compliance Engine™ system at June 30, 2011.

Health insurance

The Company offers health benefits to its employees under plans, a substantial portion of which has been self insured since February 2011. The self-insured plan is administered by a third party and the Company purchases stop loss coverage. The Company accrues for unpaid reported claims and estimated claims incurred but not yet reported. Although management believes its estimate for accrued medical claims inclusive of claims incurred but not yet reported is reasonable, actual claims may vary significantly from the estimate.

 

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Table of Contents

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE B EQUITY INVESTMENTS

The Company owns a 30% interest in Grupo Vasconia S.A.B. (“Vasconia”). 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 month periods ended June 30, 2011 and 2010 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 rate of MXN 11.78 and MXN 12.83 at June 30, 2011 and 2010, respectively. The Company’s proportionate share of Vasconia’s net income has been translated from MXN to USD using the average daily exchange rate of MXN 11.74 and MXN 12.55 during the three months ended June 30, 2011 and 2010, respectively, and MXN 11.91 and MXN 12.66 during the six months ended June 30, 2011 and 2010, respectively. The effect of the translation of the Company’s investment resulted in an increase to the investment balance of $1.0 million during the six months ended June 30, 2011 and a decrease to the investment balance of $130,000 during the six months ended June 30, 2010 (also see Note J). These translation effects are recorded in accumulated other comprehensive loss. Included in prepaid expenses and other current assets at June 30, 2011 and December 31, 2010 are amounts due from Vasconia of $111,000 and $102,000, respectively. During the three months ended June 30, 2011, the Company received a cash dividend of $466,000 from Vasconia related to its 2010 earnings, which is accounted for as a reduction to the cost basis of the investment.

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

 

     Three Months Ended
June 30,
 
     2011      2010  
     (in thousands)  
     USD      MXN      USD      MXN  

Net Sales

   $ 30,909       $ 362,784       $ 25,326       $ 317,802   

Gross Profit

     8,364         98,168         7,694         96,548   

Income from operations

     3,127         36,697         3,370         42,284   

Net Income

     2,116         24,838         1,801         22,599   
     Six Months Ended
June 30,
 
     2011      2010  
     (in thousands)  
     USD      MXN      USD      MXN  

Net Sales

   $ 59,480       $ 708,261       $ 50,464       $ 638,927   

Gross Profit

     16,447         195,905         15,023         190,169   

Income from operations

     6,452         76,903         6,904         87,430   

Net Income

     4,247         50,606         4,117         52,191   

The Company recorded equity in earnings of Vasconia, net of taxes, of $544,000 and $478,000 for the three months ended June 30, 2011 and 2010, respectively, and $1.0 million and $1.1 million for the six months ended June 30, 2011 and 2010, respectively.

The Company also has a 50% joint venture investment in World Alliance Enterprises Limited, a Hong-Kong based company that primarily sells kitchenware and cutlery products to retailers other than in North and South America. During the three months ended June 30, 2011, the Company recorded equity in earnings of $315,000, net of taxes. This reflects the cumulative results of this investment through June 30, 2011. Operating activities of this investment for the remainder of 2011 is expected to be immaterial.

 

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LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE C — INTANGIBLE ASSETS

Intangible assets, all of which relate to the Company’s Wholesale segment, consist of the following (in thousands):

 

    June 30, 2011     December 31, 2010  
    Gross     Accumulated
Amortization
    Net     Gross     Accumulated
Amortization
    Net  

Indefinite-lived intangible assets:

           

Trade names

  $           19,433      $ —        $           19,433      $           19,433      $ —        $           19,433   

Finite-lived intangible assets:

           

Licenses

    15,847        (6,413     9,434        15,847        (6,186     9,661   

Trade names

    2,477        (1,309     1,168        2,477        (1,267     1,210   

Customer relationships

    586        (558     28        586        (530     56   

Patents

    584        (143     441        584        (126     458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 38,927      $ (8,423   $ 30,504      $ 38,927      $ (8,109   $ 30,818   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE D DEBT

Revolving Credit Facility

The Company has a $125.0 million secured credit agreement (the “Revolving Credit Facility”), which matures on June 9, 2015, with a bank group led by JPMorgan Chase Bank, N.A.

Borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at one of the following rates: (i) the Alternate Base Rate, defined as the greater of the Prime Rate, Federal Funds Rate plus 0.5% or the Adjusted LIBOR rate plus 1.0%, plus a margin of 1.25% to 1.75%, or (ii) the Eurodollar Rate, defined as the Adjusted LIBOR Rate plus a margin of 2.25% to 2.75%. The respective margin is based upon availability. In addition, the Company pays a commitment fee of 0.50% on the unused portion of the Revolving Credit Facility. Availability under the Revolving Credit Facility was approximately 58.1% of the total facility commitment at June 30, 2011.

At June 30, 2011, the Company had $1.4 million of open letters of credit and $17.4 million of borrowings outstanding under the Revolving Credit Facility. Interest rates on outstanding borrowings at June 30, 2011 ranged from 2.50% to 4.50%.

Pursuant to the provisions of ASC Topic No. 470-10, Short-term Obligations Expected to be Refinanced, at June 30, 2011, the Company classified the Revolving Credit Facility as a long-term liability based on the Company’s intent and ability to repay the loan. Repayments are planned to the extent that such anticipated cash flows are generated, although the Company is not obligated to repay any portion of the debt until maturity of the facility in June 2015, provided that availability exists under the facility. The Company expects that it will continue to borrow (subject to availability) and repay funds under the facility based on corporate requirements including, but not limited to, working capital needs.

During the quarter ended June 30, 2010, the Company recognized a loss before income taxes of approximately $408,000 in connection with the repayment of the prior credit agreement, consisting of the write-off of unamortized debt issuance costs, which was included in loss on early retirement of debt in the accompanying condensed consolidated statements of operations.

 

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LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE D — DEBT (continued)

 

Term Loan

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

The Term Loan bears interest, at the Company’s option, at one of the following rates: (i) the Alternate Base Rate, defined as the greater of the corporate rate published by the lender and the Federal Funds Rate plus 0.50% provided that such calculated rate is a minimum of 2.50%, plus a margin of 7.50%, or (ii) the Adjusted LIBOR rate which shall be a minimum of 1.50%, plus a margin of 8.50%. The interest rate on the outstanding borrowings at June 30, 2011 was 10.0%.

The Term Loan requires the Company to have EBITDA, as defined, of not less than $30.0 million for the trailing four fiscal quarters and limits capital expenditures to $7.5 million for the year ending December 31, 2011. The Company was in compliance with these financial covenants at June 30, 2011.

4.75% Convertible Senior Notes

At June 30, 2011, the Company had outstanding $24.1 million aggregate principal amount of the Notes due July 15, 2011. Pursuant to the provisions of ASC Topic No. 470-10, the Company classified the Notes as a long-term liability based on the Company’s intent and ability to repay the Notes with borrowings from the Revolving Credit Facility. On July 15, 2011, the Company retired the $24.1 million aggregate principal amount of the Notes with borrowings from the Revolving Credit Facility.

At June 30, 2011 and December 31, 2010, the carrying amounts of the debt and equity components of the Notes were as follows (in thousands):

 

     June 30,
2011
    December 31,
2010
 

Carrying amount of equity component, net of tax

   $             8,262      $ 8,262   
  

 

 

   

 

 

 

Principal amount of debt component

   $ 24,100      $ 24,100   

Unamortized discount

     (79     (543
  

 

 

   

 

 

 

Carrying amount of debt component

   $ 24,021      $ 23,557   
  

 

 

   

 

 

 

The effective interest rate of the debt component was 9.02% at the date of issuance. Total interest expense recognized related to the Notes, including amortization of the debt discount and offering costs, was $587,000 and $1.6 million for the three months ended June 30, 2011 and 2010, respectively, and $1.2 million and $3.3 million for the six months ended June 30, 2011 and 2010, respectively.

Included in the loss on early retirement of debt in the accompanying condensed consolidated statement of operations was a loss before income taxes of $356,000 related to the debt component of the portion of the Notes repurchased in June 2010 and unamortized debt discount and issuance costs written off.

 

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LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE E STOCK COMPENSATION

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2011 is as follows:

 

         Options           Weighted-
average
exercise
price
    Weighted-
average
remaining
contractual life
(years)
    Aggregate
intrinsic

value
 

Options outstanding, January 1, 2011

    2,219,200      $               12.46       

Grants

    376,500        11.16       

Exercises

    (4,500     3.26       

Cancellations

    (9,300     12.40       
 

 

 

       

Options outstanding, June 30, 2011

    2,581,900        12.29        6.75      $         7,572,163   
 

 

 

       

 

 

 

Options exercisable, June 30, 2011

    1,376,950        13.73        5.25        4,745,023   
 

 

 

       

 

 

 

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, 2011. 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, 2011 and the exercise price.

The total intrinsic value of stock options exercised for the six months ended June 30, 2011 and 2010 was $41,000 and $234,000, respectively. The intrinsic value of a stock option that is exercised is calculated at the date of exercise.

The Company recognized stock compensation expense of $675,000 and $741,000 for the three months ended June 30, 2011 and 2010, respectively, and $1.4 million for both the six months ended June 30, 2011 and 2010.

Total unrecognized compensation cost related to unvested stock options at June 30, 2011, before the effect of income taxes, was $5.6 million and is expected to be recognized over a weighted-average period of 1.88 years.

During the three months ended, June 30, 2011, the Company granted an aggregate of 13,900 shares of restricted stock to its independent directors as part of their annual retainer that vests 100% one year from the date of grant. The restricted stock had a fair value of $150,000 at the grant date that will be recognized in expense over the one year vesting period. On August 4, 2011, the Company granted an aggregate of 7,500 shares of restricted stock to its independent directors that vests one year from the date of grant. The restricted stock had a fair value of $80,000 at the grant date that will be recognized in expense over the one year vesting period.

At June 30, 2011, there were 352,826 shares available for grants of awards under the Company’s 2000 Long-Term Incentive Plan.

 

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Table of Contents

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE F — INCOME (LOSS) PER COMMON SHARE

Basic income (loss) per common share has been computed by dividing net income (loss) by the weighted-average number of shares of the Company’s common stock outstanding. Diluted income (loss) per common share adjusts net income (loss) and basic income (loss) per common share for the effect of all potentially dilutive shares of the Company’s common stock. The calculations of basic and diluted income (loss) per common share for the three and six month periods ended June 30, 2011 and 2010 are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011      2010     2011      2010  
     (in thousands, except per share amounts)  

Net income (loss) - basic

   $ 2,063       $ (981   $ 1,114       $ (252

Net interest expense, 4.75% Convertible Senior Notes

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) - diluted

   $ 2,063       $ (981   $ 1,114       $ (252
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares outstanding – basic

     12,070         12,027        12,068         12,021   

Effect of dilutive securities:

          

Stock options

     416         —          427         —     

4.75% Convertible Senior Notes

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares outstanding – diluted

     12,486         12,027        12,495         12,021   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic income (loss) per common share

   $ 0.17       $ (0.08   $ 0.09       $ (0.02
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted income (loss) per common share

   $ 0.17       $ (0.08   $ 0.09       $ (0.02
  

 

 

    

 

 

   

 

 

    

 

 

 

The computation of diluted income (loss) per common share for the three months ended June 30, 2011 and 2010 excludes: (i) options to purchase 1,146,150 shares and 2,310,650 shares, respectively; and (ii) 860,714 shares and 2,405,141 shares of the Company’s common stock issuable upon the conversion of the Company’s Notes and related interest expense, respectively. The computation of diluted income (loss) per common share for the six months ended June 30, 2011 and 2010 excludes: (i) options to purchase 1,756,075 shares and 1,504,075 shares, respectively; and (ii) 860,714 shares and 2,541,101 shares of the Company’s common stock issuable upon the conversion of the Company’s Notes and related interest expense, respectively. The above shares were excluded due to their antidilutive effects.

NOTE G — INCOME TAXES

As of December 31, 2010, the Company had fully utilized the Federal net operating loss and other credit carryforwards generated in previous years. The Company has generated various state net operating loss carryforwards of $8.6 million that will begin to expire in 2014. The Company has net operating losses in foreign jurisdictions of $4.0 million that will begin to expire in 2013. In accordance with ASC Topic No. 740, Income Taxes, the Company has offset its total deferred tax assets with certain deferred tax liabilities that are expected to reverse in the carryforward period. As of December 31, 2010, management had determined that it was “more likely than not” that certain deferred tax assets would be realized and the corresponding valuation allowance had been released based on the Company’s ability to utilize deferred tax assets currently and the expected future use of temporary differences in the carryback period. The Company did not release any valuation allowance during the six months ended June 30, 2011 as the evaluation of the realization of deferred tax assets was unchanged.

The estimated value of the Company’s tax positions at June 30, 2011 is a liability of $407,000. If the Company’s tax positions are sustained by the taxing authorities in favor of the Company, the Company’s liability would be reduced by $331,000, all of which would impact the Company’s tax provision. On a quarterly basis, the Company evaluates its tax positions and revises its estimates accordingly. The Company believes that $153,000 of its tax positions will be resolved within the next twelve months.

 

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Table of Contents

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE G — INCOME TAXES (continued)

 

The Company has identified the following jurisdictions as “major” tax jurisdictions: U.S. Federal, California, Massachusetts, Pennsylvania, New York and New Jersey. The Company is no longer subject to U.S. Federal income tax examinations for the years prior to 2009. The periods subject to examination for the Company’s major state jurisdictions are the years ended 2007 through 2010.

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 financial position, results of operations or cash flows as of and for the six months ended June 30, 2011 and 2010.

NOTE H — BUSINESS SEGMENTS

The Company operates in two reportable business segments; the Wholesale segment, the Company’s primary business, in which the Company designs, markets and distributes products to retailers and distributors, and the Retail Direct segment, in which the Company markets and sells to consumers through its Pfaltzgraff®, Mikasa®, Housewares Deals™ and Lifetime Sterling™ Internet websites.

The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. While both segments distribute similar products, the segments are distinct due to the different types of customers and the different methods the Company uses to sell, market and distribute the products.

Management evaluates the performance of the Wholesale 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, 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,
 
     2011     2010     2011     2010  
     (in thousands)  

Net sales

        

Wholesale

   $ 86,301      $ 81,530      $ 171,204      $ 163,640   

Retail Direct

     4,070        5,359        10,940        11,985   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 90,371      $ 86,889      $ 182,144      $ 175,625   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

        

Wholesale

   $ 7,136      $ 5,637      $ 10,050      $ 10,658   

Retail Direct

     (316     (288     (420     (418

Unallocated corporate expenses

     (2,469     (2,827     (5,302     (5,191
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income from operations

   $ 4,351      $ 2,522      $ 4,328      $ 5,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

        

Wholesale

   $ (1,931   $ (2,435   $ (3,906   $ (4,954

Retail Direct

     (89     (23     (109     (46
  

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization

   $ (2,020   $ (2,458   $ (4,015   $ (5,000
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE I — CONTINGENCIES

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

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

The Company has received no information and is not aware of any determination by the EPA that any remedial action is warranted for the Site; and, accordingly, is not able to estimate the extent of any possible liability.

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 of this litigation, individually or collectively, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

NOTE J OTHER

Cash Dividends

In March 2011, the Company resumed the declaration of cash dividends on its outstanding shares of common stock. Dividends declared in 2011 are as follows:

 

Dividend per share

  Date declared   Date of record   Payment date
$0.025   March 4, 2011   May 2, 2011   May 16, 2011
$0.025   June 27, 2011   August 2, 2011   August 16, 2011

On May 16, 2011, the Company paid cash dividends of $302,000, which reduced retained earnings. In the three months ended June 30, 2011, the Company reduced retained earnings for the accrual of $302,000 relating to the dividend payable on August 16, 2011.

 

Supplemental cash flow information    Six Months Ended
June 30,
 
     2011     2010  
     (in thousands)  

Supplemental disclosure of cash flow information:

  

Cash paid for interest

   $ 3,471      $ 3,710   

Cash paid for taxes

     5,169        1,110   

Non-cash investing activities:

    

Grupo Vasconia, S.A.B. translation adjustment

   $ (1,049   $ 130   

 

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Table of Contents

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2011

(unaudited)

 

NOTE J — OTHER (continued)

 

Comprehensive income (loss)    Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2011     2010     2011      2010  
     (in thousands)  

Net income (loss)

   $ 2,063      $ (981   $ 1,114       $ (252

Derivative fair value adjustment, net of taxes

     —          —          —           57   

Grupo Vasconia, S.A.B. foreign currency translation adjustment, net of taxes

     (176     (659     1,049         (79

Derivative hedge de-designation

     —          97        —           207   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

   $ 1,887      $ (1,543   $ 2,163       $ (67
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

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

We have reviewed the condensed consolidated balance sheet of Lifetime Brands, Inc. and subsidiaries (the “Company”) as of June 30, 2011, and the related condensed consolidated statements of operations and cash flows for the three and six month periods ended June 30, 2011 and 2010. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information 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 Public Company Accounting Oversight Board, 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.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with US generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company and subsidiaries as of December 31, 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended and in our report dated March 11, 2011, we expressed an unqualified opinion on those consolidated financial statements. The consolidated balance sheet of Grupo Vasconia, S.A.B. and Subsidiaries (a corporation in which the Company has a 30.21% interest) as of December 31, 2010, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein) were audited by other auditors whose report dated March 8, 2011 expressed an unqualified opinion on those statements. In the consolidated financial statements, the Company’s investment in Grupo Vasconia, S.A.B. and Subsidiaries is stated at $24.1 million at December 31, 2010 and the Company’s equity in the net income of Grupo Vasconia, S.A.B. and Subsidiaries is stated at $2.7 million for the year then ended.

/s/ ERNST & YOUNG LLP

Jericho, New York

August 5, 2011

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

There are a number of risks and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Important factors that could cause the Company’s actual results to differ materially from those expressed as forward-looking statements are set forth in the Company’s 2010 Annual Report on Form 10-K in Part I, Item 1A under the heading Risk Factors. Such risks, uncertainties and other important factors include, among others, risks related to:

 

   

General economic factors and political conditions;

 

   

Liquidity;

 

   

Supply chain;

 

   

Competition;

 

   

Customers;

 

   

Intellectual property;

 

   

Personnel;

 

   

Regulatory matters; and

 

   

Technology.

In 2011, the Company became subject to an additional risk of self insurance related to a substantial portion of health plans offered to employees. There may be other factors that may cause the Company’s actual results to differ materially from the forward-looking statements. Except as may be required by law, the Company undertakes no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

 

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Table of Contents

ABOUT THE COMPANY

The Company is one of North America’s leading resources for nationally branded kitchenware, tabletop, home décor and lifestyle products. The Company markets several product lines within each of its product categories and under most of the Company’s brands, primarily targeting moderate to premium price points, through every major level of trade. The Company believes it possesses certain competitive advantages based on its brands, its emphasis on innovation and new product development and its sourcing capabilities. The Company owns or licenses a number of the leading brands in its industry including Farberware®, Mikasa®, KitchenAid®, Pfaltzgraff®, Melannco®, Elements® and Cuisinart®. Historically, the Company’s sales growth has come from expanding product offerings within its product categories, by developing existing brands, acquiring new brands and establishing new product categories. Key factors in the Company’s growth strategy have been the selective use and management of the Company’s brands, and the Company’s ability to provide a stream of new products and designs. A significant element of this strategy is the Company’s in-house design and development teams that create new products, packaging and merchandising concepts.

BUSINESS SEGMENTS

The Company operates in two reportable business segments; the Wholesale segment, which is the Company’s primary business that designs, markets and distributes its products to retailers and distributors, and the Retail Direct segment in which the Company markets and sells to consumers through its Pfaltzgraff®, Mikasa®, Housewares Deals™ and Lifetime Sterling™ Internet websites.

EQUITY INVESTMENTS

The Company owns approximately 30% of the outstanding capital stock of Grupo Vasconia, S.A.B. (“Vasconia”), a leading Mexican housewares company. The Company accounts for its investment in Vasconia using the equity method of accounting and has recorded its proportionate share of Vasconia’s net income, net of taxes, as equity in earnings in the Company’s consolidated statements of operations. Pursuant to a Shares Subscription Agreement (the “Agreement”), the Company may designate four persons to be nominated as members of Vasconia’s Board of Directors. The Agreement also provides a mechanism whereby, through December 2012, the Company is able to acquire from certain shareholders of Vasconia a controlling interest in Vasconia; subject to such shareholders electing not to sell their interest and, instead, acquiring the Company’s shares or Vasconia repurchasing the Company’s shares. Shares of Vasconia’s capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange (www.bmv.com.mx). The Quotation Key is VASCONI.

The Company has a 50% joint venture investment in World Alliance Enterprises Limited, a Hong-Kong based company that primarily sells kitchenware and cutlery products to retailers other than in North and South America.

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 2010, 2009 and 2008, net sales for the third and fourth quarters accounted for 60%, 58%, 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to the Company’s critical accounting policies and estimates discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates included in the Company’s Annual Report on Form 10-K dated December 31, 2010, other than estimates related to the Company’s self insurance of certain portions of its health insurance plan beginning in 2011. The Company maintains an estimated accrual for unpaid claims and claims incurred but not reported (IBNR). Although management believes that it uses the best information available to estimate IBNR, actual claims may vary significantly from estimated claims.

 

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Table of Contents

RESULTS OF OPERATIONS

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

 

     Three Months  Ended
June 30,
    Six Months  Ended
June 30,
 
     2011     2010     2011     2010  

Net sales

     100.0     100.0     100.0     100.0

Cost of sales

     62.3        60.9        63.0        60.9   

Distribution expenses

     10.3        11.0        11.1        11.2   

Selling, general and administrative expenses

     22.6        25.1        23.6        25.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     4.8        3.0        2.3        2.8   

Interest expense

     (2.2     (3.0     (2.2     (2.9

Loss on early retirement of debt

     —          (0.9     —          (0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes and equity in earnings

     2.6        (0.9     0.1        (0.6

Income tax provision

     (1.2     (0.7     (0.3     (0.3

Equity in earnings, net of tax

     1.0        0.6        0.7        0.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     2.4     (1.0 )%      0.5     (0.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

THREE MONTHS ENDED JUNE 30, 2011 AS COMPARED TO THE THREE MONTHS ENDED

JUNE 30, 2010

Net Sales

Net sales for the three months ended June 30, 2011 were $90.4 million, an increase of 4.0% as compared to net sales of $86.9 million for the corresponding period in 2010.

Net sales for the Wholesale segment for the three months ended June 30, 2011 were $86.3 million, an increase of $4.8 million or 5.9%, as compared to net sales of $81.5 million for the corresponding period in 2010. Net sales for the Company’s Kitchenware product category increased by approximately $6.4 million for the three months ended June 30, 2011 as compared to the corresponding period in 2010. The increase in the Company’s Kitchenware product category was primarily attributable to increased volumes due, in part, to successful new programs and promotions during the period as compared to the corresponding period in 2010. Net sales for the Company’s Tabletop product category increased approximately $3.1 million for the three months ended June 30, 2011 as compared to the corresponding period in 2010. The Tabletop product category sales increase was primarily attributable to higher volumes related to the success of certain dinnerware lines and promotions of dinnerware. Net sales for the Company’s Home Décor product category decreased approximately $4.7 million for the three months ended June 30, 2011 as compared to the corresponding period in 2010. The decrease in sales for the Company’s Home Décor product category reflects lower volumes due, in part, to certain sales programs in 2010 not repeated in the 2011 period as well as reductions in certain customer inventory levels.

Net sales for the Retail Direct segment for the three months ended June 30, 2011 were $4.1 million, a decrease of $1.3 million, or 24.1%, as compared to $5.4 million for the corresponding period in 2010. The decrease in net sales was primarily attributable to a reduction in promotional activities and the Company’s decision to terminate its print consumer catalog.

 

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Table of Contents

Cost of sales

Cost of sales for the three months ended June 30, 2011 was $56.3 million as compared to $52.9 million for the corresponding period in 2010. Cost of sales as a percentage of net sales was 62.3% for the three months ended June 30, 2011 as compared to 60.9% for the corresponding period in 2010.

Cost of sales as a percentage of net sales for the Wholesale segment was 63.8% for the three months ended June 30, 2011 as compared to 62.8% for the corresponding period in 2010. Gross margin declined in the three months ended June 30, 2011 reflecting changes in product mix.

Cost of sales as a percentage of net sales for the Retail Direct segment decreased to 32.0% for the three months ended June 30, 2011 from 33.2% for the corresponding period in 2010. Gross margin increased in the three months ended June 30, 2011 as a result of reduced promotional activities which favorably affected margins during the 2011 period.

Distribution expenses

Distribution expenses for the three months ended June 30, 2011 were $9.3 million compared to $9.6 million for the corresponding period in 2010. Distribution expenses as a percentage of net sales were 10.3% for the three months ended June 30, 2011 compared to 11.0% for the corresponding period in 2010.

Distribution expenses as a percentage of sales for the Wholesale segment, shipped from the Company’s warehouses, were 10.4% for the three months ended June 30, 2011 and the three months ended June 30, 2010.

Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 29.7% for the three months ended June 30, 2011 compared to 27.6% for the corresponding period in 2010. The percentage increase is the result of the decrease in sales during the period.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 30, 2011 were $20.4 million, a decrease of 6.4%, from $21.8 million for the corresponding period in 2010.

Selling, general and administrative expenses for the three months ended June 30, 2011 for the Wholesale segment were $16.0 million, a decrease of $0.6 million or 3.6%, from $16.6 million for the corresponding period in 2010. As a percentage of net sales, selling, general and administrative expenses were 18.5% for the three months ended June 30, 2011 compared to 20.4% for the corresponding period in 2010. The decrease was primarily attributable to lower office related expenses.

Selling, general and administrative expenses for the three months ended June 30, 2011 for the Retail Direct segment were $1.9 million as compared to $2.4 million for the corresponding period in 2010. The decrease was primarily attributable to a decrease in employee, selling and office related expenses associated with the Company’s decision to terminate its print consumer catalog.

Unallocated corporate expenses for the three months ended June 30, 2011 and 2010 were $2.5 million and $2.8 million, respectively. The decrease was attributable primarily to a reduction in certain professional fees during the 2011 period as compared to the corresponding period in 2010.

Interest expense

Interest expense for the three months ended June 30, 2011 was $2.0 million compared to $2.6 million for the corresponding period in 2010. The decrease in interest expense in the 2011 period was attributable to lower average borrowings and lower interest rates as compared to those in the corresponding period in 2010.

Loss on early retirement of debt

In June 2010, the Company refinanced its prior revolving credit facility and repurchased $50.9 million principal amount of its Notes. In connection therewith, the Company recorded a non-cash pre-tax charge of approximately $764,000 consisting primarily of the write-off of deferred financing costs and unamortized debt discount related to these debt instruments.

 

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Table of Contents

Income tax provision

The income tax provision for the three months ended June 30, 2011 was $1.1 million as compared to $573,000 for the corresponding period in 2010. The Company’s effective tax rate for the three months ended June 30, 2011 was 47.9% as compared to 64.7% for the corresponding period in 2010. The effective tax rate for the quarter ended June 30, 2011 reflects taxes on income derived from U.S. sources. The rate is higher than the statutory rate primarily as a result of foreign losses without benefit as their use is limited. For the three months ended June 30, 2010, the effective tax rate reflects an expense for certain deferred taxes that reversed as a result of the repurchase of the Notes and the corresponding change in valuation allowance.

Equity in earnings

Equity in the earnings of Grupo Vasconia was $544,000 and $478,000 for the three months ended June 30, 2011 and 2010, respectively. Grupo Vasconia reported income from operations for the 2011 quarter of $3.1 million as compared to $3.4 million for the corresponding period in 2010 and net income of $2.1 million compared to $1.8 million for the corresponding period in 2010. Net income in the 2011 period reflects higher sales and gross margins related to kitchenware products and improved results related to more effective hedging activities as compared to the corresponding period in 2010, which were partially offset by lower margins related to sales of aluminum disks reflecting an increase in the cost of aluminum.

Equity in earnings for the three months ended June 30, 2011 also includes $315,000 derived from the 50% joint venture investment in World Alliance Enterprises Limited. This reflects the cumulative results of this investment through June 30, 2011. Operating activities of this investment for the remainder of 2011 are expected to be immaterial.

SIX MONTHS ENDED JUNE 30, 2011 AS COMPARED TO THE SIX MONTHS ENDED

JUNE 30, 2010

Net Sales

Net sales for the six months ended June 30, 2011 were $182.1 million, an increase of 3.7%, as compared to net sales of $175.6 million for the corresponding period in 2010.

Net sales for the Wholesale segment for the six months ended June 30, 2011 were $171.2 million, an increase of $7.6 million or 4.6%, as compared to $163.6 million for the corresponding period in 2010. Net sales for the Wholesale segment included $3.4 million of sales of excess sterling silver inventory and silver products produced under manufacturing contracts, an increase of $2.8 million over the corresponding period in 2010. Net sales for the Company’s Kitchenware product category increased by approximately $6.1 million for the six months ended June 30, 2011 as compared to the corresponding period in 2010. The increase in the Company’s Kitchenware product category was primarily attributable to increased volumes due, in part, to successful new programs and promotions during the period as compared to the corresponding period in 2010. Net sales for the Company’s Tabletop product category increased approximately $7.9 million (including the $2.8 million increase in sales from excess sterling silver finished goods inventory and sterling silver products produced under manufacturing contracts) for the six months ended June 30, 2011 as compared to the corresponding period in 2010. Excluding the sterling silver product sales noted above, the Tabletop product category sales increase was primarily attributable to higher volumes related to the success of certain dinnerware lines and promotions of dinnerware. Net sales for the Company’s Home Décor product category decreased approximately $6.4 million for the six months ended June 30, 2011 as compared to the corresponding period in 2010. The decrease in sales from the Company’s Home Décor product category reflects lower volumes due, in part, to certain sales programs in 2010 not repeated in the 2011 period.

Net sales for the Retail Direct segment for the six months ended June 30, 2011 were $10.9 million, a decrease of $1.1 million or 9.2%, as compared to $12.0 million for the corresponding period in 2010. The decrease in net sales was primarily attributable to a reduction in promotional activities and the Company’s decision to terminate its print consumer catalog.

 

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Cost of sales

Cost of sales for the six months ended June 30, 2011 was $114.7 million as compared to $106.9 million for the corresponding period in 2010. Cost of sales as a percentage of net sales was 63.0% for the six months ended June 30, 2011 as compared to 60.9% for the corresponding period in 2010.

Cost of sales as a percentage of net sales for the Wholesale segment was 64.9% for the six months ended June 30, 2011 as compared to 62.9% for the corresponding period in 2010. Gross margin decreased in the six months ended June 30, 2011 reflecting changes in product mix and increased low margin sales of excess inventory and products produced under manufacturing contracts. Gross margin in the 2010 period benefited from favorable product mix and lower royalty expenses as the Company allowed unprofitable licenses to expire.

Cost of sales as a percentage of net sales for the Retail Direct segment decreased to 33.1% for the six months ended June 30, 2011 from 33.3% for the corresponding period in 2010. The increase in gross margin was due to reduced promotional activities which favorably affected margins during the period.

Distribution expenses

Distribution expenses for the six months ended June 30, 2011 were $20.2 million as compared to $19.7 million for the corresponding period in 2010. Distribution expenses as a percentage of net sales were 11.1% for the six months ended June 30, 2011 compared to 11.2% for the corresponding period in 2010.

Distribution expenses as a percentage of sales for the Wholesale segment, shipped from the Company’s warehouses, were 10.6% for the six months ended June 30, 2011 as compared to 10.1% for the corresponding period in 2010. The increase is the result of additional equipment rental expenses and higher freight-out costs.

Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 29.1% for the six months ended June 30, 2011 as compared to 28.1% for the corresponding period in 2010. The percentage increase is the result of the decrease in sales during the period.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 30, 2011 were $42.9 million, a decrease of 2.5%, as compared to $44.0 million for the corresponding period in 2010.

Selling, general and administrative expenses for the six months ended June 30, 2011 for the Wholesale segment were $33.0 million, a decrease of $0.7 million or 2.1%, as compared to $33.7 million for the corresponding period in 2010. As a percentage of net sales, selling, general and administrative expenses were 19.3% for the six months ended June 30, 2011 as compared to 20.6% for the corresponding period in 2010. The decrease was attributable to a reduction in bad debt expense and lower office related expenses.

Selling, general and administrative expenses for the six months ended June 30, 2011 for the Retail Direct segment were $4.6 million as compared to $5.1 million for the corresponding period in 2010. The decrease was primarily attributable to a decrease in employee, selling and office related expenses associated with the Company’s decision to terminate its print consumer catalog.

Unallocated corporate expenses for the six months ended June 30, 2011 and 2010 were $5.3 million and $5.2 million, respectively. The increase in the 2011 period was primarily attributable to an increase in employee expenses which was offset by a decrease in certain professional fees.

Interest expense

Interest expense for the six months ended June 30, 2011 was $4.0 million as compared to $5.1 million for the corresponding period in 2010. The decrease in interest expense was primarily attributable to lower average borrowings and lower interest rates in the 2011 period.

Loss on early retirement of debt

In June 2010, the Company refinanced its prior revolving credit facility and repurchased $50.9 million principal amount of its Notes. In connection therewith, the Company recorded a non-cash pre-tax charge of approximately $764,000 consisting primarily of the write-off of deferred financing costs and unamortized debt discount related to these debt instruments.

 

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Income tax provision

The income tax provision for the six months ended June 30, 2011 was $520,000 as compared to $612,000 for the corresponding period in 2010. The Company’s effective tax rate for the six months ended June 30, 2011 was 167.7% as compared to 77.7% for the corresponding period in 2010. The effective tax rate in the six months ended June 30, 2011 reflects taxes on income derived from U.S. sources. The rate is higher than the statutory rate primarily as a result of foreign losses without benefit as their use is limited. The income tax provision for the six months ended June 30, 2010 reflects an expense for certain deferred taxes that reversed as a result of the repurchase of the Notes and the corresponding change in valuation allowance.

Equity in earnings

Equity in the earnings of Grupo Vasconia was $1.0 million and $1.1 million for the six months ended June 30, 2011 and 2010, respectively. Grupo Vasconia reported income from operations for the six months ended June 30, 2011 of $6.5 million as compared to $6.9 million for the corresponding period in 2010 and net income of $4.2 million as compared to $4.1 million for the corresponding period in 2010. Net income in the 2011 period reflects higher sales and gross margins related to kitchenware products and improved results related to more effective hedging activities as compared to the corresponding period in 2010, which were partially offset by lower margins related to sales of aluminum disks reflecting an increase in the cost of aluminum.

Equity in earnings for the six months ended June 30, 2011 also includes $315,000 derived from the 50% joint venture investment in World Alliance Enterprises Limited. This reflects the cumulative results of this investment through June 30, 2011. Operating activities of this investment for the remainder of 2011 are expected to be immaterial.

LIQUIDITY AND CAPITAL RESOURCES

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

Revolving Credit Facility

The Company has a $125.0 million secured credit agreement (the “Revolving Credit Facility”), which matures on June 9, 2015, with a bank group led by JPMorgan Chase Bank, N.A. At June 30, 2011, borrowings outstanding under the Revolving Credit Facility were $17.4 million and open letters of credit were $1.4 million.

Borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at one of the following rates: (i) the Alternate Base Rate, defined as the greater of the Prime Rate, Federal Funds Rate plus 0.5% or the Adjusted LIBOR rate plus 1.0%, plus a margin of 1.25% to 1.75%, or (ii) the Eurodollar Rate, defined as the Adjusted LIBOR Rate plus a margin of 2.25% to 2.75%. The respective margin is based upon availability. Interest rates on outstanding borrowings at June 30, 2011 ranged from 2.50% to 4.50%. In addition, the Company pays a commitment fee of 0.50% on the unused portion of the Revolving Credit Facility. Availability under the Revolving Credit Facility was approximately 58.1% of the total loan commitment at June 30, 2011. On July 15, 2011, the Company retired the $24.1 million aggregate principal amount of the Notes with borrowings from the Revolving Credit Facility.

Pursuant to the provisions of ASC Topic No. 470-10, Short-term Obligations Expected to be Refinanced, at June 30, 2011 the Company classified the Revolving Credit Facility as a long-term liability based on the Company’s intent and ability to repay the loan from cash flows from operations which are not expected to occur within the year. Repayments and borrowings under the facility can vary significantly from planned levels based on cash flow needs or general economic conditions. The Company expects that it will continue to borrow and repay funds under the facility based on working capital needs which is subject to availability.

Term Loan

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

The Term Loan bears interest, at the Company’s option, at one of the following rates: (i) the Alternate Base Rate, defined as the greater of the corporate rate published by the lender and the Federal Funds Rate plus 0.50% provided that such calculated rate is a minimum of 2.50%, plus a margin of 7.50%, or (ii) the Adjusted LIBOR rate which shall be a minimum of 1.50%, plus a margin of 8.50%. The interest rate on the outstanding borrowings at June 30, 2011 was 10.0%.

The Term Loan requires the Company to have EBITDA, as defined, of not less than $30.0 million for the trailing four

 

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fiscal quarters and limited capital expenditures to $7.5 million for the year ending December 31, 2011. The Company was in compliance with these financial covenants at June 30, 2011.

Consolidated EBITDA for the four quarters ended June 30, 2011 was $41.3 million and was determined as follows:

 

Consolidated EBITDA for the four quarters ended

June 30, 2011

 
(in thousands)  

Three months ended June 30, 2011

   $ 7,512   

Three months ended March 31, 2011

     2,720   

Three months ended December 31, 2010

     17,544   

Three months ended September 30, 2010

     13,529   
  

 

 

 

Total for the four quarters

   $ 41,305   
  

 

 

 

Capital expenditures for the six months ended June 30, 2011 were $2.1 million.

Non-GAAP financial measure

Consolidated EBITDA is a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The following is a reconciliation of the net income (loss) as reported to Consolidated EBITDA for the three and six months ended June 30, 2011 and 2010:

 

     Three Months  Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (in thousands)  

Net income (loss) as reported

   $ 2,063      $ (981   $ 1,114      $ (252

Subtract out:

        

Undistributed equity earnings

     (393     (82     (858     (752

Add back:

        

Income tax provision

     1,108        573        520        612   

Interest expense

     2,039        2,644        4,018        5,073   

Depreciation and amortization

     2,020        2,458        4,015        5,000   

Stock compensation expense

     675        741        1,423        1,400   

Loss on early retirement of debt

     —          764        —          764   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated EBITDA

   $ 7,512      $ 6,117      $ 10,232      $ 11,845   
  

 

 

   

 

 

   

 

 

   

 

 

 

Convertible Notes

At June 30, 2011, the Company had outstanding $24.1 million aggregate principal amount of 4.75% Convertible Senior Notes (the “Notes”) due July 15, 2011. Pursuant to the provisions of ASC Topic No. 470-10, the Company classified the Notes as a long-term liability based on the Company’s intent and ability to repay the Notes with borrowings from the Revolving Credit Facility. On July 15, 2011, the Company retired the $24.1 million aggregate principal amount of the Notes with borrowings from the Revolving Credit Facility.

Operating activities

Cash used in operating activities was $2.3 million for the six months ended June 30, 2011 as compared to cash provided by operating activities of $11.1 million for the corresponding period in 2010. The decrease was primarily attributable to a decrease in accounts payable and payment of income taxes partially offset by a decrease in accounts receivable.

Investing activities

Cash used in investing activities was $2.1 million for the six months ended June 30, 2011 as compared to $1.3 million for the corresponding period in 2010. The increase was primarily attributable to computer software and hardware purchases as well as equipment purchases for the Company’s distribution facilities.

 

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Financing activities

Cash provided by financing activities was $2.9 million for the six months ended June 30, 2011 as compared to cash used in financing activities of $9.7 million for the corresponding period in 2010. In the 2011 period, net proceeds from the Company’s borrowings were $3.3 million as compared to $44.2 million for the corresponding period in 2010. In the 2010 period, the Company entered into the Revolving Credit Facility and Term Loan and utilized funds from these new facilities to repay amounts outstanding under the Company’s prior credit facility and repurchase $50.9 million principal amount of its Notes. On July 15, 2011, the Company retired the $24.1 million aggregate principal amount of the Notes with proceeds from the Revolving Credit Facility.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of June 30, 2011, that the Company’s controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed by it under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Controls

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

 

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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

The Company has received no information and is not aware that the EPA has determined that any remedial action is warranted; and, accordingly, is not able to estimate the extent of any possible liability.

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 of this litigation, individually or collectively, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s 2010 Annual Report on Form 10-K, other than for the addition of a risk related to the Company’s self insurance of a substantial portion of its health plans beginning in 2011.

Item 6. Exhibits

 

Exhibit No.  
31.1   Certification by Jeffrey Siegel, Chief Executive Officer and President, pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification by Laurence Winoker, Senior Vice President – Finance, Treasurer and Chief Financial Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1   Certification by Jeffrey Siegel, Chief Executive Officer and President, and Laurence Winoker, Senior Vice President – Finance, Treasurer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   Interactive data files pursuant to Rule 405 of Regulation S-T. The following materials from Lifetime Brands, Inc.’s Quarterly Report of Form 10-Q for the quarter ended June 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statement of Cash Flows, and (iv) Notes to the Unaudited Condensed Consolidated Financial Statements, tagged as blocks of text.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Lifetime Brands, Inc.      
 

/s/ Jeffrey Siegel

    August 8, 2011  
  Jeffrey Siegel      
  Chief Executive Officer and President
  (Principal Executive Officer)
 

/s/ Laurence Winoker

    August 8, 2011  
  Laurence Winoker      
  Senior Vice President – Finance, Treasurer and Chief Financial Officer  
  (Principal Financial and Accounting Officer)      

 

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