What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-21 · 237 added, 121 removed, 234 unchanged (60% of the section changed)

4 unchanged sentences

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 are intended to identify forward-looking statements.

When used in this Quarterly Report on Form 10-Q, the words “estimates,” “expects,” “predicts,” “plans,” “believes,” “may,” “should,” “would,” and variations of such words or similar expressions are intended to identify forward-looking statements.

All forward-looking statements, including, without limitation, those based on the Company’s examination of historical operating trends, are based upon the Company’s current expectations and various assumptions.

18 unchanged sentences

• Foreign exchange rates;

• International trade and transportation;

• International trade, including trade negotiations;

• Transportation;

• Product liability;

11 unchanged sentences

• Public health pandemics, such as COVID-19;

• Social unrest, including related protests or disturbances.

There may be other factors that may cause the Company’s actual results to differ materially from the forward-looking statements.

Except as may be required by law, the Company undertakes no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

The Company is required to file its Annual Reports on Forms 10-K, Quarterly Reports on Forms 10-Q, Current Reports on Form 8-K, and other reports and documents as required from time to time with the United States Securities and Exchange Commission (the “SEC”).

The Company also maintains a website at http://www.lifetimebrands.com .

Information contained on this website is not a part of or incorporated by reference into this Annual Report.

The Company makes available on its website the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports as soon as reasonably practicable after these reports are filed with or furnished to the SEC.

Users can access these reports free of charge on the Company’s website.

The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company’s electronic filings with the SEC at http://www.sec.gov.

The Company intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD.

Such disclosures will be included on the Company’s website in the ‘Investor Relations’ section.

Accordingly, investors should monitor such portion of the Company's website, in addition to following the Company's press releases, SEC filings and public conference calls and webcasts.

ABOUT THE COMPANY

8 unchanged sentences

The Company owns or licenses a number of leading brands in its industry, including Farberware ® , Mikasa ® , Taylor ® , KitchenAid ® , KitchenCraft ® , Pfaltzgraff ® , Built NY ® , Rabbit ® , Kamenstein ® , and MasterClass®.

Historically, the Company’s sales growth has come from expanding product offerings within its product categories, 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.

16 unchanged sentences

The Company accounts for its investment in Vasconia using the equity method of accounting and records its proportionate share of Vasconia’s net income in the Company’s condensed consolidated statements of operations.

Accordingly, the Company has recorded its proportionate share of Vasconia’s net income (reduced for amortization expense related to the customer relationships acquired) for the three months ended March 31, 2020 and 2019 in the accompanying unaudited condensed consolidated statements of

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, 2020 and 2019 in the accompanying unaudited condensed consolidated statements of operations.

Pursuant to a Shares Subscription Agreement, the Company may designate four persons to be nominated as members of Vasconia’s Board of Directors.

As of March 31, 2020, Vasconia’s Board of Directors is comprised of twelve members of whom the Company has designated three members.

As of June 30, 2020, Vasconia’s Board of Directors is comprised of fourteen members of whom the Company has designated three members.

The Company’s business and working capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters.

2 unchanged sentences

Consistent with the seasonality of the Company’s net sales and inventory levels, the Company also experiences seasonality in its inventory turnover and turnover days from one quarter to the next.

The Company expects that the COVID-19 pandemic will lead to shifts in some of its selling and purchasing cycles as customers are likely to deviate from their typical ordering patterns.

The COVID-19 pandemic has led, and may continue to lead, to shifts in some of the Company's selling and purchasing cycles as customers deviate from their historical ordering patterns.

RESTRUCTURING

During the three months ended March 31, 2020 the Company did not incur any restructuring expenses.

During the three and six months ended June 30, 2020, the Company's international segment incurred $0.3 million of restructuring expenses related to severance associated with the strategic reorganization of the international segment’s product development and sales workforce.

The strategic reorganization is the result of the Company's efforts for product development efficiencies and a country tailored international sales approach.

As of June 30, 2020, $0.2 million of severance was accrued.

The Company does not expect to incur any additional restructuring charges for these strategic reorganization efforts for the remainder of 2020.

During the three and six months ended June 30, 2019, the Company incurred $0.1 million and $0.4 million, respectively, of Filament restructuring charges, primarily related to severance.

During the three and six months ended June 30, 2019, the Company incurred $0.1 million and $0.4 million of restructuring expenses, primarily related to severance, for the integration of its legal entities operating in Europe.

In 2018, the Company finalized its integration plans for its European operations and took further steps to consolidate its operations.

RECENT DEVELOPMENTS

In March 2020, the World Health Organization declared COVID-19 a global pandemic.

The pandemic has resulted in a significant reduction in traditional retail traffic due to changes in consumer behavior as individuals are being encouraged to practice social distancing, and other restrictions have been mandated by foreign, federal, state and local governments, such as closure of non-essential businesses or reduced operating hours for businesses.

This reduction in traditional retail traffic resulted in a decline in global demand for the Company’s products from the Company's brick-and-mortar retail customers in the second half of March.

The Company expects this decline in demand from brick-and-mortar retail customers to continue while social distancing and other restrictions mandated by foreign, federal, state and local governments remain in place.

As of May 21, 2020, the Company’s distribution centers remain operational despite labor concerns and continue to support e-commerce and certain brick-and-mortar retail customers that have remained open.

The Company has not experienced disruptions in its supply chain related to the COVID-19 pandemic to date.

In response to the current conditions, the Company's Board of Directors postponed the record and payment date of the quarterly dividend declared on March 10, 2020.

Additionally, to secure the Company’s liquidity position and provide financial flexibility given uncertain market conditions, the Company drew $43.1 million on its revolving credit facility.

See the subsection below entitled "Liquidity and Capital Resources" for further details.

The virus has continued to plague the United States and the rest of the world.

The pandemic has resulted in an increase in sales of certain of the Company’s products as well as a decrease in sales in other of its products.

The Company has experienced a significant reduction in sales at certain retailers which have been closed or have had a limited number of stores that are open during the pandemic.

This reduction in sales has been offset by higher sales at retailers that have remained open.

Many of the retailers that remain open provide products that are deemed essential.

In addition, the Company's e-commerce sales have increased during the pandemic.

The Company’s distribution centers remain operational and continue to support e-commerce and brick-and-mortar retail customers.

The Company has not experienced disruptions in its supply chain related to the COVID-19 pandemic.

However, in limited instances and categories, increased demand has strained the manufacturing capacity of certain of the Company’s suppliers.

In response to the COVID-19 pandemic, the Company announced and implemented cost reductions in April 2020.

Also in April 2020, the Company's Board of Directors authorized the postponement of the Company's quarterly cash dividend, which was to be paid on May 15, 2020, to shareholders of record on May 1, 2020.

The Company set November 16, 2020 as the new record date for such dividend payable on December 16, 2020.

The Company cannot estimate the length or severity of this pandemic.

However the Company believes that it could have a material adverse impact on its future sales, results of operations, and cash flows, including the potential impairment of certain intangible and other long-lived assets.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

3 unchanged sentences

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

5 unchanged sentences

Goodwill and other impairments

Loss from operations

Income (loss) from operations

2.9 (8.8) (7.1) (5.1)

Interest expense (2.8) (3.5) (3.0) (3.4)

Mark to market loss on interest rate derivatives (1.6) —

Loss before income taxes and equity in earnings (losses)

Income tax benefit

Equity in earnings (losses), net of taxes

Mark to market (loss) gain on interest rate derivatives

(0.1) 0.2 (0.8) 0.1

Loss before income taxes and equity in losses

— (12.1) (11.0) (8.4)

Income tax (provision) benefit

(2.0) 4.1 0.2 2.8

Equity in losses, net of taxes

(0.6) — (0.1) (0.1)

(2.6) % (8.0) % (10.9) % (5.7) %

MANAGEMENT’S DISCUSSION AND ANALYSIS

THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THE THREE MONTHS ENDED

MARCH 31, 2019

Consolidated net sales for the three months ended March 31, 2020 were $145.1 million, representing a decrease of $4.8 million, or 3.2%, as compared to net sales of $149.9 million for the corresponding period in 2019.

In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2020 average rates to 2019 local currency amounts, net sales decreased by $4.7 million, or 3.1%, as compared to consolidated net sales in the corresponding period in 2019.

THREE MONTHS ENDED JUNE 30, 2020 COMPARED TO THE THREE MONTHS ENDED

JUNE 30, 2019

Consolidated net sales for the three months ended June 30, 2020 were $150.1 million, representing an increase of $7.6 million, or 5.3%, as compared to net sales of $142.5 million for the corresponding period in 2019.

In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2020 average rates to 2019 local currency amounts, consolidated net sales increased by $8.2 million, or 5.8%, as compared to consolidated net sales in the corresponding period in 2019.

Net sales for the U.S.

segment for the three months ended March 31, 2020 were $129.2 million, an increase of $2.2 million, or 1.7%, as compared to net sales of $127.0 million for the corresponding period in 2019.

segment for the three months ended June 30, 2020 were $132.6 million, an increase of $9.5 million, or 7.7%, as compared to net sales of $123.1 million for the corresponding period in 2019.

Net sales for the U.S.

segment’s Kitchenware product category were $79.3 million for the three months ended March 31, 2020, an increase of $10.0 million, or 14.4%, as compared to $69.3 million for the corresponding period in 2019.

The increase was attributable to the continuance of promotional programs that commenced in the latter part of 2019 for tools and gadgets, cutlery and bakeware in addition to increased e-commerce sales.

segment’s Kitchenware product category were $84.4 million for the three months ended June 30, 2020, an increase of $18.8 million, or 28.7%, as compared to $65.6 million for the corresponding period in 2019.

The increase was mainly driven by higher consumer demand in the e-commerce and wholesale channels for essential kitchen tools and gadgets, cutlery and boards and bakeware products.

Net sales for the U.S.

segment’s Tableware product category were $23.6 million for the three months ended March 31, 2020, a decrease of $2.9 million, or 10.9%, as compared to $26.5 million for the corresponding period in 2019.

The decrease was primarily driven by lower sales of dinnerware products to brick-and-mortar retailers;

segment’s Tableware product category were $23.6 million for the three months ended June 30, 2020, a decrease of $5.2 million, or 18.1%, as compared to $28.8 million for the corresponding period in 2019.

The decrease was primarily driven by lower sales of dinnerware products to brick-and-mortar retailers which were closed for most of the period as a result of the COVID-19 pandemic.

This decrease was partially offset by increased e-commerce sales.

Net sales for the U.S.

segment’s Home Solutions product category were $26.3 million for the three months ended March 31, 2020, a decrease of $5.0 million, or 16.0%, as compared to $31.3 million for the corresponding period in 2019.

segment’s Home Solutions product category were $24.6 million for the three months ended June 30, 2020, a decrease of $4.1 million, or 14.3%, as compared to $28.7 million for the corresponding period in 2019.

The decrease was driven by lower sales in the private label hydration category.

Net sales for the International segment were $15.9 million for the three months ended March 31, 2020, a decrease of $7.0 million, or 30.6%, as compared to net sales of $22.9 million for the corresponding period in 2019.

Net sales for the International segment were $17.5 million for the three months ended June 30, 2020, a decrease of $1.9 million, or 9.8%, as compared to net sales of $19.4 million for the corresponding period in 2019.

In constant currency, which excludes the impact of foreign exchange fluctuations, net sales decreased $1.3 million, or 6.7%, as compared to consolidated net sales in the corresponding period in 2019.

The decrease in sales, and sales in constant currency, was primarily due to lower sales to brick-and-mortar retailers as a result of lower demand and closures due to COVID-19.

Gross margin for the three months ended March 31, 2020 was $52.9 million, or 36.5%, as compared to $54.3 million, or 36.2%, for the corresponding period in 2019.

The decrease in sales, and sales in constant currency, was primarily due to lower sales to brick-and-mortar retailers as a result of lower demand and closures due to COVID-19, offset by increased e-commerce sales due to higher customer demand in online channels.

Gross margin for the three months ended June 30, 2020 was $54.2 million, or 36.1%, as compared to $44.0 million, or 30.9%, for the corresponding period in 2019.

Gross margin for the U.S.

segment was $49.3 million, or 38.2%, for the three months ended March 31, 2020, as compared to $46.3 million, or 36.5%, for the corresponding period in 2019.

The increase in gross margin percentage was primarily due to changes in product mix.

Gross margin for the International segment was $3.6 million, or 22.9%, for the three months ended March 31, 2020, as compared to $8.0 million, or 34.9%, for the corresponding period in 2019.

The decrease in gross margin percentage was primarily due to increased sales allowances granted to customers in the 2020 period, in addition to a decrease in sales against a period over period comparable amount of fixed import and warehouse inventoriable costs.

segment was $49.8 million, or 37.6%, for the three months ended June 30, 2020, as compared to $36.7 million, or 29.8%, for the corresponding period in 2019.

Gross margin in the 2019 period reflects an $8.5 million charge for the SKU rationalization initiative.

Excluding the SKU rationalization the gross margin would have been 36.7%.

The increase in gross margin, excluding the SKU rationalization change, was primarily due to changes in product mix.

Gross margin for the International segment was $4.4 million, or 24.8%, for the three months ended June 30, 2020, as compared to $7.3 million, or 37.6%, for the corresponding period in 2019.

The decrease in gross margin percentage was driven by higher inventory reserves and lower sales to independent retailers a result of lower demand and store closures due to COVID-19.

Distribution expenses

Distribution expenses for the three months ended March 31, 2020 were $16.6 million, as compared to $15.9 million for the corresponding period in 2019.

Distribution expenses as a percentage of net sales were 11.4% for the three months ended March 31, 2020, as compared to 10.6% for the three months ended March 31, 2019.

Distribution expenses for the three months ended June 30, 2020 were $15.2 million, as compared to $15.5 million for the corresponding period in 2019.

Distribution expenses as a percentage of net sales were 10.1% for the three months ended June 30, 2020, as compared to 10.9% for the three months ended June 30, 2019.

Distribution expenses as a percentage of net sales for the U.S.

segment were approximately 9.8% and 10.4% for the three months ended March 31, 2020 and 2019, respectively.

Distribution expenses during the three months ended March 31, 2019 include $0.2 million for the Company’s facility relocation efforts of its west coast distribution facility.

segment were approximately 8.8% and 10.4% for the three months ended June 30, 2020 and 2019, respectively.

As a percentage of sales shipped from the Company’s U.S.

warehouses, excluding relocation expenses, distribution expenses were 9.8% and 10.8% for

the three months ended March 31, 2020 and 2019, respectively.

The improvement reflects the continued realization of labor management efficiency and the leverage benefit of fixed costs on higher sales volume.

Distribution expenses as a percentage of net sales for the International segment were 24.7% for the three months ended March 31, 2020, compared to 11.6% for the corresponding period in 2019.

Distribution expenses during the three months ended March 31, 2020 include $0.8 million for the Company’s facility relocation costs.

warehouses distribution expenses were 9.0% and 11.8% for the three months ended June 30, 2020 and 2019, respectively.

The improvement reflects the continued realization of labor management efficiency, realized synergy savings and the leverage benefit of fixed costs on higher sales volume.

Distribution expenses as a percentage of net sales for the International segment were 19.9% for the three months ended June 30, 2020, compared to 13.9% for the corresponding period in 2019.

Distribution expenses during the three months ended June 30, 2020 include $0.3 million for the Company’s facility relocation costs.

As a percentage of sales shipped from the Company’s U.K.

warehouses, excluding the moving and relocation costs for U.K.

operations, distribution expenses were 15.9% and 11.6% for the three months ended March 31, 2020 and 2019, respectively.

The increase is primarily attributed to temporary labor inefficiencies associated with setting up the new U.K.

operations, distribution expenses were 15.0% and 14.5% for the three months ended June 30, 2020 and 2019, respectively.

The increase was primarily attributed to higher labor costs associated with increased e-commerce channel sales.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 30, 2020 were $34.4 million, a decrease of $6.5 million, or 15.9%, as compared to $40.9 million for the corresponding period in 2019.

Selling, general and administrative expenses for the U.S.

segment were $25.0 million for the three months ended June 30, 2020, as compared to $28.9 million for the corresponding period in 2019.

As a percentage of net sales, selling, general and administrative expenses were 18.9% and 23.5% for the three months ended June 30, 2020 and 2019, respectively.

The decrease was primarily attributable to lower expenses resulting from the Company's cost reduction strategy in response to the COVID-19 pandemic, as well as lower selling and marketing expenses.

Selling, general and administrative expenses for the International segment were $4.4 million for the three months ended June 30, 2020, as compared to $7.0 million for the corresponding period in 2019.

Unallocated corporate expenses were $5.0 million for the three months ended June 30, 2020 and 2019.

Restructuring expenses

During the three months ended June 30, 2020, the Company's international segment incurred $0.3 million, of restructuring expenses related to severance associated with the strategic reorganization of the international segment’s product development and sales workforce.

The strategic reorganization is the result of the Company's efforts for product development efficiencies and a country tailored international sales approach.

During the three months ended June 30, 2019, the Company incurred $0.1 million of Filament restructuring charges and $0.1 million of restructuring expenses, primarily related to severance, for the integration of its legal entities operating in Europe.

Interest expense

Interest expense was $4.2 million for the three months ended June 30, 2020 and $5.0 million for the three months ended June 30, 2019 as a result of lower debt outstanding and a lower interest rate environment.

Mark to market (loss) gain on interest rate derivatives

Mark to market loss on interest rate derivatives was $0.2 million for the three months ended June 30, 2020 as compared to a mark to market gain on interest rate derivatives of $0.4 million for the three months ended June 30, 2019.

The decrease was primarily driven by mark to market fair value fluctuations on the Company's interest rate derivatives.

These derivatives were entered into for purposes of locking-in a fixed interest rate on the Company's variable interest rate debt.

The current period loss was caused by lower interest rates as compared to the three months ended June 30, 2019.

The intent of the Company is to hold these derivative contracts until their maturity.

Therefore, the Company expects that this loss will reverse over time.

Income tax (provision) benefit

The provision for income taxes includes federal, foreign, state and local income taxes.

The Company used a discrete effective tax rate method to calculate taxes for the three months ended June 30, 2020.

Management determined that since minimal changes in estimated pre-tax income or loss would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the three months ended June 30, 2020.

Income tax provision for the three months ended June 30, 2020 was $3.0 million as compared to an income tax benefit of$5.8 million for the corresponding period in 2019.

The Company’s effective income tax provision rate for the three months ended June 30, 2020 was 3,092.9% as compared to a tax benefit rate of 33.6% for the corresponding 2019 period.

The effective tax rate for the three months ended June 30, 2020 differs from the federal statutory income tax rate of 21.0% primarily due to the impact of the non-deductible portion of the goodwill impairment charge (recorded in the three months ended March 31, 2020), the reversal of a discrete benefit recorded in the three months ended March 31, 2020 for a favorable rate arbitrage related to a net operating loss carryback claim available under the CARES Act, which is no longer expected based on a revised estimate, and other permanent items, partially offset by the benefit of losses in foreign jurisdictions.

The effective rate for the three months ended June 30, 2019 differs from the federal statutory income tax rate of 21.0% primarily due to state and local taxes and the impact of non-deductible expenses.

Equity in losses

Equity in losses of Vasconia, net of taxes, was $0.6 million for the three months ended June 30, 2020, as compared to equity in losses of Vasconia, net of taxes, of $0.1 million for the three months ended June 30, 2019.

Vasconia reported income from operations of $1.4 million for the three months ended June 30, 2020, as compared to income from operations of $2.8 million for the three months ended June 30, 2019 .

The decrease is primarily due to a decrease in operating income from Vasconia's aluminum and kitchenware division.

During the three months ended June 30, 2020, the Company recognized a loss of $0.2 million, relating to cumulative translation foreign currency losses that were recognized to earnings upon the dissolution of Lifetime Brands Do Brasil Participacoes Ltda., a 100% owned foreign subsidiary.

The foreign currency translation losses related to the notes receivable due to the company from the 2016 sale of its equity interest in GS International S/A.

MANAGEMENT’S DISCUSSION AND ANALYSIS

SIX MONTHS ENDED JUNE 30, 2020 COMPARED TO THE SIX MONTHS ENDED

JUNE 30, 2019

Consolidated net sales for the six months ended June 30, 2020 were $295.2 million, representing an increase of $2.7 million, or 0.9%, as compared to net sales of $292.5 million for the corresponding period in 2019.

In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2020 average rates to 2019 local currency amounts, net sales increased by $3.8 million, or 1.3%, as compared to consolidated net sales in the corresponding period in 2019.

Net sales for the U.S.

segment for the six months ended June 30, 2020 were $261.8 million, an increase of $11.7 million, or 4.7%, as compared to net sales of $250.1 million for the corresponding period in 2019.

Net sales for the U.S.

segment’s Kitchenware product category were $163.7 million for the six months ended June 30, 2020, an increase of $28.8 million, or 21.3%, as compared to $134.9 million for the corresponding period in 2019.

The increase was mainly attributable to higher consumer demand in the e-commerce and wholesale channels for essential kitchen tools and gadgets, cutlery and boards, and cookware and bakeware products.

In addition, in the early part of 2020, sales increased as a result of the continuance of promotional programs that commenced in the latter part of 2019 for tools and gadgets, cutlery and bakeware.

Net sales for the U.S.

segment’s Tableware product category were $47.2 million for the six months ended June 30, 2020, a decrease of $8.0 million, or 14.4%, as compared to $55.2 million for the corresponding period in 2019.

The decrease was primarily driven by lower sales of dinnerware products to brick-and-mortar retailers;

this decrease was partially offset by increased e-commerce sales.

Net sales for the U.S.

segment’s Home Solutions product category were $50.9 million for the six months ended June 30, 2020, a decrease of $9.1 million, or 15.2%, as compared to $60.0 million for the corresponding period in 2019.

The decrease was driven by lower sales in the private label hydration category, offset by new program hydration category sales.

Net sales for the International segment were $33.4 million for the six months ended June 30, 2020, a decrease of $8.9 million, or 21.0%, as compared to net sales of $42.3 million for the corresponding period in 2019.

In constant currency, which excludes the impact of foreign exchange fluctuations, net sales decreased $7.9 million, or 19.1%, as compared to consolidated net sales in the corresponding period in 2019.

The decrease in sales, and sales in constant currency, was driven by several factors including lower sales to independent retailers resulting from lower demand and store closures due to COVID-19, offset by increased e-commerce sales due to higher customer demand in online channels.

Gross margin for the six months ended June 30, 2020 was $107.1 million, or 36.3%, as compared to $98.3 million, or 33.6%, for the corresponding period in 2019.

Gross margin for the U.S.

segment was $99.1 million, or 37.9%, for the six months ended June 30, 2020, as compared to $83.0 million, or 33.2%, for the corresponding period in 2019.

Gross margin in the 2019 period reflects an $8.5 million charge for the SKU rationalization initiative.

Excluding the SKU rationalization the gross margin would have been 36.6%.

The increase in gross margin, excluding the SKU rationalization change, was primarily due to changes in product mix.

Gross margin for the International segment was $8.0 million, or 23.9%, for the six months ended June 30, 2020, as compared to $15.3 million, or 36.2%, for the corresponding period in 2019.

The decrease in gross margin percentage was primarily due to additional allowances to brick-and-mortar customers, higher inventory reserves and a decrease in sales against a period over period comparable amount of fixed inventoriable costs.

Distribution expenses

Distribution expenses for the six months ended June 30, 2020 were $31.7 million, as compared to $31.4 million for the corresponding period in 2019.

Distribution expenses as a percentage of net sales were 10.8% for the six months ended June 30, 2020, as compared to 10.7% for the six months ended June 30, 2019.

Distribution expenses as a percentage of net sales for the U.S.

segment were approximately 9.3% and 10.4% for the six months ended June 30, 2020 and 2019, respectively.

Distribution expenses during the six months ended June 30, 2019 include $0.2 million for the Company’s facility relocation efforts of its west coast distribution facility.

As a percentage of sales shipped from the Company’s U.S.

warehouses, excluding relocation expenses, distribution expenses were 9.4% and 11.3% for the six months ended June 30, 2020 and 2019, respectively.

The improvement reflects the continued realization of labor management efficiency and synergy savings as well as the leverage benefit of fixed costs on higher sales volume.

Distribution expenses as a percentage of net sales for the International segment were 22.2% for the six months ended June 30, 2020, compared to 12.8% for the corresponding period in 2019.

Distribution expenses during the six months ended June 30, 2020 include $1.1 million for the Company’s facility relocation costs.

As a percentage of sales shipped from the Company’s U.K.

warehouses, excluding the moving and relocation costs for U.K.

operations, distribution expenses were 15.5% and 12.7% for the six months ended June 30, 2020 and 2019, respectively.

The increase is primarily attributed to higher labor costs associated with increased e-commerce channel sales and temporary labor inefficiencies associated with setting up the new U.K.

warehouse but not directly attributable to relocation costs.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 31, 2020 were $41.5 million, an increase of $1.4 million, or 3.4%, as compared to $40.1 million for the corresponding period in 2019.

Selling, general and administrative expenses for the six months ended June 30, 2020 were $75.9 million, a decrease of $5.1 million, or 6.3%, as compared to $81.0 million for the corresponding period in 2019.

Selling, general and administrative expenses for the U.S.

segment were $30.4 million for the three months ended March 31, 2020, as compared to $28.4 million for the corresponding period in 2019.

As a percentage of net sales, selling, general and administrative expenses were 23.5% and 22.4% for the three months ended March 31, 2020 and 2019, respectively.

The increase was primarily attributable to a higher estimate for bad debt expense related to the economic uncertainties caused by the COVID-19 pandemic.

Selling, general and administrative expenses for the International segment were $6.5 million for the three months ended March 31, 2020, as compared to $6.1 million for the corresponding period in 2019.

The increase was primarily attributable to a higher estimate for bad debt expense related to the economic uncertainties caused by the COVID-19 pandemic, and was partially offset by lower employee and selling expenses.

Unallocated corporate expenses for the three months ended March 31, 2020 were $4.6 million, as compared to $5.6 million for the corresponding period in 2019.

The decrease was mainly attributable to lower professional fees.

segment were $55.4 million for the six months ended June 30, 2020, as compared to $57.0 million for the corresponding period in 2019.

As a percentage of net sales, selling, general and administrative expenses were 21.2% and 22.8% for the six months ended June 30, 2020 and 2019, respectively.

The decrease was primarily attributable to lower labor costs resulting from the Company's cost reduction strategy in response to the COVID-19 pandemic, as well as lower selling and marketing expenses, offset by higher estimates for bad debt expense related to the economic uncertainties caused by the COVID-19 pandemic.

Selling, general and administrative expenses for the International segment were $10.8 million for the six months ended June 30, 2020, as compared to $13.4 million for the corresponding period in 2019.

The decrease was primarily attributable to the realization of cost savings resulting from the Company's integration efforts, and lower employee and selling expenses resulting from the Company's cost reduction strategy in response to the COVID-19 pandemic, offset by higher estimates for bad debt expense related to the economic uncertainties caused by the COVID-19 pandemic.

Unallocated corporate expenses for the six months ended June 30, 2020 were $9.7 million, as compared to $10.6 million for the corresponding period in 2019.

The decrease was primarily attributable to executive salary costs as well as lower professional fees.

Restructuring expenses

During the six months ended June 30, 2020, the Company's international segment incurred $0.3 million of restructuring expenses related to severance associated with the strategic reorganization of the international segment’s product development and sales workforce.

The strategic reorganization is the result of the Company's efforts for product development efficiencies and a country tailored international sales approach.

During the six months ended June 30, 2019, the Company incurred $0.4 million of Filament restructuring charges and$0.4 million of restructuring expenses, primarily related to severance, for the integration of its legal entities operating in Europe.

Goodwill and infinite-lived intangible asset impairment

During the three months ended March 31, 2020, the Company recorded a $20.1 million non-cash goodwill and intangible asset impairment charge related to the U.S.

During the six months ended June 30, 2020, the Company recorded a $20.1 million non-cash goodwill and intangible asset impairment charge related to the U.S.

reporting unit.

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Interest expense

Interest expense was $4.7 million for three months ended March 31, 2020 and $4.9 million for the three months ended March 31, 2019.

Mark to market loss on interest rate derivatives

During the three months ended March 31, 2020, the Company recorded a non-cash charge of $2.3 million for a mark to market loss on certain of its interest rate derivatives.

Interest expense was $9.0 million for the six months ended June 30, 2020 and $10.0 million for the six months ended June 30, 2019 primarily as a result of lower debt outstanding and a lower interest rate environment.

Mark to market (loss) gain on interest rate derivatives

Mark to market loss on interest rate derivatives was $2.4 million for the six months ended June 30, 2020 as compared to a mark to market gain on interest rate derivatives of $0.4 million for the six months ended June 30, 2019.

The decrease was primarily driven by mark to market fair value fluctuations on the Company's interest rate derivatives.

These derivatives were entered into for purposes of locking-in a fixed interest rate on the Company's variable interest rate debt.

The loss was caused by the recent precipitous decline in interest rates.

The current period loss was caused by lower interest rates as compared to the six months ended June 30, 2019.

The intent of the Company is to hold these derivative contracts until their maturity.

Therefore, this loss will reverse over time.

Income tax benefit

Income tax benefit for the three months ended March 31, 2020 was $3.7 million as compared to $2.5 million for the corresponding period in 2019.

The Company’s effective income tax benefit rate for the three months ended March 31, 2020 was 11.6% as compared to 34.1% for the corresponding 2019 period.

The effective tax rate for the three months ended March 31, 2020 differs from the federal statutory income tax rate of 21.0% primarily due to the impact of the non-deductible portion of the goodwill impairment charge.

The effective rate for the three months ended March 31, 2019 differs from the federal statutory income tax rate of 21.0% primarily due to state and local taxes and a benefit related to rate changes, partially offset by non-deductible expenses.

Equity in earnings (losses)

Equity in earnings of Vasconia, net of taxes, was $0.3 million for the three months ended March 31, 2020, as compared to equity in losses of Vasconia, net of taxes, of $0.1 million for the three months ended March 31, 2019.

Vasconia reported a loss from operations of $0.5 for the three months ended March 31, 2020, as compared to income from operations of $1.9 million for the three months ended March 31, 2019.

The loss from operations is primarily due to a decrease in operating income from Vasconia's aluminum division.

Therefore, the Company expects that this loss will reverse over time.

Income tax (provision) benefit

The provision for income taxes includes federal, foreign, state and local income taxes.

The Company used a discrete effective tax rate method to calculate taxes for the six months ended June 30, 2020.

Income tax benefit for the six months ended June 30, 2020 was $0.7 million as compared to an income tax benefit of $8.3 million for the corresponding period in 2019.

The Company’s effective income tax benefit rate for the six months ended June 30, 2020 was 2.2% as compared to 33.8% for the corresponding 2019 period.

The effective tax rate for the six months ended June 30, 2020 differs from the federal statutory income tax rate of 21.0% primarily due to the impact of the non-deductible portion of the goodwill impairment charge (recorded in the three months ended March 31, 2020) and other permanent items, partially offset by the benefit of losses in the foreign jurisdictions.

The effective rate for the six months ended June 30, 2019 differs from the federal statutory income tax rate of 21.0% primarily due to state and local taxes and the impact of non-deductible expenses.

Equity in losses

Equity in losses of Vasconia, net of taxes, was $0.3 million for the six months ended June 30, 2020, as compared to equity in losses of Vasconia, net of taxes, of $0.2 million for the six months ended June 30, 2019.

Vasconia reported income from operations of $0.9 million for the six months ended June 30, 2020, as compared to income from operations of $4.7 million for the six months ended June 30, 2019.

The decrease is primarily due to a decrease in operating income from Vasconia's aluminum and kitchenware division.

During the six months ended June 30, 2020, the Company recognized a loss of $0.2 million, relating to cumulative translation foreign currency losses that were recognized to earnings upon the dissolution of Lifetime Brands Do Brasil Participacoes Ltda., a 100% owned foreign subsidiary.

The foreign currency translation losses related to the notes receivable due to the company from the 2016 sale of its equity interest in GS International S/A.

LIQUIDITY AND CAPITAL RESOURCES

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As a result of the COVID-19 pandemic, there is the potential for reduced demand for the Company's products and limited distribution facility capacity.

Consequently, the Company may not be able to generate cash from operations at the levels historically provided while operating at these reduced capacities.

Accordingly, in response to adverse conditions and as a precautionary measure, throughout March 2020, the Company drew down $43.1 million from its revolving credit facility under its ABL Agreement, as defined below.

At March 31, 2020, the Company had cash and cash equivalents of $85.3 million, compared to $11.4 million at December 31, 2019.

Working capital was $260.0 million at March 31, 2020, compared to $221.8 million at December 31, 2019.

Liquidity, which includes cash and cash equivalents and availability under the ABL Agreement, was approximately $136.6 million at March 31, 2020.

Consequently, the Company may not be able to generate cash from operations at the levels historically provided while operating under pandemic conditions.

At June 30, 2020, the Company had cash and cash equivalents of $63.5 million, compared to $11.4 million at December 31, 2019.

Working capital was $205.6 million at June 30, 2020, compared to $221.8 million at December 31, 2019.

Liquidity, which includes cash and cash equivalents and availability under the ABL Agreement, was approximately $183.5 million at June 30, 2020.

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.

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Certain other product categories experience higher inventory turns due to lower minimum order quantities or trending sale demands.

In addition, recent tariff increases resulted in higher inventory carrying costs at March 31, 2020 compared to March 31, 2019.

For the three months ended March 31, 2020, inventory turnover was 2.2 times, or 167 days, as compared to 2.1 times, or 172 days, for the three months ended March 31, 2019.

For the three months ended June 30, 2020, inventory turnover was 2.3 times, or 157 days, as compared to 1.8 times, or 203 days, for the three months ended June 30, 2019, as adjusted for the SKU Rationalization initiative.

The improvement was a result of programs implemented by the Company to improve the productivity of its inventory, including the SKU Rationalization initiative implemented in the second quarter of 2019, along with an increase in consumer demand for certain products in the second quarter of 2020.

The Company believes that availability under the revolving credit facility under its ABL Agreement and cash flows from operations are sufficient to fund the Company’s operations for the next twelve months.

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However, there can be no assurance that any such alternative sources would be available or sufficient.

The Company expects the COVID-19 pandemic to adversely and materially affect the business operations and financial condition of some of its wholesale customers.

The Company closely monitors the creditworthiness of its customers.

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However, notwithstanding the Company’s efforts to monitor its customers’ financial condition, the Company could be materially adversely affected by changes in customers' creditworthiness in the future.

Some of the Company’s customers may be adversely and materially affected by the COVID-19 pandemic.

Credit Facilities

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(“JPMorgan”), includes a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $150.0 million, which facility will mature on March 2, 2023, and a loan agreement (the “Term Loan” and together with the ABL Agreement, the “Debt Agreements”) which provides for a senior secured term loan credit facility in the original principal amount of $275.0 million, which matures on February 28, 2025.

The Term Loan facility will be repaid in quarterly payments, which commenced June 30, 2018, of principal equal to 0.25% of the original aggregate principal amount of the Term Loan facility.

The Term Loan requires the Company to make an annual prepayment of principal based upon excess cash flow (“Excess Cash Flow”), if any.

This estimated amount is recorded in current maturity of term loan on the unaudited condensed consolidated balance sheets.

The Company paid a prepayment amount of $6.9 million in April 2020.

Additionally, the Term Loan facility requires quarterly payments, which commenced June 30, 2018, of principal equal to 0.25% of the original aggregate principal amount of the Term Loan facility.

Per the Debt Agreements, when an Excess Cash Flow payment is made by the Company, the payment is first applied to satisfy the future quarterly required payments in order of maturity.

The maximum borrowing amount under the ABL Agreement may be increased to up to $200.0 million if certain conditions are met.

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The Incremental Facilities may not exceed the sum of (i) $50.0 million plus (ii) an unlimited amount so long as, in the case of (ii) only, the Company’s secured net leverage ratio, as defined in and computed pursuant to the Term Loan, is no greater than 3.75 to 1.00, subject to certain limitations and for the period defined pursuant to the Term Loan.

As of March 31, 2020 and December 31, 2019, the total availability under the ABL Agreement was as follows (in thousands):

March 31, 2020

As of June 30, 2020 and December 31, 2019, the total availability under the ABL Agreement was as follows (in thousands):

June 30, 2020

December 31, 2019

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The current and non-current portions of the Company’s Term Loan facility included in the condensed consolidated balance sheets were as follows (in thousands):

March 31, 2020 December 31, 2019

June 30, 2020 December 31, 2019

Current portion of Term Loan facility:

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Estimated Excess Cash Flow payment 15,000 7,145

Unamortized debt issuance costs (1,478) (1,482)

Estimated unamortized debt issuance costs (1,473) (1,482)

Total Current portion of Term Loan facility $ 13,527 $ 8,413

Non-current portion of Term Loan facility:

Term Loan facility $ 259,847 $ 260,293

Unamortized debt issuance costs (5,637) (6,012)

Term Loan facility payment, net of current portion $ 247,605 $ 260,293

Estimated unamortized debt issuance costs (5,268) (6,012)

Total Non-current portion of Term Loan facility $ 242,337 $ 254,281

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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 March 31, 2020 ranged from 1.8% to 4.0%.

In addition, the Company pays a commitment fee on the unused portion of the ABL Agreement.

The interest rate on outstanding borrowings under the ABL Agreement at June 30, 2020 was 1.8%.

In addition, the Company pays a commitment fee of 0.375% on the unused portion of the ABL Agreement.

The Term Loan facility bears interest, at the Company’s option, at one of the following rates:

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(ii) LIBOR, but not less than 1%, plus a margin of 3.5%.

The interest rate on outstanding borrowings under the Term Loan at March 31, 2020 was 4.5%.

The interest rate on outstanding borrowings under the Term Loan at June 30, 2020 was 4.5%.

The Debt Agreements provide for customary restrictions and events of default.

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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 March 31, 2020.

The Company was in compliance with the covenants of the Debt Agreements at June 30, 2020.

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.

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

Consolidated adjusted EBITDA for the Four Quarters Ended March 31, 2020

Consolidated adjusted EBITDA for the Four Quarters Ended June 30, 2020

(in thousands)

Three months ended June 30, 2020 $ 12,388

Three months ended March 31, 2020 3,252

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Three months ended September 30, 2019 25,758

Three months ended June 30, 2019 4,306

Consolidated adjusted EBITDA, before limitation 61,189

Permitted non-recurring charge limitation (8,988)

Consolidated adjusted EBITDA $ 69,271

Capital expenditures for the three months ended March 31, 2020 were $1.2 million.

Capital expenditures for the six months ended June 30, 2020 were $1.4 million.

Non-GAAP financial measure

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Further, the Company’s non-GAAP information may be different from the non-GAAP information provided by other companies including other companies within the home retail industry.

The following is a reconciliation of the net loss, as reported, to consolidated adjusted EBITDA, for the four quarters ended March 31, 2020:

Three Months Ended Twelve Months Ended March 31, 2020

June 30, 2019 September 30,

2019 December 31,

The following is a reconciliation of the net loss, as reported, to consolidated adjusted EBITDA, for the four quarters ended June 30, 2020:

Three Months Ended Twelve Months Ended June 30, 2020

September 30, 2019 December 31,

2019 March 31,

2020 June 30,

(in thousands)

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210 (738) (339) 848 (19)

Income tax (benefit) provision

Income tax provision (benefit)

15,066 (5,704) (3,729) 3,031 8,664

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Mark to market loss on interest rate derivatives

— — 2,251 164 2,415

Depreciation and amortization 6,122 6,344 6,234 6,061 24,761

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Stock compensation expense 1,505 1,436 1,326 1,420 5,687

SKU Rationalization (1)

8,500 — — — 8,500

Acquisition and divestment related expenses — 55 47 55 157

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881 1,689 790 303 3,663

Consolidated adjusted EBITDA, before limitation $ 4,306 $ 25,758 $ 27,873 $ 3,252 $ 61,189

Permitted non-recurring charge limitation (1)

Consolidated adjusted EBITDA $ 25,758 $ 27,873 $ 3,252 $ 12,388 $ 69,271

(1) Permitted non-recurring charges include restructuring expenses, integration charges, warehouse relocation costs, and SKU Rationalization.

These are permitted exclusions from the Company’s consolidated adjusted EBITDA, subject to limitations, pursuant to the Company’s Debt Agreements.

Consolidated adjusted EBITDA is a non-GAAP financial measure which is defined in the Company’s debt agreements.

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Either party may terminate the agreement at any time upon sixty days’ prior written notice to the other party.

Pursuant to this agreement, the Company sold to HSBC $37.9 million and $25.1 million of receivables during the three months ended March 31, 2020 and 2019, respectively.

Charges of $0.2 million and $0.1 million related to the sale of the receivables are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019, respectively.

At March 31, 2020 and 2019, $23.2 million and $17.3 million, respectively, of receivables sold were outstanding and due to HSBC from customers.

Pursuant to this agreement, the Company sold to HSBC $36.0 million and $73.9 million of receivables during the three and six months ended June 30, 2020, respectively, and $24.1 million and $49.2 million of receivables during the three and six months ended June 30, 2019, respectively.

Charges of $0.1 million related to the sale of the receivables are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations for the three months ended June 30, 2020 and June 30, 2019.

Charges of $0.3 million related to the sale of the receivables are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations for the six months ended June 30, 2020 and June 30, 2019.

At June 30, 2020 and 2019, $20.8 million and $14.8 million , respectively, of receivables sold were outstanding and due to HSBC from customers.

Interest Rate Swaps

The Company is a party to interest rate swap agreements, with an aggregate notional value of $94.0 million at March 31, 2020, designated 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 Company is a party to interest rate swap agreements, with an aggregate notional value of $75.0 million at June 30, 2020, designated as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings.

The hedge periods of these agreements commenced in April 2018 and expire in March 2023.

The notional amounts are reduced over these periods.

In June 2019, the Company entered into additional interest rate swap agreements, with an aggregate notional value of $25.0 million at March 31, 2020.

These are non-designated interest rate swaps that serve as economic hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings and expire in February 2025.

The Company's net total outstanding notional value of interest rate swaps was $119.0 million at March 31, 2020.

The Company entered into additional interest rate swap agreements, with an aggregate notional value of $25.0 million at June 30, 2020 that do not meet the criteria for hedge accounting treatment.

As a result, these interest rate swap agreements are considered non-designated interest rate swaps that serve as economic hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings and expire in February 2025.

The Company's total outstanding notional value of interest rate swaps was $100.0 million at June 30, 2020.

Foreign Exchange Contracts

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The Company does not hedge the translation of foreign currency profits into USD, as the Company regards this as an accounting exposure rather than an economic exposure.

The aggregate gross notional value of foreign exchange contracts at March 31, 2020 was $2.1 million.

The Company's foreign exchange contracts, that had been designed as hedges in order to apply hedge accounting, matured in April 2020.

As of June 30, 2020 the Company did not have any outstanding foreign exchange contracts.

The Company is exposed to market risks as well as changes in foreign currency exchange rates as measured against the USD and each other, and to changes to the credit risk of derivative counterparties.

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All foreign currency forward contracts that the Company enters into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure.

The Company does not enter into such contracts for speculative purposes and as of March 31, 2020, the Company does not have any foreign currency forward contract derivatives that are not designated as hedges.

The Company does not enter into such contracts for speculative purposes and as of June 30, 2020, the Company does not have any foreign currency forward contract derivatives that are not designated as hedges.

Operating activities

Net cash provided by operating activities was $33.7 million and $17.5 million for the three months ended March 31, 2020 and 2019, respectively.

The change in 2020 as compared to the corresponding 2019 period was primarily attributable to the timing of collections related to the Company's accounts receivable.

Net cash provided by operating activities was $66.2 million and $7.1 million for the six months ended June 30, 2020 and 2019, respectively.

The change in 2020 as compared to the corresponding 2019 period was primarily attributable to inventory reduction initiatives commencing in the second quarter of 2019, the timing of collections related to the Company's accounts receivable, in addition to cost savings initiatives and payment deferral strategies utilized in response to the COVID-19 pandemic.

Investing activities

Net cash used in investing activities was $1.2 million and $1.4 million for the three months ended March 31, 2020 and 2019, respectively.

Net cash used in investing activities was $1.4 million and $3.9 million for the six months ended June 30, 2020 and 2019, respectively.

The change in 2020 as compared to the corresponding 2019 period was primarily attributable to higher capital expenditures in the 2019 period resulting from the Company's U.K.

reorganization and warehouse consolidation efforts.

Financing activities

Net cash provided by financing activities was $41.7 million for the three months ended March 31, 2020, as compared to net cash used in financing activities of $17.6 million for the corresponding 2019 period.

The change was mainly attributable to draw downs made by the Company from its revolving credit facility under its ABL Agreement in 2020 as compared to repayments made to its revolving credit facility under its ABL Agreement in the corresponding 2019 period.

Net cash used in financing activities was $12.3 million and $0.5 million for the six months ended June 30, 2020 and 2019, respectively.

The change was mainly attributable to repayments on the Company's revolving credit facility under its ABL Agreement and the Company's term loan in 2020.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis