What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-10 compared with 2020-03-13 · 228 added, 312 removed, 391 unchanged (58% of the section changed)

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These forward-looking statements involve risks and uncertainties.

The Company’s actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section and elsewhere in this Annual Report including those discussed under “Disclosures regarding Forward-Looking Statements,” under Item 1A “Risk Factors” and under Item 7A “Quantitative and Qualitative Disclosures Regarding Market Risk.” The Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future, other than as required by law.

The Company’s actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section and elsewhere in this Annual Report including those discussed under “Disclosures regarding Forward-Looking Statements,” “Risk Factors Summary” under Item 1A “Risk Factors” and under Item 7A “Quantitative and Qualitative Disclosures Regarding Market Risk.” The Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future, other than as required by law.

ABOUT THE COMPANY

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BUSINESS SEGMENTS

Effective October 1, 2018, the Company operates in two reportable segments:

The Company operates in two reportable segments:

and International.

segment is the Company’s primary domestic business that designs, markets and distributes its products to retailers and distributors, as well as directly to consumers through third party and its own internet websites.

The International segment consists of certain business operations conducted outside the U.S.

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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 December 31, 2020, Vasconia's Board of Directors is comprised of fourteen members of whom the Company has designated three members.

The Company recorded equity in earnings of Vasconia, net of taxes, of $1.5 million, $0.5 million and $0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.

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In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period.

In 2020, the Company's inventory levels did not significantly decrease during the fourth quarter.

The higher inventory levels at December 31, 2020 were a result of increased inventory purchases to meet higher expected demand in 2021 due in part to the effects on demand from the COVID-19 pandemic.

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

RESTRUCTURING

In connection with the Company’s March 2018 acquisition of Filament, the Company commenced a restructuring plan to integrate the operations of Filament with the Company’s operations and realize the savings expected from the synergies of the acquisition.

During the years ended December 31, 2019 and 2018, the Company's U.S.

segment incurred $0.7 million and $2.1 million, respectively, of restructuring expense related to the Filament integration, of which $0.1 million and $1.4 million was accrued at December 31, 2019 and 2018, respectively.

During the years ended December 31, 2019, and December 31, 2018 the Company's international segment incurred $0.7 million and $0.2 million, respectively, of restructuring expense primarily related to the integration of its legal entities operating in Europe of which $0.2 million was accrued at December 31, 2018.

The Company had no international restructuring accrual as of December 31, 2019.

The Company's International segment expects to incur restructuring charges of $0.5 million in 2020 to complete its warehouse integration efforts.

segment incurred $0.7 million and $2.1 million.

During the year ended December 31, 2020, the Company's International segment incurred $0.2 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 was the result of the Company's efforts for product development efficiencies and an international sales approach tailored to countries.

During the years ended December 31, 2019, and 2018, the Company's international segment incurred $0.7 million and $0.2 million, respectively, of restructuring expense primarily related to the integration of its legal entities operating in Europe.

The Company does not expect to incur any additional restructuring charges for these efforts.

RECENT DEVELOPMENTS

government recently announced and, in some cases, implemented additional tariffs on certain foreign goods, including certain finished products and raw materials such as steel and aluminum.

These tariffs have resulted or may result in increased prices for these imported goods and materials and may limit the amount of these goods and materials that may be imported into the U.S.

The COVID-19 pandemic continues to affect 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 reduction in sales at certain retailers, that had closed or had limited store openings, during the pandemic.

These declines were offset by higher sales at retailers that remained open and by e-commerce sales.

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

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

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

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

The Company expects, in the short term, higher inbound freight cost to import inventory as a result of expected higher demand of the Company's products and broader macroeconomic demand for ocean freight.

Additionally, in the U.S., the Company has experienced instances of trucking availability shortages, resulting in delays of shipments to certain of its customers.

During 2019, the Office of the U.S.

Trade Representative (‘‘USTR’’) has imposed, and in certain cases subsequently reduced or removed, additional tariffs on products imported from China.

Trade Representative (‘‘USTR’’) imposed additional tariffs on products imported from China.

In certain cases, both in 2019 and 2020, these tariffs were subsequently reduced, suspended or removed.

The Company purchases a high concentration of products from unaffiliated manufacturers located in China.

This concentration exposes the Company to risks associated with doing business globally, including changes in tariffs.

The tariff increases that have been implemented by the USTR began to adversely impact the Company's cost of sales in the third quarter of fiscal 2019 and will continue to do so, as long as these tariff increases remain in effect.

In December 2019, the U.S.

and China announced an interim trade agreement to halt additional tariff increases that were due to become effective before the end of the year and reverse some tariff increases that became effective in September 2019.

The specific details of the interim trade agreement are unclear, as is the ultimate outcome of the broader trade negotiations.

At this time, the Company expects to mitigate the impact of tariff increases primarily through pricing actions and product cost reductions in its supply chain.

A substantial majority of the Company’s products are sourced from vendors in China.

Although the Company's pricing actions are intended to offset the gross profit dollar impact of tariff increases, there are no assurances that the pricing actions will be successful in fully offsetting this impact or will not reduce retail consumption or customer orders in the short-term.

The tariff increases that were implemented by the USTR began to adversely impact the Company's cost of sales in the third quarter of fiscal 2019 and will continue to do so, as long as these tariff increases remain in effect.

In January 2020, the U.S.

and China signed a trade agreement known as the Phase One Agreement.

This agreement reversed some tariff increases that had become effective in September 2019.

Significant uncertainty exists as to the timing and content of a Phase Two agreement, particularly due to the ongoing pandemic and to changes in the United States Administration as a result of the November 2020 Presidential election.

The Company expects to mitigate the impact of tariff increases primarily through pricing actions and product cost reductions in its supply chain.

Since July 2018, the USTR has periodically issued lists of products that are excluded from tariffs on Chinese imports.

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left the European Union.

The U.K.’s exit from the European Union is unprecedented and it remains unclear what impact this will have on the U.K.’s access to the EU Single Market and on the legal and regulatory environment in which the Company operates, as well as its effect on the global macroeconomic environment.

Net sales attributable to U.K.

domiciled businesses were $85.8 million for the year ended December 31, 2019, and represent approximately 12% of the Company’s consolidated net sales for the period.

Significant uncertainty remains regarding the impact of the U.K.’s exit from the European Union.

In December 2020, the U.K and European Union announced the agreement of a new Trade and Cooperation Agreement that will govern the ongoing relationship between the U.K.

and the European Union.

The U.K.’s exit from the European Union is unprecedented and it remains unclear what long-term impact this will have on the U.K.’s access to the EU Single Market and on the legal and regulatory environment in which the Company operates, as well as its effect on the global macroeconomic environment.

The uncertainty surrounding the consequences of the U.K.’s exit could adversely impact the U.K.

economy, customers and investor confidence.

Such uncertainty may contribute to additional market volatility, including volatility in the value of the U.K.

The U.K.'s exit also could adversely impact the export of products between the U.K.

and the European Union.

uncertainty may contribute to additional market volatility, including volatility in the value of the U.K.

pound and European euro, and may adversely affect the Company’s businesses, results of operations, and financial condition.

Net sales attributable to U.K.

domiciled businesses were $78.0 million for the year ended December 31, 2020, and represent approximately 10% of the Company’s consolidated net sales for the period.

On March 3, 2021, the Chancellor of the Exchequer presented the U.K Budget 2021 to Parliament.

The budget includes a proposal to increase the U.K.

corporate tax rate from 19% to 25% effective April 1, 2023.

The proposed change will be enacted into law upon approval by Parliament, which is expected in the second half of 2021.

The Company expects the higher tax rate could negatively impact the Company's operating results.

EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLES

Adopted Accounting Pronouncements

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230):

Classification of Certain Cash Receipts and Cash Payments, which reduces the diversity in practice on how certain transactions are classified in the statement of cash flows.

The adoption of this ASU did not have a material impact on the Company’s cash flow statement.

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), which requires a lessee, in most leases, to initially recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term.

The guidance required adoption using a modified retrospective transition approach with either 1) periods prior to the adoption date being recast or 2) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast.

The Company adopted this standard on January 1, 2019 using the cumulative-effect adjustment method and elected certain practical expedients allowed under the standard.

The Company’s project team assessed the effect of the adoption of this standard on its accounting policies, business processes, internal controls over financial reporting and related disclosures.

Upon adoption, the Company's asset and lease liabilities increased by $91.0 million and $104.5 million, respectively.

The Company did not recognize a material cumulative-effect adjustment to retained earnings upon adoption.

On April 10, 2020, the FASB staff issued a question-and-answer document to address stakeholder questions on the application of the lease accounting guidance for lease concessions related to the effects of the COVID-19 pandemic (the “Question-and-Answer Document”).

The guidance allows concessions related to the timing of payments, where the total consideration has not changed, to not be accounted for as lease modifications.

Instead, any such concessions can be accounted for as if no change was made to the contract or as variable lease payments.

The Company adopted the guidance on April 1, 2020 and elected to account for COVID-19-related rent concessions that did not result in a substantial increase in the rights of the lessor or the obligations of the lessee not as lease modifications.

See NOTE 4 — LEASES for additional information on the Company’s adoption of this guidance.

Accounting Pronouncements to be Adopted in Future Periods

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In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles and improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles and simplifies the application of U.S.

GAAP for other areas of Topic 740 by clarifying and amending the existing guidance.

The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2020.

Early adoption is permitted.

Additionally, an entity that elects early adoption must adopt all the amendments in the same period.

Management is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

The impact of the adoption is not expected to have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments.

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Management is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to account for contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate that is expected to be discontinued as a result of reference rate reform.

The guidance was effective upon issuance and may be applied prospectively to contract modifications and hedging relationships entered into or evaluated as of any date from March 12, 2020 but no later than December 31, 2022.

The Company has not yet applied the guidance in this ASU and is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

RESULTS OF OPERATIONS

The results of operations below focuses on the results of 2020 compared to 2019.

For a discussion of 2019 compared to 2018 refer to "Results of Operations" in our Form 10-K for the year ended December 31, 2019.

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

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Selling, general and administrative expenses 20.3 22.0 23.1

Impairment of goodwill 5.8 0.3 —

Goodwill and other impairments 2.6 5.8 0.3

Restructuring expenses 0.0 0.2 0.3

(Loss) income from operations

Income (loss) from operations

3.2 (3.2) 2.7

Interest expense (2.2) (2.8) (2.6)

(Loss) income before income taxes and equity in earnings

Mark to market (loss) gain on interest rate derivatives

Loss on early retirement of debt — — 0.0

Income (loss) before income taxes and equity in earnings

0.7 (6.0) 0.1

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Equity in earnings, net of taxes

Net (loss) income

(0.4) % (6.1) % (0.2) %

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2020 COMPARED TO 2019

In 2019, the Company realigned its operating segments to reflect the changes in how the Company manages its business, reviews operating performance and allocates resources.

The prior period segment information has been recast to reflect the current reportable segment structure of the Company.

Net sales for the year 2020 were $769.2 million, an increase of $34.3 million, or 4.7%, compared to net sales of $734.9 million 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 $33.6 million, or 4.6%, as compared to consolidated net sales in the corresponding period in 2019.

Net sales in 2019 increased $4.6 million or 0.6% on an unaudited pro forma basis, reflecting the acquisition of Filament as if it had occurred on January 1, 2018.

Net sales for the U.S.

segment in 2020 were $683.5 million, an increase of $39.3 million, or 6.1%, compared to net sales of $644.2 million in 2019.

Net sales in 2019 increased $9.3 million or 1.5%, on a pro forma basis, reflecting the acquisition of Filament as if it had occurred on January 1, 2018.

Net sales for the U.S.

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The net sales increase in the U.S.

segment’s Kitchenware product category was partially attributable to the inclusion of Filament for a full year in 2019.

Additionally, net sales increased as a result of new tools and gadgets program, as well as higher sales for Taylor and Rabbit branded kitchenware.

The increase was partially offset by lower sales for cutlery and bakeware/pantryware products.

segment’s Kitchenware product category was primarily a result of higher consumer demand in both the e-commerce and wholesale channels for essential food preparation products including kitchen tools and gadgets, cutlery/boards, and measurement products.

Net sales for the U.S.

segment’s Tableware product category in 2020 were $141.1 million, a decrease of $15.0 million, or 9.6%, compared to net sales of $156.1 million for 2019.

The decrease was primarily driven by lower replenishment orders related to certain dinnerware retail programs in 2019.

The decrease was primarily driven by lower sales of dinnerware products to brick-and-mortar retailers many of which were closed due to the COVID-19 pandemic.

This decrease was partially offset by higher sales of flatware products and e-commerce sales.

Net sales for the U.S.

segment’s Home Solutions products category in 2019 were $133.8 million, an increase of $23.6 million, or 21.4%, compared to net sales of $110.2 million in 2018.

The increase was primarily attributable to a new program for the home decor products line and the inclusion of Filament for a full year in 2019.

segment’s Home Solutions products category in 2020 were $115.5 million, a decrease of $18.3 million, or 13.7%, compared to net sales of $133.8 million in 2019.

The decrease was primarily driven by lower sales in the food and beverage outlet channel and lower home décor sales due to certain retailer program initiatives not repeating in 2020 and store closing due to the pandemic.

This decrease was offset by higher sales resulting from new programs of branded hydration products in the wholesale channel.

Net sales for the International segment in 2020 were $85.7 million, a decrease of $5.0 million, compared to net sales of $90.7 million for 2019.

In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2020 average exchange rates to 2019 local currency amounts, net sales decreased approximately 6.3%.

The decrease in sales was partially due to an order fulfillment disruption caused by a consolidation from multiple to a single new warehouse, partially offset by growth in E-Commerce and an increase in Asia trading operations.

The decrease in sales was driven by lower sales to national and independent retailers primarily as a result from lower demand and store closures due to COVID-19.

This decrease was offset by increased e-commerce sales due to higher customer demand in online channels.

Gross margin for 2020 was $274.0 million, or 35.6%, compared to $255.2 million, or 34.7%, for the corresponding period in 2019.

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segment was $250.5 million, or 36.6%, for 2020, compared to $226.5 million, or 35.2%, for 2019.

Gross margin fluctuates from period to period based on a number of factors, including product and customer mix.

segment's gross margin was negatively impacted by higher tariff rates on products imported from China.

This impact was partially offset by tariff exclusion refunds for certain duties charged to cost of sales in 2018, devalued Chinese Yuan, cost concessions from suppliers, packaging redesigns, and higher wholesale price points on affected inventory.

Both the tariff environment, and the suppliers and customer community's response are highly dynamic, which can negatively or positively impact gross margin in future reporting periods.

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

Excluding the SKU Rationalization initiative, the gross margin in the 2019 period would have been 36.5%.

Gross margin for the International segment was $23.5 million, or 27.4%, for 2020, compared to $28.7 million, or 31.6%, for 2019.

The decrease was primarily attributable to sales of clearance inventory and changes in customer and product mix.

The decrease in gross margin percentage was primarily due to higher inventory reserves and unfavorable sales mix related to store closures due to COVID-19.

Distribution expenses

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segment were approximately 8.4% in 2020 and 8.6% in 2019.

Distribution expenses in 2019 and 2018 include $0.2 million and $2.7 million, respectively, for the Company’s facility relocation efforts of its west coast distribution facility.

Distribution expenses in 2019 included $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 warehouses, distribution expenses, excluding the relocation costs for the U.S.

segment, were 8.8% and 9.6% f or 2020 and 2019, respectively.

T he decrease reflects the termination of the Company's variable cost distribution facility as part of the efforts to integrate the operations of Filament.

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.

The improvement was partially offset by higher hourly labor rates for warehouse employees.

Distribution expenses as a percentage of net sales for the International segment were approximately 17.9% in 2020 and 18.7% in 2019, respectively.

Distribution expenses in 2019 include $2.6 million, for the Company’s facility relocation costs of its International distribution facilities.

No International relocation costs were incurred in 2018.

As a percentage of sales shipped from the Company’s warehouses, distribution expenses, excluding the relocation costs for the International segment, were 15.6% and 13.1% f or 2019 and 2018, respectively.

The increase was primarily driven by higher U.K.

integration facility expenses due to running multiple facilities concurrently in 2019.

Distribution expenses in 2020 and 2019 included $1.1 million and $2.6 million, respectively, for the Company’s facility relocation costs of its International distribution facilities.

As a percentage of sales shipped from the Company’s warehouses, distribution expenses, excluding the relocation costs for the International segment, were 13.8% and 15.6% f or 2020 and 2019, re spectively.

The decrease was primarily attributable to the improvement in the fulfillment of orders and labor efficiencies compared to the prior year.

Selling, general and administrative expenses

Selling, general and administrative (“SG&A”) expenses for 2019 were $161.6 million, a decrease of $1.3 million, or 0.8%, as compared to $162.9 million for 2018.

Selling, general and administrative (“SG&A”) expenses for 2020 w ere $155.9 million, a decrease of $5.7 million, or 3.5%, as compared to $161.6 million for 2019.

SG&A expenses for 2020 for the U.S.

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As a percentage of net sales, SG&A expenses were 16.5% for 2020, compared to 18.2% for 2019.

The 2019 period reflects the synergy savings from the Filament acquisition, primarily from efficiencies in labor reduction initiatives.

The 2018 period does not reflect a full year of SG&A expenses for Filament, which was acquired on March 2, 2018.

The decrease was primarily attributable to a reduction in headcount and selling and marketing expenses as a result from the Company's cost savings efforts in response to the COVID-19 pandemic.

This reduction was partially offset by higher employee incentive compensation and higher estimates for bad debt expense related to the economic uncertainties caused by the COVID-19 pandemic.

SG&A expenses for 2020 for the International segment were $20.7 million , compared to $24.3 million for 2019.

As a percentage of net sales, SG&A expenses increased to 26.8% for 2019 compared to 24.7% for 2018.

The increase was driven by higher professional fees and higher warehouse expenses as the Company began consolidating its Corby, England distribution center into the Aston, England distribution center in 2019.

Unallocated corporate expenses were $20.2 million for both 2019 and 2018.

The 2019 results reflect higher professional fees offset by lower acquisition expenses than the comparative 2018 period.

Impairment of goodwill

As a percentage of net sales, SG&A expenses decrease d to 24.2% for 2020, compared to 26.8% for 2019.

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

This was partially offset by higher estimates for bad debt expense related to the economic uncertainties caused by the COVID-19 pandemic.

Unallocated corporate expenses for 2020 were $22.6 million , compared to $20.2 million for 2019.

The increase was driven by higher executive incentive compensation, partially offset by lower executive salary costs for the temporary reduction in base salary during 2020 and lower professional fees.

Goodwill and other impairments

Reporting Unit

During the first quarter of 2020, as a result of the economic downturn caused by the COVID-19 pandemic, the Company performed an interim assessment of the goodwill for the U.S.

reporting unit as of March 31, 2020, by comparing the fair value of the reporting unit with its carrying value.

The Company performed the analysis using a discounted cash flow and market multiple method.

Based upon the analysis performed, the Company recognized a non-cash goodwill impairment charge of $19.1 million during the first quarter of 2020.

The goodwill impairment charge resulted from, among other factors, the uncertain market conditions arising from the COVID-19 pandemic, which impacted the Company's market capitalization, as well as a reduction of forecasted future cash flows associated with the effects of the COVID-19 pandemic.

The fair value of the U.S.

reporting unit was approximately 3.9% below its carrying value as of March 31, 2020.

The Company performed its annual impairment assessment of its U.S.

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The Company performed the analysis using a discounted cash flow and market multiple method.

Based upon the analysis performed, the Company recognized a non-cash goodwill impairment charge of $33.2 million, during the three months ended December 31, 2019.

The goodwill impairment charge resulted from, among other factors, a sustained decline in the Company's market capitalization observed in the fourth quarter of 2019.The fair value of the U.S, reporting unit was approximately 6.1% below its carrying value.

Management’s projections used to estimate the cash flows included organic net sales growth and net sales growth through new customer channels as well as continued operating efficiencies in future periods.

Changes in any of the significant assumptions used in the valuation of the reporting unit could materially affect the expected cash flows, and such impacts could potentially result in a material non-cash impairment charge.

As of October 1, 2020, the fair value of the U.S.

reporting unit exceeded the carrying value of goodwill.

In 2019, the Company recognized a non-cash goodwill impairment charge of $33.2 million , during the three months ended December 31, 2019.

The Company performed the analysis using a discounted cash flow and market multiple method.

The goodwill impairment charge resulted from, among other factors, a sustained decline in the Company's market capitalization observed in the fourth quarter of 2019.

The fair value of the U.S, reporting unit was approximately 6.1% below its carrying value at October 1, 2019.

International Reporting Unit

During the third quarter of 2019, the Company performed an interim assessment of its European kitchenware business by comparing the fair value of the reporting unit with its carrying value.

In the third quarter of 2019, the Company performed an interim assessment of its European kitchenware business by comparing the fair value of the reporting unit with its carrying value as of September 30, 2019.

The Company performed the analysis using a discounted cash flow and market multiple approach.

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The fair value of the business was approximately 30.1% below its carrying value as of September 30, 2019.

In 2018, the Company incurred a non-cash goodwill impairment charge of $2.2 million related to the European tableware business due to a decline in operating performance and reduced expectations for future cash flows.

Following the goodwill impairment charges taken in both the third quarter of 2019 and 2018, goodwill associated with the International reporting unit, comprised of the European kitchenware business and tableware business, acquired in 2014 and 2011, respectively, is zero.

Indefinite-lived intangibles

As a result of the impairment testing performed in connection with the COVID-19 pandemic triggering event, the Company determined that certain of its indefinite-lived intangible assets in the U.S.

segment were impaired.

As a result, the Company recorded a $1.0 million non-cash impairment charge during the first quarter of 2020.

Restructuring expenses

During the years ended December 31, 2019 and 2018, the Company's U.S.

The Company had no international restructuring accrual as of December 31, 2019.

The Company's International segment expects to incur restructuring charges of $0.5 million in 2020 to complete its warehouse integration efforts.

During the year ended December 31, 2019, the Company's U.S.

segment incurred $0.7 million, of restructuring expense related to the integration of Filament, of which $0.1 million was accrued at December 31, 2019.

The strategic reorganization was the result of the Company's efforts for product development efficiencies and an international sales approach tailored to countries.

During the year ended December 31, 2019, the Company's International segment incurred $0.7 million of restructuring expense primarily related to the integration of its legal entities operating in Europe.

The Company had no international restructuring accrual as of December 31, 2020 and December 31, 2019.

The Company does not expect to incur any additional restructuring charges for these efforts.

Interest expense

Interest expense for 2020 was $17.3 million, compared to $20.8 million for 2019 .

The increase in expense was attributable to the financing obtained in connection with the acquisition of Filament which was completed in March 2018.

The 2019 interest expense included a full year of interest related to the financing of Filament.

The decrease in expense was primarily a result of less 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 $2.1 million for the year ended December 31, 2020, as compared to a mark to market gain on interest rate derivatives of $0.4 million for the year ended December 31, 2019 .

The mark to market amount represents the change in the fair value on the Company's interest rate derivatives that have not been designed as hedging instruments.

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 year ended December 31, 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

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The Company’s effective tax rate for 2020 was 177.8%, compared to (2.5)% for 2019.

The effective tax rate in 2019 was driven primarily by the impairment of goodwill in the U.S.

The effective tax rate in 2020 was driven primarily by the impairment of goodwill in the U.S, nondeductible expenses, equity-based awards, and a valuation allowance against net deferred tax assets in the United Kingdom.

The effective tax rate in 2019 was driven by the impairment of goodwill in the U.S.

and international reporting units, nondeductible expenses, state taxes and tax credits.

The effective tax rate in 2018 was driven by nondeductible expenses related to the Filament acquisition, impairment of goodwill in the international reporting unit, the increase in liability related to uncertain tax positions, and state taxes.

Equity in earnings

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(in thousands)

Equity earnings, net of taxes $ 467 $ 807

Tax act transition adjustments — 80

Equity in earnings, net of taxes and adjustments 467 887

Impairment of Grand Venture — (227)

Equity in earnings $ 467 $ 660

Vasconia reported income from operations for 2019 of $8.6 million, as compared to $11.4 million for 2018 and reported net income of $1.8 million and $2.9 million in 2019 and 2018, respectively .

Vasconia Equity earnings, net of taxes $ 1,545 $ 467

Cumulative translation foreign currency losses related to dissolution of Lifetime Brands Do Brasil Participacoes Ltda

Equity in earnings (losses), net of taxes $ 1,310 $ 467

Vasconia reported loss from operations for 2020 of $0.1 million, as compared to income of $8.6 million for 2019 and reported net income of $5.6 million and $1.8 million in 2020 and 2019, respectively.

The effect of the translation of the Company’s investment, as well as the translation of Vasconia’s balance sheet, resulted in a decrease of the investment of $2.7 million during the year ended December 31, 2020 and a decrease of the investment of $1.6 million during the year ended December 31, 2019.

Due to the operating losses in the Company’s investment in Grand Venture, the Company evaluated the investments carrying value and assessed if an other-than temporary impairment under the equity method of accounting was necessary.

As a result of this evaluation, the Company recorded an impairment charge of approximately $0.2 million during the year ended December 31, 2018.

MANAGEMENT’S DISCUSSION AND ANALYSIS

2018 COMPARED TO 2017

Prior to December 31, 2018, certain international operations of the Company’s business were managed domestically by the U.S.

The prior period segment information has been recast to reflect the current reportable segment structure of the Company.

Net sales for the year 2018 were $704.5 million, an increase of $125.0 million, or 21.6%, compared to net sales of $579.5 million in 2017.

Net sales from Filament for the period from March 2, 2018, the date of the acquisition of Filament, were $128.8 million.

In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2018 average rates to 2017 local currency amounts, net sales increased $122.3 million, or 21.0%, as compared to consolidated net sales in the corresponding period in 2018.

Net sales for the U.S.

segment in 2018 were $609.1 million, an increase of $131.0 million, or 27.4%, compared to net sales of $478.1 million in 2017.

Net sales for the U.S.

segment’s Kitchenware product category in 2018 were $330.1 million, an increase of $56.0 million, or 20.4%, compared to net sales of $274.1 million in 2017.

The increase in the U.S.

segment’s Kitchenware product category was primarily attributable to contributions from Filament, and to a lesser extent, an increase in pantryware club program sales and an increase in tools and gadget off price retailer sales.

These increase were partially offset by a decline in tools and gadget club sales and a decline in novelty kitchenware sales.

Net sales for the U.S.

segment’s Tableware product category in 2018 were $168.8 million, an increase of $16.3 million, or 10.7%, compared to net sales of $152.5 million for 2017.

The Tableware product category sales increase was primarily attributable to warehouse club programs and an increase in sales from Fitz and Floyd, which was acquired in August 2017.

Net sales for the U.S.

segment’s Home Solutions products category in 2018 were $110.2 million, an increase of $58.6 million, compared to net sales of $51.6 million in 2017.

The increase primarily reflects contributions from Filament and an increase in hydration programs.

This increase was partially offset by a decline in home décor sales attributable to a customer bankruptcy and a decline in a customer program.

Net sales for the International segment in 2018 were $95.4 million, a decrease of $6.0 million, compared to net sales of $101.4 million for 2017.

In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2018 average exchange rates to 2017 local currency amounts, net sales decreased approximately 8.3%.

The decrease, in constant currency, is due to a decline in private label tableware sales and a decline in kitchenware export and field sales.

Gross margin for 2018 was $255.8 million, or 36.3%, compared to $215.2 million, or 37.1%, for the corresponding period in 2017.

Gross margin for the U.S.

segment was $223.5 million, or 36.7%, for 2018 compared to $182.2 million, or 38.1%, for 2017.

Gross margin fluctuates from period to period based on a number of factors, including product and customer mix.

The decrease in gross margin percentage is attributable to a change in customer and product mix from the Kitchenware and Tableware product categories, partially offset by the impact of Filament.

Gross margin for the International segment was $32.3 million, or 33.9%, for 2018 compared to $33.0 million, or 32.5%, for 2017.

The increase in gross margin in the International segment is attributable to the tableware products favorable customer and product mix.

Distribution expenses

Distribution expenses were $69.7 million for the 2018 period as compared to $58.1 million for the 2017 period.

Distribution expenses as a percentage of net sales were 9.9% and 10.0% in 2018 and 2017, respectively.

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

segment were approximately 9.5% in 2018 and 9.8% in 2017.

Distribution expenses in 2018 and 2017 include $2.7 million and $0.7 million, respectively, for the Company’s west coast distribution facility relocation which was completed in 2018.

Distribution expenses as a percentage of sales shipped from the Company’s warehouses located in the United States for the U.S.

segment were 10.4% and 10.8% for 2018 and 2017, respectively.

The decrease reflects the addition of Filament, which has less distribution expense as a percentage of net sales than the Company’s historical operations.

Distribution expenses as a percentage of net sales for the International segment were approximately 12.4% and 11.0% for 2018 and 2017, respectively.

Distribution expenses as a percentage of sales shipped from the Company’s warehouses for the International segment were 13.1% and 12.3% for 2018 and 2017, respectively.

The increase reflects an increase in labor and facility expenses, in part, due to an increase in inventory for new branded product portfolio.

Selling, general and administrative expenses

SG&A expenses for 2018 were $162.9 million, an increase of $22.0 million, or 15.6%, as compared to $140.9 million for 2017.

SG&A expenses for 2018 for the U.S.

segment were $119.1 million, an increase of $22.4 million, or 23.2%, compared to $96.7 million for 2017.

The 2018 period reflects an increase related to the Company’s acquisition of Filament, including an increase in intangible amortization expense.

The acquisition related increases offset a decrease in employee, office and selling expense due to synergies realized from the acquisition of Filament.

As a percentage of net sales, SG&A expenses were 19.6% for 2018 compared to 20.2% for 2017.

SG&A expenses for 2018 for the International segment were $23.6 million, compared to $27.1 million for 2017.

The decrease was due in part to unrealized losses on foreign currency contracts of $2.6 million in the prior period, as compared to a net realized and unrealized gain of $0.2 million in the 2018 period.

The 2017 period also includes expenses of approximately $0.7 million attributable to the implementation of Systems, Applications and Products (“SAP”), which is software that the Company uses in the management of its business, which were not repeated in 2018.

As a percentage of net sales, SG&A expenses decreased to 24.7% for 2018 compared to 27.7% for 2017.

Unallocated corporate expenses for 2018 were $20.2 million compared to $17.2 million for 2017.

The increase in the 2018 period was attributable to an increase in professional fees, share based compensation expense and insurance expense partially offset by a decrease in short term incentive compensation expense.

Restructuring expenses

During 2018, the U.S.

segment recorded $2.3 million of restructuring expense, primarily for severance, related to the Company’s Filament integration.

During 2018 and 2017, the Company recorded $0.2 million and $1.0 million, respectively, of international restructuring expense, primarily for severance, related to the integration of operations in Europe.

Interest expense

Interest expense for 2018 was $18.0 million compared to $4.3 million for 2017.

The increase in expense was attributable to the financing obtained in connection with the acquisition of Filament.

Loss on early retirement of debt

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

Income tax provision

The income tax provision was $2.9 million in 2018 and $9.0 million in 2017.

The Company’s effective tax rate for 2018 was 567.6%, compared to 83.8% for 2017.

The effective tax rate in 2018 was driven by nondeductible expenses related to the Filament acquisition, impairment of goodwill in the foreign jurisdictions, the increase in liability related to uncertain tax positions, and state taxes.

The effective tax rate in 2017 was driven by the reduced deferred tax assets resulting from the application of a lower corporate tax rate under the Tax Act, enacted in December 2017, and the estimated transition tax.

Year Ended December 31, 2017

(in thousands)

Transition tax on non-U.S.

subsidiaries’ earnings $ 338

Re-measurement of U.S.

deferred tax assets and liabilities 2,981

Total impact of the Tax Act on the provision for income taxes $ 3,319

Due to the complexities involved in accounting for the Tax Act, the Company was required to include in its 2017 financial statements the reasonable estimate of the impact of the Tax Act on its earnings to the extent such reasonable estimate had been determined.

Accordingly, the U.S.

provision for income tax for 2017 is based on the reasonable estimate guidance.

The Company continued to assess the impact from the Tax Act in 2018 and recorded an adjustment of approximately $0.7 million.

Equity in earnings (losses)

The Company’s equity in earnings (losses), net of tax, for 2018 and 2017 are as follows:

Year Ended December 31,

(in thousands)

Equity earnings, net of tax $ 807 $ 176

Tax benefit recorded in equity in earnings (1)

Tax act transition adjustments 80 239

Equity in earnings 887 415

Impairment of Grand Venture $ (227) $ (8)

(1) Income tax provision related to the valuation allowance for deferred taxes associated with the cumulative foreign currency translation adjustment.

Equity in earnings, net of taxes, was $0.9 million in 2018, as compared to $0.4 million in 2017.

Vasconia reported income from operations for 2018 of $11.4 million, as compared to $10.5 million for 2017, and reported net income of $2.9 million in 2018, compared to $1.2 million in 2017.

Due to the operating losses in the Company’s investment in Grand Venture, the Company evaluated the carrying value of its investment for other-than temporary impairment under the equity method of accounting, and recorded an impairment charge of approximately $0.2 million during the year ended December 31, 2018.

During the year ended December 31, 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements which have been prepared in accordance with GAAP and with the instructions to Form 10-K and Article 10 of Regulation S-X.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s audited consolidated financial statements which have been prepared in accordance with GAAP and with the instructions to Form 10-K and Article 10 of Regulation S-X.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

The Company evaluates these estimates including those related to revenue recognition, allowances for doubtful accounts, reserves for sales returns and allowances and customer chargebacks, inventory mark-down provisions, health insurance reserves, impairment of goodwill, tangible and intangible assets, stock compensation expense, accruals related to the Company’s tax positions and tax valuation allowances.

Actual results may differ from these estimates using different assumptions and under different conditions.

The Company’s significant accounting policies are more fully described in Note A- Significant Accounting Policies in the Notes to the consolidated financial statements included in Item 15.

The Company evaluates these estimates including those related to revenue recognition, allowances for doubtful accounts, reserves for sales returns and allowances and customer chargebacks, inventory mark-down provisions, estimates for unpaid healthcare claims, impairment of goodwill, tangible and intangible assets, stock compensation expense, accruals related to the Company’s tax positions and tax valuation allowances.

Actual results may differ from these estimates using different assumptions and under different conditions and changes in these estimates are recorded when known.

The Company’s significant accounting policies are more fully described in NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES in the Notes to the consolidated financial statements included in Item 15.

The Company believes that the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the Company’s consolidated financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

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Accounts Receivable

The Company periodically reviews the collectability of its accounts receivable and establishes allowances for estimated losses that could result from the inability of its customers to make required payments, taking into consideration customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impact of the COVID-19 pandemic in 2020.

A considerable amount of judgment is required to assess the ultimate realization of these receivables including assessing the initial and on-going creditworthiness of the Company’s customers.

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To improve its liquidity during seasonally high working capital periods, the Company has an uncommitted Receivables Purchase Agreement with HSBC Bank USA, as Purchaser (the “Receivables Purchase Agreement”).

Under the Receivables Purchase Agreement, the Company may offer to sell certain eligible accounts receivable (the “Receivables”) to HSBC Bank USA, which may accept such offer, and purchase the offered Receivables.

Under the Receivables Purchase Agreement, the Company may offer to sell certain eligible accounts receivables (the “Receivables”) to HSBC Bank USA, which may accept such offer, and purchase the offered Receivables.

Under the Receivables Purchase Agreement, following each purchase of Receivables, the outstanding aggregate purchased Receivables shall not exceed $30.0 million.

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The Company will service the Receivables, and as such servicer, collect and otherwise enforce the Receivables on behalf of HSBC Bank USA.

The term of the agreement is for 364 days and shall automatically be extended for annual successive terms unless terminated.

The term of the agreement is for 364 days and automatically extends for annual successive terms unless terminated.

Either party may terminate the agreement at any time upon 60 days prior written notice to the other party.

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At December 31, 2020 and 2019, $24.7 million and $20.9 million, respectively, of receivables sold are outstanding and are due to HSBC Bank USA from customers.

A charge of $0.6 million and $0.5 million related to the sale of the Receivables is included in SG&A expenses in the consolidated statement of operations for the years ended December 31, 2019 and 2018, respectively.

A charge of $0.4 million and $0.6 million related to the sale of the Receivables is included in selling, general and administrative expenses in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively.

The Company determines if an arrangement is a lease at the inception of a contract.

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The current and long-term components of operating lease liabilities are included in the current portion of operating lease liability and operating lease liabilities, respectively, on the consolidated balance sheets.

Finance leases are not material to the Company’s consolidated balance sheets.

Finance leases are included in property and equipment, net, accrued expenses and other long-term liabilities.

The Company's finance leases are not material to the Company’s consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term.

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Additionally, if events or conditions were to indicate the carrying value of a reporting unit may not be recoverable, the Company would evaluate goodwill and other intangible assets for impairment at that time.

As it relates to the goodwill assessment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment testing described in Accounting Standards Update (“ASU”) Topic 350, Intangibles – Goodwill and Other.

(“ASU”) Topic 350, Intangibles – Goodwill and Other.

If, after assessing qualitative factors, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative test is unnecessary and the Company’s goodwill is considered to be unimpaired.

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The Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of October 1st or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values.

Impairment testing is based upon the best information available including estimates of fair value which incorporate assumptions marketplace

participants would use in making their estimates of fair value.

For goodwill, impairment testing is based upon the best information available using a combination of the discounted cash flow method, a form of the income approach, and the guideline public company method, a form of the market approach.

The significant assumptions used under the income approach, or discounted cash flow method, are projected net sales, projected earnings before interest, tax, depreciation and amortization (“EBITDA”), terminal growth rates, and the cost of capital.

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Cost of capital was also determined to be a significant assumption as it is the discount rate used to calculate the current fair value of those projected cash flows.

For the guideline public company method, significant assumptions relate to the selection of appropriate guideline companies and related valuation multiples used in the market analysis.

Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results.

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These tests can include the relief from royalty model or other valuation models.

The significant assumptions used in the relief from royalty model are future net sales for the related brands, royalty rates and the cost of capital to determine the fair value of the indefinite lived intangibles.

The Company also evaluates qualitative factors to determine whether or not its indefinite lived intangibles have been impaired and then performs quantitative tests if required.

These tests can include the relief from royalty model or other valuation models.

Long-lived assets, including intangible assets deemed to have finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

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Payment terms vary by customer, but generally range from 30 to 90 days or at the point of sale for the Company’s retail direct sales.

As a result of the COVID-19 pandemic, beginning in the first quarter of 2020 and lasting through the fourth quarter of 2020, many of the Company's customers that operate retail locations temporarily closed their stores voluntarily or as mandated by government stay at home orders.

In response to these closings, the affected customers have requested extended payment terms.

The Company has been working with these customers to address their temporary extended payment requests.

The Company incurs certain direct incremental costs to obtain contracts with customers, such as sales-related commissions, where the recognition period for the related revenue is less than one year.

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

Prior to January 1, 2019, depreciation associated with certain tooling used to produce products was classified as selling, general and administrative expenses.

The amount recorded in cost of sales for the year ended December 31, 2019 was $1.4 million.

The impact on the comparative periods presented is immaterial and therefore, the comparative periods have not been adjusted to reflect this change in accounting policy.

The Company implemented programs to improve the productivity of its inventory and simplify its U.S.

In connection therewith, it initiated a stock keeping unit rationalization (“SKU Rationalization”) initiative to identify inventory to discontinue from

active status, consistent with the objectives of these programs.

In 2019, the Company implemented programs to improve the productivity of its inventory and simplify its U.S.

In connection therewith, it initiated a stock keeping unit rationalization (“SKU Rationalization”) initiative to identify inventory to discontinue from active status, consistent with the objectives of these programs.

During the year ended December 31, 2019, the Company recorded an $8.5 million charge to cost of sales associated with the SKU Rationalization initiative.

The inventory charge represented approximately 8% of the Company's consolidated inventory as of June 30, 2019, the period in which the charge was taken.

The inventory charge, which was recognized in cost of sales during the three months ended June 30, 2019, represented approximately 8% of the Company's consolidated inventory at June 30, 2019.

Prior to January 1, 2019, depreciation associated with certain tooling used to produce products was recorded in selling, general and administrative expenses in the consolidated statement of operations.

The amount recorded in cost of sales for the year ended December 31, 2020 and 2019 was $1.0 million and $1.4 million, respectively.

The impact on the comparative periods presented is immaterial and therefore, the comparative periods have not been adjusted to reflect this change in accounting policy.

Share-based compensation

The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718, Stock Compensation, which requires the measurement of compensation expense for all share-based compensation granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service period.

The Company accounts for its share-based compensation arrangements in accordance with ASC Topic 718, Compensation:

Stock-based Compensation, which requires the measurement of compensation expense for all share-based compensation granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service period.

Forfeitures are accounted for as they occur.

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Each performance award represents the right to receive up to 150% of the target number of shares of common stock.

The number of shares of common stock earned will be determined based on the attainment of specified performance goals by the end of the performance period, as determined by the Compensation Committee of the Board of Directors.

The number of shares of common stock earned will be determined based on the attainment of specified performance goals, as determined by the Compensation Committee of the Board of Directors, by the end of the performance period.

Compensation expense for performance awards is recognized over the vesting period and will vary based on remeasurement during the performance period.

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The performance share awards vest at the end of a three year period, as determined by the Compensation Committee.

The Company bases the estimated fair value of Stock Compensation restricted stock awards on the date of grant.

The Company bases the estimated fair value of restricted stock awards on the date of grant.

The estimated fair value is determined based on the closing price of the Company’s common stock on the date of grant multiplied by the number of shares awarded.

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Restructuring Expenses

During the years ended December 31, 2019 and 2018, the Company's U.S.

The Company had no international restructuring accrual as of December 31, 2019.

The Company's International segment expects to incur restructuring charges of $0.5 million in 2020 to complete its warehouse integration efforts.

Costs associated with restructuring activities are recorded at fair value when a liability has been incurred.

A liability has been incurred at the communication date for severance.

Charges associated with lease terminations, related to restructuring activities, are recognized at the effective date of the lease modification.

Employee healthcare

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Although management believes that it uses the best information available to estimate IBNR claims, actual claims may vary significantly from estimated claims.

The Company applies the required provisions for financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the Company’s financial statements .

Tax positions must meet a more-likely-than-not recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken.

The valuation allowance is also calculated, established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized.

On December 22, 2017, the Tax Act was enacted.

The Tax Act is one of the most comprehensive changes in the U.S.

corporate tax law and policy since 1986 and certain provisions are extremely complex in their application.

The Tax Act revises the U.S.

corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%, adopting a quasi-territorial income tax

system and imposing a one-time transition tax on foreign unremitted earnings, and setting limitations on the deductibility of certain costs (e.g., interest expense).

The lower U.S.

corporate income tax rate is effective January 1, 2018, however the Company’s U.S.

deferred tax assets and liabilities were adjusted in 2017 when the new tax law was enacted.

Additionally, in 2017, as part of the transition to the new quasi-territorial tax system, the Tax Act imposes a one-time tax on deemed repatriation of foreign subsidiaries’ earnings.

provision for income tax for 2017 was based on the reasonable estimate guidance provided by SAB 118.

The Company is continuing to assess the impact from the Tax Act.

Changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the impact of the Tax Act could result in material changes to the Company’s future income tax provision.

The Company applies the authoritative guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the Company’s financial statements .

In accordance with this guidance, tax positions must meet a more-likely-than-not recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position.

A valuation allowance is required to be established or maintained when it is “more likely than not” that all or a portion of deferred tax assets will not be realized.

The Company accounts for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging.

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Changes in the fair value of derivatives that qualify as hedges and have been designated as part of a hedging relationship for accounting purposes have no net impact on earnings until the hedged item is recognized in earnings.

The change in the fair value of hedges are included in accumulated other comprehensive loss and is subsequently recognized in the Company’s consolidated statements of operations to mirror the location of the hedged items impacting earnings.

Changes in fair value of derivatives that do not qualify as hedging instruments for accounting purposes are recorded in the consolidated statement of operations.

The change in the fair value of hedges are included in accumulated other comprehensive income (loss) and is subsequently recognized in the Company’s consolidated statements of operations to mirror the location of the hedged items impacting earnings.

Changes in fair value of derivatives that do not qualify as hedging instruments for accounting purposes are recorded in the consolidated statements of operations.

Foreign currency

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The current ratio (current assets to current liabilities) was 2.3 to 1.0 at December 31, 2020, compared to 3.1 to 1.0 at December 31, 2019.

The decrease in the current ratio was driven by the adoption of the new lease accounting standard and the excess cash flow principal payment related to the debt agreement.

The increase in working capital was driven by higher sales and increased inventory levels compared to the prior year.

The decrease in the current ratio was primarily due to an increase in accounts payable due to timing of inventory purchases and an increase in the estimated excess cash flow principal payment related to the Company's debt agreement.

At December 31, 2020, borrowings under the Company’s ABL Agreement were $27.3 million and $262.6 million was outstanding under the Term Loan.

At December 31, 2019, borrowings under the Company’s ABL Agreement were $32.8 million and $270.2 million was outstanding under the Term Loan.

The borrowings in 2019 and 2018 were primarily attributable to the financing of the acquisition of Filament.

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

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

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.

In 2020, the Company's inventory levels did not significantly decrease during the fourth quarter.

The higher inventory levels at December 31, 2020 were a result of increased inventory purchases to meet higher expected demand in 2021.

The Company also expects inventory turnover to fluctuate from period to period based on product and customer mix.

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For the three months ended December 31, 2020 inventory turnover was 3.1 times, or 117 days, as compared to 2.9 times, or 128 days, for the three months ended December 31, 2019.

The improvement was a result of an increase in consumer demand for certain products beginning in the second quarter of 2020.

Credit Facilities

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

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

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

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

The 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 December 31, 2019 and 2018, the total availability under the ABL Agreement are as follows (in thousands):

December 31, 2019 December 31, 2018

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

December 31, 2020

December 31, 2019

Maximum aggregate principal allowed $ 150,000 $ 150,000

Outstanding borrowings under the ABL Agreement (27,302) (32,822)

Open letters of credit (2,288) (3,392)

Total availability under the credit agreement $ 114,890 $ 104,528

Standby letters of credit (2,698) (2,288)

Total availability under the ABL agreement $ 120,000 $ 114,890

Availability under the ABL Agreement depends on the valuation of certain current assets comprising the borrowing base.

Due to the seasonality of the Company’s business, this may mean that the Company will have greater borrowing availability during the third and fourth quarters of each year.

The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts

receivable and inventory that fluctuate regularly.

The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly.

Consequently, the $150.0 million commitment thereunder may not represent actual borrowing capacity.

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Current portion of Term Loan facility:

Term Loan facility annual principal payment $ 2,750 $ 2,750

Excess Cash Flow principal payment 7,145 —

Unamortized debt issuance costs (1,482) (1,497)

Term Loan facility payment $ — $ 2,750

Estimated Excess Cash Flow principal payment 19,120 7,145

Estimated unamortized debt issuance costs (1,463) (1,482)

Total Current portion of Term Loan facility $ 17,657 $ 8,413

Non-current portion of Term Loan facility:

Term Loan facility $ 260,293 $ 270,188

Unamortized debt issuance costs (6,012) (7,494)

Term Loan facility, net of current portion $ 243,485 $ 260,293

Estimated unamortized debt issuance costs (4,508) (6,012)

Total Non-current portion of Term Loan facility $ 238,977 $ 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 December 31, 2019 ranged from 2.44% to 2.63%.

The interest rate on outstanding borrowings under the ABL Agreement at December 31, 2020 was 1.52%.

In addition, the Company paid a commitment fee that ranged from 0.250% to 0.375% on the unused portion of the ABL Agreement during the year ended December 31, 2020.

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Three months ended March 31, 2020

Consolidated adjusted EBITDA, before limitation 64,064

Permitted non-recurring charge limitation (8,929)

Consolidated adjusted EBITDA $ 77,326

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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 net loss as reported to consolidated adjusted EBITDA for the years ended December 31, 2019 and 2018 and each fiscal quarter of 2019 and 2018:

The following is a reconciliation of net (loss) income as reported to consolidated adjusted EBITDA for the years ended December 31, 2020 and 2019 and each fiscal quarter of 2020 and 2019:

Three Months Ended Year Ended

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September 30, 2020

December 31, 2019 December 31, 2019

December 31, 2020

(in thousands)

Net loss as reported

Net (loss) income as reported

$ (28,164) $ (3,977) 13,913 $ 15,221 $ (3,007)

Subtract out:

Undistributed equity losses (earnings), net

Undistributed equity (earnings) losses, net

(339) 848 (147) (1,620) (1,258)

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Depreciation and amortization 6,234 6,061 6,090 6,279 24,664

Impairment of goodwill — — 9,748 33,242 42,990

Mark to market loss (gain) on interest rate derivatives 2,251 164 (99) (172) 2,144

Goodwill and other impairments 20,100 — — — 20,100

Stock compensation expense 1,326 1,420 1,575 1,630 5,951

SKU Rationalization (1)

— 8,500 — — 8,500

Acquisition and divestment related expenses 151 — — 55 206

Restructuring expenses (1)

608 173 338 316 1,435

Integration charges (1)

174 695 235 159 1,263

Warehouse relocation (1)

215 — 881 1,689 2,785

Consolidated adjusted EBITDA, before limitation $ 6,127 $ 4,306 $ 25,758 $ 27,873 $ 64,064

Permitted non-recurring charge limitation (1)

Acquisition related expenses 47 55 57 126 285

Restructuring expenses (benefit) — 253 — (42) 211

Warehouse relocation expenses 790 303 — — 1,093

Consolidated adjusted EBITDA $ 3,252 $ 12,388 $ 29,228 $ 32,458 $ 77,326

(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.

Consolidated adjusted EBITDA is defined as net income (loss), adjusted to exclude undistributed equity in (earnings) losses, income tax (benefit) provision, interest, depreciation and amortization, stock compensation expense, and other items detailed in the table above that are consistent with exclusions permitted by our debt agreements

Consolidated adjusted EBITDA is defined as net income (loss), adjusted to exclude undistributed equity in (earnings) losses, income tax (benefit) provision, interest expense, depreciation and amortization, mark to market loss (gain) on interest rate derivatives, goodwill and other impairments, stock compensation expense, and other items detailed in the table above that are consistent with exclusions permitted by our debt agreements.

Three Months Ended Year Ended

5 unchanged sentences

(in thousands)

Net (loss) income as reported

Net loss as reported

$ (4,867) $ (11,513) $ (13,519) $ (14,516) $ (44,415)

Subtract out:

Undistributed equity (earnings), net

Undistributed equity losses (earnings), net

116 69 210 (738) (343)

2 unchanged sentences

Interest expense 4,922 5,044 5,539 5,275 20,780

Loss on early retirement of debt 66 — — — 66

Depreciation and amortization, net 6,359 6,290 6,122 6,344 25,115

Mark to market loss (gain) on interest rate derivatives — (350) (367) 315 (402)

Impairment of goodwill — — 9,748 33,242 42,990

Stock compensation expense 907 1,193 1,505 1,436 5,041

Contingent consideration fair value adjustment — — — (1,774) (1,774)

Unrealized loss (gain) on foreign currency contracts 393 (2,112) (190) (33) (1,942)

Other permitted non-cash charges (1)

SKU Rationalization (1)

— 8,500 — — 8,500

Acquisition related expenses 809 391 43 523 1,766

Acquisition and divestment related expenses 151 — — 55 206

Restructuring expenses (1)

2 unchanged sentences

174 695 235 159 1,263

Warehouse relocation (2)

2,384 168 55 118 2,725

Pro forma Filament adjustment (3)

3,326 — — — 3,326

Projected synergies (4)

Warehouse relocation expenses (1)

215 — 881 1,689 2,785

2 unchanged sentences

Consolidated adjusted EBITDA $ 55,135

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

(2) Permitted non-recurring charges include restructuring expenses, integration charges, warehouse relocation costs, transition expenses and severance expense.

(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.

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

(4) Pro forma projected synergies represents the amount of projected cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies projected by the Company as a result of actions taken through December 31, 2018 or expected to be taken as of December 31, 2018, net of the benefits realized during the twelve months ended December 31, 2018.

Pro forma projected synergies is a permitted exclusion from the Company’s consolidated adjusted EBITDA, subject to limitations, pursuant to the Company’s Debt Agreements.

Capital expenditures

Capital expenditures for the year ended December 31, 2019 were $9.2 million mainly attributable to the warehouse consolidation efforts related to the International business.

Capital expenditures for the year ended December 31, 2020 were $2.1 million.

Interest Rate Swap Agreements

The Company is a party to interest rate swap agreements, with an aggregate notional value of $100.0 million at December 31, 2019.

The Company designated these interest rate swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings.

The Company's net total outstanding notional value of interest rate swaps was $100 million at December 31, 2020.

The Company designated a portion of these interest rate swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings.

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

The notional amounts are reduced over these periods.

The original notional values are reduced over these periods.

The aggregate notional value was $75.0 million at December 31, 2020.

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

These non-designated interest rate swaps

serve as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings and expire in February 2025.

The Company's net total outstanding notional value of interest rate swaps was $125.0 million at December 31, 2019.

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

Foreign Exchange Contracts

The Company is a party from time to time to certain foreign exchange contracts, primarily to offset the earnings impact related to fluctuations in foreign currency exchange rates associated with inventory purchases denominated in foreign currencies.

Fluctuations in the value of certain foreign currencies as compared to the USD may positively or negatively affect the Company’s revenues, gross margins, operating expenses, and retained earnings, all of which are expressed in USD.

Where the Company deems it prudent, the Company engages in hedging programs using foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings.

The Company purchases short-term (i.e., 12 months or less) foreign currency forward contracts to protect against currency exchange risks associated with the payment of merchandise purchases to foreign suppliers.

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

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

At December 31, 2020, the Company had no outstanding foreign exchange contracts.

The aggregate gross notional values of foreign exchange contracts at December 31, 2019 was $7.3 million.

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 changes to credit risk of derivative counterparties.

5 unchanged sentences

These foreign exchange contracts have been designated as hedges in to order to apply hedge accounting.

No contracts were outstanding at December 31, 2018.

The Company purchases short-term (i.e.

12 months or less) foreign currency forward contracts to protect against currency exchange risks associated with the payment of merchandise purchases to foreign suppliers.

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

The aggregate gross notional values of foreign exchange contracts at December 31, 2019 was $7.3 million.

Dividends were declared in 2020 and 2019 as follows:

2 unchanged sentences

$0.0425 June 27, 2019 August 1, 2019 August 15, 2019

$0.0425 July 31, 2018 November 1, 2018 November 15, 2018

$0.0425 November 7, 2018 February 1, 2019 February 15, 2019

$0.0425 March 12, 2019 May 1, 2019 May 15, 2019

$0.0425 August 6, 2019 November 1, 2019 November 15, 2019

$0.0425 November 7, 2019 January 31, 2020 February 14, 2020

$0.0425 March 10, 2020 November 16, 2020 December 16, 2020

$0.0425 June 25, 2020 August 3, 2020 August 17, 2020

4 unchanged sentences

Net cash provided by operating activities was $44.8 million in 2020, compared to $29.9 million in 2019 and $19.2 million in 2018.

The change from 2019 compared to 2018 was primarily attributable to timing of collections related to the Company's accounts receivables.

The increase in 2018 as compared to 2017, is attributable to a decrease in payments of accounts payable and accrued expenses and an increase in collection of receivables, partially offset by an increase in inventory purchases.

The increase from 2020 compared to 2019 was attributable to an increase in net income, most significantly before goodwill impairment, partially offset by an increase in working capital primarily attributable to the timing of collections related to accounts receivables.

The change from 2019 compared to 2018 was primarily attributable to timing of collections related to accounts receivables.

Cash used in investing activities

Net cash used in investing activities was $2.1 million in 2020, compared to $9.2 million in 2019 and $224.2 million in 2018.

The 2019 investing activity includes the capital expenditures incurred as a result of the warehouse integration efforts of the International business.

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.

The 2018 investing activity includes the cash consideration paid for the acquisition of Filament and capital expenditures related to the Company’s relocation of its west coast distribution facility.

Cash (used in) provided by

Cash (used in) provided by financing activities

Net cash (used in) provided by financing activities was $(18.2) million in 2020 compared to $(16.9) million in 2019 and $205.3 million in 2018.

In 2019, the Company utilized cash generated in the latter part of the year to repay a portion of its outstanding debt related to its Term Loan and credit facility.

During 2020 and 2019, the Company utilized cash generated to repay a portion of its outstanding debt related to its Term Loan and credit facility.

In 2018, the change in financing activities was attributable to the new Debt Agreements entered into in order to finance the acquisition of Filament in 2018.

5 unchanged sentences

Operating leases $ 146,290 $ 18,112 $ 36,375 $ 35,688 $ 56,115

Finance leases 203 127 62 14 —

Short-term debt 19,120 19,120 — — —

5 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis