LIFETIME BRANDS, INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q of Lifetime Brands, Inc. (the “Company” and, unless the context otherwise requires, references to the “Company” shall include its consolidated subsidiaries), contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. These forward-looking statements include information concerning the Company’s plans, objectives, goals, strategies, future events, future revenues, performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, in Management’s Discussion and Analysis of Financial Condition and Results of Operations. When used in this Quarterly Report on Form 10-Q, the words “estimates,” “expects,” “intends,” “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. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company’s assumptions will prove correct. There are a number of risks and uncertainties that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Important factors that could cause the Company’s actual results to differ materially from those expressed as forward-looking statements include, without limitation, those set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”) in Part I, Item 1A under the heading Risk Factors, and in the Company’s subsequent filings with the U.S. Securities and Exchange Commission (the “SEC”). Such risks, uncertainties and other important factors include, among others, risks related to: • Macroeconomic conditions, including inflationary impacts and disruptions to the global supply chain; • Increase in supply chain costs, including raw materials, sourcing, transportation and energy; • The impact of the United Kingdom's exit from the European Union on the Company's U.K. operations; • The impact of tariffs and trade policies, particularly with respect to China; • Legislative or regulatory risks relating to climate change; • Indebtedness, compliance with credit agreements, and access to credit markets; • Access to the capital markets and credit markets; • The seasonality of the Company's cash flows; • The Company's ability to complete acquisitions or successfully integrate acquisitions, such as the recent acquisition of S'well; • Intense market competition and changing customer practices or preferences; • Dependence on third-party manufacturers; • Technology, cybersecurity and data privacy risks; • Geopolitical conditions, including war, conflict, unrest and sanctions, including those related to the conflicts in Ukraine, Israel and surrounding areas; • Product liability claims; and • Reputational risks. 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 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 Quarterly Report on Form 10-Q. 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 any 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 - 32 - Table of Contents Company’s website. The SEC also maintains a website 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 The Company designs, sources and sells branded kitchenware, tableware and other products used in the home. The Company’s product categories include two categories of products used to prepare, serve, and consume foods: Kitchenware (kitchen tools and gadgets, cutlery, kitchen scales, thermometers, cutting boards, shears, cookware, pantryware, spice racks, and bakeware) and Tableware (dinnerware, stemware, flatware, and giftware); and one category, Home Solutions, which comprises other products used in the home (thermal beverageware, bath scales, weather and outdoor household products, food storage, neoprene travel products and home décor). In 2022, Kitchenware products and Tableware products accounted for approximately 82% of the Company’s U.S. segment’s net sales and 84% of the Company’s consolidated net sales. The Company markets several product lines within each of its product categories and under most of the Company’s brands, primarily targeting moderate price points through virtually every major level of trade. The Company believes it possesses certain competitive advantages based on its brands, its emphasis on innovation and new product development, and its sourcing capabilities. The Company owns or licenses a number of leading brands in its industry, including Farberware ® , Mikasa ® , KitchenAid ® , Taylor ® , Rabbit ® , Pfaltzgraff ® , Built NY ® , Sabatier ® , Fred ® & Friends, Kamenstein ® , and S'well ® . Historically, the Company’s sales growth has come from expanding product offerings within its product categories, developing existing brands, acquiring new brands (including complementary brands in markets outside the United States), and establishing new product categories. Key factors in the Company’s growth strategy have been the selective use and management of the Company’s brands and the Company’s ability to provide a stream of new products and designs. A significant element of this strategy is the Company’s in-house design and development teams that create new products, packaging and merchandising concepts. RECENT DEVELOPMENTS The global economy continues to experience relatively high inflation, which has in part been caused by the supply chain disruptions and higher consumer spending. The rise in inflation has contributed to higher prices, resulting in increased transportation and labor cost and consumer spending and buying patterns. Retailers have responded to the economic challenges by rightsizing inventory levels, and further reducing safety stock and weekly supply on hand. The recent rise in interest rates has lessened inflationary pressures in the U.S., but has also resulted in higher interest expense on the Company’s outstanding borrowings. Further, the U.K. economy has been facing unfavorable economic and market conditions, with high inflation and low consumer confidence due to uncertain geopolitical and economic outlooks. The Company has been adversely impacted by these trends in 2022 and these trends have continued in 2023. BUSINESS SEGMENTS The Company has two reportable segments, U.S. and International. The Company has segmented its operations to reflect the manner in which management reviews and evaluates the results of its operations. The U.S. segment includes the Company’s primary domestic business that designs, markets and distributes its products to retailers, distributors and directly to consumers through its own websites. The International segment consists of certain business operations conducted outside the U.S.. Management evaluates the performance of the U.S. and International segments based on net sales and income from operations. Such measures give recognition to specifically identifiable operating costs such as cost of sales, distribution expenses and selling, general and administrative expenses. Certain general and administrative expenses, such as senior executive salaries and benefits, stock compensation, director fees, and accounting, legal fees and consulting fees, are not allocated to the specific segments and are reflected as unallocated corporate expenses. EQUITY INVESTMENT As of September 30, 2023, the Company owned 24.7% of the outstanding capital stock of Grupo Vasconia S.A.B. (“Vasconia”), an integrated manufacturer of aluminum products and one of Mexico’s largest housewares companies. Shares of Vasconia’s capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange. The Quotation Key is VASCONI. The Company accounts for its investment in Vasconia using the equity method of accounting and records its - 33 - Table of Contents 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 and nine months ended September 30, 2023 and 2022 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 (the "Vasconia Board"). As of September 30, 2023, the Vasconia Board was comprised of eleven members, of whom the Company had no designated members. SEASONALITY The Company’s business and working capital needs are seasonal, with a majority of sales occurring in the third and fourth quarters. In 2022 and 2021, net sales for the third and fourth quarters accounted for 54% and 56% of total annual net sales, respectively. The current market conditions and shifts in both consumer and retailer purchasing patterns has impacted the seasonality of the Company's net sales compared to historical trends. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period. In 2023, the Company's inventory trends may deviate from historical trends due to a change in inventory strategy to react to the current market conditions impacting the Company and retailers. 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. CRITICAL ACCOUNTING ESTIMATES There have been no material changes to the Company’s critical accounting estimates discussed in the 2022 Annual Report on Form 10-K in Item 7 under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates . RESULTS OF OPERATIONS The following table sets forth statements of operations data of the Company as a percentage of net sales for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 63.0 63.6 62.6 64.3 Gross margin 37.0 36.4 37.4 35.7 Distribution expenses 8.9 10.0 10.3 10.6 Selling, general and administrative expenses 21.0 19.5 23.6 21.9 Wallace facility remediation expense — 2.8 — 1.0 Restructuring expenses — — 0.1 — Income from operations 7.1 4.1 3.4 2.2 Interest expense (2.7) (2.5) (3.4) (2.3) Mark to market (loss) gain on interest rate derivatives (0.1) 0.4 — 0.4 Gain on early retirement of debt — — 0.3 — Income before income taxes and equity in losses 4.3 2.0 0.3 0.3 Income tax provision (1.6) (1.0) (0.6) (0.7) Equity in losses, net of taxes (0.5) (4.4) (2.0) (1.4) Net income (loss) 2.2 % (3.4) % (2.3) % (1.8) % - 34 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS THREE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2022 Net Sales Consolidated net sales for the three months ended September 30, 2023 were $191.7 million, representing an increase of $5.1 million, or 2.7%, as compared to net sales of $186.6 million for the corresponding period in 2022. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2023 average rates to 2022 local currency amounts, consolidated net sales increased by $4.1 million, or 2.2%, as compared to consolidated net sales in the corresponding period in 2022. Net sales for the U.S. segment for the three months ended September 30, 2023 were $179.4 million, an increase of $6.6 million, or 3.8%, as compared to net sales of $172.8 million for the corresponding period in 2022. Net sales for the U.S. segment’s Kitchenware product category were $97.7 million for the three months ended September 30, 2023, an increase of $5.1 million, or 5.5%, as compared to $92.6 million for the corresponding period in 2022. The increase was driven by sales for kitchen tools and gadgets and cutlery and boards, partially offset by lower sales in bakeware products. Net sales for the U.S. segment’s Tableware product category were $48.9 million for the three months ended September 30, 2023, an increase of $4.4 million, or 9.9%, as compared to $44.5 million for the corresponding period in 2022. The increase was attributable to higher dinnerware sales due to a new warehouse club program in 2023. Net sales for the U.S. segment’s Home Solutions product category were $32.8 million for the three months ended September 30, 2023, a decrease of $2.9 million, or 8.1%, as compared to $35.7 million for the corresponding period in 2022. The decrease was in hydration products, partially offset by Taylor branded bath measurement products. Net sales for the International segment were $12.3 million for the three months ended September 30, 2023, a decrease of $1.5 million, or 10.9%, as compared to net sales of $13.8 million for the corresponding period in 2022. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations, net sales decreased $2.4 million, or 16.6%, as compared to consolidated net sales in the corresponding period in 2022. The decrease was driven by the Company's global trading business in Asia due to a general slowing of replenishment orders in part caused by macroeconomic factors in the region. Gross margin Gross margin for the three months ended September 30, 2023 was $71.0 million, or 37.0%, as compared to $67.8 million, or 36.4%, for the corresponding period in 2022. Gross margin for the U.S. segment was $67.0 million, or 37.3%, for the three months ended September 30, 2023, as compared to $63.3 million, or 36.6%, for the corresponding period in 2022. The improvement in the gross margin percentage for the U.S. segment was driven by product mix. Gross margin for the International segment was $4.0 million, or 32.5%, for the three months ended September 30, 2023, as compared to $4.5 million, or 32.6%, for the corresponding period in 2022. The decrease in the gross margin percentage was attributable to higher inventory reserves recorded in the current period compared to the prior quarter, mostly offset by lower product and inbound freight costs. Distribution expenses Distribution expenses for the three months ended September 30, 2023 were $17.1 million, as compared to $18.6 million for the corresponding period in 2022. Distribution expenses as a percentage of net sales were 8.9% for the three months ended September 30, 2023, as compared to 10.0% for the three months ended September 30, 2022. Distribution expenses as a percentage of net sales for the U.S. segment were approximately 7.8% and 9.0% for the three months ended September 30, 2023 and 2022, respectively. Distribution expenses during the three months ended September 30, 2023 included $0.2 million for redesign costs related to the Company's U.S. warehouses. As a percentage of sales shipped from the Company’s U.S. warehouses, excluding non-recurring expenses, distribution expenses were 9.1% and 10.4% for the three months ended September 30, 2023 and 2022, respectively. The decrease in expenses as a percentage of sales was attributable to - 35 - Table of Contents lower storage expenses, improved labor management efficiencies resulting in a decrease of employee expenses, and lower pallet expenses. Distribution expenses as a percentage of net sales for the International segment were 26.1% for the three months ended September 30, 2023, compared to 22.5% for the corresponding period in 2022. As a percentage of sales shipped from the Company’s international warehouses distribution expenses were 22.4% and 22.9% for the three months ended September 30, 2023 and 2022, respectively. The increase in expenses as a percentage of sales was attributable to lower sales. Selling, general and administrative expenses Selling, general and administrative expenses for the three months ended September 30, 2023 were $40.2 million, an increase of $3.7 million, or 10.1%, as compared to $36.5 million for the corresponding period in 2022. Selling, general and administrative expenses for the U.S. segment were $31.6 million for the three months ended September 30, 2023, as compared to $28.3 million for the corresponding period in 2022. As a percentage of net sales, selling, general and administrative expenses were 17.6% and 16.4% for the three months ended September 30, 2023 and 2022, respectively. The increase in expenses was attributable to higher incentive compensation expense. Selling, general and administrative expenses for the International segment were $3.7 million for the three months ended September 30, 2023, as compared to $3.9 million for the corresponding period in 2022. As a percentage of net sales, selling, general and administrative expenses were 30.1% and 28.3% for the three months ended September 30, 2023 and 2022, respectively. The decrease in expenses was attributable to lower foreign currency exchange losses. Unallocated corporate expenses for the three months ended September 30, 2023 were $4.9 million, as compared to $4.3 million for the corresponding period in 2022. The current period increase was driven by higher incentive compensation expense, partially offset by a decrease in salary costs. The decrease in salary is due to the elimination of the Executive Chairman role as of March 31, 2023. Wallace facility remediation expense In connection with the Wallace EPA matter, the Company recorded an expense of $5.1 million for the three months ended September 30, 2022, to increase its estimated liability for remediation cost related to the Wallace facility. Refer to NOTE 13 — CONTINGENCIES for further discussion on this matter. Interest expense Interest expense was $5.2 million and $4.6 million for the three months ended September 30, 2023 and 2022, respectively. The increase in expense was a result of higher interest rates on outstanding borrowings, partially offset by lower average outstanding borrowings. Mark to market (loss) gain on interest rate derivatives Mark to market loss on interest rate derivatives was $0.1 million for the three months ended September 30, 2023, as compared to a mark to market gain on interest rate derivatives of $0.6 million for the three months ended September 30, 2022. The gain recognized for the three months ended September 30, 2022 was attributable to the change in the fair value due to the change in the projected interest rate environment. The mark to market amount represents the change in fair value on the Company’s interest rate derivatives that have not been designated as hedging instruments. These derivatives were entered into for purposes of locking-in a fixed interest rate on a portion of the Company’s variable interest rate debt. As of September 30, 2023, the intent of the Company is to hold these derivative contracts until their maturity. Income taxes Income tax provision of $3.0 million and $1.8 million for the three months ended September 30, 2023 and 2022, respectively, represent taxes on both U.S. and foreign earnings at a combined effective income tax provision rate of 36.5% and 50.6%, respectively. The effective tax rate for the three months ended September 30, 2023 differs from the federal statutory income tax rate of 21.0% primarily due to foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. The effective tax rate for the three months ended September 30, 2022 differs from the federal statutory income tax rate of 21.0% primarily due to foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. - 36 - Table of Contents Equity in losses Equity in losses of Vasconia, net of taxes, was $0.7 million for the three months ended September 30, 2023, as compared to equity in losses of Vasconia, net of taxes, of $2.0 million for the three months ended September 30, 2022. For the three months ended September 30, 2023 and 2022, equity in losses included a non-cash impairment charge of $0.3 million and $6.2 million, respectively, to reduce the carrying value of the Company’s investment in Vasconia to its fair value. The decline in the fair value was determined to be other than temporary due to the decline in the quoted stock price, the continued decline in the operating results of Vasconia and the recent downgrade in Vasconia’s debt rating. Vasconia reported loss from operations of $1.1 million for the three months ended September 30, 2023, as compared to loss from operations of $5.5 million for the three months ended September 30, 2022. The decrease in loss from operations was primarily attributable to improved operating results in the current period. MANAGEMENT’S DISCUSSION AND ANALYSIS NINE MONTHS ENDED SEPTEMBER 30, 2023 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2022 Net Sales Consolidated net sales for the nine months ended September 30, 2023 were $483.5 million, a decrease of $37.1 million, or 7.1%, as compared to net sales of $520.6 million for the corresponding period in 2022. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2023 average rates to 2022 local currency amounts, consolidated net sales decreased by $36.2 million, or 7.0%, as compared to consolidated net sales in the corresponding period in 2022. Net sales for the U.S. segment for the nine months ended September 30, 2023 were $447.9 million, a decrease of $28.3 million, or 5.9%, as compared to net sales of $476.2 million for the corresponding period in 2022. Net sales for the U.S. segment’s Kitchenware product category were $267.4 million for the nine months ended September 30, 2023, a decrease of $23.7 million, or 8.1%, as compared to $291.1 million for the corresponding period in 2022. The decrease was mainly driven by lower sales across most distribution channels for kitchen tools and gadgets, cutlery and board, and bakeware products in the first half of 2023 due to retail inventory rightsizing, which began in the second quarter of 2022. The decrease was partially offset by higher sales in the third quarter of 2023 as retailer's ordering patterns normalized. Net sales for the U.S. segment’s Tableware product category were $99.0 million for the nine months ended September 30, 2023, a decrease of $2.0 million, or 2.0%, as compared to $101.0 million for the corresponding period in 2022. The decrease was primarily driven by dinnerware sales primarily due to lower sales to e-commerce and brick-and-mortar customers, partially offset by off-price retailers and a new warehouse club program. Net sales for the U.S. segment’s Home Solutions product category were $81.5 million for the nine months ended September 30, 2023, a decrease of $2.6 million, or 3.1%, as compared to $84.1 million for the corresponding period in 2022. The decrease was in hydration products, partially offset by Taylor branded bath measurement products. Net sales for the International segment were $35.6 million for the nine months ended September 30, 2023, a decrease of $8.8 million, or 19.8%, as compared to net sales of $44.4 million for the corresponding period in 2022. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations, net sales decreased $7.9 million, or 18.1%, as compared to consolidated net sales in the corresponding period in 2022. The decrease was driven by a slowing of replenishment orders in the U.K. due to weaker end market demand caused by macroeconomic factors and lower e-commerce sales. Gross margin Gross margin for the nine months ended September 30, 2023 was $180.8 million, or 37.4%, as compared to $186.1 million, or 35.7%, for the corresponding period in 2022. Gross margin for the U.S. segment was $167.6 million, or 37.4%, for the nine months ended September 30, 2023, as compared to $172.1 million, or 36.1%, for the corresponding period in 2022. The decrease in gross margin for the U.S. was driven by lower sales. The improvement in gross margin percentage was due to lower inbound freight costs and product mix. - 37 - Table of Contents Gross margin for the International segment was $13.2 million, or 37.1%, for the nine months ended September 30, 2023, as compared to $14.0 million, or 31.5%, for the corresponding period in 2022. The decrease in gross margin was driven by lower sales. The increase in gross margin percentage was due to lower product costs and inbound freight costs. In addition, the current year reflects the benefit of lower duty costs on goods sold to European Union (“EU”) customers now distributed from the EU through the Company’s Netherlands distribution facility rather than the U.K. Distribution expenses Distribution expenses for the nine months ended September 30, 2023 were $49.7 million, as compared to $55.2 million for the corresponding period in 2022. Distribution expenses as a percentage of net sales were 10.3% for the nine months ended September 30, 2023, as compared to 10.6% for the nine months ended September 30, 2022. Distribution expenses as a percentage of net sales for the U.S. segment were approximately 8.9% and 9.4% for the nine months ended September 30, 2023 and 2022, respectively. Distribution expenses during the nine months ended September 30, 2023 and 2022 include $0.5 million and $0.1 million, respectively, for redesign costs related to the Company's U.S. warehouses. As a percentage of sales shipped from the Company’s U.S. warehouses, excluding non-recurring expenses, distribution expenses were 9.7% and 10.5% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in the expenses as a percentage of sales was a result of improved labor management efficiencies resulting in a decrease of employee expenses, lower pallet expenses, and storage expenses, partially offset by higher real estate taxes and labor rates. Distribution expenses as a percentage of net sales for the International segment were 27.2% for the nine months ended September 30, 2023, compared to 23.5% for the corresponding period in 2022. Distribution expenses during the nine months ended September 30, 2022 include $0.5 million for the Company’s relocation costs for its new warehouse distribution facility in the Netherlands. As a percentage of sales shipped from the Company’s international warehouse, excluding non-recurring expenses, distribution expenses were 23.8% and 22.2% for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily attributed to lower shipment volume. Selling, general and administrative expenses Selling, general and administrative expenses for the nine months ended September 30, 2023 were $114.0 million, a decrease of $0.2 million, or 0.2%, as compared to $114.2 million for the corresponding period in 2022. Selling, general and administrative expenses for the U.S. segment were $88.3 million for the nine months ended September 30, 2023, as compared to $85.9 million for the corresponding period in 2022. As a percentage of net sales, selling, general and administrative expenses were 19.7% and 18.0% for the nine months ended September 30, 2023 and 2022, respectively. The increase in selling, general and administrative expenses as a percentage of net sales is due to the impact of fixed costs on lower sales volume. The increase in expenses was attributable to the provision for doubtful accounts in the current period primarily related to significant declines in the financial condition of the Company's customer, Bed, Bath and Beyond Inc. and an increase in incentive compensation expense. The increase was partially offset by cost incurred in the prior year for integration costs related to the S’well acquisition and financing fees on receivables sold to HSBC. Selling, general and administrative expenses for the International segment were $11.3 million for the nine months ended September 30, 2023, as compared to $13.2 million for the corresponding period in 2022. The decrease was primarily attributable to lower foreign currency exchange losses and lower employee costs. The reduction in employee costs was a result of the restructuring action taken by the Company in the fourth quarter of 2022. Unallocated corporate expenses for the nine months ended September 30, 2023 were $14.4 million, as compared to $15.1 million for the corresponding period in 2022. The decrease was driven by lower salary costs, as a result of the elimination of the Executive Chairman role as of March 31, 2023 and lower stock compensation expense. The decrease was partially offset by higher incentive compensation expense. Wallace facility remediation expense In connection with the Wallace EPA matter, the Company recorded an expense of $5.1 million for the nine months ended September 30, 2022, to increase its estimated liability for remediation cost related to the Wallace facility. Refer to NOTE 13 — CONTINGENCIES for further discussion on this matter. Restructuring expenses For the nine months ended September 30, 2023, the Company incurred $0.8 million of unallocated corporate expense related to the termination payment with its Executive Chairman. On November 1, 2022, the Company entered into a transition agreement - 38 - Table of Contents with its Executive Chairman, which provided for termination of his employment with the Company, effective March 31, 2023. The transition agreement amended his employment agreement which was set to expire on December 31, 2022. The employment agreement provided for a one-time termination payment which was paid in April, 2023. Interest expense Interest expense was $16.1 million and $12.1 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in expense was a result of higher interest rates on outstanding borrowings, partially offset by lower average outstanding borrowings. Mark to market (loss) gain on interest rate derivatives Mark to market loss on interest rate derivatives was $0.1 million for the nine months ended September 30, 2023, as compared to a mark to market gain on interest rate derivatives of $2.0 million for the nine months ended September 30, 2022. The decrease was attributable to the change in the fair value based on the increase in interest rates. The mark to market amount represents the change in fair value on the Company’s interest rate derivatives that have not been designated as hedging instruments. These derivatives were entered into for purposes of locking-in a fixed interest rate on a portion of the Company’s variable interest rate debt. As of September 30, 2023, the intent of the Company is to hold these derivative contracts until their maturity. Gain on early retirement of debt Gain on early retirement of debt was $1.5 million for the nine months ended September 30, 2023. The gain recognized for the nine months ended September 30, 2023 was attributable to the repurchase of $47.2 million in principal amount of the Term Loan. Refer to NOTE 7 — DEBT for additional information. Income taxes Income tax provision of $2.9 million and $3.4 million for the nine months ended September 30, 2023 and 2022, respectively, represent taxes on both US and foreign earnings at a combined effective income tax provision rate of 197.0% and 245.9%, respectively. The effective tax rate for the nine months ended September 30, 2023 differs from the federal statutory income tax rate of 21.0% primarily due to the impact of non-deductible expenses, and foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. The effective tax rate for the nine months ended September 30, 2022 differs from the federal statutory income tax rate of 21.0% primarily due to foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. Equity in losses Equity in losses of Vasconia, net of taxes, was $2.9 million for the nine months ended September 30, 2023, as compared to equity in losses of Vasconia, net of taxes, of $1.2 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2023 and 2022, equity in losses included non-cash impairment charges of $6.8 million and $6.2 million, respectively, to reduce the carrying value of the Company’s investment in Vasconia to its fair value. The decline in the fair value was determined to be other than temporary due to the decline in the quoted stock price, the continued decline in the operating results of Vasconia and the recent downgrade in Vasconia’s debt rating. Vasconia reported loss from operations of $1.9 million for the nine months ended September 30, 2023, as compared to loss from operations of $0.3 million for the nine months ended September 30, 2022. The decrease in loss from operations was primarily attributable to decreased operating results in the current period. - 39 - Table of Contents LIQUIDITY AND CAPITAL RESOURCES Historically, the Company’s principal sources of cash to fund liquidity needs were: (i) cash provided by operating activities and (ii) borrowings available under its revolving credit facility under the ABL Agreement, as defined below. The Company’s primary uses of funds consist of working capital requirements, capital expenditures, acquisitions and investments, and payments of principal and interest on its debt. At September 30, 2023, the Company had cash and cash equivalents of $6.3 million, compared to $23.6 million at December 31, 2022. Working capital was $236.9 million at September 30, 2023, compared to $270.4 million at December 31, 2022. Liquidity, which includes cash and cash equivalents, availability under the ABL Agreement, and available funding under the Receivables Purchase Agreement, was approximately $198.8 million at September 30, 2023. Inventory, a large component of the Company’s working capital, is expected to fluctuate from period to period, with inventory levels higher primarily in the June through October time period. The Company also expects inventory turnover to fluctuate from period to period based on product and customer mix. Certain product categories have lower inventory turnover rates as a result of minimum order quantities from the Company’s vendors or customer replenishment needs. Certain other product categories experience higher inventory turns due to lower minimum order quantities or trending sale demands. For the three months ended September 30, 2023, inventory turnover was 2.2 times, or 164 days, as compared to 1.7 times, or 219 days, for the three months ended September 30, 2022. The improvement was attributable to lower inventory levels as compared to the prior year, which were elevated due to inventory buildup at retailers as a result of supply chain disruptions and weaker end market demand. In connection with the Wallace EPA Matter, the Company expects in the next twelve months it will be required to provide financial assurance of $5.6 million, which it expects to provide in the form of a letter of credit. This would reduce availability under the revolving credit facility. The Company believes that availability under the revolving credit facility under its ABL Agreement, cash on hand and cash flows from operations are sufficient to fund the Company’s operations for the next twelve months. However, if circumstances were to adversely change, the Company may seek alternative sources of liquidity including debt and/or equity financing. However, there can be no assurance that any such alternative sources would be available or sufficient or available on terms favorable to the Company. On October 25, 2023, the Company launched the syndication of an Amendment & Extension of the Company’s existing Term Loan B facility due 2025 through an extended maturity of August 2027.The Company has received the required commitments from the lenders and expects the closing of such Term Loan B facility in the fourth quarter of 2023. The Company closely monitors the creditworthiness of its customers. Based upon its evaluation of changes in customers’ creditworthiness, the Company may modify credit limits and/or terms of sale. However, notwithstanding the Company’s efforts to monitor its customers’ financial condition, the Company could be materially adversely affected by changes in customers’ creditworthiness in the future. Credit Facilities On August 26, 2022, the Company entered into Amendment No. 2 (the “Amendment”) to the Company’s credit agreement, dated as of March 2, 2018 (as amended, the “ABL Agreement”) among the Company, as a Borrower, certain subsidiaries of the Company, as Borrowers and/or Loan Parties, JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender, HSBC Bank USA, National Association and Wells Fargo Bank, National Association, as Co-Documentation Agents and Lenders, and Manufacturers and Traders Trust Company. The ABL Agreement provides for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $200.0 million, which facility will mature on August 26, 2027 (subject to an earlier springing maturity date that is 90 days prior to the Term Loan maturity date of February 28, 2025 if the Company’s Term Loan has not been repaid or refinanced by such date). The Company’s loan agreement, dated as of March 2, 2018, (the “Term Loan” and together with the ABL Agreement, the “Debt Agreements”) provides for a senior secured term loan credit in the original principal amount of $275.0 million, which matures on February 28, 2025. On December 29, 2022, the Company entered into Amendment No. 1 to the Term Loan, which replaces the LIBOR-based interest rates with SOFR-based interest rates and modifies the provisions for determining the alternative rate of interest upon the occurrence of certain events relating to the availability of interest rate benchmarks. The Term Loan requires the Company to make an annual prepayment of principal based upon a percentage of the Company's excess cash flow, (“Excess Cash Flow”), if any. The percentage applied to the Company’s excess cash flow is based on the Company’s Total Net Leverage Ratio (as defined in the Debt Agreements). When an Excess Cash Flow payment is required, each lender has the option to decline a portion or all of the prepayment amount payable to it. An estimate of the amount of the Excess Cash Flow payment is recorded in current maturity of term loan on the unaudited condensed consolidated balance sheets. - 40 - Table of Contents Additionally, the Term Loan requires quarterly payments, which commenced on June 30, 2018, of principal equal to 0.25% of the original aggregate principal amount of the Term Loan, which payments are to be adjusted from time to time to account for prepayments made. Per the Term Loan, when the Company makes an Excess Cash Flow payment, the payment is first applied to satisfy the next eight (8) scheduled future quarterly required payments of the Term Loan in order of maturity and then to the remaining scheduled installments on a pro rata basis. The quarterly principal payments have been satisfied through maturity of the Term Loan by the annual Excess Cash Flow payments made to date. The maximum borrowing amount under the ABL Agreement may be increased to up to $250.0 million if certain conditions are met but limited to $220.0 million pursuant to the Term Loan. One or more tranches of additional term loans (the “Incremental Term Facilities”) may be added under the Term Loan if certain conditions are met. The Incremental Facilities may not exceed the sum of (i) $50.0 million plus (ii) an unlimited amount so long as, in the case of (ii) only, the Company’s secured net leverage ratio, as defined in and computed on a pro forma basis pursuant to the Term Loan, after giving effect to such increase, is no greater than 3.75 to 1.00, subject to certain limitations and for the period defined pursuant to the Term Loan but not to mature earlier than the maturity date of the then existing term loans. As of September 30, 2023 and December 31, 2022, the total availability under the ABL Agreement was as follows (in thousands): September 30, 2023 December 31, 2022 Maximum aggregate principal allowed $ 200,000 $ 189,411 Outstanding borrowings under the ABL Agreement (29,305) (10,424) Standby letters of credit (2,974) (2,765) Total availability under the ABL Agreement $ 167,721 $ 176,222 Availability under the ABL Agreement is limited to the lesser of the $200.0 million commitment thereunder and the borrowing base and therefore depends on the valuation of certain current assets comprising the borrowing base. The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly. Due to the seasonality of the Company’s business, this means that the Company may have greater borrowing availability during the third and fourth quarters of each year. Consequently, the $200.0 million commitment thereunder may not represent actual borrowing capacity. On June 8, 2023, the Company completed the repurchase of $47.2 million in principal amount of the Term Loan, for $95.0 per $100.0 of principal. The repurchase was executed by way of a reverse Dutch auction, pursuant to and in accordance with the terms and conditions provided for in the Term Loan. In connection therewith, debt issuance costs of $0.5 million were written off and fees of $0.4 million were incurred. The gain on the early retirement of the Term Loan was $1.5 million, net of fees and expenses. The current and non-current portions of the Company’s Term Loan included in the condensed consolidated balance sheets were as follows (in thousands): September 30, 2023 December 31, 2022 Current portion of Term Loan: Estimated Excess Cash Flow principal payment $ 15,000 $ — Estimated unamortized debt issuance costs (1,134) — Total Current portion of Term Loan $ 13,866 $ — Non-current portion of Term Loan: Term Loan, net of current portion $ 183,684 $ 245,911 Estimated unamortized debt issuance costs (450) (3,054) Total Non-current portion of Term Loan $ 183,234 $ 242,857 The estimated Excess Cash Flow principal payment recorded at September 30, 2023 represents the Company’s estimate for the 2024 Excess Cash Flow Payment. There was no Excess Cash Flow payment due in 2023. The Company’s payment obligations under its Debt Agreements are unconditionally guaranteed by its existing and future U.S. subsidiaries with certain minor exceptions. Certain payment obligations under the ABL Agreement are also direct obligations of - 41 - Table of Contents its foreign subsidiary borrowers designated as such under the ABL Agreement and, subject to limitations on such guaranty, are guaranteed by the foreign subsidiary borrowers, as well as by the Company. The obligations of the foreign subsidiary borrowers under the ABL Agreement are secured by security interests in substantially all of the assets of, and stock in, such foreign subsidiary borrowers, subject to certain limitations. The obligations of the Company under the Debt Agreements and any hedging arrangements and cash management services and the guarantees by its domestic subsidiaries in respect of those obligations are secured by security interests in substantially all of the assets and stock (but in the case of foreign subsidiaries, limited to 65% of the capital stock in first-tier foreign subsidiaries and not including the stock of subsidiaries of such first-tier foreign subsidiaries) owned by the Company and the U.S. subsidiary guarantors, subject to certain exceptions. Such security interests consist of (1) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and certain of its subsidiaries (the “ABL Collateral”) pledged as collateral in favor of lenders under the ABL Agreement and a second-priority lien in the ABL Collateral in favor of the lenders under the Term Loan (2) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and certain of its subsidiaries (the “Term Loan Collateral”) pledged as collateral in favor of lenders under the Term Loan and a second-priority lien in the Term Loan Collateral in favor of the lenders under the ABL Agreement. Borrowings under the revolving credit facility bear interest, at the Company’s option, at one of the following rates: (i) an alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate plus 0.5% or one-month Adjusted Term Secured Overnight Financing Rate (“SOFR”) plus 1.0% as of a specified date in advance of the determination, but in each case not less than 1.0%, plus a margin of 0.25% to 0.50%, or (ii) Adjusted Term SOFR, which is the Term SOFR Rate for the selected 1, 3 or 6 month interest period plus 0.10% (or Euro Interbank Offered Rate “EURIBOR” for borrowings denominated in Euro; or Sterling Overnight Index Average “SONIA” for borrowings denominated in Pounds Sterling), but in each case not less than zero, plus a margin of 1.25% to 1.50%. The respective margins are based upon average quarterly availability, as defined in and computed pursuant to the ABL Agreement. In addition, the Company pays a commitment fee of 0.20% to 0.25% per annum based on the average daily unused portion of the aggregate commitment under the ABL Agreement. The interest rate on outstanding borrowings under the ABL Agreement at September 30, 2023 was between 6.44% and 8.75%. The Company paid a commitment fee of 0.25% during the nine months ended September 30, 2023. The Term Loan bears interest, at the Company’s option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of (x) the prime rate, (y) a federal funds and overnight bank funding based rate plus 0.5% or (z) one-month Adjusted Term SOFR, but not less than 1.0%, plus 1.0%, plus a margin of 2.5% or (ii) SOFR for the applicable interest period, multiplied by any statutory reserve rate, but not less than 1.0%, plus a margin of 3.5%. The interest rate on outstanding borrowings under the Term Loan at September 30, 2023 was 8.93%. The Debt Agreements provide for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, liens, acquisitions, investments and payment of dividends, among other things. Further, the ABL Agreement provides that during any period (a) commencing on the last day of the most recently ended four consecutive fiscal quarters on or prior to the date availability under the ABL Agreement is less than the greater of $20.0 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 $20.0 million and 10% of the aggregate commitment under the ABL Agreement for 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 September 30, 2023. The Company expects that it will continue to borrow, subject to availability, and repay funds under the ABL Agreement based on working capital and other corporate needs. Covenant Calculations Adjusted EBITDA (a non-GAAP financial measure), which is defined in the Company’s Debt Agreements, is used in the calculation of the Fixed Charge Coverage Ratio, Secured Net Leverage Ratio, Total Leverage Ratio and Total Net Leverage Ratio, which are required to be provided to the Company’s lenders pursuant to its Debt Agreements. The Company’s adjusted EBITDA (including pro forma adjustments), for the trailing twelve months ended September 30, 2023 was $55.8 million. Capital expenditures for the nine months ended September 30, 2023 were $1.8 million. - 42 - Table of Contents Non-GAAP financial measure Adjusted EBITDA is a non-GAAP financial measure within the meaning of Regulation G and Item 10(e) of Regulation S-K, each promulgated by the SEC. This measure is provided because management of the Company uses this financial measure in evaluating the Company’s on-going financial results and trends, and management believes that exclusion of certain items allows for more accurate period-to-period comparison of the Company’s operating performance by investors and analysts. Management also uses this non-GAAP information as an indicator of business performance. Adjusted EBITDA, as discussed above, is also one of the measures used to calculate financial covenants required to be provided to the Company’s lenders pursuant to its Debt Agreements. Investors should consider this non-GAAP financial measure in addition to, and not as a substitute for, the Company’s financial performance measures prepared in accordance with U.S. GAAP. 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 income (loss), as reported, to adjusted EBITDA, for each of the last four quarters and the 12 months ended September 30, 2023: Quarter Ended Twelve Months Ended September 30, 2023 December 31, 2022 March 31, 2023 June 30, 2023 September 30, 2023 (in thousands) Net income (loss) as reported $ 3,272 $ (8,805) $ (6,520) $ 4,206 $ (7,847) Undistributed equity losses, net 2,058 2,777 5,863 1,047 11,745 Income tax provision (benefit) 2,308 (1,348) 1,242 3,015 5,217 Interest expense 5,125 5,336 5,528 5,246 21,235 Depreciation and amortization 5,001 4,870 4,925 4,821 19,617 Mark to market loss (gain) on interest rate derivatives 19 234 (197) 98 154 Stock compensation expense 281 861 1,011 898 3,051 Contingent consideration fair value adjustments — — (50) — (50) Gain on early retirement of debt — — (1,520) — (1,520) Acquisition related expenses 170 490 242 186 1,088 Restructuring expenses 1,420 856 — — 2,276 Warehouse redesign expenses (1) — 194 157 176 527 Adjusted EBITDA 19,654 5,465 10,681 19,693 55,493 Pro forma projected synergies adjustment (2) $ 323 Pro forma Adjusted EBITDA (3) $ 19,654 $ 5,465 $ 10,681 $ 19,693 $ 55,816 (1) For the twelve months ended September 30, 2023, the warehouse redesign expenses were related to the U.S. segment. (2) Pro forma projected synergies represents the projected cost savings of $0.2 million associated with the Executive Chairman's cessation of service in such role, and $0.1 million associated with reorganization of the U.S. segment's sales management structure. (3) Adjusted EBITDA is a non-GAAP financial measure that is defined in the Company’s debt agreements. Adjusted EBITDA is defined as net income (loss), adjusted to exclude undistributed equity in losses, income tax provision (benefit), interest expense, depreciation and amortization, mark to market loss (gain) on interest rate derivatives, stock compensation expense, gain on early retirement of debt, and other items detailed in the table above that are consistent with exclusions permitted by our debt agreements. Accounts Receivable Purchase Agreement To improve its liquidity during seasonally high working capital periods, the Company has an uncommitted Receivables Purchase Agreement with HSBC Bank USA, National Association (“HSBC”) 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, 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. HSBC will assume the credit risk of the Receivables purchased, and the Company will continue to be responsible for all non-credit risk matters. The Company will service the Receivables, and as such servicer, collect and otherwise enforce the Receivables on behalf of HSBC. The term of the agreement is for 364 days and shall automatically be - 43 - Table of Contents extended for annual successive terms unless terminated. Either party may terminate the agreement at any time upon sixty days’ prior written notice to the other party. The Company did not sell receivables to HSBC during the three and nine months ended September 30, 2023. Pursuant to the Receivable Purchase Agreement, the Company sold to HSBC $30.0 million and $109.8 million of receivables during the three and nine months ended September 30, 2022, respectively. Charges of $0.2 million and $0.5 million, respectively, related to the sale of the receivables were included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2022. At September 30, 2023 and 2022, zero and $20.2 million, respectively, of receivables sold were outstanding and due to HSBC from customers. At September 30, 2023, $24.8 million of accounts receivables were available for sale to HSBC, net of applicable charges. Derivatives Interest Rate Swaps The Company’s total outstanding notional value of interest rate swaps was $25.0 million at September 30, 2023. These non-designated interest rate swaps were entered into in June 2019 and 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 interest rate swaps that were 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 expired in March 2023. The Company has no designated interest rate swaps at September 30, 2023. Foreign Exchange Contracts The Company is 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 foreign currency forward contracts with terms less than 18 months 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 value of foreign exchange contracts at September 30, 2023 was $8.8 million. These foreign exchange contracts have been designated as hedges in order to apply hedge accounting. 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. The Company attempts to minimize these risks primarily by using foreign currency forward contracts and by maintaining counterparty credit limits. These hedging activities provide only limited protection against currency exchange and credit risk. Factors that could influence the effectiveness of the Company’s hedging programs include those impacting currency markets and the availability of hedging instruments and liquidity of the credit markets. 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 September 30, 2023, these foreign exchange contracts have been designated as hedges in to order to apply hedge accounting. Operating activities Net cash provided by operating activities was $17.0 million for the nine months ended September 30, 2023, as compared to net cash used in operating activities of $20.1 million for the nine months ended September 30, 2022. The increase from 2023 compared to 2022 was attributable to the timing of payments for accounts payable and accrued expenses and a reduction in inventory levels, partially offset by timing of collections related to the Company's accounts receivables. - 44 - Table of Contents Investing activities Net cash used in investing activities was $1.8 million and $19.9 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease from 2023 compared to 2022 was attributable to the cash consideration of $18.0 million paid for the acquisition of S'well in 2022. Financing activities Net cash used in financing activities was $32.4 million for the nine months ended September 30, 2023, as compared to net cash provided by financing activities of $18.4 million for the nine months ended September 30, 2022. The change was attributable to the repurchase of a portion of the term loan in the 2023 period, compared to the Excess Cash Flow principal payment on the term loan in the 2022 period and lower proceeds from the revolving credit facility in the 2023 period. The cash used in financing activities was partially offset by decreased payments for stock repurchases in the 2023 period. Stock repurchase program On March 14, 2022, the Company announced that its Board authorized the repurchase of up to $20.0 million of the Company’s common stock, replacing the Company’s previously-authorized $10.0 million share repurchase program. The repurchase authorization permits the Company to effect the repurchases from time to time through open market purchases and privately negotiated transactions. During the nine months ended September 30, 2023, the Company repurchased 320,204 shares for a total cost of $2.5 million and thereafter retired the shares. No repurchases were effected during the three months ended September 30, 2023. As of September 30, 2023, the remaining dollar amount available for repurchases under the Board authorized plan was $11.1 million. - 45 - Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk There were no material changes in market risk for changes in foreign currency exchange rates and interest rates from the information provided in Item 7A – Quantitative and Qualitative Disclosures About Market Risk in the 2022 Annual Report on Form 10-K.