LIFETIME BRANDS, INC. This Quarterly Report on Form 10-Q ofLifetime 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 endedDecember 31, 2021 (the "2021 Annual Report on Form 10-K") in Part I, Item 1A under the heading Risk Factors, and in the Company's subsequent filings with theU.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;
•The ongoing impact of the COVID-19 pandemic;
•Increase in supply chain costs, including raw materials, sourcing, transportation and energy;
•The impact of the
•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 conflict in
•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 theSEC . 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 - 29 -
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practicable after these reports are filed with or furnished to theSEC . Users can access these reports free of charge on the Company's website. TheSEC also maintains a website that contains reports, proxy and information statements, and other information regarding the Company's electronic filings with theSEC 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 2021, Kitchenware products and Tableware products accounted for approximately 85% of the Company'sU.S. segment's net sales and 87% 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®, KitchenAid®, Taylor®, Mikasa®, KitchenCraft®, Built NY®, Kamenstein®, Pfaltzgraff®, Rabbit®, and Sabatier®. 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 outsidethe 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 COVID-19 pandemic, as well as other factors including, increased demand and shifts in consumer shopping patterns, have caused disruption in the global supply chain. The increased demand for containers, limited container capacity, backlog atU.S. ports and recent shutdowns impacting ports inChina , have resulted in increased market costs of inbound freight, container shortages, and longer lead times. The disruption in the global supply chain has also caused increased input costs used to manufacture the Company's product. The Company has been impacted by these disruptions and has experienced higher inbound freight cost, delays in importing inventory due to limited availability of containers, and an increase in product costs. There have also been instances of limited trucking availability. The Company has experienced instances of trucking shortages, which has resulted in delays of shipments to certain of its customers. The Company expects that these trends may continue in 2022. The Company has experienced an increase in delivery times and cost for products shipped from theU.K. warehouse to continentalEurope . To remain competitive in the distribution of products within continentalEurope , the Company expands its distribution and warehouse capacity through a third-party operated distribution provider located inthe Netherlands in the first quarter of 2022. The Company expects to begin shipments from this location in the second quarter of 2022. OnMarch 23 2022 , the United States Trade Representative ("USTR") announced it had reinstated exclusions on certain product categories or harmonized tariff codes retroactive toOctober 12, 2021 . The exclusion is effective throughDecember 31, 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. TheU.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 theU.S. Management evaluates the performance of theU.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 - 30 -
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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 INVESTMENTS
As ofMarch 31, 2022 , 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 ofMexico's largest housewares companies. Shares of Vasconia's capital stock are traded on the BolsaMexicana de Valores , theMexican Stock Exchange . The Quotation Key is VASCONI. For the period endedMarch 31, 2021 , the Company's investment ownership was 30%. The Company's investment ownership decreased to approximately 27% onJune 30, 2021 and was further reduced to 24.7% onJuly 29, 2021 as a result of transactions that occurred in those periods. The Company accounts for its investment in Vasconia using the equity method of accounting and records its proportionate share of Vasconia's net income in the Company's condensed consolidated statements of operations. Accordingly, the Company has recorded its proportionate share of Vasconia's net income (reduced for amortization expense related to the customer relationships acquired) for the three months endedMarch 31, 2022 and 2021 in the accompanying unaudited condensed consolidated statements of operations. Pursuant to a Shares Subscription Agreement, the Company may designate four persons to be nominated as members of Vasconia's Board of Directors. As ofMarch 31, 2022 , Vasconia's Board of Directors is comprised of eleven members, of whom the Company has designated two members.
The Company continues to explore opportunities to sell additional shares of its investment in Vasconia.
SEASONALITY The Company's business and working capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters. In 2021 and 2020, net sales for the third and fourth quarters accounted for 56% and 62% of total annual net sales, respectively. The increase in the Company's net sales in the first half of the year in 2021 compared to historical trend was a result of increased demand for the Company's products due shifts in consumer purchasing patterns. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period. The Company's inventory levels atMarch 31, 2022 , did not decrease from the previous two quarters, as a result of increased inventory purchases, to maintain inventory availability and meet expected demand, and higher inventory cost. In 2021, the Company's inventory levels increased during the fourth quarter compared to the third quarter. The higher inventory balance atDecember 31, 2021 was a result of increased inventory purchases, to maintain inventory availability and meet expected demand, and higher inventory cost. Consistent with the seasonality of the Company's net sales and inventory levels, the Company also experiences seasonality in its inventory turnover and turnover days from one quarter to the next.
The COVID-19 pandemic has caused, and may continue to cause, shifts in some of the Company's selling and purchasing cycles as customers deviate from their historical ordering patterns.
CRITICAL ACCOUNTING ESTIMATES
There have been no material changes to the Company's critical accounting
estimates discussed in the 2021 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.
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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
March 31,
2022 2021
Net sales 100.0 % 100.0 %
Cost of sales 65.5 66.3
Gross margin 34.5 33.7
Distribution expenses 10.5 9.5
Selling, general and administrative expenses 21.6 19.5
Income from operations 2.4 4.7
Interest expense (2.1) (2.1)
Mark to market gain on interest rate derivatives 0.6 0.3
Income before income taxes and equity in earnings (losses) 0.9 2.9
Income tax provision (0.9) (1.2)
Equity in earnings (losses), net of taxes 0.2 (0.1)
Net income 0.2 % 1.6 %
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2021
Consolidated net sales for the three months endedMarch 31, 2022 were$182.7 million , representing a decrease of$13.0 million or 6.6%, as compared to net sales of$195.7 million for the corresponding period in 2021. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2022 average rates to 2021 local currency amounts, consolidated net sales decreased by$12.5 million , or 6.4%, as compared to consolidated net sales in the corresponding period in 2021. Net sales for theU.S. segment for the three months endedMarch 31, 2022 were$166.2 million , a decrease of$10.0 million , or 5.7%, as compared to net sales of$176.2 million for the corresponding period in 2021. Net sales for theU.S. segment's Kitchenware product category were$114.1 million for the three months endedMarch 31, 2022 , a decrease of$5.9 million , or 4.9%, as compared to$120.0 million for the corresponding period in 2021. The decrease was mainly driven by timing of customer inventory replenishment and lower sales for kitchen tools and gadgets as prior period sales were benefited by increased demand in the first quarter due to shifts in consumer purchasing patterns. The decrease was partially offset by higher selling prices and an increase in sales for barware and wine products attributable to a new warehouse club program. Net sales for theU.S. segment's Tableware product category were$26.6 million for the three months endedMarch 31, 2022 , a decrease of$3.6 million , or 11.9%, as compared to$30.2 million for the corresponding period in 2021. The decrease was attributable to lower dinnerware sales to brick-and-mortar retailers and e-commerce sales. Net sales for theU.S. segment's Home Solutions product category were$25.5 million for the three months endedMarch 31, 2022 , a decrease of$0.5 million , or 1.9%, as compared to$26.0 million for the corresponding period in 2021. The decrease was primarily driven by lower sales for home décor attributable to supply chain delays and measurement products, partially offset by S'well sales. Net sales for the International segment were$16.5 million for the three months endedMarch 31, 2022 , a decrease of$3.0 million , or 15.4%, as compared to net sales of$19.5 million for the corresponding period in 2021. In constant currency, which excludes the impact of foreign exchange fluctuations, net sales decreased$2.5 million , or 13.3%, as compared to consolidated - 32 -
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net sales in the corresponding period in 2021. The decrease was attributable to
the Company's global trading business in
Gross margin
Gross margin for the three months endedMarch 31, 2022 was$63.1 million , or 34.5%, as compared to$66.0 million , or 33.7%, for the corresponding period in 2021. Gross margin for theU.S. segment was$57.7 million , or 34.7%, for the three months endedMarch 31, 2022 , as compared to$59.8 million , or 33.9%, for the corresponding period in 2021. The improvement in gross margin for theU.S. was primarily driven by a tariff reduction on certain product categories. Gross margin for the International segment was$5.4 million , or 32.7%, for the three months endedMarch 31, 2022 , as compared to$6.2 million , or 31.8%, for the corresponding period in 2021.The improvement in gross margin was attributable to customer mix.
Distribution expenses
Distribution expenses for the three months ended
Distribution expenses as a percentage of net sales for theU.S. segment were approximately 9.0% and 8.7% for the three months endedMarch 31, 2022 and 2021, respectively. As a percentage of sales shipped from the Company'sU.S. warehouses, distribution expenses were 9.9% and 8.9% for the three months endedMarch 31, 2022 and 2021, respectively. The increase in expenses as a percentage of sales was attributable to lower shipment volume, higher labor rates and an increase in warehouse supply expenses. Distribution expenses as a percentage of net sales for the International segment were 26.2% for the three months endedMarch 31, 2022 , compared to 17.2% for the corresponding period in 2021. Distribution expenses during the three months endedMarch 31, 2022 include$0.4 million for the Company's relocation costs for its new warehouse distribution facility inthe Netherlands . As a percentage of sales shipped from the Company's international warehouses, excluding non-recurring expenses, distribution expenses were 21.7% and 14.4% for the three months endedMarch 31, 2022 and 2021, respectively. The increase was primarily attributed to increased shipping cost for products shipped from theU.K. warehouse to continentalEurope and an increase in business occupancy tax expense for theU.K. warehouse.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended
Selling, general and administrative expenses for theU.S. segment were$28.5 million for the three months endedMarch 31, 2022 , as compared to$27.4 million for the corresponding period in 2021. As a percentage of net sales, selling, general and administrative expenses were 17.1% and 15.6% for the three months endedMarch 31, 2022 and 2021, respectively. The increase was driven by integration cost related to the S'well acquisition. Selling, general and administrative expenses for the International segment were$5.1 million for the three months endedMarch 31, 2022 , as compared to$5.0 million for the corresponding period in 2021. As a percentage of net sales, selling, general and administrative expenses were 30.9% and 25.6% for the three months endedMarch 31, 2022 and 2021, respectively. The expense increase was attributable to unfavorable foreign currency exchange losses, partially offset by lower amortization expense on intangible assets as a result of the prior year impairment, which reduced the carrying value of the assets to its fair value. Unallocated corporate expenses for the three months endedMarch 31, 2022 were$5.9 million , as compared to$5.7 million for the corresponding period in 2021. The current period increases in legal and professional fees related to the S'well acquisition were offset by lower incentive compensation expense.
Interest expense
Interest expense was$3.8 million for the three months endedMarch 31, 2022 and$4.0 million for the three months endedMarch 31, 2021 . The decrease in expense was a result of less debt outstanding. - 33 -
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Mark to market gain on interest rate derivatives
Mark to market gain on interest rate derivatives was$1.0 million for the three months endedMarch 31, 2022 , as compared to a mark to market gain on interest rate derivatives of$0.5 million for the three months endedMarch 31, 2021 . The increase was attributable to the change in 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 ofMarch 31, 2022 , the intent of the Company is to hold these derivative contracts until their maturity.
Income taxes
Income tax provision of$1.7 million and$2.4 million for the three months endedMarch 31, 2022 and 2021, respectively, represent taxes on bothU.S. and foreign earnings at combined effective income tax provision rates of 102.2% and 42.2%, respectively. The effective tax rate for both the three months endedMarch 31, 2022 and 2021 differs from the federal statutory income tax rate of 21.0% primarily due to state and local tax expenses, and foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance.
Equity in earnings (losses)
Equity in earnings of Vasconia, net of taxes, was$0.4 million for the three months endedMarch 31, 2022 , as compared to equity in losses of Vasconia, net of taxes, of$0.2 million for the three months endedMarch 31, 2021 . Vasconia reported income from operations of$4.7 million for the three months endedMarch 31, 2022 , as compared to income from operations of$3.8 million for the three months endedMarch 31, 2021 . The increase in income from operations was primarily attributable to improved operating results in the current period in Vasconia's aluminum division. The prior year equity in losses of Vasconia was attributable to losses from discontinued operations recognized for the three months endedMarch 31, 2021 .
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. AtMarch 31, 2022 , the Company had cash and cash equivalents of$14.8 million , compared to$28.0 million atDecember 31, 2021 . Working capital was$255.8 million atMarch 31, 2022 , compared to$270.8 million atDecember 31, 2021 . Liquidity, which includes cash and cash equivalents and availability under the ABL Agreement, was approximately$162.0 million atMarch 31, 2022 . 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 2021, the Company's inventory levels increased during the fourth quarter compared to the third quarter. The Company's inventory levels atMarch 31, 2022 , did not decrease from the previous two quarters, as a result of increased inventory purchases, to maintain inventory availability and meet expected demand, and higher inventory cost. 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 endedMarch 31, 2022 , inventory turnover was 1.8 times, or 205 days, as compared to 2.6 times, or 143 days, for the three months endedMarch 31, 2021 . The decrease in inventory turnover was attributable to higher inventory levels and higher inventory costs in the current period. The Company intends to refinance the ABL Agreement on or before its maturity onMarch 2, 2023 . AtMarch 31, 2022 there were no outstanding borrowings under the ABL Agreement. The Company believes that availability under the revolving credit facility under its ABL Agreement, including anticipated refinancing on it prior to its maturity, 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. - 34 -
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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. Some of the Company's customers may be adversely and materially affected by the COVID-19 pandemic. Credit Facilities The Company's credit agreement, dated as ofMarch 2, 2018 (the "ABL Agreement") withJPMorgan Chase Bank, N.A . ("JPMorgan"), includes a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of$150.0 million , which facility will mature onMarch 2, 2023 , and a loan agreement (the "Term Loan" and together with the ABL Agreement, the "Debt Agreements") that provides for a senior secured term loan credit facility in the original principal amount of$275.0 million , which matures onFebruary 28, 2025 . 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, lenders have the option to decline a portion or all of the prepayment amount. This estimated amount is recorded in current maturity of term loan on the unaudited condensed consolidated balance sheets. Additionally, the Term Loan facility requires quarterly payments, which commenced onJune 30, 2018 , of principal equal to 0.25% of the original aggregate principal amount of the Term Loan facility. 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 quarterly principal payments have been satisfied through maturity of the Term Loan by the annual Excess Cash Flow payments. The maximum borrowing amount under the ABL Agreement may be increased to up to$200.0 million if certain conditions are met. One or more tranches of additional term loans (the "Incremental Facilities") may be added under the Term Loan if certain conditions are met. The Incremental Facilities may not exceed the sum of (i)$50.0 million plus (ii) an unlimited amount so long as, in the case of (ii) only, the Company's secured net leverage ratio, as defined in and computed pursuant to the Term Loan, is no greater than 3.75 to 1.00, subject to certain limitations and for the period defined pursuant to the Term Loan.
As of
March 31, 2022 December 31, 2021
Maximum aggregate principal allowed $ 150,000 $ 150,000
Standby letters of credit (2,765)
(3,659)
Total availability under the ABL Agreement
146,341
Availability under the ABL Agreement 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 may mean that the Company will have greater borrowing availability during the third and fourth quarters of each year. Consequently, the$150.0 million commitment thereunder may not represent actual borrowing capacity.
The current and non-current portions of the Company's Term Loan facility included in the condensed consolidated balance sheets were as follows (in thousands):
March 31, 2022 December 31, 2021
Current portion of Term Loan facility:
Estimated Excess Cash Flow principal payment $ 2,500 $ 7,200 Estimated unamortized debt issuance costs (1,412) (1,429) Total Current portion of Term Loan facility $ 1,088 $ 5,771 Non-current portion of Term Loan facility: Term Loan facility, net of current portion$ 243,411 $ 244,927 Estimated unamortized debt issuance costs (2,708) (3,054) Total Non-current portion of Term Loan facility $
240,703 $ 241,873
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The estimated Excess Cash Flow principal payment recorded atMarch 31, 2022 represents the Company's estimate for the 2023 Excess Cash Flow payment. The 2022 Excess Cash Flow payment, paid onMarch 30, 2022 , totaled$6.2 million . The Excess Cash Flow payment differs from the estimated amount atDecember 31, 2021 of$7.2 million as certain lenders opted to not require payment per the terms of the Debt Agreements. The Company's payment obligations under its Debt Agreements are unconditionally guaranteed by its existing and futureU.S. subsidiaries with certain minor exceptions. Certain payment obligations under the ABL Agreement are also direct obligations of its foreign subsidiary borrowers designated as such under the ABL Agreement and, subject to limitations on such guaranty, are guaranteed by the foreign subsidiary borrowers, as well as by the Company. The obligations of the Company under the Debt Agreements and any hedging arrangements and cash management services and the guarantees by its domestic subsidiaries in respect of those obligations are secured by substantially all of the assets and stock (but in the case of foreign subsidiaries, limited to 65% of the capital stock in first-tier foreign subsidiaries and not including the stock of subsidiaries of such first-tier foreign subsidiaries) owned by the Company and theU.S. subsidiary guarantors, subject to certain exceptions. Such security interest consists of (1) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and its domestic subsidiaries (the "ABL Collateral") pledged as collateral in favor of lenders under the ABL Agreement and a second-priority lien in the ABL Collateral in favor of the lenders under the Term Loan and (2) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and its domestic subsidiaries (the "Term Loan Collateral") pledged as collateral in favor of lenders under the Term Loan and a second-priority lien in the Term Loan Collateral in favor of the lenders under the ABL Agreement. Borrowings under the ABL Agreement bear interest, at the Company's option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate plus 0.5% or one-month LIBOR plus 1.0%, plus a margin of 0.25% to 0.75%, or (ii) LIBOR (or Euro Interbank Offered Rate "EURIBOR" for borrowings denominated in Euro; or Sterling Overnight Index Average "SONIA" for borrowings denominated in Pounds Sterling) plus a margin of 1.25% to 1.75%. The respective margins are based upon the Company's total leverage ratio, as defined in and computed pursuant to the ABL Agreement. There were no outstanding borrowings under the ABL Agreement atMarch 31, 2022 . In addition, the Company pays a commitment fee of 0.375% on the unused portion of the ABL Agreement. The Term Loan facility bears interest, at the Company's option, at one of the following rates: (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 LIBOR, but not less than 1.0%, plus 1.0%, which alternate base rate shall not be less than 2%, plus a margin of 2.5% or (ii) LIBOR, but not less than 1%, plus a margin of 3.5%. The interest rate on outstanding borrowings under the Term Loan atMarch 31, 2022 was 4.5%. The Debt Agreements provide for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, acquisitions, investments and payment of dividends, among other things. Further, the ABL Agreement provides that during any period (a) commencing on the last day of the most recently ended four consecutive fiscal quarters on or prior to the date availability under the ABL Agreement is less than the greater of$15.0 million and 10% of the aggregate commitment under the ABL Agreement at any time and (b) ending on the day after such availability has exceeded the greater of$15.0 million and 10% of the aggregate commitment under the ABL Agreement for 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
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 last
twelve months ended
Capital expenditures for the three months ended
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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 theSEC . 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 withU.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 endedMarch 31, 2022 : Quarter Ended Twelve Months September 30, December 31, March 31, Ended March 31, June 30, 2021 2021 2021 2022 2022 (in thousands) Net income (loss) as reported$ 5,789 $
12,571
(393) (195) (466) (416) (1,470)
Income tax provision 1,832 5,589 6,704 1,673 15,798
Interest expense 3,819 3,835 3,856 3,767 15,277
Mark to market (gain) on interest rate
derivatives (46) (120) (398) (1,049) (1,613)
Depreciation and amortization 5,765 5,837 4,960 4,899 21,461
Intangible asset impairments - - 14,760 - 14,760
Stock compensation expense 1,328 1,201 1,244 1,174 4,947
Acquisition related expenses 72 41 378 1,119 1,610
Warehouse relocation and redesign
expenses(1) - - 450 497 947
S'well integration costs - - - 781 781
Wallace facility remedial design expense - 500 - - 500
Adjusted EBITDA (2) 18,166 29,259 30,862 12,825 91,112
Pro forma historical S'well and projected
synergies adjustment(3) 4,000
Pro forma Adjusted EBITDA(2) $ 18,166 $ 29,259 $ 30,862 $ 12,825 $ 95,112
(1) For the twelve months ended March 31, 2022 , the warehouse relocation and
redesign expenses included $0.5 million of expenses related to the International
segment and $0.4 million of expenses related to the U.S. segment. For the three
months ended March 31, 2022 , warehouse relocation and redesign expenses included
$0.4 million of expenses related to the International segment and $0.1 million
of expenses related to the U.S. segment.
(2) 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 (earnings), income tax provision,
interest expense, mark to market (gain) on interest rate derivatives,
depreciation and amortization, intangible asset impairments, stock compensation
expense, and other items detailed in the table above that are consistent with
exclusions permitted by our debt agreements.
(3) Pro forma historical S'well and projected synergies adjustment represents a
permitted adjustment to the Company's adjusted EBITDA for the acquisition of
S'well on March 2, 2022 pursuant to the Company's Debt Agreements. Pro forma
projected synergies represents the amount of projected cost savings, operating
expense reductions and cost saving synergies projected by the Company as a
result of actions taken through March 31, 2022 or expected to be taken as of
March 31, 2022 , net of the benefits realized during the twelve months ended
March 31, 2022 .
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Accounts Receivable Purchase Agreement
To improve its liquidity during seasonally high working capital periods, the Company has an uncommitted Receivables Purchase Agreement withHSBC 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 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. Pursuant to the Receivable Purchase Agreement, the Company sold to HSBC$46.3 million and$40.6 million of receivables during the three months endedMarch 31, 2022 and 2021, respectively. Charges of$0.1 million related to the sale of the receivables are included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations for both the three months endedMarch 31, 2022 and 2021. AtMarch 31, 2022 and 2021,$28.1 million and$25.6 million , respectively, of receivables sold were outstanding and due to HSBC from customers.
Derivatives
Interest Rate Swaps
The Company's total outstanding notional value of interest rate swaps was
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 inApril 2018 and expire inMarch 2023 . The original notional values are reduced over these periods. The aggregate notional value of designated interest rate swaps was$44.0 million atMarch 31, 2022 . InJune 2019 , the Company entered into additional interest rate swap agreements, with an aggregate notional value of$25.0 million atMarch 31, 2022 . 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 inFebruary 2025 .
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 values of foreign exchange contracts atMarch 31, 2022 was$18.0 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 ofMarch 31, 2022 , the Company did not have any foreign currency forward contract derivatives that are not designated as hedges. These foreign exchange contracts have been designated as hedges in to order to apply hedge accounting. - 38 -
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Operating activities
Net cash provided by operating activities was$13.4 million for the three months endedMarch 31, 2022 , as compared to net cash provided by operating activities of$36.3 million for the three months endedMarch 31, 2021 . The decrease from 2022 compared to 2021 was attributable to timing of payment for accounts payable and accrued expenses, partially offset by timing of collections related to the Company's accounts receivables.
Investing activities
Net cash used in investing activities was$18.4 million and$0.9 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase from 2022 compared to 2021 was attributable to the cash consideration of$18.0 million paid for the acquisition of S'well.
Financing activities
Net cash used in financing activities was$8.2 million and for the three months endedMarch 31, 2022 , as compared to net cash used in financing activities of$40.8 million for the three months endedMarch 31, 2021 . The change was mainly attributable to repayments on the Company's revolving credit facility under its ABL Agreement in the 2021 period and the lower Excess Cash Flow principal payment on the term loan for the 2022 period compared to the 2021 period.
Stock repurchase program
OnMarch 14, 2022 , the Company announced that its Board of Directors of the Company authorized the repurchase of up to$20.0 million of the Company's common stock, replacing the Company's previously-authorized$10 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 three months endedMarch 31, 2022 , the Company repurchased 51,145 shares for a total cost of$0.7 million and thereafter retired the shares. Please see Part II, Item 2-Unregistered Sales ofEquity Securities and Use of Proceeds included in this Quarterly Report on Form 10-Q. - 39 -
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