SEC Filing - Lifetime Brands, Inc.

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2019

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

For the transition period from to

Commission File Number: 0-19254

LIFETIME BRANDS, INC.

(Exact name of registrant as specified in its charter)

Delaware

11-2682486

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1000 Stewart Avenue, Garden City, New York, 11530

(Address of principal executive offices) (Zip Code)

(516) 683-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common Stock, $.01 par value

LCUT

The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of July 31, 2019 was 21,255,218.

LIFETIME BRANDS, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2019

INDEX


		Page No.
Part I.	Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – June 30, 2019 (unaudited) and December 31, 2018		2

	Condensed Consolidated Statements of Operations (unaudited) – Three and Six Months Ended June 30, 2019 and 2018		3

	Condensed Consolidated Statements of Comprehensive Loss (unaudited) – Three and Six Months Ended June 30, 2019 and 2018		4

	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) –Three and Six Months Ended June 30, 2019 and 2018		5

	Condensed Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2019 and 2018		6

	Notes to Condensed Consolidated Financial Statements (unaudited)		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		41

Item 4.	Controls and Procedures		41

Part II.	Other Information

Item 1.	Legal Proceedings		42

Item 1A.	Risk Factors		42

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		43

Item 6.	Exhibits		44

Signatures			45

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	June 30,			December 31,
	2019			2018
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	10,535		$	7,647
Accounts receivable, less allowances of $7,473 at June 30, 2019 and $7,855 at December 31, 2018		91,109			125,292
Inventory		205,607			173,601
Prepaid expenses and other current assets		12,724			10,822
Income taxes receivable		10,690			1,442

TOTAL CURRENT ASSETS		330,665			318,804
PROPERTY AND EQUIPMENT, net		26,563			25,762
OPERATING LEASE RIGHT-OF-USE ASSETS		109,757			—
INVESTMENTS		20,935			22,582
INTANGIBLE ASSETS, net		331,314			338,847
DEFERRED INCOME TAXES		122			733
OTHER ASSETS		3,345			1,844

TOTAL ASSETS	$	822,701		$	708,572

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Current maturity of term loan	$	13,261		$	1,253
Accounts payable		48,495			38,167
Accrued expenses		50,966			45,456
Current portion of operating lease liability		11,163			—

TOTAL CURRENT LIABILITIES		123,885			84,876
DEFERRED RENT & OTHER LONG-TERM LIABILITIES		10,055			23,339
DEFERRED INCOME TAXES		15,103			15,141
OPERATING LEASE LIABILITIES		114,630			—
INCOME TAXES PAYABLE, LONG-TERM		949			949
REVOLVING CREDIT FACILITY		44,913			42,080
TERM LOAN		250,062			262,694
STOCKHOLDERS’ EQUITY
Preferred stock, $1.00 par value, shares authorized: 100 shares of Series A and 2,000,000 shares of Series B; none issued and outstanding		—			—
Common stock, $.01 par value, shares authorized: 50,000,000 at June 30, 2019 and December 31, 2018; shares issued and outstanding: 21,255,218 at June 30, 2019 and 20,764,143 at December 31, 2018		213			208
Paid-in capital		260,461			258,637
Retained earnings		37,090			55,264
Accumulated other comprehensive loss		(34,660	)		(34,616	)

TOTAL STOCKHOLDERS’ EQUITY		263,104			279,493

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	822,701		$	708,572

See accompanying notes to unaudited condensed consolidated financial statements.

- 2 -

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net sales	$	142,536		$	148,651		$	292,462		$	266,820
Cost of sales		98,517			96,573			194,122			169,655

Gross margin		44,019			52,078			98,340			97,165
Distribution expenses		15,541			14,942			31,401			32,764
Selling, general and administrative expenses		40,850			40,042			80,990			80,217
Restructuring expenses		173			395			781			801

Loss from operations		(12,545	)		(3,301	)		(14,832	)		(16,617	)
Interest expense		(4,694	)		(4,676	)		(9,616	)		(6,779	)
Loss on early retirement of debt		—			—			—			(66	)

Loss before income taxes and equity in (losses) earnings		(17,239	)		(7,977	)		(24,448	)		(23,462	)
Income tax benefit		5,795			1,765			8,253			5,575
Equity in (losses) earnings, net of taxes		(69	)		155			(185	)		232

NET LOSS	$	(11,513	)	$	(6,057	)	$	(16,380	)	$	(17,655	)

BASIC LOSS PER COMMON SHARE		(0.56	)	$	(0.30	)		(0.80	)	$	(0.96	)

DILUTED LOSS PER COMMON SHARE		(0.56	)	$	(0.30	)		(0.80	)	$	(0.96	)

See accompanying notes to unaudited condensed consolidated financial statements.

- 3 -

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Net loss	$	(11,513	)	$	(6,057	)	$	(16,380	)	$	(17,655	)
Other comprehensive loss, net of taxes:
Translation adjustment		(2,953	)		(5,489	)		(1,647	)		(2,109	)
Net change in cash flow hedges		982			(263	)		1,578			(277	)
Effect of retirement benefit obligations		12			17			25			35

Other comprehensive loss, net of taxes		(1,959	)		(5,735	)		(44	)		(2,351	)

Comprehensive loss	$	(13,472	)	$	(11,792	)	$	(16,424	)	$	(20,006	)

See accompanying notes to unaudited condensed consolidated financial statements.

- 4 -

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

(unaudited)


	Common stock					Paid-in			Retained			Accumulated other
Six Months Ended June 30, 2018	Shares			Amount		capital			earnings			comprehensive loss			Total
BALANCE AT DECEMBER 31, 2017		14,903		$	149	$	178,909		$	60,546		$	(29,325	)	$	210,279
Comprehensive loss:
Net loss		—			—		—			(11,598	)		—			(11,598	)
Translation adjustment		—			—		—			—			3,380			3,380
Derivative fair value adjustment		—			—		—			—			(14	)		(14	)
Effect of retirement benefit obligations		—			—		—			—			18			18

Total comprehensive loss																(8,214	)

Issuance of 5,593,116 shares of common stock for acquisition of Filament, net of equity issuance costs		5,593			56		75,920			—			—			75,976
Restricted shares issued to directors		3			—		—			—			—			—
Net issuance of restricted shares to employees		126			1		(1	)		—			—			—
Stock compensation expense		—			—		838			—			—			838
Shares effectively repurchased for required employee withholding taxes		(19	)		—		(258	)		—			—			(258	)
Dividends ⁽¹⁾		—			—		—			(880	)		—			(880	)

BALANCE AT MARCH 31, 2018		20,606			206		255,408			48,068			(25,941	)		277,741
Comprehensive loss:
Net loss		—			—		—			(6,057	)		—			(6,057	)
Translation adjustment		—			—		—			—			(5,489	)		(5,489	)
Derivative fair value adjustment		—			—		—			—			(263	)		(263	)
Effect of retirement benefit obligations		—			—		—			—			17			17

Total comprehensive loss																(11,792	)

Filament net equity issuance costs adjustment		—			—		(6	)								(6	)
Restricted shares issued to directors		54			—		—			—			—			—
Net issuance of restricted shares to employees		93			1		(1	)		—			—			—
Stock compensation expense		—			—		921			—			—			921
Shares effectively repurchased for required employee withholding taxes		(12	)		—		(140	)		—			—			(140	)
Dividends ⁽¹⁾		—			—		—			(885	)		—			(885	)

BALANCE AT JUNE 30, 2018		20,741			207		256,182			41,126			(31,676	)		265,839


	Common stock					Paid-in			Retained			Accumulated other
Six Months Ended June 30, 2019	Shares			Amount		capital			earnings			comprehensive loss			Total
BALANCE AT DECEMBER 31, 2018		20,764		$	208	$	258,637		$	55,264		$	(34,616	)	$	279,493
Comprehensive loss:
Net loss		—			—		—			(4,867	)		—			(4,867	)
Translation adjustment		—			—		—			—			1,306			1,306
Net change in cash flow hedges		—			—		—			—			596			596
Effect of retirement benefit obligations		—			—		—			—			13			13

Total comprehensive loss																(2,952	)

Net issuance of restricted shares to employees		169			1		(1	)		—			—			—
Stock compensation expense		—			—		900			—			—			900
Net exercise of stock options		19			—		—			—			—			—
Shares effectively repurchased for required employee withholding taxes		(25	)		—		(232	)		—			—			(232	)
Dividends ⁽¹⁾		—			—		—			(898	)		—			(898	)

BALANCE AT MARCH 31, 2019		20,927		$	209	$	259,304		$	49,499		$	(32,701	)	$	276,311
Comprehensive loss:
Net loss		—			—		—			(11,513	)		—			(11,513	)
Translation adjustment		—			—		—			—			(2,953	)		(2,953	)
Net change in cash flow hedges		—			—		—			—			982			982
Effect of retirement benefit obligations		—			—		—			—			12			12

Total comprehensive loss																(13,472	)

Restricted shares issued to directors		61			1		(1	)		—			—			—
Net issuance of restricted shares to employees		250			3		(3	)		—			—			—
Stock compensation expense		—			—		1,186			—			—			1,186
Net exercise of stock options		34			—		133			—			—			133
Shares effectively repurchased for required employee withholding taxes		(17	)		—		(158	)		—			—			(158	)
Dividends ⁽¹⁾		—			—		—			(896	)		—			(896	)

BALANCE AT JUNE 30, 2019		21,255		$	213	$	260,461		$	37,090		$	(34,660	)	$	263,104

⁽¹⁾	Cash dividends declared per share of common stock were $0.085 and $0.085 in the six months ended June 30, 2018 and 2019, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

- 5 -

LIFETIME BRANDS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Six Months Ended
	June 30,
	2019			2018
OPERATING ACTIVITIES
Net loss	$	(16,380	)	$	(17,655	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		12,649			10,731
Amortization of financing costs		876			663
Deferred rent		—			368
Non-cash lease expense		1,156			—
Stock compensation expense		2,100			1,759
Undistributed equity in losses (earnings), net of taxes		185			(232	)
Loss on early retirement of debt		—			66
SKU Rationalization		8,500			—
Changes in operating assets and liabilities (excluding the effects of business acquisitions):
Accounts receivable		34,184			41,441
Inventory		(40,900	)		(39,555	)
Prepaid expenses, other current assets and other assets		(1,568	)		(185	)
Accounts payable, accrued expenses and other liabilities		15,587			5,170
Income taxes receivable		(9,247	)		(4,095	)
Income taxes payable		—			(4,242	)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		7,142			(5,766	)

INVESTING ACTIVITIES
Purchases of property and equipment		(3,867	)		(3,168	)
Filament acquisition, net of cash acquired		—			(217,932	)

NET CASH USED IN INVESTING ACTIVITIES		(3,867	)		(221,100	)

FINANCING ACTIVITIES
Proceeds from revolving credit facility		136,455			126,283
Repayments of revolving credit facility		(133,497	)		(161,173	)
Proceeds from term loan		—			275,000
Repayments of term loan		(1,375	)		(688	)
Proceeds from short term loan		—			79
Payments on short term loan		—			(71	)
Payment of financing costs		—			(11,154	)
Payment of equity issuance costs		—			(936	)
Payments for capital leases		(12	)		(24	)
Payments of tax withholding for stock based compensation		(390	)		(398	)
Proceeds from exercise of stock options		133			—
Cash dividends paid		(1,786	)		(1,535	)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(472	)		225,383

Effect of foreign exchange on cash		85			(118	)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,888			(1,601	)
Cash and cash equivalents at beginning of period		7,647			7,600

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	10,535		$	5,999

See accompanying notes to unaudited condensed consolidated financial statements.

- 6 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

NOTE A — BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES

Organization and business

Lifetime Brands, Inc. (the “Company”) designs, sources and sells branded kitchenware, tableware and other products used in the home and markets its products under a number of brand names and trademarks, which are either owned or licensed by the Company, or through retailers’ private labels. The Company markets and sells its products principally on a wholesale basis to retailers. The Company also markets and sells a limited selection of its products directly to consumers through third parties and its own internet websites.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, which consist only of normal recurring accruals, considered necessary for a fair presentation have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Annual Report on Form 10-K”).

Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Revenue recognition

The Company offers various sales incentives and promotional programs to its customers in the normal course of business. These incentives and promotions typically include arrangements such as cooperative advertising, buydowns, volume rebates and discounts. These arrangements and returns are reflected as reductions of revenue at the time of sale. See Note B – Revenue for additional information.

Cost of sales

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

Prior to January 1, 2019, depreciation associated with certain tooling used to produce products was classified as selling, general and administrative expenses. The amount recorded in cost of sales for the three and six months ended June 30, 2019 was $0.4 million and $0.7 million, respectively. The impact on the comparative periods presented is de minimis and therefore, the comparative periods have not been adjusted to reflect this change in accounting policy.

The Company implemented programs to improve the productivity of its inventory and simplify its U.S. business. In connection therewith, it initiated a stock keeping unit rationalization (“SKU Rationalization”) initiative to identify inventory to discontinue from active status, consistent with the objectives of these programs.

- 7 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

During the three months ended June 30, 2019, the Company recorded an $8.5 million charge to cost of sales associated with the SKU Rationalization initiative. The inventory affected represents approximately 8% of its consolidated inventory.

Distribution expenses

Distribution expenses consist primarily of warehousing expenses and freight-out expenses.

Accounts receivable

The Company periodically reviews the collectability of its accounts receivable and establishes allowances for estimated losses that could result from the inability of its customers to make required payments. A considerable amount of judgment is required to assess the ultimate potential realization of these receivables including assessing the initial and on-going creditworthiness of the Company’s customers.

The Company also maintains an allowance for anticipated customer deductions. The allowances for deductions are primarily based on contracts with customers. However, in certain cases, the Company does not have a formal contract and, therefore, customer deductions are non-contractual. To evaluate the reasonableness of non-contractual customer deductions, the Company analyzes currently available information and historical trends of deductions.

Receivable purchase agreement

The Company has an uncommitted Receivables Purchase Agreement with HSBC Bank USA, National Association (“HSBC”) as Purchaser (the “Receivables Purchase Agreement”). The sale of accounts receivable, under the Company’s Receivable Purchase Agreement with HSBC, is reflected as a reduction of accounts receivable in the Company’s condensed consolidated balance sheets at the time of sale and any related expense is included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. Pursuant to this agreement, the Company sold to HSBC $24.1 million and $49.2 million of receivables during the three and six months ended June 30, 2019, respectively, and $19.1 million and $38.7 million of receivables during the three and six months ended June 30, 2018, respectively. Charges of $138,500 and $286,000 related to the sale of the receivables are included in selling, general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2019, respectively. Charges of $99,000 and $189,000 related to the sale of receivables are included in selling, general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2018, respectively.

Inventory

Inventory consists principally of finished goods sourced from third-party suppliers. Inventory also includes finished goods, work in process and raw materials related to the Company’s manufacture of sterling silver products. Inventory is priced using the lower of cost (first-in, first-out basis) or net realizable value. The Company estimates the selling price of its inventory on a product by product basis based on the current selling environment. If the estimated selling price is lower than the inventory’s cost, the Company reduces the value of the inventory to its net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

- 8 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

The components of inventory were as follows (in thousands):


	June 30,		December 31,
	2019		2018
Finished goods	$	197,310	$	165,969
Work in process		97		375
Raw materials		8,200		7,257

Total	$	205,607	$	173,601

Fair value of financial instruments

The Company determined that the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable are reasonable estimates of their fair values because of their short-term nature. The Company determined that the carrying amounts of borrowings outstanding under its revolving credit facility, term loan and short term loan approximate fair value since such borrowings bear interest at variable market rates.

Derivatives

The Company accounts for derivative instruments in accordance with Accounting Standard Codification (“ASC”) Topic No. 815, Derivatives and Hedging. ASC Topic No. 815 requires that all derivative instruments be recognized on the balance sheet at fair value as either an asset or liability. Changes in the fair value of derivatives that qualify as hedges and have been designated as part of a hedging relationship for accounting purposes have no net impact on earnings until the hedged item is recognized in earnings. The change in the fair value of hedges is included in accumulated other comprehensive loss and subsequently recognized in the Company’s condensed consolidated statements of operations to mirror the location of the hedged items impacting earnings. Changes in the fair value of derivatives that do not qualify as hedging instruments for accounting purposes are recorded in the Company’s condensed statements of operations.

Goodwill, intangible assets and long-lived assets

Goodwill and intangible assets deemed to have indefinite lives are not amortized but, instead, are subject to an annual impairment assessment. Additionally, if events or conditions were to indicate the carrying value of a reporting unit may not be recoverable, the Company would evaluate goodwill and other intangible assets for impairment at that time. As it relates to the goodwill assessment, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment testing described in Accounting Standards Update (“ASU”) Topic No. 350, Intangibles – Goodwill and Other. If, after assessing qualitative factors, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary and the Company’s goodwill is considered to be unimpaired. However, if based on the Company’s qualitative assessment, it concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if the Company elects to bypass the qualitative assessment, the Company will proceed with performing the quantitative impairment test. The quantitative impairment test compares the carrying value of each reporting unit that has goodwill with the estimated fair value of the respective reporting unit. Should the carrying value of a reporting unit be in excess of the estimated fair value of that reporting unit, an impairment charge will be recorded to reduce the reporting unit to fair value. The Company also evaluates qualitative factors to determine whether or not its indefinite lived intangibles have been impaired and then performs quantitative tests if required. These tests can include the relief from royalty model or other valuation models.

- 9 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

Long-lived assets, including intangible assets deemed to have finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit or material adverse changes in the business climate that indicate that the carrying amount of an asset may be impaired. When impairment indicators are present, the recoverability of the asset is measured by comparing the carrying value of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Leases

The Company determines if an arrangement is a lease at the inception of a contract. Operating lease right-of-use (“ROU”) assets are included in operating lease right-of-use assets on the condensed consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current portion of operating lease liability and operating lease liabilities, respectively, on the condensed consolidated balance sheets. Finance leases were not material to the Company’s condensed consolidated balance sheets.

Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. The operating lease ROU asset may also include any lease payments made, adjusted for any prepaid or accrued rent payments, lease incentives, and initial direct costs incurred. Certain leases may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

For certain equipment leases, the Company applies a portfolio approach to effectively account for any ROU assets and liabilities. Leases with an initial term of twelve months or less are not recorded on the balance sheet.

The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized.

Employee healthcare

The Company self-insures certain portions of its health insurance plans. The Company maintains an accrual for unpaid claims and estimated claims incurred but not yet reported (“IBNR”). Although management believes that it uses the best information available to estimate claims IBNR, actual claims may vary significantly from estimated claims.

Restructuring expenses

Costs associated with restructuring activities are recorded at fair value when a liability has been incurred. A liability has been incurred at the point of closure for any remaining operating lease obligations and at the communication date for severance.

In connection with the Company’s March 2018 acquisition of Filament, the Company commenced a restructuring plan to integrate the operations of Filament with the Company’s operations and realize the savings expected from the synergies of the acquisition. During the three and six months ended June 30, 2019, the Company incurred $0.1 million and $0.4 million, respectively, of Filament restructuring charges, primarily related to severance, of which $0.1 million was accrued at June 30, 2019. During the three and six months ended June 30, 2018, the Company incurred $0.4 million and $0.8 million, respectively, of Filament restructuring charges, primarily related to severance, of which $0.4 million was accrued at June 30, 2018.

- 10 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

During the three and six months ended June 30, 2019, the Company incurred $0.1 million and $0.4 million of restructuring expense, primarily related to severance, for the integration of its legal entities operating in Europe. In 2018, the Company finalized its integration plans for its European operations and took further steps to consolidate its operations. The Company will combine its physical locations in the U.K. in 2019 and expects to incur approximately $1.1 million of additional restructuring and integration charges in 2019. At June 30, 2019, $0.6 million of restructuring charges related to the European restructuring plan were accrued.

Adoption of new accounting pronouncements

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) (“ASC 842”), which requires a lessee, in most leases, to initially recognize a lease liability for the obligation to make lease payments and an ROU asset for the right to use the underlying asset for the lease term. The Company adopted this standard using the cumulative-effect adjustment method and elected certain practical expedients allowed under the standard. Upon adoption, the Company recognized ROU assets and a lease liability of $90.9 million and $104.4 million, respectively. See Note D – Leases for additional information on the Company’s adoption of this standard.

Effective January 1, 2019, the Company adopted ASU 2018-02, Income Statement- Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which addresses the effect on items within accumulated other comprehensive income (loss) of the change in the U.S. federal corporate tax rate due to the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. Upon adoption, the Company did not elect to reclassify the stranded income tax effects of the Tax Act from accumulated other comprehensive income (loss) to retained earnings.

NOTE B —REVENUE

The Company sells products wholesale, to retailers and distributors, and retail, directly to the consumer. Wholesale sales and retail sales are recognized at the point in time the customer obtains control of the products in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is not a formality, the customer must have accepted the product or service. The Company’s principal terms of sale are Free On Board (“FOB”) Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB Shipping Point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. Shipping and handling fees that are billed to customers in sales transactions are included in net sales and amounted to $0.6 million and $1.3 million for the three and six months ended June 30, 2019, respectively, and $0.8 million and $1.3 million for the three and six months ended June 30, 2018, respectively. Net sales exclude taxes that are collected from customers and remitted to the taxing authorities.

The Company offers various sales incentives and promotional programs to its wholesale customers from time to time in the normal course of business. These incentives and promotions typically include arrangements such as cooperative advertising, buydowns, volume rebates and discounts. These arrangements represent forms of variable consideration and an estimate of sales returns are reflected as reductions in net sales in the Company’s condensed consolidated statements of operations. These estimates are based on historical experience and other known factors or as the most likely amount in a range of possible outcomes. On a quarterly basis, variable consideration is assessed on a portfolio approach in estimating the extent to which the components of variable consideration are constrained.

Payment terms with customers vary by customer, but generally range from 30 to 90 days or at the point of sale for the Company’s retail direct sales. The Company incurs certain direct incremental costs to obtain contracts with customers, such as sales-related commissions, where the recognition period for the related revenue is less than one year. These costs are expensed as incurred and recorded within selling, general and administrative expenses in the condensed consolidated statements of operations. Incidental items that are immaterial in the context of the contract are expensed as incurred.

- 11 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

The following tables present the Company’s net sales disaggregated by segment, product category and geographic region for the three and six months ended June 30, 2019 (in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
U.S. Segment
Kitchenware	$	65,625	$	134,892
Tableware		28,759		55,211
Home Solutions		28,708		60,027

Total U.S.Segment		123,092		250,130

International Segment
Kitchenware		12,376		26,512
Tableware		7,068		15,820

Total International Segment		19,444		42,332

Total net sales	$	142,536	$	292,462

United States	$	116,683	$	238,092
United Kingdom		14,775		30,712
Rest of World		11,078		23,658

Total net sales	$	142,536	$	292,462

NOTE C —ACQUISITION

On December 22, 2017, the Company entered into an agreement providing for the acquisition of Filament by the Company. The acquisition was completed on March 2, 2018. The aggregate consideration for Filament, after taking into account certain adjustments, was $294.4 million, consisting of $217.5 million of cash consideration and 5,593,116 newly issued shares of the Company’s common stock, with a value equal to $76.9 million based on the market value of the Company’s common stock as of March 2, 2018.

The purchase price was allocated based on the Company’s final estimate of the fair value of the assets acquired and liabilities assumed, as follows (in thousands):


Accounts receivable	$	26,224
Inventory		29,044
Other assets		5,620
Other liabilities		(23,018	)
Deferred income tax		(13,881	)
Goodwill and other intangibles		270,427

Total allocated value	$	294,416

- 12 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

Goodwill results from such factors as an assembled workforce. The total amount of goodwill is not expected to be deductible for tax purposes. The goodwill and other intangible assets are primarily included in the U.S. segment. Customer relationships are amortized on a straight-line basis over their estimated useful lives (see Note F – Intangible Assets).

The three and six months ended June 30, 2018 included the operations of Filament for the period from March 2, 2018, the date of acquisition, to June 30, 2018. The condensed consolidated statements of operations for the three months ended June 30, 2018 include $29.3 million of net sales and $0.4 million of net loss from operations contributed by Filament. The condensed consolidated statements of operations for the six months ended June 30, 2018, include $38.6 million of net sales and $1.5 million of net loss from operations contributed by Filament.

Unaudited Pro forma Results

The following table presents the Company’s pro forma consolidated net sales, loss before income taxes and equity in earnings and net loss for the three and six months ended June 30, 2018. The unaudited pro forma results include the historical statements of operations information of the Company and of Filament, giving effect to the Filament acquisition and related financing as if they had occurred at the beginning of the periods presented.


	Three Months Ended			Six Months Ended
	June 30, 2018			June 30, 2018
	(in thousands, except per share data)
Net sales	$	148,651		$	292,631
Loss before income taxes and equity in earnings		(6,694	)		(22,904	)
Net loss		(5,092	)		(17,235	)
Basic and diluted loss per common share		(0.25	)		(0.85	)

The unaudited pro forma results do not include any revenue or cost reductions that may be achieved through the business combination or the impact of non-recurring items directly related to the business combination.

The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Filament acquisition had been completed as of the date for which the pro forma financial information is presented. In addition, the unaudited pro forma results do not purport to project the future condensed consolidated operating results of the combined company.

NOTE D — LEASES

The Company adopted ASC 842 as of January 1, 2019, using the cumulative effective adjustment method wherein the Company applied the new leases standard at the adoption date. Accordingly, all periods prior to January 1, 2019 were presented in accordance with the previous ASC Topic 840 – Leases, and no retrospective adjustments were made to the comparative periods presented. Adoption of ASC 842 resulted in an increase to total assets and liabilities due to the recording of operating lease ROU assets and operating lease liabilities of approximately $90.9 million and $104.4 million, respectively, as of January 1, 2019. Finance leases are not material to the Company and were not impacted by the adoption of ASC 842, as finance lease liabilities and the corresponding assets were already recorded in the balance sheet under the previous guidance, ASC 840. The adoption did not materially impact the Company’s condensed consolidated statements of operations or cash flows.

- 13 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

The Company has operating leases for corporate offices, distribution facilities, manufacturing plants, and certain vehicles. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company has elected the practical expedient to account for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. The Company also elected the package of practical expedients permitted within the new standard, which among other things, allows the Company to carry forward historical lease classification. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense.

ROU assets represent the Company’s right to use an underlying asset during the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the net present value of fixed lease payments over the lease term. The Company’s lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. ROU assets also include any advance lease payments. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The components of lease costs for the three and six months ended June 30, 2019 were as follows (in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Operating lease costs:
Fixed	$	4,907	$	9,131

Total	$	4,907	$	9,131

Supplemental cash flow information for the three and six months ended June 30, 2019 was as follows (in thousands):


	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	4,295	$	7,975

Total	$	4,295	$	7,975


	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	20,991	$	115,488

Total	$	20,991	$	115,488

- 14 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

The aggregate future lease payments for operating leases as of June 30, 2019 were as follows (in thousands):


	Operating
2019 (excluding the six months ending June 30, 2019)	$	9,952
2020		17,461
2021		17,102
2022		17,178
2023		17,343
Thereafter		88,825

Total lease payments		167,861
Less: Interest		(42,068	)

Present value of lease liabilities	$	125,793

Average lease terms and discount rates were as follows:


	June 30, 2019
Weighted-average remaining lease term (years)
Operating leases		9.6
Weighted-average discount rate
Operating leases		6.2	%

NOTE E —INVESTMENTS

The Company owns approximately a 30% interest in 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 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 six months ended June 30, 2019 and 2018 in the accompanying condensed consolidated statements of operations. The value of the Company’s investment balance has been translated from Mexican Pesos (“MXN”) to U.S. Dollars (“USD”) using the spot rates of MXN 19.19 and MXN 19.64 at June 30, 2019 and December 31, 2018, respectively. The Company’s proportionate share of Vasconia’s net income has been translated from MXN to USD using the average exchange rates of MXN 19.11 and MXN 19.38 during the three months ended June 30, 2019 and 2018, respectively, and MXN 19.11 to MXN 19.24 and MXN 18.71 to MXN 19.38 during the six months ended June 30, 2019 and 2018, respectively. The effect of the translation of the Company’s investment resulted in a decrease to the investment of $1.5 million during the six months ended June 30, 2019 and a decrease to the investment of $1.1 million during the six months ended 2018. These translation effects are recorded in accumulated other comprehensive loss. Included within prepaid expenses and other current assets at June 30, 2019 and December 31, 2018 are amounts due from Vasconia of $159,000 and $95,000, respectively. Included within accrued expenses and accounts payable at June 30, 2019 and December 31, 2018 are amounts due to Vasconia of $68,000 and $0, respectively.

- 15 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

Summarized statement of income information for Vasconia in USD and MXN is as follows (in thousands):


	Three Months Ended
	June 30,
	2019						2018
	USD			MXN			USD		MXN
Net sales	$	37,040		$	707,837		$	48,061	$	931,329
Gross profit		9,291			177,552			9,986		193,517
Income from operations		2,805			53,601			3,655		70,827
Net (Loss) Income		(178	)		(3,407	)		2,457		47,621

	Six Months Ended
	June 30,
	2019						2018
	USD			MXN			USD		MXN
Net Sales	$	78,534		$	1,506,175		$	87,630	$	1,671,735
Gross Profit		17,229			330,273			17,105		326,724
Income from operations		4,698			90,027			4,804		92,330
Net (Loss) Income		(511	)		(9,813	)		2,095		40,845

The Company recorded equity in (losses) earnings of Vasconia, net of taxes, of $(69,000) and $(185,000) for the three and six months ended June 30, 2019, respectively. The Company recorded equity in (losses) earnings of Vasconia, net of taxes, of $155,000 and $232,000 for the three and six months ended June 30, 2018, respectively. Equity in (losses) earnings for the three and six months ended June 30, 2018 includes deferred tax expense of $(501,000) and $(306,000), respectively, due to the requirement to record tax benefits for foreign currency translation gains and losses through other comprehensive loss, with a corresponding adjustment to deferred tax liabilities.

As of June 30, 2019 and December 31, 2018, the fair value (based upon Vasconia’s quoted stock price) of the Company’s investment in Vasconia was $34.2 million and $31.9 million, respectively. The carrying value of the Company’s investment in Vasconia was $20.9 million and $22.6 million as of June 30, 2019 and December 31, 2018, respectively.

- 16 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

NOTE F — INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):


	June 30, 2019							December 31, 2018
			Accumulated										Accumulated
	Gross		Amortization			Net		Gross		Impairment			Amortization			Net
Goodwill	$	92,637	$	—		$	92,637	$	93,895	$	(2,205	)	$	—		$	91,690
Indefinite-lived intangible assets:
Trade names		58,216		—			58,216		58,216		—			—			58,216
Finite-lived intangible assets:
Licenses		15,847		(10,059	)		5,788		15,847		—			(9,825	)		6,022
Trade names		43,559		(15,545	)		28,014		43,689		—			(13,965	)		29,724
Customer relationships		175,396		(33,691	)		141,705		175,482		—			(27,538	)		147,944
Other		6,508		(1,554	)		4,954		6,510		—			(1,259	)		5,251

Total	$	392,163	$	(60,849	)	$	331,314	$	393,639	$	(2,205	)	$	(52,587	)	$	338,847

NOTE G — DEBT

The Company’s credit agreement (the “ABL Agreement”) with JPMorgan 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 on March 2, 2023, and a loan agreement (the “Term Loan” and together with the ABL Agreement, the “Debt Agreements”) provides for a senior secured term loan credit facility in the original principal amount of $275.0 million, which will mature on February 28, 2025. The Term Loan facility will be repaid in quarterly payments, which commenced June 30, 2018, of principal equal to 0.25% of the original aggregate principal amount of the Term Loan facility. The Term Loan requires the Company to make an annual prepayment of principal based upon excess cash flow (the “Excess Cash Flow”), if any. Based upon its current estimate of Excess Cash Flow, as defined, to be generated in calendar year 2019, the Company expects to prepay approximately $12.0 million of principal in the first quarter of 2020. Accordingly, this estimated amount is recorded in the current maturity of term loan on the condensed consolidated balance sheets. 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.

At June 30, 2019 and December 31, 2018, borrowings outstanding under the ABL Agreement were $44.9 million and $42.1 million, respectively, and open letters of credit were $3.2 million and $3.4 million, respectively. At June 30, 2019, availability under the ABL Agreement was approximately $101.9 million. Availability under the ABL Agreement depends on the valuation of certain current assets comprising the borrowing base. Due to the seasonality of the Company’s business, this may mean that the Company will have greater borrowing availability during the third and fourth quarters of each year. The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly. Consequently, the $150.0 million commitment thereunder may not represent actual borrowing capacity.

At June 30, 2019 and December 31, 2018, $271.6 million and $272.9 million, respectively, was outstanding under the Term Loan. At June 30, 2019, unamortized debt issuance costs of $1.5 million and $6.8 million offset the short-term and long-term outstanding balances, respectively, of the Term Loan.

- 17 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

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 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 the U.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 revolving credit facility 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 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. Interest rates on outstanding borrowings under the ABL Agreement at June 30, 2019 ranged from 2.4% to 6.25%. In addition, the Company paid a commitment fee that ranged from 0.250% to 0.375% on the unused portion of the ABL Agreement during the six months ended June 30, 2019.

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 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 2.50% or (ii) LIBOR plus a margin of 3.50%. The interest rate on outstanding borrowings under the Term Loan at June 30, 2019 was 5.9%.

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 forty-five (45) consecutive days, the Company is required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 as of the last day of any period of four consecutive fiscal quarters.

The Company was in compliance with the covenants of the Debt Agreements at June 30, 2019.

NOTE H — DERIVATIVES

The Company is a party to interest rate swap agreements with an aggregate notional value of $100.0 million at June 30, 2019. The Company designated the interest rate swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The hedge periods of these agreements commenced in April 2018 and expire in March 2023. The notional amounts are reduced over these periods. In June 2019, the Company entered into new interest rate swap agreements, with an aggregate notional value of $25.0 million at June 30, 2019. These non-designated interest rate swaps serve as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings and expire in February 2025.

- 18 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

The Company is exposed to market risks as well as changes in foreign currency exchange rates as measured against the USD and each other, and changes to credit risk of derivative counterparties. The Company attempts to minimize these risks by primarily 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 currency markets and 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 currently does not have any foreign currency forward contract derivatives that are not designated as hedges.

Fluctuations in the value of certain foreign currencies as compared to the USD may positively or negatively affect the Company’s revenues, gross margins, operating expenses, and retained earnings, all of which are expressed in USD. Where the Company deems it prudent, the Company engages in hedging programs using foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. The Company purchases short-term (i.e. 12 months or less) foreign currency forward contracts to protect against currency exchange risks associated with the payment of merchandise purchases to foreign suppliers. The Company does not hedge the translation of foreign currency profits into USD, as the Company regards this as an accounting exposure rather than an economic exposure. The aggregate gross notional values of foreign exchange contracts at June 30, 2019 was $9.0 million. These foreign exchange contracts have been designated as hedges in to order to apply hedge accounting.

The fair values of the Company’s derivative financial instruments included in the condensed consolidated balance sheets are presented as follows (in thousands):


Derivatives designated as hedging instruments	Balance Sheet Location	June 30, 2019		December 31, 2018
Interest rate swaps	Prepaid Expenses	$	460	$	42
	Other Assets		1,372		157
Foreign exchange contracts	Prepaid Expenses		370		—

Derivatives not designated as hedging instruments	Balance Sheet Location	June 30, 2019		December 31, 2018
Interest rate swaps	Other Assets	$	350	$	—

The fair values of the derivatives have been obtained from the counterparties to the agreements and were based on Level 2 observable inputs using proprietary models and estimates about relevant future market conditions.

The counterparties to the derivative financial instruments are major international financial institutions. The Company is exposed to credit risk for the net exchanges under these agreements, but not for the notional amounts. The Company does not anticipate non-performance by any of its counterparties.

- 19 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

The amounts of gains and (losses) related to the Company’s derivative financial instruments designated as hedging instruments are recognized in other comprehensive loss, net of taxes, as follows (in thousands):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
Derivatives designated as hedging instruments	2019		2018			2019		2018
Interest rate swaps, net of taxes	$	748	$	(263	)	$	1,224	$	(277	)
Foreign exchange contracts, net of taxes		234		—			354		—

	$	982	$	(263	)	$	1,578	$	(277	)

Gains or losses on the interest rate swaps, designated as hedges, will be reclassified into earnings as interest expense as the interest on the debt is recognized. During the three and six months ended June 30, 2019 and June 30, 2018, the Company recognized $0.1 million and $0.2 million of interest expense related to the interest rate swaps, respectively.

Gains or losses on the foreign exchange contracts will be reclassified into cost of sales as the hedged merchandise purchases are sold. The amount recorded as a gain in cost of sales for the three and six months ended June 30, 2019 was $0.1 million.

The amounts of the gains and (losses) related to the Company’s derivative financial instruments not designated as hedging instruments that were recognized in earnings are as follows (in thousands):


		Three Months Ended				Six Months Ended
		June 30,				June 30,
Derivatives not designated as hedging instruments	Location of gain (loss)	2019		2018		2019		2018
Interest rate swaps	Interest expense	$	350		—	$	350		—
Foreign exchange contracts	Selling, general and administrative expense		—	$	1,468		—	$	(47	)

NOTE I — STOCK COMPENSATION

Option Awards

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2019 is as follows:


	Options			Weighted- average exercise price		Weighted- average remaining contractual life (years)		Aggregate intrinsic value
Options outstanding, January 1, 2019		1,548,825		$	13.87
Grants		296,500			9.21
Exercises		(75,000	)		4.28
Cancellations		(6,750	)		13.34
Expirations		(68,125	)		15.57

Options outstanding, June 30, 2019		1,695,450			13.41		4.9	$	87,425

Options exercisable, June 30, 2019		1,212,172		$	14.27		3.1	$	87,425

- 20 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that would have been received by the option holders had all option holders exercised their stock options on June 30, 2019. The intrinsic value is calculated for each in-the-money stock option as the difference between the closing price of the Company’s common stock on June 30, 2019 and the exercise price.

Total unrecognized stock option compensation expense at June 30, 2019, before the effect of income taxes, was $1.7 million and is expected to be recognized over a weighted-average period of 1.8 years.

Restricted Stock

A summary of the Company’s restricted stock activity and related information for the six months ended June 30, 2019 is as follows:


	Restricted Shares			Weighted- average grant date fair value
Non-vested restricted shares, January 1, 2019		326,545		$	14.63
Grants		437,997			9.26
Vested		(145,049	)		14.49
Cancellations		(24,362	)		13.99

Non-vested restricted shares, June 30, 2019		595,131		$	10.74

Total unrecognized compensation expense remaining	$	5,904,000
Weighted-average years expected to be recognized over		1.8

The fair value of restricted stock that vested during the six months ended June 30, 2019 was $1.4 million.

Performance shares

Each performance award represents the right to receive up to 150% of the target number of shares of common stock. The number of shares of common stock earned will be determined based on the attainment of specified performance goals, as determined by the Compensation Committee, by the end of the performance period. The shares are subject to the terms and conditions of the Company’s Amended and Restated 2000 Long Term Incentive Plan (the “Plan”).

- 21 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

A summary of the Company’s performance-based award activity and related information for the six months ended June 30, 2019 is as follows:


	Performance- based stock awards ⁽¹⁾			Weighted- average grant date fair value
Non-vested performance-based awards, January 1, 2019		339,287		$	14.82
Grants		156,775			9.21
Vested		(66,761	)		15.69
Cancellations		(25,767	)		15.46

Non-vested performance-based awards, June 30, 2019		403,534		$	12.45

Total unrecognized compensation expense remaining	$	3,037,000
Weighted-average years expected to be recognized over		1.9

(1)	Represents the target number of shares to be issued for each performance-based award.

The total fair value of performance-based awards that vested during the six months ended June 30, 2019 was $0.6 million.

The Company recognized total stock compensation expense of $1.2 million for the three months ended June 30, 2019, of which $0.1 million represents stock option compensation expense and $1.1 million represents restricted stock and performance-based stock compensation expense. For the six months ended June 30, 2019, the Company recognized total stock compensation expense of $2.1 million, of which $0.3 million represents stock option compensation expense and $1.8 million represents restricted stock and performance-based stock compensation expense. The Company recognized total stock compensation expense of $0.9 million for the three months ended June 30, 2018, of which $0.2 million represents stock option compensation expense and $0.7 million represents restricted stock and performance-based stock compensation expense. For the six months ended June 30, 2018, the Company recognized total stock compensation expense of $1.8 million, of which $0.4 million represents stock option compensation expense and $1.4 million represents restricted stock and performance-based stock compensation expense.

At June 30, 2019, there were 152,342 shares available for awards that could be granted under the Plan, assuming maximum performance of performance-based awards.

- 22 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

NOTE J —LOSS PER COMMON SHARE

Basic loss per common share has been computed by dividing net loss by the weighted-average number of shares of the Company’s common stock outstanding during the relevant period. Diluted loss per common share adjusts net loss and basic loss per common share for the effect of all potentially dilutive shares of the Company’s common stock. The calculations of basic and diluted loss per common share for the three and six months ended June 30, 2019 and 2018 are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands, except per share amounts)
Net loss– basic and diluted	$	(11,513	)	$	(6,057	)	$	(16,380	)	$	(17,655	)
Weighted-average shares outstanding – basic and diluted		20,545			20,327			20,527			18,474
Basic and diluted loss per common share	$	(0.56	)	$	(0.30	)	$	(0.80	)	$	(0.96	)

The computation of diluted loss per common share for the three and six months ended June 30, 2019 excludes 2,147,690 shares and 1,882,113 shares, respectively, related to options to purchase shares and other stock awards. The computation of diluted loss per common share for the three and six months ended June 30, 2018 excludes 1,990,536 shares and 1,938,124 shares, respectively, related to options to purchase shares and other stock awards. These shares were excluded due to their antidilutive effects.

NOTE K— INCOME TAXES

Income tax benefit of $5.8 million and $8.3 million for the three and six months ended June 30 2019, respectively, represent taxes on both U.S. and foreign earnings at combined effective income tax benefit rates of 33.6% and 33.8%, respectively. The effective rates for the three and six months ended June 30, 2019 differs from the federal statutory rate of 21% primarily due to state and local taxes and the impact of non-deductible expenses.

Income tax benefit of $1.8 million and $5.6 million for the three and six months ended June 30, 2018, respectively, represent taxes on both U.S. and foreign earnings at a combined effective income tax benefit rate of 22.1% and 23.8%, respectively. The effective rates for the three and six months ended June 30, 2018 reflects the reduced U.S. corporate income tax rate, partially offset by non-deductible expenses.

The Company has identified the following jurisdictions as “major” tax jurisdictions: U.S. Federal, California, Massachusetts, New York, New Jersey, Illinois, Georgia and the United Kingdom. The Company’s 2015 U.S. Federal income tax return and New York State tax returns for years 2014-2016 remain under audit with no proposed adjustments as of June 30, 2019.

The Company evaluates its tax positions on a quarterly basis and revises its estimates accordingly. There were no material changes to the Company’s uncertain tax positions, interest, or penalties during the three-month periods ended June 30, 2019 and June 30, 2018.

NOTE L – BUSINESS SEGMENTS

The Company has two reportable segments, U.S. and International. Prior to October 1, 2018, the U.S. segment was reported as two separate reportable segments, U.S. Wholesale and Retail Direct. The Company changed its reporting structure as of October 1, 2018 to reflect how the Company is managing its operations as well as what the chief operating decision maker reviews to make organizational decisions about resource allocations. Prior period segment information has been recast to reflect the current reportable segment structure of the Company.

- 23 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

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 its internet 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 loss from operations. Such measures give recognition to specifically identifiable operating costs such as cost of sales, distribution expenses and selling, general and administrative expenses. Certain general and administrative expenses, such as senior executive salaries and benefits, stock compensation, director fees, and accounting, legal and consulting fees, are not allocated to the specific segments and are reflected as unallocated corporate expenses.

The Company implemented its SKU Rationalization initiative to improve the productivity of its inventory and simplify its U.S. business. During the three months ended June 30, 2019, the Company recorded an $8.5 million charge to cost of sales associated with the SKU Rationalization initiative, which negatively impacted loss from operations for the U.S. segment.


	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(in thousands)
Net sales
U.S.	$	123,092		$	128,985		$	250,130		$	224,892
International		19,444			19,666			42,332			41,928

Total net sales	$	142,536		$	148,651		$	292,462		$	266,820

Loss from operations
U.S.	$	(4,678	)	$	1,968		$	(292	)	$	(3,572	)
International		(2,868	)		(204	)		(3,915	)		(3,424	)
Unallocated corporate expenses		(4,999	)		(5,065	)		(10,625	)		(9,621	)

Loss from operations	$	(12,545	)	$	(3,301	)	$	(14,832	)	$	(16,617	)

Depreciation and amortization
U.S.	$	5,210		$	5,292		$	10,481		$	8,439
International		1,080			1,130			2,168			2,292

Total depreciation and amortization	$	6,290		$	6,422		$	12,649		$	10,731


	June 30,		December 31,
	2019		2018
	(in thousands)
Assets
U.S.	$	684,229	$	604,532
International		117,295		94,210
Unallocated corporate		21,177		9,830

Total Assets	$	822,701	$	708,572

- 24 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

NOTE M — CONTINGENCIES

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

On August 13, 2015, the EPA released its remedial investigation and feasibility study (“RI/FS”) for the Site. On December 11, 2015, the EPA issued the Record of Decision (“ROD”) for an initial operable unit, electing to implement its preferred remedy, which consists of soil vapor extraction and dual-phase extraction/in-situ treatment. This selected remedy includes soil vapor extraction (“SVE”) to address soil (vadose zone) source areas at the Site, impermeable cover as necessary for the implementation of SVE, dual phase extraction in the shallow saprolite zone, and in-situ treatment as needed to address residual sources. The EPA’s estimated capital cost for its selected remedy is $7.3 million. In February 2017, the EPA indicated that it planned to expand its field investigation for the RI/FS to a second operable unit to further determine the nature and extent of the groundwater damage at and from the Site and to determine the nature of the remedial action needed. The EPA requested access to the property occupied by WSPR to install monitoring wells and to undertake groundwater sampling as part of this expanded investigation. WSPR consented to the EPA’s access request, subject to PRIDCO’s consent, as the property owner.

In December 2018, the Company, WSPR, and other identified Potentially Responsible Parties affiliated with the Site entered into tolling agreements to extend the statute of limitations for potential claims for the recovery of response costs for the initial operable unit under Section 107 of CERCLA. The tolling agreements do not constitute in any way an admission or acknowledgment of any fact, conclusion of law or liability by the parties to the agreements.

On July 19, 2019, WSPR’s counsel received an email from the US Department of Justice attorney representing the EPA with respect to the Site providing, as a courtesy, information relating to a public meeting to be held on July 30, 2019, in San German concerning the EPA’s proposed plan for a second operable unit. The EPA is accepting public comments on the proposed remedy, which is estimated to cost $17.3 million and includes in situ treatment and monitored nature attenuation of groundwater. The public comment period lasts for 30 days and ends on August 11, 2019. However, any member of the public can request a mandatory 30 day extension.

WSPR never used the primary constituents of concern and did not take up its tenancy at the Site until after EPA had discovered the damage to the local water supply. EPA has also issued notices of potential liability to numerous other entities affiliated with the Site, which used the constituents of concern. Accordingly, based on the above uncertainties and variables, it is not possible at this time for the Company to estimate its share of liability, if any, related to this matter. However, in the event of one or more definitive claims because of property damage asserted against the Company and adverse determinations related to this matter, it is possible that the ultimate liability resulting from this matter and the impact on the Company’s results of operations could be material.

The Company is, from time to time, involved in other legal proceedings. The Company believes that other current litigation is routine in nature and incidental to the conduct of the Company’s business and that none of this litigation, individually or collectively, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

- 25 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

NOTE N — OTHER

Cash dividends

Dividends declared in the six months ended June 30, 2019 were as follows:


Dividend per share	Date declared	Date of record	Payment date
$0.0425	March 12, 2019	May 1, 2019	May 15, 2019
$0.0425	June 27, 2019	August 1, 2019	August 15, 2019

On February 15, 2019 and May 15, 2019, the Company paid dividends of $0.9 million and $0.9 million to shareholders of record on February 1, 2019 and May 1, 2019, respectively. In the six months ended June 30, 2019, the Company reduced retained earnings for the accrual of $0.9 million relating to the dividend payable on August 15, 2019.

On August 6, 2019, the Board of Directors declared a quarterly dividend of $0.0425 per share payable on November 15, 2019 to shareholders of record on November 1, 2019.

Supplemental cash flow information


	Six Months Ended June 30,
	2019			2018
	(in thousands)
Supplemental disclosure of cash flow information:
Cash paid for interest	$	9,066		$	5,614
Cash paid for taxes		993			2,763
Non-cash investing activities:
Translation loss adjustment	$	(1,647	)	$	(2,109	)

- 26 -

LIFETIME BRANDS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(unaudited)

Components of accumulated other comprehensive loss, net


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
	(in thousands)
Accumulated translation adjustment:
Balance at beginning of period	$	(32,421	)	$	(24,441	)	$	(33,727	)	$	(27,821	)
Translation loss during period		(2,953	)		(5,489	)		(1,647	)		(2,109	)

Balance at end of period	$	(35,374	)	$	(29,930	)	$	(35,374	)	$	(29,930	)

Accumulated deferred gains (losses) on cash flow hedges:
Balance at beginning of period	$	757		$	—		$	161		$	14
Amounts reclassified from accumulated other comprehensive loss:
Settlement of cash flow hedge		(52	)		—			(23	)		(14	)
Change in unrealized gains (losses)		1,034			(263	)		1,601			(263	)

Net change in cash flow hedges, net of taxes of $306, $88, $495, and $88		982			(263	)		1,578			(277	)

Balance at end of period	$	1,739		$	(263	)	$	1,739		$	(263	)

Accumulated effect of retirement benefit obligations:
Balance at beginning of period	$	(1,037	)	$	(1,500	)	$	(1,050	)	$	(1,518	)
Amounts reclassified from accumulated other comprehensive loss: ⁽¹⁾
Amortization of actuarial losses, net of taxes		12			17			25			35

Balance at end of period	$	(1,025	)	$	(1,483	)	$	(1,025	)	$	(1,483	)

Total accumulated other comprehensive loss at end of period	$	(34,660	)	$	(31,676	)	$	(34,660	)	$	(31,676	)

(1)	Amounts are recorded in selling, general and administrative expense on the condensed consolidated statements of operations.

- 27 -

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. 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,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “may,” “should,” “assumes,” “seeks,” 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. Important factors that could cause the Company’s actual results to differ materially from those expressed as forward-looking statements are set forth in the Company’s 2018 Annual Report on Form 10-K in Part I, Item 1A under the heading Risk Factors. Such risks, uncertainties and other important factors include, among others, risks related to:

•

General economic factors and political conditions;

•

Exit of the United Kingdom from the European Union;

•

Tariffs;

•

Indebtedness and compliance with credit agreements;

•

Seasonality;

•

Liquidity;

•

Interest;

•

Acquisition integration;

•

Competition;

•

Customer practices;

•

Intellectual property, brands and licenses;

•

Goodwill;

•

International operations;

•

Supply chain;

•

Foreign exchange rates;

•

International trade and transportation;

•

Product liability;

•

Regulatory matters;

•

Product development;

•

Stock keeping unit rationalization (“SKU Rationalization”) initiative;

- 28 -

•

Reputation;

•

Technology;

•

Personnel;

•

Price fluctuations;

•

Business interruptions;

•

Projections;

•

Fixed costs;

•

Governance; and

•

Acquisitions and investments.

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.

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, cutting boards, shears, kitchen scales, thermometers, timers, cookware, pantryware, spice racks, wine accessories, and bakeware) and Tableware (dinnerware, stemware, flatware, wire organization, and giftware); and one category, Home Solutions, which comprises other products used in the home (thermal beverageware, food storage, neoprene travel products, bath scales, weather instruments, and home décor). In 2018, 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.

On March 2, 2018, the Company completed the acquisition of Taylor Holdco LLC and its subsidiaries (doing business as Filament Brands) (“Filament”). Filament primarily designs, markets and distributes consumer and food service precision measurement products, including kitchen scales, thermometers and timers, bath scales, wine accessories, kitchen tools, hydration products, and select outdoor products. The six months ended June 30, 2018 include the operations of Filament for the period from March 2, 2018 to June 30, 2018.

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^®, Taylor^®, KitchenAid^®, Pfaltzgraff^®, KitchenCraft^®, Fitz and Floyd^®, Sabatier^®, Kamenstein^®, Built NY^®, MasterClass^®, Fred^®, Rabbit^® and LaCafetière^®. Historically, the Company’s sales growth has come from expanding product offerings within its product categories, by developing existing brands, acquiring new brands, including complementary brands in markets outside the United States, and establishing new product categories. Key factors in the Company’s growth strategy have been the selective use and management of the Company’s brands and the Company’s ability to provide a stream of new products and designs. A significant element of this strategy is the Company’s in-house design and development teams that create new products, packaging and merchandising concepts.

BUSINESS SEGMENTS

Effective October 1, 2018, the Company operates in two reportable segments: U.S. and International. The U.S. segment is the Company’s primary domestic business that designs, markets and distributes its products to retailers and distributors, as well as directly to consumers through third party and its own internet websites. The International segment consists of certain business operations conducted outside the U.S. The Company has segmented its operations to reflect the manner in which management reviews and evaluates its results of operations.

- 29 -

EQUITY INVESTMENTS

The Company owns approximately 30% 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 has recorded its proportionate share of Vasconia’s results of operations as equity in earnings or losses in the Company’s condensed consolidated statements of operations. Pursuant to a Shares Subscription Agreement, the Company may designate four persons to be nominated as members of Vasconia’s Board of Directors. As of June 30, 2019, Vasconia’s Board of Directors is comprised of twelve members of whom the Company has designated three members.

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 2018 and 2017, net sales for the third and fourth quarters accounted for 62% and 60% of total annual net sales, respectively. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period. Consistent with the seasonality of the Company’s net sales and inventory levels, the Company also experiences seasonality in its inventory turnover and turnover days from one quarter to the next.

RESTRUCTURING

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following is an update to the corresponding critical accounting policies and estimates set forth in the Company’s 2018 Annual Report on Form 10-K. Except as modified below, there have been no material changes to the Company’s critical accounting policies and estimates discussed in the 2018 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.

Cost of Sales

The Company implemented programs to improve the productivity of its inventory and simplify its U.S. business. In connection therewith, it initiated a SKU Rationalization initiative to identify inventory to discontinue from active status, consistent with the objectives of these programs. During the three months ended June 30, 2019, the Company recorded an $8.5 million charge to cost of sales associated with the SKU Rationalization initiative. The inventory affected represents approximately 8% of its consolidated inventory.

- 30 -

Leases

The Company determines if an arrangement contains a lease at inception. Operating lease right-of-use (“ROU”) assets are included in operating lease right-of-use assets on the condensed consolidated balance sheets. The current and long-term components of operating lease liabilities are included in the current portion of the operating lease liability and operating lease liabilities, respectively, on the condensed consolidated balance sheets. Finance leases were not material to the Company’s condensed consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized upon commencement of the lease based on the present value of the lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Leases with a lease term of 12 months or less are not capitalized.

The Company has lease agreements with lease and non-lease components, which are generally accounted for as a single lease component.

RESULTS OF OPERATIONS

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		69.1			65.0			66.4			63.6

Gross margin		30.9			35.0			33.6			36.4
Distribution expenses		10.9			10.1			10.7			12.3
Selling, general and administrative expenses		28.7			26.9			27.7			30.1
Restructuring expenses		0.1			0.3			0.3			0.3

Loss from operations		(8.8	)		(2.2	)		(5.1	)		(6.2	)
Interest expense		(3.3	)		(3.1	)		(3.3	)		(2.5	)

Loss before income taxes and equity in (losses) earnings		(12.1	)		(5.3	)		(8.4	)		(8.7	)
Income tax benefit		4.1			1.2			2.8			2.1
Equity in (losses) earnings, net of taxes		—			0.1			(0.1	)		0.1

Net loss		(8.0	)%		(4.0	)%		(5.7	)%		(6.5	)%

- 31 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

THREE MONTHS ENDED JUNE 30, 2019 COMPARED TO THE THREE MONTHS ENDED

JUNE 30, 2018

Net Sales

Consolidated net sales for the three months ended June 30, 2019 were $142.5 million, a decrease of $6.2 million, or 4.2%, as compared to net sales of $148.7 million for the corresponding period in 2018. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2019 average rates to 2018 local currency amounts, net sales decreased $5.0 million, or 3.4%, as compared to consolidated net sales in the corresponding period in 2018.

Net sales for the U.S. segment for the three months ended June 30, 2019 were $123.1 million, a decrease of $5.9 million, or 4.6%, as compared to net sales of $129.0 million for the corresponding period in 2018.

Net sales for the U.S. segment’s Kitchenware product category were $65.6 million for the three months ended June 30, 2019, a decrease of $2.8 million, or 4.1%, as compared to $68.4 million for the corresponding period in 2018. The decrease was attributable to decreases for cutlery, bakeware, pantryware, partially offset by increases for tools and gadgets and Taylor branded kitchenware. The decrease was attributable to lower volume, including higher sales allowances, for certain brick and mortar retailers, partially offset by higher e-commerce sales.

Net sales for the U.S. segment’s Tableware product category were $28.8 million for the three months ended June 30, 2019, a decrease of $6.5 million, or 18.4%, as compared to $35.3 million for the corresponding period in 2018. The decrease was primarily attributable to certain retailer programs not repeating in 2019 and the expected timing of other programs. In addition, volume declines for certain brick and mortar retailers were partially offset by higher e-commerce sales.

Net sales for the U.S. segment’s Home Solutions product category were $28.7 million for the three months ended June 30, 2019, an increase of $3.4 million, or 13.4%, as compared to $25.3 million for the corresponding period in 2018. The increase reflects increased volumes in the hydration products category.

Net sales for the International segment were $19.4 million for the three months ended June 30, 2019, which was consistent with net sales of $19.7 million for the corresponding period in 2018. In constant currency, which excludes the impact of foreign exchange fluctuations, net sales increased $0.9 million, or 4.6%, as compared to consolidated net sales in the corresponding period in 2018. The increase, in constant currency, is primarily due to an increase in sales to e-commerce retailers.

Gross margin

Gross margin for the three months ended June 30, 2019 was $44.0 million, or 30.9%, as compared to $52.1 million, or 35.0%, for the corresponding period in 2018.

Gross margin for the U.S. segment was $36.7 million, or 29.8%, for the three months ended June 30, 2019, as compared to $45.5 million, or 35.3%, for the corresponding period in 2018. The gross margin decrease reflects an $8.5 million charge for the SKU Rationalization initiative, offset by a $0.9 million non-recurring inventory step-up charge related to the acquisition of Filament in the 2018 period. Excluding the SKU Rationalization and step-up charges, gross margin would have been 36.7% and 36.0% in the 2019 and 2018 periods, respectively. The increase in margin is attributable to changes in customer and product mix.

Gross margin for the International segment was $7.3 million, or 37.6%, for the three months ended June 30, 2019, as compared to $6.6 million, or 33.4%, for the corresponding period in 2018. The increase was primarily attributable to lower sales allowances, and the de-emphasis of lower margin private label tableware product lines.

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Distribution expenses

Distribution expenses for the three months ended June 30, 2019 were $15.5 million, as compared to $14.9 million for the corresponding period in 2018. Distribution expenses as a percentage of net sales were 10.9% for the three months ended June 30, 2019, as compared to 10.1% for the three months ended June 30, 2018.

Distribution expenses as a percentage of net sales for the U.S. segment were approximately 10.4% and 9.5% for the three months ended June 30, 2019 and 2018, respectively. As a percentage of sales shipped from the Company’s warehouses, distribution expenses (excluding the moving and relocation costs for the U.S. segment) were 11.8% and 10.5% for the three months ended June 30, 2019 and 2018, respectively. The increase is primarily attributable to lower shipment volume, higher real estate taxes and an increase in freight expense on higher sales to prepaid freight customers.

Distribution expenses as a percentage of net sales for the International segment were 13.9% for the three months ended June 30, 2019, which was consistent with distribution expenses as a percentage of net sales of 13.8%, for the corresponding period in 2018. Distribution expenses as a percentage of sales shipped from the Company’s U.K. warehouses approximated 14% for both the three months ended June 30, 2019 and 2018.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 30, 2019 were $40.9 million, an increase of $0.9 million, or 2.2%, as compared to $40.0 million for the corresponding period in 2018.

Selling, general and administrative expenses for the U.S. segment were $28.9 million for the three months ended June 30, 2019, as compared to $30.9 million for the three months ended June 30, 2018. As a percentage of net sales, selling, general and administrative expenses were 23.5% and 24.0% for the three months ended June 30, 2019 and 2018, respectively. The 2019 period reflects the synergy savings from the Filament acquisition, primarily from efficiencies in labor reduction initiatives.

Selling, general and administrative expenses for the three months ended June 30, 2019 for the International segment were $7.0 million, an increase of $3.0 million, from $4.0 million for the corresponding period in 2018. Of the increase, $2.1 million represented the absence of a mark to market gain from foreign currency contracts in 2018. Additionally, the Company commenced an operating lease for its new U.K. headquarters and warehouse as part of its reorganization plan to consolidate its European operations and incurred $0.5 million in duplicative operating lease expense.

Unallocated corporate expenses for the three months ended June 30, 2019 were $5.0 million, as compared to $5.1 million for the corresponding period in 2018. Lower employee related and acquisition expenses were partially offset by higher professional fees.

Interest expense

Interest expense was $4.7 million for both the three months ended June 30, 2019 and the corresponding period in 2018. This reflects the benefit of lower debt balances offset by higher interest rates, and a benefit from mark to market changes from interest rate swaps not designated as hedges.

Income tax benefit

Income tax benefit for the three months ended June 30, 2019 was $5.8 million as compared to $1.8 million for the corresponding period in 2018. The Company’s effective tax rate for the three months ended June 30, 2019 was 33.6% as compared to 22.1% for the corresponding 2018 period. The effective tax rate for the three months ended June 30, 2019 differs from the federal statutory rate of 21% primarily due to state and local taxes and the impact of non-deductible expenses. The effective tax rate for the three months ended June 30, 2018 reflects the reduced statutory U.S. corporate income tax rate, partially offset by non-deductible expenses.

Equity in (losses) earnings

Equity in (losses) earnings of Vasconia, net of taxes, was $(0.1) million for the three months ended June 30, 2019, as compared to equity in (losses) earnings of Vasconia, net of taxes, of $0.2 million for the three months ended June 30, 2018. Equity in (losses) earnings for the three months ended June 30, 2018 includes a deferred tax expense of $(0.5) million due to the requirement to record tax benefits for foreign currency translation gains and losses through other comprehensive loss, with a corresponding adjustment to deferred tax liabilities. Vasconia reported income from operations of $2.8 million for the three months ended June 30, 2019, as compared to income from operations of $3.7 million for the three months ended June 30, 2018. The decrease in income from operations is primarily due to a decrease in operating income from the aluminum division.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

SIX MONTHS ENDED JUNE 30, 2019 COMPARED TO THE SIX MONTHS ENDED

JUNE 30, 2018

Net Sales

Consolidated net sales for the six months ended June 30, 2019 were $292.5 million, an increase of $25.7 million, or 9.6%, as compared to net sales of $266.8 million for the corresponding period in 2018. The six months ended June 30, 2018 includes sales of $38.6 million from Filament for the period from March 2, 2018, the date of the acquisition. In constant currency, which excludes the impact of foreign exchange fluctuations, net sales increased $28.2 million, or 10.7%, as compared to consolidated net sales in the corresponding period in 2018.

Net sales for the U.S. segment for the six months ended June 30, 2019 were $250.1 million, an increase of $25.2 million, or 11.2%, as compared to net sales of $224.9 million for the corresponding period in 2018.

Net sales for the U.S. segment’s Kitchenware product category were $134.9 million for the six months ended June 30, 2019, an increase of $9.4 million, or 7.5%, as compared to $125.5 million for the corresponding period in 2018. The increase was primarily attributable to the inclusion of Filament for a full six months in 2019, which added $11.3 million of net sales. This was offset by lower sales for cutlery, bakeware, and pantryware. The reduction in sales of these products were partially offset by increases in tools and gadgets product sales. In addition, volume declines for certain brick and mortar retailers were partially offset by higher e-commerce sales.

Net sales for the U.S. segment’s Tableware product category were $55.2 million for the six months ended June 30, 2019, a decrease of $5.7 million, or 9.4%, as compared to $60.9 million for the corresponding period in 2018. The decrease was primarily attributable to certain retailer programs, including close-outs, not repeating in 2019. In addition, volume declines for certain brick and mortar retailers were partially offset by higher e-commerce sales.

Net sales for the U.S. segment’s Home Solutions product category were $60.0 million for the six months ended June 30, 2019, an increase of $21.5 million, or 55.8%, as compared to $38.5 million for the corresponding period in 2018. The increase was primarily attributable to the inclusion of Filament for a full six months in 2019, which added $16.9 million of net sales. In addition, hydration products volume increased in the 2019 period.

Net sales for the International segment were $42.3 million for the six months ended June 30, 2019, an increase of $0.4 million, or 1.0%, as compared to net sales of $41.9 million for the corresponding period in 2018. In constant currency, which excludes the impact of foreign exchange fluctuations, net sales increased $2.9 million, or 7.4%, as compared to consolidated net sales in the corresponding period in 2018. The International segment increase reflects an increase in sales from the e-commerce retailer channel.

Gross margin

Gross margin for the six months ended June 30, 2019 was $98.3 million, or 33.6%, as compared to $97.2 million, or 36.4%, for the corresponding period in 2018.

Gross margin for the U.S. segment was $83.0 million, or 33.2%, for the six months ended June 30, 2019, as compared to $82.9 million, or 36.8%, for the corresponding period in 2018. The gross margin decrease reflects an $8.5 million charge for the SKU Rationalization initiative, offset by the $1.2 million non-recurring inventory step-up charge incurred in the six month period in 2018. Excluding the SKU Rationalization and step-up charges, gross margin would have been 36.6% and 37.4% in the 2019 and 2018 periods, respectively. The decrease was attributable to changes in customer and product mix.

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Gross margin for the International segment was $15.3 million, or 36.2%, for the six months ended June 30, 2019, as compared to $14.3 million, or 34.2%, for the corresponding period in 2018. The increase in gross margin is primarily attributable to the de-emphasis of lower margin private label tableware product lines.

Distribution expenses

Distribution expenses for the six months ended June 30, 2019 were $31.4 million, as compared to $32.8 million for the corresponding period in 2018. Distribution expenses as a percentage of net sales were 10.7% for the six months ended June 30, 2019, as compared to 12.3% for the six months ended June 30, 2018.

Distribution expenses as a percentage of net sales for the U.S. segment were approximately 10.4% and 12.1% for the six months ended June 30, 2019 and 2018, respectively. Distribution expenses in the 2019 and 2018 periods include $0.2 million and $2.6 million, respectively, of costs related to the Company’s facility relocations. As a percentage of sales shipped from the Company’s warehouses, distribution expenses, excluding the moving and relocation costs for the U.S. segment, were 11.3% and 11.6% for the six months ended June 30, 2019 and 2018, respectively.

Distribution expenses as a percentage of net sales for the International segment were approximately 12.8% and 13.3% for the six months ended June 30, 2019 and 2018, respectively. Distribution expenses as a percentage of sales shipped from the Company’s U.K. warehouses were 12.7% and 13.9% for the six months ended June 30, 2019 and 2018, respectively.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 30, 2019 were $81.0 million, an increase of $0.8 million, or 1.0%, as compared to $80.2 million for the corresponding period in 2018.

Selling, general and administrative expenses for the U.S. segment were $57.0 million for the six months ended June 30, 2019, as compared to $58.3 million for the six months ended June 30, 2018. As a percentage of net sales, selling, general and administrative expenses were 22.8% and 25.9% for the six months ended June 30, 2019 and 2018, respectively. The 2019 period reflects the synergy savings from the Filament acquisition, primarily from efficiencies in labor reduction initiatives. The 2018 period includes Filament from the date of acquisition only.

Selling, general and administrative expenses for the six months ended June 30, 2019 for the International segment were $13.4 million, an increase of $1.1 million, from $12.3 million for the corresponding period in 2018. The increase primarily reflects the absence of a mark to market gain from foreign currency contracts in 2018. Additionally, the Company commenced an operating lease for its new U.K. headquarters and warehouse as part of its reorganization plan to consolidate its European operations and incurred $0.5 million in duplicative operating lease expense.

Unallocated corporate expenses for the six months ended June 30, 2019 were $10.6 million, as compared to $9.6 million for the corresponding period in 2018. The increase is attributed to an increase in professional fees, partially offset by lower acquisition related expenses.

Interest expense

Interest expense for the six months ended June 30, 2019 was $9.6 million, an increase of $2.8 million, from $6.8 million for the six months ended June 30, 2018. The increase reflects higher interest rates on debt during the 2019 period, which was partially offset by lower debt balances.

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Income tax benefit

Income tax benefit for the six months ended June 30, 2019 was $8.3 million as compared to $5.6 million for the corresponding period in 2018. The Company’s effective tax rate for the six months ended June 30, 2019 was 33.8%, as compared to 23.8% for the corresponding 2018 period. The effective tax rate for the six months ended June 30, 2019 differs from the federal statutory rate of 21% primarily due to state and local taxes and the impact of non-deductible expenses. The effective tax rate for the six months ended June 30, 2018 reflects the reduced statutory U.S. corporate income tax rate, partially offset by non-deductible expenses.

Equity in (losses) earnings

Equity in (losses) earnings of Vasconia, net of taxes, was $(0.2) million for the six months ended June 30, 2019, as compared to equity in (losses) earnings of Vasconia, net of taxes, of $0.2 million for the six months ended June 30, 2018. Equity in (losses) earnings for the six months ended June 30, 2018 includes a deferred tax expense of $(0.3) million due to the requirement to record tax benefits for foreign currency translation gains and losses through other comprehensive loss, with a corresponding adjustment to deferred tax liabilities. Vasconia reported income from operations of $4.7 million for the six months ended June 30, 2019, as compared to $4.8 million for the six months ended June 30, 2018.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s principal sources of cash to fund liquidity needs are: (i) cash provided by operating activities and (ii) borrowings available under its revolving credit facility 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 June 30, 2019, the Company had cash and cash equivalents of $10.5 million, compared to $7.6 million at December 31, 2018. Working capital was $206.8 million at June 30, 2019, compared to $233.9 million at December 31, 2018. Liquidity, which includes cash and cash equivalents and availability under the ABL Agreement, was approximately $112.4 million at June 30, 2019.

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. In addition, recent tariff increases resulted in higher inventory carrying costs at June 30, 2019. For the three months ended June 30, 2019, inventory turnover, adjusted for the SKU Rationalization initiative, was 1.8 times, or 203 days, as compared to 2.1 times, or 177 days, for the three months ended June 30, 2018. The Company expects the SKU Rationalization initiative to generate increased liquidity through the sale of inventory during the third and fourth quarter of 2019. Liquidation of low-margin products should improve inventory turnover rates and reduce overall carrying costs.

Credit Facilities

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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.

At June 30, 2019, borrowings outstanding under the ABL Agreement were $39.8 million and open letters of credit were $3.2 million. At June 30, 2019, availability under the ABL Agreement was approximately $101.9 million. The borrowing capacity under the ABL Agreement depends, in part, on eligible levels of certain current assets comprising the borrowing base and the Company’s ability to meet and maintain a financial ratio, if and when applicable. Due to the seasonality of the Company’s business, this may mean that the Company will have greater borrowing availability during the third and fourth quarters of each year. The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly. Consequently, the $150.0 million commitment thereunder may not represent actual borrowing capacity.

As of June 30, 2019, $271.6 million was outstanding under the Term Loan. At June 30, 2019, unamortized debt issuance costs of $1.5 million and $6.8 million offset the short-term and long-term outstanding balances, respectively, of the Term Loan.

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The Company was in compliance with the covenants of the Debt Agreements at June 30, 2019.

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

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


	Consolidated adjusted EBITDA for the Four Quarters Ended June 30, 2019
	(in thousands)
Three months ended June 30, 2019	$	4,306
Three months ended March 31, 2019		6,127
Three months ended December 31, 2018		30,876
Three months ended September 30, 2018		22,722
Pro forma projected synergies		4,763

Consolidated adjusted EBITDA, before limitation		68,794
Permitted non-recurring charge limitation		(8,008	)

Consolidated adjusted EBITDA	$	60,786

Capital expenditures for the six months ended June 30, 2019 were $3.9 million.

Non-GAAP financial measure

Consolidated 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 Securities and Exchange Commission. 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 comparison of the Company’s operating performance by investors and analysts. Management also uses this non-GAAP information as an indicator of business performance. Consolidated 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 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.

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The following is a reconciliation of the net income (loss), as reported, to consolidated adjusted EBITDA, for the four quarters ended June 30, 2019:


													Twelve
	Three Months Ended												Months Ended June 30, 2019
	September 30, 2018			December 31, 2018			March 31, 2019			June 30, 2019			Months Ended June 30, 2019
		(in thousands)
Net income (loss) as reported	$	5,948		$	9,987		$	(4,867	)	$	(11,513	)	$	(445	)
Undistributed equity (earnings) losses, net		(185	)		(128	)		116			69			(128	)
Income tax provision (benefit)		906			7,558			(2,458	)		(5,795	)		211
Interest expense		5,634			5,591			4,922			4,694			20,841
Depreciation and amortization		6,076			6,522			6,359			6,290			25,247
Impairment of goodwill		2,205			—			—			—			2,205
Stock compensation expense		1,268			1,108			907			1,193			4,476
Contingent consideration fair value adjustment		—			(1,774	)		—			—			(1,774	)
Unrealized gain on foreign currency contracts		(190	)		(33	)		—			—			(223	)
Other permitted non-cash charges ⁽¹⁾		307			—			—			—			307
SKU Rationalization		—			—			—			8,500			8,500
Acquisition related expenses		43			523			151			—			717
Restructuring expenses ⁽²⁾		552			971			608			173			2,304
Integration charges ⁽²⁾		103			433			174			695			1,405
Warehouse relocation ⁽²⁾		55			118			215			—			388
Projected synergies ⁽³⁾		—			—			—			—			4,763

Consolidated adjusted EBITDA, before limitation	$	22,722		$	30,876		$	6,127		$	4,306		$	68,794

Permitted non-recurring charge limitation ⁽²⁾														(8,008	)

Consolidated adjusted EBITDA													$	60,786

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

(2)	Permitted non-recurring charges include severance expense, warehouse relocation costs, transition expenses and restructuring expenses. These are permitted exclusions from the Company’s consolidated adjusted EBITDA, subject to limitations, pursuant to the Company’s Debt Agreements.

(3)

Projected synergies represents the amount of projected cost savings, operating expense reductions, restructuring charges and expenses and cost saving synergies projected by the Company as a result of actions taken through June 30, 2019 or expected to be taken as of June 30, 2019, net of the benefits realized during the twelve months ended June 30, 2019. Projected synergies is a permitted exclusion from the Company’s consolidated adjusted EBITDA, subject to limitations, pursuant to the Company’s Debt Agreements.

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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 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 $25.0 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 this agreement, the Company sold to HSBC $24.1 million and $49.2 million of Receivables during the three and six months ended June 30, 2019, respectively, and $19.1 million and $38.7 million of Receivables during the three and six months ended June 30, 2018, respectively. Charges of $138,500 and $286,000 related to the sale of the Receivables are included in selling, general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2019, respectively. Charges of $99,000 and $189,000 related to the sale of the Receivables are included in selling, general and administrative expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2018, respectively.

Derivatives

The Company is a party to interest rate swap agreements with an aggregate notional value of $100 million at June 30, 2019. The Company designated the interest rate swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The hedge periods of these agreements commenced in April 2018 and expire in March 2023. The notional amounts are reduced over these periods. In June 2019, the Company entered into new interest rate swap agreements, with an aggregate notional value of $25.0 million at June 30, 2019. These non-designated interest rate swaps serve as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings and expire in February 2025.

The Company has also entered into certain foreign exchange contracts, to primarily offset the earnings impact related to fluctuations in foreign currency exchange rates associated with sales and inventory purchases denominated in foreign currencies. Beginning on January 29, 2019, these foreign exchange contracts have been designated as hedges as required in order to apply hedge accounting, and accordingly, the changes in the fair value of these contracts are recorded in accumulated other comprehensive loss in the condensed consolidated statements of stockholders equity. Prior to January 29, 2019, these foreign exchange contracts were not designated as hedges as required in order to apply hedge accounting. The changes in the fair value of these contracts are recorded in the condensed consolidated statements of operations.

Operating activities

Net cash provided by operating activities was $7.1 million for the six months ended June 30, 2019, as compared to net cash used in operating activities of $5.8 million for the corresponding 2018 period. The increase in 2019 as compared to 2018 was primarily attributable to favorable timing of the payment of accounts payable and accrued expenses as well as additional cash generated from Filament.

Investing activities

Net cash used in investing activities was $3.9 million and $221.1 million for the six months ended June 30, 2019 and 2018, respectively. The 2018 investing activity includes the cash consideration paid for the acquisition of Filament.

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Financing activities

Net cash used in financing activities was $0.5 million for the six months ended June 30, 2019, as compared to net cash provided by financing activities of $225.4 million for the corresponding 2018 period. The change in financing activities was attributable to the new Debt Agreements entered into in order to finance the acquisition of Filament in 2018.

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 2018 Annual Report on Form 10-K.

Item 4. Controls and Procedures

(a)	Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of June 30, 2019, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed by it under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.

(b)

Changes in Internal Controls

The Company implemented the new lease standard under ASC 842 as of January 1, 2019. In connection with these changes, the Company implemented certain modifications to internal controls over financial reporting, including the documentation of the policy regarding the new accounting for leases, implementation of processes to address various judgments and assessments necessary during the life of a lease, as well as implementing new controls to capture the expanded disclosures required under ASC 842.

Except as described above, there have been no other changes in the Company’s internal controls over financial reporting during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is, from time to time, involved in other legal proceedings. The Company believes that other current litigation is routine in nature and incidental to the conduct of the Company’s business and that none such litigation, individually or collectively, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s 2018 Annual Report on Form 10-K.

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Item 2. Unregistered Sales of Equity Securities

Issuer Purchases of Equity Securities


Period	Total number of shares purchased⁽¹⁾		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs⁽²⁾		Maximum approximate dollar value of shares that may yet be purchased under the plans or programs subsequent to end of period ⁽²⁾
April 1 - April 30, 2019		2,972	$	9.33		—	$	6,771,467
May 1 - May 31, 2019		255		9.52		—		6,771,467
June 1 - June 30, 2019		30,021		8.73		—		6,771,467

(1)

The repurchased shares were acquired other than as part of a publicly announced plan or program. The Company repurchased these securities in connection with its Amended and Restated 2000 Long Term Incentive Plan which allow participants to use shares to satisfy the exercise price of options exercised, certain tax liabilities arising from the exercise of options, and certain tax liabilities arising from the vesting of restricted stock. The number above does not include unvested shares forfeited back to us pursuant to the terms of our stock compensation plans.

(2)

On April 30, 2013, the Board of Directors of Lifetime Brands, Inc. authorized the repurchase of up to $10.0 million of the Company’s common stock. The repurchase authorization permits the Company to effect the repurchases from time to time through open market purchases and privately negotiated transactions. No repurchases occurred during the six months ended June 30, 2019.

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Item 6. Exhibits

See Exhibit Index below, which is incorporated by reference herein.

Exhibit Index


Exhibit No.

10.1		Amended and Restated Employment Agreement dated June 27, 2019 between Lifetime Brands, Inc. and Jeffrey Siegel (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 28, 2019)

31.1		Certification by Robert B. Kay, Chief Executive Officer and Director, pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by Laurence Winoker, Senior Vice President – Finance, Treasurer and Chief Financial Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification by Robert B. Kay, Chief Executive Officer and Director, and Laurence Winoker, Senior Vice President – Finance, Treasurer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

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


Lifetime Brands, Inc.

/s/ Robert B. Kay		August 8, 2019
Robert B. Kay
Chief Executive Officer and Director
(Principal Executive Officer)

/s/ Laurence Winoker		August 8, 2019
Laurence Winoker
Senior Vice President – Finance, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)

- 45 -

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert B. Kay, certify that:

I have reviewed this quarterly report on Form 10-Q of Lifetime Brands, Inc. (“the registrant”);

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)4) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Robert B. Kay

Robert B. Kay

Chief Executive Officer and Director

Date: August 8, 2019

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Laurence Winoker, certify that:

I have reviewed this quarterly report on Form 10-Q of Lifetime Brands, Inc. (“the registrant”);

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Laurence Winoker

Laurence Winoker

Senior Vice President – Finance,

Treasurer and Chief Financial Officer

Date: August 8, 2019

EX-32.1

Exhibit 32.1

Certification by Robert B. Kay, Chief Executive Officer and Director, and Laurence Winoker, Senior Vice President – Finance, Treasurer and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

I, Robert B. Kay, Chief Executive Officer and Director, and I, Laurence Winoker, Senior Vice President – Finance, Treasurer and Chief Financial Officer, of Lifetime Brands, Inc., a Delaware corporation (the “Company”), each hereby certify that:

(1)

The Company’s periodic report on Form 10-Q for the period ended June 30, 2019 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)

The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Robert B. Kay				/s/ Laurence Winoker
Robert B. Kay				Laurence Winoker
Chief Executive Officer and Director				Senior Vice President- Finance, Treasurer and Chief Financial Officer

Date: August 8, 2019				Date: August 8, 2019

A signed original of this written statement required by Section 1350 has been provided to Lifetime Brands, Inc. and will be retained by Lifetime Brands, Inc. and furnished to the Securities and Exchange Commission or its staff, upon request.