| BASIS OF PRESENTATION AND SUMMARY ACCOUNTING POLICIES | NOTE A — BASIS OF PRESENTATION AND SUMMARY 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 its Pfaltzgraff ® ® ® ® ®
Basis of presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally
accepted accounting principles 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. generally accepted accounting principles
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 condensed consolidated financial statements
and footnotes thereto included in the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2014.
Operating results for the three and six month periods ended
June 30, 2015 are not necessarily indicative of the results
that may be expected for the year ending December 31,
2015.
The Company’s business and working capital needs are highly
seasonal, with a majority of sales occurring in the third and
fourth quarters. In 2014 and 2013, net sales for the third and
fourth quarters accounted for 60% and 61% 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.
Revenue recognition
The Company sells products wholesale, to retailers and
distributors, and retail, directly to the consumer. Wholesale sales
and retail sales are recognized when title passes to the customer,
which is primarily at the shipping point for wholesale sales and
upon delivery to the customer for retail sales. Shipping and
handling fees that are billed to customers in sales transactions
are included in net sales and amounted to $290,000 and $312,000 for
the three months ended June 30, 2015 and 2014, respectively,
and $699,000 and $682,000 for the six months ended June 30,
2015 and 2014, 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 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 and an estimate of sales
returns are reflected as reductions in net sales in the
Company’s condensed consolidated statements of
operations.
Cost of sales
Cost of sales consists primarily of costs associated with the
production and procurement of product, inbound freight costs,
purchasing costs, royalties and other product procurement related
charges.
Distribution expenses
Distribution expenses consist primarily of warehousing expenses and
freight-out expenses.
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 market method. 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.
The components of inventory are as follows:
June 30, December 31,
(in thousands)
Finished goods $ 151,022 $ 134,564
Work in process 1,694 1,887
Raw materials 1,528 1,473
Total $ 154,244 $ 137,924
Fair value of financial instruments
The Company determined 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 to the extent
the derivative is considered highly effective in achieving
offsetting changes in fair value or cash flows attributable to the
risk being hedged, until the hedged item is recognized in earnings.
If a derivative which is designated as part of a hedging
relationship is considered ineffective in achieving offsetting
changes in fair value or cash flows attributable to the risk being
hedged, the changes in fair value are recorded in operations. For
derivatives that do not qualify or are not designated as hedging
instruments for accounting purposes, changes in fair value are
recorded in operations.
The Company is a party to interest rate swap agreements with an
aggregate notional amount of $22.8 million to manage interest rate
exposure in connection with its variable interest rate
borrowings. The hedge periods of these agreements commenced in
March 2013 and expire in June 2018 and the notional amounts
amortize over these periods. The interest rate swap agreements were
designated as cash flow hedges under ASC Topic
No. 815. The effective portion of the fair value gain or
loss on these agreements is recorded as a component of accumulated
other comprehensive income (loss). The effect of recording
these derivatives at fair value resulted in an unrealized gain of
$17,000 and an unrealized loss of $43,000, net of taxes, for the
three months ended June 30, 2015 and 2014, respectively, and
an unrealized loss of $37,000 and $34,000, net of taxes, for the
six months ended June 30, 2015 and 2014, respectively. No
amounts recorded in accumulated other comprehensive loss are
expected to be reclassified to interest expense in the next twelve
months.
The fair value of the derivatives have been obtained from the
counterparties to the agreement and were based on Level 2
observable inputs using proprietary models and estimates about
relevant future market conditions. The aggregate fair value of
the Company’s interest derivative instruments was a liability
of $94,000 and $32,000 at June 30, 2015 and December 31,
2014, respectively, and is included in accrued expenses and other
long-term liabilities in the condensed consolidated balance
sheet.
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
inventory purchases denominated in foreign currencies. These
foreign exchange contracts have not been designated as hedges as
required in order to apply hedge accounting. The changes in the
fair value of these contracts are recorded in earnings immediately.
A gain of $122,000 is included in selling, general and
administrative expenses in the condensed consolidated statements of
operations for the three and six months ended June 30,
2015.
The aggregate gross notional amount of foreign exchange contracts
at June 30, 2015 was $12.0 million. The fair value of the
Company’s foreign exchange contracts was an asset of $122,000
and is included within other assets in the condensed consolidated
balance sheet. The fair value 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.
Employee Healthcare
The Company self-insures certain portions of its health insurance
plan. 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.
New Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2015-05, Customer’s Accounting for
Fees Paid in a Cloud Computing Arrangement
In April 2015, FASB issued ASU 2015-03, Simplifying the
Presentation of Debt Issuance Costs
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts
with Customers |
