The following discussion should be read in conjunction with the consolidated financial statements for the Company and Notes thereto set forth in Item 15. This discussion contains forward-looking statements relating to future events and the future performance of the Company based on the Company's current expectations, assumptions, estimates and projections about it and the Company's industry. These forward-looking statements involve risks and uncertainties. The Company's actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section and elsewhere in this Annual Report including those discussed under "Disclosures Regarding Forward-Looking Statements," "Risk Factors Summary" under Item 1A "Risk Factors" and under Item 7A "Quantitative and Qualitative Disclosures Regarding Market Risk." The Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future, other than as required by law.
ABOUT THE COMPANY
The Company designs, sources and sells branded kitchenware, tableware and other products used in the home. The Company's product categories include two categories of products used to prepare, serve and consume foods, Kitchenware (kitchen tools and gadgets, cutlery, kitchen scales, thermometers, cutting boards, shears, cookware, pantryware, spice racks and bakeware) and Tableware (dinnerware, stemware, flatware and giftware); and one category, Home Solutions, which comprises other products used in the home (thermal beverageware, bath scales, weather and outdoor household products, food storage, neoprene travel products and home décor). In 2022, Kitchenware products and Tableware products accounted for approximately 82% of the Company's
U.S.net sales and 84% of the Company's consolidated net sales. In 2021, Kitchenware products and Tableware products accounted for approximately 85% of the Company's U.S.net sales and 87% of the Company's consolidated net sales. The Company markets several product lines within each of its product categories and under most of the Company's brands, primarily targeting moderate price points through virtually every major level of trade. The Company believes it possesses certain competitive advantages based on its brands, its emphasis on innovation and new product development, and its sourcing capabilities. The Company owns or licenses a number of leading brands in its industry, including Farberware®, Mikasa®, KitchenAid®, Taylor®, Rabbit®, Pfaltzgraff® , BUILT NY®, Sabatier®, Fred® & Friends, Kamenstein®, and S'well®. Historically, the Company's sales growth has come from expanding product offerings within its product categories, 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.
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 parties and its own internet websites. The International segment consists of certain business operations conducted outside the U.S. The Companyhas segmented its operations to reflect the manner in which management reviews and evaluates its results of operations.
The Company owns 24.7% interest in Grupo Vasconia S.A.B ("Vasconia"), an integrated manufacturer of aluminum products and one of
Mexico'slargest 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 Companyaccounts 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 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 years ended December 31, 2022, 2021, and 2020 in the accompanying 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 December 31, 2022, Vasconia's Board of Directors is comprised of 11 members of whom the Company has designated two members. On June 30, 2021, Vasconia issued additional shares of its stock, which diluted the Company's investment ownership from approximately 30% to approximately 27%. The Company recorded a non-cash gain of $1.7 million, increasing the Company's investment balance. Additionally, a loss of $2.0 millionwas recognized for the proportionate share of the diluted ownership for amounts previously recognized in accumulated other comprehensive loss. The net loss of $0.3 millionwas included in equity in earnings, net of taxes, in the accompanying consolidated statements of operations for the year ended December 31, 2021. 30
Table of Contents
July 29, 2021, the Company sold 2.2 million shares further reducing its ownership from approximately 27% to 24.7% in Vasconia for net cash proceeds of approximately $3.1 million, as a result the Company recorded a gain of $1.0 million, after decreasing the Company's investment balance. The gain on the sale resulted in a tax expense of $0.1 million. Additionally, a loss of $1.4 millionwas recognized for the proportionate share of the reduced ownership for amounts previously recognized in accumulated other comprehensive loss. The net loss, including taxes, of $0.5 millionwas included in equity in earnings, net of taxes, in the accompanying consolidated statements of operations for the year ended December 31, 2021. The Company continues to apply the equity method of accounting. The Company recorded equity in (losses) earnings of Vasconia, net of taxes, of $(3.3) million, $1.8 millionand $1.5 millionfor the years ended December 31, 2022, 2021 and 2020, respectively.
The Company's business and working capital needs are seasonal, with a majority of sales occurring in the third and fourth quarters. In 2022, 2021 and 2020, net sales for the third and fourth quarters accounted for 54%, 56% and 62% of total annual net sales, respectively. The current market conditions and shifts in both consumer and retailer purchasing patterns has impacted the seasonality of the Company's net sales compared to historical trend. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period. The decrease in inventory levels at
December 31, 2022compared to the prior year was a result of the Company's response to changes in retailer purchasing patterns. The Company's inventory trends may deviate from historical trends due to a change in inventory strategy to react to current market conditions impacting the Company and retailers. Consistent with the seasonality of the Company's net sales and inventory levels, the Company also experiences seasonality in its inventory turnover and turnover days from one quarter to the next.
In 2022, the Company's international segment incurred
$0.4 millionof restructuring expenses related to severance associated with the reorganization of the International segment's workforce. The reorganization was the result of the Company's efforts to realign the management and operating structure of the European business in response to changing market conditions. The Company expects annual savings of $2.3 millionassociated with the reorganization. In 2022, the Company's U.S.segment accrued $0.4 millionrelated to severance associated with the reorganization of the U.S.segment's sales management structure. The Company accrued $0.6 millionof unallocated expense related to the termination payment with its Executive Chairman, Jeffrey Siegel. On November 1, 2022, the Company entered into a transition agreement with Jeffrey Siegel, which provides for termination of his employment with the Company, effective March 31, 2023. The transition agreement amends Mr. Siegel'semployment agreement which was to expire on December 31, 2022. The employment agreement provides for a one-time payment which will be paid upon the expiration of the transition agreement. The Company estimates the one-time payment to be approximately $1.4 million, of which $0.6 millionwas accrued as a restructuring expense in 2022. The remaining $0.8 millionis expected to be recorded over the remaining employment period. The Company expects annual savings of $1.3 milliondue to these actions. During the year ended December 31, 2020, the Company's International segment incurred $0.2 millionof restructuring expenses related to severance associated with the strategic reorganization of the International segment's product development and sales workforce. The strategic reorganization was the result of the Company's efforts for product development efficiencies and an international sales approach tailored to countries.
The global economy is experiencing accelerated inflation, which has in part been caused by supply chain disruptions and higher consumer spending. The rise in inflation is contributing to higher prices, which may result in higher input cost for products, increased transportation and labor cost and impact consumer spending and buying patterns. Retailers have responded to the economic challenges by rightsizing inventory levels that were built up by supply chain distributions, and further reducing safety stock and weekly supply on hand. The Company has been adversely impacted by these trends in 2022 and expects that these trends may continue into 2023. The Company has experienced an increase in delivery times and cost for products shipped from the
U.K.warehouse to continental Europe. To remain competitive in the distribution of products within continental Europe, the Company expanded its distribution and warehouse capacity through a third-party operated distribution provider located in the Netherlandsin the first quarter of 2022. The Company began shipments from this location in the second quarter of 2022. 31
Table of Contents
March 23 2022, the United States Trade Representative ("USTR") announced it had reinstated exclusions on certain product categories or harmonized tariff codes retroactive to October 12, 2021. The exclusion is effective through December 31, 2023. The uncertainty surrounding the consequences of the U.K.'sexit could adversely impact the U.K.economy, customers and investor confidence. The U.K.'sexit also could adversely impact the export of products between the U.K.and the European Union. Such uncertainty may contribute to additional market volatility, including volatility in the value of the U.K.pound and European euro, and may adversely affect the Company's businesses, results of operations, and financial condition. Further, the United Kingdomeconomy has been facing unfavorable economic and market conditions, with high inflation and low consumer confidence due to uncertain geopolitical and economic outlooks. Net sales attributable to U.K.domiciled businesses were $45.7 millionfor the year ended December 31, 2022, and represent approximately 6% of the Company's consolidated net sales for the period. The U.KFinance Act 2021 included an increase to the U.K.corporate tax rate from 19% to 25% effective April 1, 2023, which was enacted into law in 2021. The Company expects the higher tax rate could negatively impact the Company's operating results.
EFFECT OF ADOPTION OF ACCOUNTING PRINCIPLES
Adopted accounting pronouncements
January 1, 2022, the Company adopted ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. The adoption did not have a material impact on the Company's consolidated financial statements. In connection with the Amendment No.1 of the Term Loan, effective December 29, 2022, the Company adopted ASU 2020-04 and 2022-06, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions to account for contract modifications, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate that is expected to be discontinued as a result of reference rate reform. The guidance may be applied to contract modifications and hedging relationships as of any date from March 12, 2020but no later than December 31, 2024and should be applied on a prospective basis. The Company applied available practical expedients under Topic 848 to account for modifications, changes in critical terms, and updates to the designated hedged risks as qualifying changes have been made to applicable debt modifications as if they were not substantial. Application of these practical expedients allowed us to maintain hedge accounting for our interest rate swap contracts. The adoption did not have a material impact on the Company's consolidated financial statements.
New accounting pronouncements
Updates not listed below were assessed and either determined to not be
applicable or are expected to have a minimal effect on the Company’s financial
position, results of operations, and disclosures.
June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This guidance introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 also provides updated guidance regarding the impairment of available-for-sale debt securities and includes additional disclosure requirements. The new guidance is effective for public business entities that meet the definition of a Smaller Reporting Companyas defined by the Securities and Exchange Commissionfor interim and annual periods beginning after December 15, 2022. The Company met the definition of a Smaller Reporting Companyas of the one-time determination date of November 15, 2019. Early adoption is permitted. Management expects the adoption of ASU 2016-13 will not have a material impact on the Company's consolidated financial statements. 32
Table of Contents
RESULTS OF OPERATIONS
The results of operations below focuses on the results of the year ended
of 2021 compared to 2020 refer to “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, in Part II, Item 7 of the
Company’s Annual Report on Form 10-K for the year ended
The following table sets forth statement of operations data of the Company as a
percentage of net sales for the periods indicated below.
Year Ended December 31, 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 64.2 64.8 64.4 Gross margin 35.8 35.2 35.6 Distribution expenses 10.3 9.4 9.5 Selling, general and administrative expenses 21.3 18.1 20.3 Wallace facility remediation expense 0.7 0.1 - Goodwill and other intangible asset impairments - 1.7 2.6 Restructuring expenses 0.2 - - Income from operations 3.3 5.9 3.2 Interest expense (2.4) (1.8) (2.2) Mark to market gain (loss) on interest rate derivatives 0.3 0.1 (0.3) Income before income taxes and equity in (losses) earnings 1.2 4.2 0.7 Income tax provision (0.8) (1.9) (1.3) Equity in (losses) earnings, net of taxes (1.2) 0.1 0.2 Net (loss) income (0.8) % 2.4 % (0.4) % MANAGEMENT'S DISCUSSION AND ANALYSIS 2022 COMPARED TO 2021 Net Sales Net sales for the year ended
December 31, 2022were $727.7 million, a decrease of $135.2 million, or 15.7%, compared to net sales of $862.9 millionin 2021. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2022 average rates to 2021 local currency amounts, net sales decreased $127.7 million, or 14.9%, as compared to consolidated net sales in the corresponding period in 2021.
Net sales for the
Net sales for the
U.S.segment's Kitchenware product category in 2022 were $402.9 million, a decrease of $84.9 million, or 17.4%, compared to net sales of $487.8 millionin 2021. The net sales decrease in the U.S.segment's Kitchenware product category was driven by lower sales for kitchen tools and gadgets, cutlery and board, and bakeware products. Net sales for the U.S.segment's Tableware product category in 2022 were $148.8 million, a decrease of $18.4 million, or 11.0%, compared to net sales of $167.2 millionfor 2021. The decrease was across both tableware and flatware sales. Net sales for the U.S.segment's Home Solutions products category in 2022 were $117.5 million, an increase of $1.9 million, or 1.6%, compared to net sales of $115.6 millionin 2021. The increase was due to hydration product sales primarily attributable to S'well products, which was acquired on March 2, 2022, and added net sales of $16.9 million, offset by a decrease in home décor sales. The decrease in the Company's U.S.segment's net sales occurred in all distribution channels. This was attributable to inventory buildup at retailers, primarily in the first half of 2022, resulting in a slowing of replenishment orders as retailers reduced safety stock and weeks of supply. In addition, retail sales declined as consumers shifted their spending toward services and away from goods, including housewares, which surged during the pandemic lock-down period. 33
Table of Contents
Net sales for the International segment in 2022 were
$58.5 million, a decrease of $33.8 million, or 36.6%, compared to net sales of $92.3 millionfor 2021. In constant currency, a non-GAAP financial measure, which excludes the impact of foreign exchange fluctuations and was determined by applying 2022 average exchange rates to 2021 local currency amounts, net sales decreased approximately 31.1%. The decrease was due to similar factors as was experienced in the U.S.segment. However, it was further exacerbated by the impact of higher food and energy inflation in Europe. In addition, a decrease in the Company's global trading business in Asiadriven by lower sales to an Australian distributor.
Gross margin for 2022 was
or 35.2%, for the corresponding period in 2021.
Gross margin for the
U.S.segment was $241.1 million, or 36.0%, for 2022, compared to $274.1 million, or 35.6%, for 2021. The decrease in gross margin for the U.S.was due to lower sales. The improvement in gross margin percentage was due to product mix and a tariff reduction on certain product categories.
Gross margin for the International segment was
2022, compared to
margin was due to lower sales. The increase in gross margin percentage was
attributable to customer mix and sales price increases, partially offset by the
impact of fixed overhead costs on lower sales volume in 2022.
Distribution expenses were
sales were 10.3% and 9.4% in 2022 and 2021.
Distribution expenses as a percentage of net sales for the
U.S.segment were approximately 9.1% in 2022 and 8.0% in 2021. Distribution expenses in 2022 include $0.1 millionfor the Company's distribution operation redesign costs. As a percentage of sales shipped from the Company's warehouses, excluding non-recurring expenses, distribution expenses were 10.1% and 8.7% for 2022 and 2021. The increase in the expenses as a percentage of sales was a result of lower shipment volume resulting in an unfavorable impact on fixed expenses, increase in storage fees due to high inventory levels through the third quarter of 2022 and higher labor rates, partially offset by lower warehouse equipment and supply expenses. Distribution expenses as a percentage of net sales for the International segment were approximately 23.8% in 2022 and 20.3% in 2021, respectively. Distribution expenses in 2022 include $0.5 millionfor the Company's relocation costs for its new warehouse distribution facility in the Netherlands. As a percentage of sales shipped from the Company's warehouses, excluding non-recurring expenses, distribution expenses, were 21.5% and 17.4% for 2022 and 2021, respectively. The increase was primarily attributed to lower shipment volume resulting in an unfavorable impact on fixed expenses and higher warehouse supply expenses.
Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses for 2022 were
SG&A expenses for 2022 for the
U.S.segment were $118.2 million, an increase of $6.4 million, or 5.7%, compared to $111.8 millionfor 2021. As a percentage of net sales, SG&A expenses were 17.7% for 2022, compared to 14.5% for 2021. The increase in the expense was attributable to integration costs related to the S'well acquisition, bad debt expense related to significant declines in financial condition of certain customers due to sales declines and very high debt levels, and an increase in advertising expenses. This was partially offset by lower compensation expense. The increase in selling, general and administrative expense as a percentage of net sales is due to the unfavorable impact of fixed costs on lower sales volume. SG&A expenses for 2022 for the International segment were $17.0 million, a decrease of $3.7 million, or 17.9%, compared to $20.7 millionfor 2021. As a percentage of net sales, SG&A expenses increased to 29.1% for 2022, compared to 22.4% for 2021. The international segment expense decreased primarily due to lower amortization expense on intangible assets as a result of the prior year impairment and a decrease in employee expenses. Unallocated corporate expenses for 2022 were $19.3 million, compared to $23.9 millionfor 2021. The decrease was driven by lower incentive compensation expense and stock compensation expense, partially offset by an increase in legal and professional fees related to the S'well acquisition. 34
Table of Contents
Wallace facility remediation expense
In connection with the Wallace EPA Matter (as described in NOTE 14 - COMMITMENTS AND CONTINGENCIES, the "Wallace EPA Matter"), the Company recorded an additional expense of
$5.1 millionin 2022, for the estimated liability for remediation cost related to the Wallace facility. In 2021, the Company recorded an initial estimate of $0.5 million, related to remedial design portion of the liability. Refer to NOTE 14 - COMMITMENTS AND CONTINGENCIES for further discussion on this matter.
Due to the current operating results for the International segment as a result of low consumer confidence in the region, impairment indicators were identified for the International asset group. The Company tested the recoverability of the asset group, concluding it was not recoverable and performed an analysis of the fair value of the international long-lived assets. The Company tested the International segment's long-lived assets for impairment and concluded that the fair value exceeded the carrying value of the long-lived assets, concluding no impairment as of
December 31, 2022. In the fourth quarter of 2021, due to lower than expected operating results for the International segment caused by continuing impacts of COVID-19 and the exit of the U.K.from the European Union, impairment indicators were identified for the International asset group. The Company tested the recoverability of the asset group, concluding it was not recoverable and performed an analysis of the fair value of the international long-lived assets. For the finite-lived intangible assets, the Company performed discounted cash flow analysis and recorded an impairment of $14.8 millionwithin the International segment.
In 2022, the Company's international segment incurred
$0.4 millionof restructuring expenses related to severance associated with the reorganization of the International segment's workforce. The reorganization was the result of the Company's efforts to realign the management and operating structure of the European business in response to changing market conditions. The Company expects annual savings of $2.3 millionassociated with the reorganization. In 2022, the Company's U.S.segment accrued $0.4 millionrelated to severance associated with the reorganization of the U.S.segment's sales management structure. The Company accrued $0.6 millionof unallocated expense related to the termination payment with its Executive Chairman, Jeffrey Siegel. On November 1, 2022, the Company entered into a transition agreement with Jeffrey Siegel, which provides for termination of his employment with the Company, effective March 31, 2023. The transition agreement amends Mr. Siegel'semployment agreement which was to expire on December 31, 2022. The employment agreement provides for a one-time payment which will be paid upon the expiration of the transition agreement. The Company estimates the one-time payment to be approximately $1.4 million, of which $0.6 millionwas accrued as a restructuring expense in 2022. The remaining $0.8 millionis expected to be recorded over the remaining employment period. The Company expects annual savings of $1.3 milliondue to these actions. Interest expense Interest expense for 2022 was $17.2 million, compared to $15.5 millionfor 2021. The increase was a result of higher interest rates on outstanding borrowings in the current period.
Mark to market gain (loss) on interest rate derivatives
Mark to market gain on interest rate derivatives was
$2.0 millionfor the year ended December 31, 2022, as compared to a mark to market gain on interest rate derivatives of $1.1 millionfor the year ended December 31, 2021. The mark to market amount represents the change in the fair value on the Company's interest rate derivatives that have not been designated as hedging instruments. These derivatives were entered into for purposes of locking-in a fixed interest rate on the Company's variable interest rate debt. The increase in gain was a result of increases in interest rates during 2022. As of December 31, 2022, the intent of the Company is to hold these derivative contracts until their maturity.
Income tax provision
The income tax provision was
$5.7 millionin 2022 and $16.5 millionin 2021. The Company's effective tax rate for 2022 was 63.4%, compared to 45.5% for 2021. The effective tax rate in 2022 and 2021 was driven primarily by state and local tax expenses, nondeductible expenses, and foreign losses for which no tax benefit is recognized as such amounts are fully offset with a valuation allowance. 35
Table of Contents Equity in (losses) earnings The Company's equity in earnings, net of tax, for 2022 and 2021 are as follows: Year Ended December 31, 2022 2021 (in thousands) Vasconia equity in earnings, net of taxes
$ (3,300) $ 1,769Net loss on dilution in Vasconia ownership - (297) Net loss on partial sale of Vasconia ownership, net of taxes - (510) Impairment on investment in Vasconia (6,167) - Equity in earnings (losses), net of taxes $
Vasconia reported loss from operations for 2022 of
$1.6 million, as compared to income of $15.5 millionfor 2021 and reported net loss of $13.2 millionin 2022 and net income of $7.0 millionin 2021. The decrease in income from operations was primarily attributable to Vasconia's aluminum division as a result of increases in the price of commodities.
The effect of the translation of the Company’s investment, as well as the
translation of Vasconia’s balance sheet, resulted in a decrease of the
increase of the investment of
During the year ended
December 31, 2022, the Company recorded an impairment charge of $6.2 millionto reduce the carrying value of the Company's investment in Vasconia to its fair value. The decline in the fair value was determined to be other than temporary due to the decline in the quoted stock price and the decline in the operating results of Vasconia. During the year ended December 31, 2021, the Company's ownership in its equity method investment decreased as a result of a dilution of its investment in Vasconia and a subsequent partial sale of its investment. The Company recognized a net loss of $0.3 millionrelated to the dilution of the Company's ownership in its Vasconia investment. The net loss was comprised of a loss of $2.0 million, related to amounts that were previously recognized in accumulated other comprehensive loss, net of a non-cash gain of $1.7 millionfor the difference between the selling price and the Company's basis in the diluted shares. Additionally, the Company recognized a net loss of $0.5 millionrelated to a partial sale of the Company's ownership in its Vasconia investment. The net loss was comprised of a gain of $1.0 million, for the difference between the selling price and the Company's basis in the sale of shares, offset by tax expense of $0.1 millionand a loss of $1.4 million, related to amounts previously recognized in accumulated other comprehensive loss.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's audited consolidated financial statements which have been prepared in accordance with GAAP and with the instructions to Form 10-K and Article 10 of Regulation S-X. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments based on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The Company evaluates these estimates including those related to revenue recognition, allowances for doubtful accounts, reserves for sales returns and allowances and customer chargebacks, inventory mark-down provisions, estimates for unpaid healthcare claims, impairment of goodwill, tangible and intangible assets, stock compensation expense, accruals related to the Company's tax positions and tax valuation allowances. Actual results may differ from these estimates using different assumptions and under different conditions and changes in these estimates are recorded when known. The Company's significant accounting policies are more fully described in NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES in the Notes to the consolidated financial statements included in Item 15. The Company believes that the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the Company's consolidated financial condition and results of operations and require management's most difficult, subjective and complex judgments. 36
Table of Contents
Goodwilland 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 quantitative goodwill impairment testing described in the FASB's ASU Topic 350, Intangibles - Goodwilland Other. If, after assessing qualitative factors, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative test is unnecessary and the Company's goodwill is not considered to be impaired. 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 Company reviews goodwill and other intangibles that have indefinite lives for impairment annually as of October 1stor when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. For goodwill, impairment testing is based upon the best information available using a combination of the discounted cash flow method, a form of the income approach, and the guideline public company method, a form of the market approach. The significant assumptions used under the income approach, or discounted cash flow method, are projected net sales, projected earnings before interest, tax, depreciation and amortization ("EBITDA"), terminal growth rates, and the cost of capital. Projected net sales, projected EBITDA and terminal growth rates were determined to be significant assumptions because they are three primary drivers of the projected cash flows in the discounted cash flow fair value model. Cost of capital was also determined to be a significant assumption as it is the discount rate used to calculate the current fair value of those projected cash flows. For the guideline public company method, significant assumptions relate to the selection of appropriate guideline companies and related valuation multiples used in the market analysis. Although the Company believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact its reported financial results. In addition, sustained declines in the Company's stock price and related market capitalization could impact key assumptions in the overall estimated fair values of its reporting units and could result in non-cash impairment charges that could be material to the Company's consolidated balance sheet or results of operations. 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. The significant assumptions used in the relief from royalty model are future net sales for the related brands, royalty rates and the cost of capital to determine the fair value of the indefinite lived intangibles. The Company performed its annual impairment assessment of its U.S.reporting unit as of October 1, 2022by comparing the fair value of the reporting unit with its carrying value. The Company performed the analysis using a discounted cash flow and market multiple method. As of October 1, 2022, the fair value of the U.S.reporting unit exceeded the carrying value of goodwill by 10%. The Company completed the quantitative impairment analysis for its indefinite-lived assets as of October 1, 2022, by comparing the fair value of the indefinite-lived trade names to their respective carrying value using a relief from royalty method. As of October 1, 2022, the fair value of the Company's indefinite-lived trade names exceeded their respective carrying values by 12%. 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 carrying amount of the asset is not recoverable, the impairment to be recognized is measured by the amount by which the carrying amount of each long-lived asset exceeds the fair value of the asset.
The Company sells products wholesale, to retailers and distributors, and sells products retail, directly to consumers. 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 37
Table of Contents
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 Pointare 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. 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 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 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 consolidated statement of operations. Incidental items that are immaterial in the context of the contract are expensed as incurred. 38
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds consists of cash provided by operating activities, borrowings available under its revolving credit facility and from time-to-time working capital reductions. The Company's primary uses of funds consist of payments of principal and interest on its debt, working capital requirements, capital expenditures and dividends, From time-to-time uses also include acquisitions and repurchases of its common stock. At
December 31, 2022and 2021, the Company had cash and cash equivalents of $23.6 millionand $28.0 million, respectively, and working capital of $270.4 millionat December 31, 2022, compared to $270.8 millionat December 31, 2021. The current ratio (current assets to current liabilities) was 3.1 to 1.0 at December 31, 2022, compared to 2.3 to 1.0 at December 31, 2021. The increase in the current ratio was primarily due to operating cash flow used to reduce current obligations. At December 31, 2022, borrowings under the Company's ABL Agreement were $10.4 millionand $245.9 millionwas outstanding under the Term Loan. At December 31, 2021, borrowings under the Company's ABL Agreement were nil and $252.1 millionwas outstanding under the Term Loan. Liquidity, which includes cash and cash equivalents and availability under the ABL Agreement, was approximately $199.8 millionat December 31, 2022. Inventory, a large component of the Company's working capital, is expected to fluctuate from period to period, with inventory levels higher primarily in the June through October time period. The decrease in inventory levels at December 31, 2022compared to the prior year was a result of the Company's response to changes in retailer purchasing patterns. The Company also expects inventory turnover to fluctuate from period to period based on product and customer mix. Certain product categories have lower inventory turnover rates as a result of minimum order quantities from the Company's vendors or customer replenishment needs. Certain other product categories experience higher inventory turns due to lower minimum order quantities or trending sale demands. For the three months ended December 31, 2022inventory turnover was 2.1 times, or 170 days, as compared to 2.5 times, or 145 days, for the three months ended December 31, 2021. Inventory turns have slowed due to macroeconomic challenges that companies across industries and retailers in particular faced. Inflation has led to weaker end market demand. In connection with the Wallace EPA Matter, the Company expects it will be required to provide financial assurance of $5.6 millionin the next 12 months, which it expects to provide in the form of a letter of credit. This would reduce availability under the revolving credit facility by the same amount. The Company believes that availability under the revolving credit facility under its ABL Agreement and cash flows from operations are sufficient to fund the Company's operations for the next 12 months. However, if circumstances were to adversely change, the Company may seek alternative sources of liquidity including debt and/or equity financing. However, there can be no assurance that any such alternative sources would be available or sufficient. The Company closely monitors the creditworthiness of its customers. Based upon its evaluation of changes in customers' creditworthiness, the Company may modify credit limits and/or terms of sale. However, notwithstanding the Company's efforts to monitor its customers' financial condition, the Company could be materially affected by future changes in these conditions.
August 26, 2022, the Company entered into Amendment No. 2 (the "Amendment") to the ABL Agreement among the Company, as a Borrower, certain subsidiaries of the Company, as Borrowers and/or Loan Parties, JPMorgan Chase Bank, N.A., as Administrative Agent and a Lender, HSBC Bank USA, National Associationand Wells Fargo Bank, National Association, as Co-Documentation Agents and Lenders, and Manufacturers and Traders Trust Company. The ABL Agreement provides for a senior secured asset-based revolving credit facility in the maximum aggregate principal amount of $200.0 million, which facility will mature on August 26, 2027(subject to an earlier springing maturity date that is 90 days prior to the Term Loan maturity date of February 28, 2025if the Company's Term Loan has not been repaid or refinanced by such date). The Term Loan provides for a senior secured term loan credit facility in the original principal amount of $275.0 million, which matures on February 28, 2025. On December 29, 2022, the Company entered into Amendment No. 1 to the Term Loan, which replaces the LIBOR-based interest rates with SOFR-based interest rates and modifies the provisions for determining the alternative rate of interest upon the occurrence of certain events relating to the availability of interest rate benchmarks. The Term Loan requires the Company to make an annual prepayment of principal based upon a percentage of the Company's excess cash flow ("Excess Cash Flow"), if any. The percentage applied to the Company's excess cash flow is based on the Company's Total Net Leverage Ratio (as defined in the Debt Agreements). When an Excess Cash Flow payment is required, each lender has the option to decline a portion or all of the prepayment amount payable to it. An estimate of the amount of the Excess Cash Flow payment is recorded in current maturity of term loan on the consolidated balance sheets. Additionally, the Term Loan requires quarterly payments, which commenced on June 30, 2018, of principal equal to 0.25%, of the original aggregate principal amount of the Term Loan facility, which payments are to be adjusted from time to time to account for prepayments made. Per the Term Loan, when the Company makes an Excess Cash 39
Table of Contents
Flow payment, the payment is first applied to satisfy the next eight scheduled future quarterly required payments of the Term Loan in order of maturity and then to the remaining scheduled installments on a pro rata basis. The quarterly principal payments have been satisfied through maturity of the Term Loan by the annual Excess Cash Flow payments made to date. The maximum borrowing amount under the ABL Agreement may be increased to up to
$250.0 millionif certain conditions are met but limited to $220.0 millionpursuant to the Term Loan. One or more tranches of additional term loans (the "Incremental Term Facilities") may be added under the Term Loan if certain conditions are met. The Incremental Facilities may not exceed the sum of (i) $50.0 millionplus (ii) an unlimited amount so long as, in the case of (ii) only, the Company's secured net leverage ratio, as defined in and computed on a pro forma basis pursuant to the Term Loan, after giving effect to such increase, is no greater than 3.75 to 1.00, subject to certain limitations and for the period defined pursuant to the Term Loan but not to mature earlier than the maturity date of the then existing term loans.
were as follows (in thousands):
December 31, 2022 December 31, 2021 Maximum aggregate principal allowed $ 189,411 $ 150,000 Outstanding borrowings under the ABL Agreement (10,424) - Standby letters of credit (2,765) (3,659) Total availability under the ABL agreement $
176,222 $ 146,341
Availability under the ABL Agreement is limited to the lesser of the
$200.0 millioncommitment thereunder and the borrowing base and therefore depends on the valuation of certain current assets comprising the borrowing base. The borrowing capacity under the ABL Agreement will depend, in part, on eligible levels of accounts receivable and inventory that fluctuate regularly. Due to the seasonality of the Company's business, this mean that the Company may have greater borrowing availability during the third and fourth quarters of each year. Consequently, the $200.0 millioncommitment thereunder may not represent actual borrowing capacity.
The current and non-current portions of the Company’s Term Loan facility
included in the consolidated balance sheets are presented as follows (in
December 31, 2022 December 31, 2021
Current portion of Term Loan facility:
Estimated Excess Cash Flow principal payment $ - $ 7,200 Estimated unamortized debt issuance costs - (1,429) Total Current portion of Term Loan facility $ - $ 5,771 Non-current portion of Term Loan facility: Term Loan facility, net of current portion $ 245,911 $ 244,927 Estimated unamortized debt issuance costs (3,054) (3,054)
Total Non-current portion of Term Loan facility $ 242,857
December 31, 2022, there is no Excess Cash Flow Payment due for 2023. The 2022 Excess Cash Flow payment, paid on March 30, 2022, totaled $6.2 million. The Excess Cash Flow payment differs from the estimated amount at December 31, 2021of $7.2 millionas certain lenders opted to decline their payments per the terms of the Term Loan. 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 foreign subsidiary borrowers under the ABL Agreement are secured by security interests in substantially all of the assets of, and stock in, such foreign subsidiary borrowers, subject to certain limitations. The obligations of the Company under the Debt Agreements and any hedging arrangements and cash management services and the guarantees by its domestic subsidiaries in respect of those obligations are secured by security interests in substantially all of the assets and stock (but in the case of foreign subsidiaries, limited to 65% of the capital stock in first-tier foreign subsidiaries and not including the stock of subsidiaries of such first-tier foreign subsidiaries) owned by the Company and the U.S.subsidiary guarantors, subject to certain exceptions. Such security interests consists of (1) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and certain of its subsidiaries (the "ABL Collateral") pledged as collateral in favor of lenders under the ABL Agreement and a second-priority lien in the ABL Collateral in favor of the lenders under the Term Loan and (2) a first-priority lien, subject to certain permitted liens, with respect to certain assets of the Company and certain 40
Table of Contents
of its subsidiaries (the “Term Loan Collateral”) pledged as collateral in favor
of lenders under the Term Loan and a second-priority lien in the Term Loan
Collateral in favor of the lenders under the ABL Agreement.
Borrowings under the revolving credit facility bear interest, at the Company's option, at one of the following rates: (i) an alternate base rate, defined, for any day, as the greater of the prime rate, a federal funds and overnight bank funding based rate plus 0.5% or one-month Adjusted Term SOFR plus 1.0% as of a specified date in advance of the determination, but in each case not less than 1.0%, plus a margin of 0.25% to 0.5%, or (ii) Adjusted Term SOFR, which is the Term SOFR Rate for the selected 1, 3 or 6 month interest period plus 0.10% (or Euro Interbank Offered Rate "EURIBOR" for borrowings denominated in Euro; or Sterling Overnight Index Average "SONIA" for borrowings denominated in Pounds Sterling), but in each case not less than zero, plus a margin of 1.25% to 1.50%. The respective margins are based upon average quarterly availability, as defined in and computed pursuant to the ABL Agreement. In addition, the Company pays a commitment fee of 0.20% to 0.25% per annum based on the average daily unused portion of the aggregate commitment under the ABL Agreement. The interest rate on outstanding borrowings under the ABL Agreement at
December 31, 2022was 3.43%. In addition, the Company paid a commitment fee of 0.25% to 0.375% on the unused portion of the ABL Agreement during the year ended December 31, 2022. The Term Loan facility bears interest, at the Company's option, at one of the following rates: (i) alternate base rate, defined, for any day, as the greater of (x) the prime rate, (y) a federal funds and overnight bank funding based rate plus 0.50% or (z) one-month Adjusted Term SOFR, but not less than 1.0% plus 1.0%, plus a margin of 2.5% or (ii) SOFR for the applicable interest period, multiplied by any statutory reserve rate, but not less than 1.0%, plus a margin of 3.5%. The interest rate on outstanding borrowings under the Term Loan at December 31, 2022was 7.9%. The Debt Agreements provide for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, liens, acquisitions, investments and payment of dividends, among other things. Further, the ABL Agreement provides that during any period (a) commencing on the last day of the most recently ended four consecutive fiscal quarters on or prior to the date availability under the ABL Agreement is less than the greater of $20.0 millionand 10% of the aggregate commitment under the ABL Agreement at any time and (b) ending on the day after such availability has exceeded the greater of $20.0 millionand 10% of the aggregate commitment under the ABL Agreement for 45 consecutive days, the Company is required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 as of the last day of any period of four consecutive fiscal quarters.
The Company was in compliance with the covenants of the Debt Agreements at
Prior to the amendment of the credit agreement, the Company's ABL provided for an aggregate principal amount of
$150.0 million. Upon entering into the Amendment to the ABL Agreement the Company repaid its outstanding ABL borrowing in the amount of $32.0 millionand re-borrowed such amounts under the ABL Agreement, as amended. Unamortized debt issuance costs that were written off were immaterial.
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
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.
Non-GAAP financial measure
Adjusted EBITDA is a non-GAAP financial measure within the meaning of Regulation G and Item 10(e) of Regulation S-K, each promulgated by the
SEC. This measure is provided because management of the Company uses this financial measure in evaluating the Company's on-going financial results and trends. Management also uses this non-GAAP information as an indicator of business performance. Adjusted EBITDA, as discussed above, is also one of the measures used to calculate financial covenants required to be provided to the Company's lenders pursuant to its Debt Agreements. Investors should consider these non-GAAP financial measures 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. 41
Table of Contents
The following is a reconciliation of net income (loss) as reported to adjusted EBITDA for the years ended
December 31, 2022and 2021 and each fiscal quarter of 2022 and 2021: Three Months Ended Year Ended March 31, September 30, 2022 June 30, 2022 2022 December 31, 2022 December 31, 2022 (in thousands) Net income (loss) as reported $ 380 $ (3,460)(6,358) $ 3,272 $ (6,166) Undistributed equity (earnings) losses, net (416) (334) 8,159 2,058 9,467 Income tax provision (benefit) 1,673 (98) 1,845 2,308 5,728 Interest expense 3,767 3,732 4,581 5,125 17,205 Depreciation and amortization 4,899 5,038 4,598 5,001 19,536 Mark to market (gain) loss on interest rate derivatives (1,049) (304) (637) 19 (1,971) Stock compensation expense 1,174 1,365 1,026 281 3,846 Acquisition related expenses 1,119 75 109 170 1,473 Restructuring expenses - - - 1,420 1,420 Warehouse relocation and redesign expenses(1) 497 73 59 - 629 S'well integration costs(2) 781 864 250 - 1,895 Wallace facility remediation expense - - 5,140 - 5,140
Adjusted EBITDA, before limitation
$ 18,772$ 19,654 $ 58,202 Pro forma projected synergies adjustment(3) 3,590 Pro forma adjusted EBITDA, before limitation(5) 61,792 Permitted non-recurring charge limitation (4) (3,589) Pro forma Adjusted EBITDA(5) $ 12,825 $ 6,951 $ 18,772$ 19,654 $ 58,203 (1) For the year ended December 31, 2022, the warehouse relocation and redesign expenses included $0.5 millionof expenses related to the International segment and $0.1 millionof expenses related to the U.S.segment. (2) For the year ended December 31, 2022, S'well integration costs included $0.5 millionof expenses related to inventory step up adjustment in connection with S'well acquisition. (3) Pro forma projected synergies represents the projected cost savings of $2.3 millionassociated with the reorganization of the International segment's workforce, $0.9 millionassociated with the retirement of the Executive Chairman, and $0.4 millionassociated with reorganization of the U.S.segment's sales management structure. (4) Permitted non-recurring charges include restructuring expenses, integration charges, Wallace facility remediation expense, and warehouse relocation and redesign expenses. These are permitted exclusions from the Company's adjusted EBITDA, subject to limitations, pursuant to the Company's Debt Agreements. (5) Adjusted EBITDA is a non-GAAP financial measure which is defined in the Company's debt agreements. Adjusted EBITDA is defined as net income (loss), adjusted to exclude undistributed equity in (earnings) losses, income tax provision (benefit), interest expense, depreciation and amortization, mark to market (gain) loss on interest rate derivatives, stock compensation expense, and other items detailed in the table above that are consistent with exclusions permitted by our debt agreements. 42
Table of Contents Three Months Ended Year Ended March 31, September 30, December 31, December 31, 2021 June 30, 2021 2021 2021 2021 (in thousands)
Net income (loss) as reported
$ 12,571 $ (626) $ 20,801Undistributed equity losses (earnings), net 247 (393) (195) (466) (807) Income tax provision 2,416 1,832 5,589 6,704 16,541 Interest expense 4,014 3,819 3,835 3,856 15,524 Depreciation and amortization 5,958 5,765 5,837 4,960 22,520 Mark to market gain on interest rate derivatives (498) (46) (120) (398) (1,062) Intangible asset impairments - - - 14,760 14,760 Stock compensation expense 1,444 1,328 1,201 1,244 5,217 Acquisition related expenses 182 72 41 378 673 Warehouse relocation expenses (1) - - - 450 450 Wallace facility remediation expense - - 500 - 500 Adjusted EBITDA(2) $ 16,830 $ 18,166 $ 29,259 $ 30,862 $ 95,117
(1) Warehouse relocation expenses included
the International segment and
(2) Adjusted EBITDA is a non-GAAP financial measure which is defined in the Company's debt agreements. Adjusted EBITDA is defined as net income (loss), adjusted to exclude undistributed equity in losses (earnings), income tax provision, interest expense, depreciation and amortization, mark to market gain on interest rate derivatives, intangible asset impairments, stock compensation expense, and other items detailed in the table above that are consistent with exclusions permitted by our debt agreements.
Capital expenditures for the year ended
Derivatives Interest Rate Swap Agreements
The Company’s net total outstanding notional value of interest rate swaps was
The Company designated a portion of these interest rate swaps as cash flow hedges of the Company's exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The hedge periods of these agreements commenced in
April 2018and expire in March 2023. The original notional values are reduced over these periods. The aggregate notional value was $25.0 millionat December 31, 2022. In June 2019, the Company entered into additional interest rate swap agreements, with an aggregate notional value of $25.0 millionat December 31, 2022. These non-designated interest rate swaps serve as cash flow hedges of the Company's exposure to the variability of the payment of interest on a portion of its Term Loan borrowings and expire in February 2025.
Foreign Exchange Contracts
The Company is a party from time to time to certain foreign exchange contracts, primarily to offset the earnings impact related to fluctuations in foreign currency exchange rates associated with inventory purchases denominated in foreign currencies. Fluctuations in the value of certain foreign currencies as compared to the USD may positively or negatively affect the Company's revenues, gross margins, operating expenses, and retained earnings, all of which are expressed in USD. Where the Company deems it prudent, the Company engages in hedging programs using foreign currency forward contracts aimed at limiting the impact of foreign currency exchange rate fluctuations on earnings. The Company purchases foreign currency forward contracts with terms less than 18 months to protect against currency exchange risks associated with the payment of merchandise purchases to foreign suppliers. The Company does not hedge the translation of foreign currency profits into USD, as the Company regards this as an accounting exposure rather than an economic exposure. The aggregate gross notional values of foreign exchange contracts at
December 31, 2022and 2021 was $6.3 millionand $22.6 million, respectively. 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 43
Table of Contents
forward contracts that the Company enters into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. The Company does not enter into such contracts for speculative purposes and, as of
December 31, 2022, the Company does not have any foreign currency forward contract derivatives that are not designated as hedges. These foreign exchange contracts have been designated as hedges in to order to apply hedge accounting.
Dividends were declared in 2022 and 2021 as follows: Dividend per share Date declared Date of record Payment date
$0.0425March 9, 2021 May 3, 2021 May 17, 2021 $0.0425June 24, 2021 August 2, 2021 August 16, 2021 $0.0425August 3, 2021 November 1, 2021 November 15, 2021 $0.0425November 2, 2021 January 31, 2022 February 14, 2022 $0.0425March 8, 2022 May 2, 2022 May 16, 2022 $0.0425June 23, 2022 August 1, 2022 August 15, 2022 $0.0425August 2, 2022 November 1, 2022 November 15, 2022 $0.0425November 1, 2022 February 1, 2023 February 15, 2023
Cash provided by operating activities
Net cash provided by operating activities was
$24.3 millionin 2022, compared to $37.0 millionin 2021. The decrease from 2022 compared to 2021 was attributable to lower net income generated in 2022 compared to 2021 and timing of payments for accounts payable and accrued expenses, offset by a decrease in inventory investment and the timing of collections related to the Company's accounts receivable.
Cash used in investing activities
Net cash used in investing activities was
$20.9 millionin 2022, compared to $1.1 millionin 2021. The change from 2022 compared to 2021 was attributable to the cash consideration of $18.0 millionpaid for the acquisition of S'well.
Cash used in financing activities
Net cash used in financing activities was
$7.6 millionin 2022 compared to $44.0 millionin 2021. The change from 2022 compared to 2021 was attributable to proceeds from the Company's revolving credit facility under its ABL Agreement in the 2022 period, compared to repayments in the 2021 period, and lower Excess Cash Flow principal payment on the term loan for the 2022 period compared to the 2021 period. This was partially offset by payments for stock repurchases in the 2022 period. MATERIAL CASH REQUIREMENTS
The Company’s material cash requirements include the following:
December 31, 2022, the Company had outstanding Term Loan facility, which matures on February 28, 2025, for an aggregate principal amount of $245.9 million, with no amounts due within 12 months. Future interest obligations associated with debt and interest rate swaps total $40.7 million, with $18.8 millionpayable within 12 months. The future interest obligations are estimated by assuming the amounts outstanding under the Company's debt agreements and the interest rates as of December 31, 2022remain consistent to the end of the debt agreements. Actual amounts borrowed and interest rates may vary over time.
The Company has operating leases for corporate offices, distribution facilities, manufacturing plants, and certain vehicles. As of
December 31, 2022, the Company had fixed lease payment obligations of $109.7 million, with $19.1 millionpayable within 12 months. On January 20, 2023, the Company entered into the third amendment to the existing Medford operating lease. The amendment will reduce the leased square footage, reduce rent payments beginning in the second quarter of 2023, and extend the lease term from December 2027to December 2030. This will increase the total lease payment obligation of approximately $2.0 million. 44
Table of Contents
The Company has license agreements that require the payment of royalties on sales of licensed products which expire through 2048. As of
December 31, 2022, the estimated minimum royalties payable under these agreements amounted to $35.1 million, with $8.1 millionpayable within 12 months.
The Company assumed retirement benefit obligations, which are paid to certain former executives of a business acquired in 2006. As of
December 31, 2022, the estimated discounted obligations under the agreements with the former executives amounted to $5.7 million, with $0.5 millionpayable within 12 months.
The Company entered into a transition agreement with its Executive Chairman,
Jeffrey Siegel, which terminates his employment with the Company, effective March 31, 2023. The Company estimates the one-time payment to be approximately $1.4 million, which is payable upon his retirement on March 31, 2023.
Wallace EPA Matter
In connection with the Wallace EPA Matter, the Company expects it will be required to provide financial assurance of
$5.6 millionin the next 12 months, which it expects to provide in the form of a letter of credit. This would reduce availability under the revolving credit facility by the same amount.
© Edgar Online, source