Hamilton Beach Brands Holding Company — Q3 2022 Form 10-Q
Business context and period. The company designs, markets and distributes small household and specialty appliances, and commercial products for restaurants, bars and hotels. This unaudited report covers the quarter and nine months ended September 30, 2022. Results are seasonal, with a majority of revenue and operating profit typically generated in the second half of the year.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $150.8 | $156.7 | $444.7 | $460.6 |
| Gross profit / margin | $34.8 / 23.1% | $33.3 / 21.2% | $95.1 / 21.4% | $93.4 / 20.3% |
| Operating profit | $9.4 | $7.4 | $27.5 | $13.6 |
| Net income | $5.9 | $5.7 | $18.2 | $8.7 |
| Diluted EPS | $0.43 | $0.41 | $1.30 | $0.62 |
| Interest expense, net | $1.3 | $0.7 | $2.9 | $2.1 |
Q3 revenue fell 3.8%; nine-month revenue fell 3.5%. Lower unit volumes and product mix drove the declines, partly offset by higher prices. Gross margin improved in both comparisons, reflecting pricing, product mix and lower warehousing and labor costs; nine-month margin improvement also benefited from reduced carrier storage charges. Nine-month SG&A declined $12.3 million, primarily reflecting a $10.0 million insurance recovery recognized in Q1 2022, as well as lower outside services and the absence of 2021 distribution-center relocation costs.
Consumer revenue was $134.8 million in Q3 and $395.3 million for nine months; commercial revenue was $14.8 million and $45.0 million, respectively. Commercial revenue increased 47.5% year over year for the nine-month period as foodservice and hospitality demand continued to recover. Consumer sales were affected by retailer inventory rebalancing, holiday-order timing and softer point-of-sale trends. The shift to licensing rather than company-managed operations in Brazil and China also reduced reported revenue.
Cash flow, liquidity and capital
- Operating cash flow was negative $40.2 million for the first nine months, versus negative $4.1 million a year earlier. Management attributed the deterioration mainly to a $62.1 million use of cash from net working capital, including higher inventory and accounts payable-related cash use. Inventory was $244.5 million at September 30, 2022, versus $177.0 million a year earlier.
- Investing cash outflow was $1.6 million, compared with $9.1 million, as prior-year distribution-center spending did not recur. Financing cash inflow was $42.3 million, primarily reflecting increased revolver borrowings to fund working capital.
- Cash and cash equivalents were $1.5 million at September 30, 2022; cash, cash equivalents and restricted cash totaled $2.5 million. Revolver borrowings were $146.1 million, up from $96.8 million at December 31, 2021. Stockholders’ equity was $117.9 million.
- The borrowing base was $164.3 million, leaving $18.2 million of excess availability. A temporary 90-day amendment increased the facility limit from $150 million to $165 million and expanded eligible inventory in the borrowing base to provide flexibility ahead of the holiday season. The facility expires June 30, 2025; the company reported compliance with its financial covenants.
- The weighted-average facility interest rate was 3.00% for the nine months, including swaps. The company had $50 million of interest-rate swaps at an average fixed rate of 0.85% and $50 million of delayed-start swaps at 1.59%. Rising rates and higher average borrowings increased interest expense.
Material changes, outlook and notable items
- Nine-month operating profit more than doubled year over year, but the comparison includes the $10.0 million insurance recovery in 2022. The recovery related to unauthorized transactions by former employees at Mexican subsidiaries; proceeds were received in Q2 and the benefit was recognized in Q1.
- Other expense included a $2.1 million release of accumulated currency losses upon the Brazilian subsidiary liquidation and a $0.3 million pension settlement charge in Q3. The Q3 settlement charge was $0.2 million after tax, or $0.01 per diluted share.
- The company is terminating its frozen U.S. defined-benefit pension plan, a process expected to take up to an estimated 24 months. The plan was overfunded by $12.0 million under GAAP at September 30, 2022. Management expects no further required minimum contributions and expects any surplus after termination to be transferred to a qualified replacement plan.
- No quantitative earnings or revenue guidance is provided in the supplied filing text. Management stated that cash on hand, operating cash flows and facility availability should cover operating needs and commitments for the next 12 months. It expects to continue borrowing under the revolver and making voluntary repayments.
- Key risks include supply and transportation constraints, retailer inventory levels and consumer demand, inflation and sourcing costs, rising interest rates, foreign-exchange movements, COVID-19 developments, and global economic volatility, including effects related to the conflict in Ukraine. Management cautioned that the nine-month results are not necessarily indicative of full-year results because of seasonality.
- Environmental remediation accruals were $3.3 million; the company said additional costs of zero to $1.6 million were reasonably possible. A separate lawsuit seeks to hold the company liable for the unsatisfied portion of an $8.1 million judgment against a former retailer; the company considers the claims without merit and intends to defend them. Management did not expect the ultimate disposition of ordinary-course proceedings to materially affect financial condition, results or cash flows.
- The company repurchased 261,049 shares for $3.0 million during the first nine months under a $25 million authorization ending December 31, 2023, and paid $4.3 million in dividends. Disclosure controls were reported effective; management reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether inventory levels and retailer rebalancing ease, and whether working-capital cash use moderates during the holiday season.
- Remaining borrowing capacity and covenant headroom, particularly given $146.1 million of revolver borrowings and $18.2 million of excess availability at quarter-end.
- How much of the improvement in year-to-date operating profit is sustainable apart from the nonrecurring insurance recovery and other unusual items.
- The effects of higher borrowing costs, foreign-exchange volatility and the company’s interest-rate hedges on subsequent results.
- Progress and final costs of the pension-plan termination, environmental remediation and the pending lawsuit.