Hamilton Beach Brands Holding Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed February 26, 2020. Unless noted, financial amounts below are in U.S. dollars. Hamilton Beach Brands, Inc. (HBB), the small-appliance and commercial-products business, is the continuing reportable segment; The Kitchen Collection (KC) is reported as discontinued operations.
Business context and reporting period
HBB designs, markets and distributes household and specialty appliances, as well as commercial products for restaurants, bars and hotels. Products are largely sourced from third parties in China. On October 10, 2019, the Board approved winding down KC after worsening store foot traffic and a reduced prospect of returning to profitability. All KC stores had closed by year-end; the wind-down was expected to continue through the first half of 2020.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Revenue from continuing operations | $612.8 million | $629.7 million | Down 2.7% |
| Gross profit / margin | $129.5 million / 21.1% | $137.5 million / 21.8% | Margin down 0.7 percentage points |
| Operating profit / margin | $36.9 million / 6.0% | $38.2 million / 6.1% | Down 3.4% |
| Income from continuing operations, net of tax | $25.1 million | $27.1 million | Down 7.6%; diluted EPS $1.83 versus $1.98 |
| Loss from discontinued operations, net of tax | $(28.6) million | $(5.4) million | Includes KC wind-down costs |
| Net income (loss) | $(3.5) million | $21.8 million | Diluted EPS $(0.26) versus $1.59 |
| Cash from continuing operating activities | $0.2 million | $17.3 million | Sharp decline, primarily from increased receivables and other working-capital movements |
Revenue fell mainly because of lower sales volume in U.S. and international consumer markets and global commercial markets. Ecommerce sales grew 27%, but the growth was more than offset by tariffs, lost dollar-store placements after HBB exited very low-margin business, and retail traffic and other customer pressures. Lower volume, inbound freight, tariffs and unfavorable currency movements reduced gross margin. SG&A decreased to $91.3 million, including lower environmental expense, advertising and incentive compensation; these reductions were partly offset by a $3.2 million patent-litigation charge.
Fourth-quarter revenue was $207.1 million, gross profit $44.9 million, and operating profit $25.5 million. Continuing-operations net income was $19.4 million, while discontinued operations recorded a $20.6 million net loss; the quarter’s consolidated net loss was $1.2 million. The filing reports material seasonality, with most revenue and operating profit typically generated in the second half.
- Cash and working capital: Continuing-operations cash and equivalents were $2.1 million at year-end, versus $4.4 million in 2018. Reported net working capital was $112.3 million; the filing defines this as trade receivables plus inventory less accounts payable.
- Debt and facility: HBB borrowings, including book overdrafts, totaled $58.5 million at year-end. Its $115.0 million secured revolving facility had $56.1 million of excess availability and expires in June 2021. HBB reported compliance with financial covenants. Weighted-average effective borrowing cost, including swaps, was 3.82%.
- Other cash uses: Continuing-operations investing cash outflow was $4.1 million. Dividends paid were $4.9 million ($0.36 per share); share repurchases totaled $6.0 million. A new authorization permits up to $25.0 million of repurchases from January 2020 through December 2021.
Material changes versus the prior comparable period
- HBB revenue declined from 2018, and gross and operating margins contracted. Continuing-operations income fell despite reduced SG&A, as lower sales and cost pressures weighed on performance.
- Continuing-operations operating cash flow declined from $17.3 million to $0.2 million. Management attributed the change principally to higher trade receivables from collection timing and increased fourth-quarter sales; inventory declined with continued inventory management.
- KC’s 2019 revenue was $100.9 million, down from $113.5 million. Its net loss widened to $28.6 million from $5.4 million, including $15.2 million of estimated lease-termination expense.
- HBB borrowings increased from $46.6 million to $58.5 million. The increase in revolving-facility borrowing helped fund working capital and repurchases.
Outlook, risks, contingencies and unusual items
- Outlook: No specific revenue or earnings guidance is provided. Management stated that cash on hand, operating cash flows and facility availability should meet operating needs and commitments for the next 12 months and until the HBB facility expires. This assessment is subject to the risks described in the filing.
- KC wind-down: KC had current liabilities exceeding current assets by $24.3 million at year-end. KC’s balance sheet included a $17.2 million lease-termination liability and $29.7 million of current discontinued-operation liabilities. KC had defaulted under store lease agreements; remaining settlement costs and outcomes depended in part on negotiations with landlords and other counterparties. HBB and the parent did not guarantee KC obligations. KC’s separate credit facility was repaid and terminated in December 2019.
- Patent litigation: A jury awarded a plaintiff $3.2 million in May 2019 for alleged patent infringement. HBB recorded the charge, filed post-trial motions challenging the verdict and damages, and said it would continue to defend the case. Plaintiff motions, including for interest, injunctive relief and attorneys’ fees, remained pending; the filing does not provide a clear final outcome.
- Environmental matters: HBB accrued $4.4 million for investigation and remediation at year-end and disclosed a reasonably possible additional expense range of zero to $4.0 million. It also recorded a $1.5 million receivable for a probable recovery from a responsible party.
- Trade and supply risks: Section 301 tariffs affected approximately 25% of annualized HBB purchases. The filing noted a reduction in the List 4a tariff rate to 7.5%, effective February 14, 2020, and uncertainty about the scope and duration of trade actions. HBB also cited dependence on Chinese suppliers, freight and input costs, currency movements, customer concentration, competition and changing retail channels.
- Customer concentration: Walmart accounted for approximately 33% of HBB revenue and Amazon approximately 14% in 2019; the five largest customers accounted for approximately 58%. HBB generally relies on purchase orders rather than long-term customer supply contracts.
- Other risks and controls: The filing identified the potential impact of coronavirus, pension-plan investment and interest-rate changes, product liability and recalls, environmental obligations, and implementation risks for a multi-year ERP project. Management and the auditor reported effective internal control over financial reporting at December 31, 2019; the financial-statement audit opinion was unqualified.
Most important facts an investor should verify
- Whether HBB can restore revenue and margin performance as tariffs, freight costs, currency effects and retail-channel pressures evolve.
- Receivables collection, operating cash generation and seasonal borrowing needs, including HBB’s liquidity and refinancing plans ahead of the June 2021 facility maturity.
- Final KC lease and other wind-down settlements, including the extent to which subleases or landlord negotiations reduce stated obligations.
- The outcome and potential additional exposure from the patent case, and changes in environmental remediation costs or recoveries.
- Ongoing dependence on Walmart, Amazon and other major customers, and concentration of sourcing with suppliers in China.