Hamilton Beach Brands Holding Company — Q1 2022 10-Q
Reporting period: Three months ended March 31, 2022; comparison is with Q1 2021. Hamilton Beach designs, markets and distributes consumer and commercial small appliances and housewares. Results are seasonal, with most revenue and operating profit typically generated in the second half of the year.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $146.4 million | $149.2 million |
| Gross profit / margin | $28.2 million / 19.3% | $31.7 million / 21.2% |
| Operating profit | $12.7 million | $5.3 million |
| Net income | $7.2 million | $2.9 million |
| Diluted EPS | $0.51 | $0.21 |
| Operating cash flow | $(20.8) million | $(1.9) million |
- Revenue declined 1.9%. Consumer product sales fell to $129.8 million from $139.5 million, while commercial products rose to $15.1 million from $8.6 million and licensing revenue increased to $1.5 million from $1.1 million.
- Management attributed the revenue decline primarily to lower U.S. and Canadian consumer-market volume. Latin American and global commercial demand remained strong; higher average selling prices partially offset lower volume and mix.
- Gross margin contracted by 1.9 percentage points, mainly due to product and customer mix and shipping-container costs that price increases did not fully recover.
- Operating profit and net income improved substantially, primarily because SG&A included a $10.0 million insurance recovery. The approved recovery related to unauthorized transactions at Mexican subsidiaries identified in 2020; the receivable was collected in April 2022. The filing also reports $2.1 million of accumulated Brazil-related currency losses released into other expense following liquidation of the Brazilian subsidiary.
Cash, debt and liquidity
- Cash and cash equivalents were $1.0 million at March 31, 2022; cash, cash equivalents and restricted cash totaled $2.1 million. Operating activities used $20.8 million, principally reflecting a $24.9 million working-capital use. Inventory was higher amid longer lead times and supply-chain and transportation disruptions.
- Investing activities used $0.4 million. Financing activities provided $21.0 million, including increased revolver borrowing to fund working capital; cash dividends paid were $1.4 million.
- Revolver borrowings were $119.3 million, up from $96.8 million at December 31, 2021. Against a $148.4 million borrowing base, excess availability was $29.1 million. The $150 million secured facility expires June 30, 2025; the company reported compliance with financial covenants.
- The weighted-average revolver interest rate was 2.4% for the quarter, including the effect of swaps. Swaps covered $50 million at an average fixed rate of 0.95%, with delayed-start swaps totaling another $50 million at 1.67%.
- Management believes cash, revolver availability and operating cash flows will be sufficient for operating needs and commitments over the next 12 months. It expects to continue borrowing and making voluntary repayments. A $25 million share repurchase authorization was approved in February 2022, but no shares were repurchased in the quarter.
Outlook, risks and contingencies
- The filing gives no quantified revenue or earnings guidance. Management emphasizes seasonality and describes ongoing supply-chain and transportation constraints, including elevated shipping costs. Actual results may also be affected by consumer demand, COVID-19 developments, the conflict in Ukraine and global economic volatility, foreign exchange, tariffs, suppliers and customer concentration.
- Environmental remediation accruals were $3.4 million; additional costs of zero to $1.7 million were considered reasonably possible. The company is defending a lawsuit related to a judgment against former affiliate Kitchen Collection; it considers the claims without merit. Management does not expect the overall disposition of disclosed legal and regulatory matters to materially harm financial condition, results or cash flows, while noting outcomes are uncertain.
- The company recognized a 32.0% effective tax rate, affected by interest and penalties on unrecognized tax benefits and a valuation allowance on certain foreign deferred tax assets related to the Brazil liquidation. It expects adoption of lease accounting rules to result in additional material operating-lease assets and liabilities.
- Disclosure controls were concluded to be effective as of March 31, 2022; no material changes in internal control over financial reporting were reported during the quarter.
Important facts for investors to verify
- How much of the earnings improvement is sustainable after excluding the one-time $10.0 million insurance recovery, and how margins respond to product mix, freight and pricing.
- Whether consumer volumes stabilize and commercial-market strength and price increases continue to offset weaker consumer demand.
- Working-capital needs, inventory levels, operating cash conversion and revolver availability as supply-chain conditions evolve.
- Potential effects of Brazil liquidation, foreign-exchange movements, environmental remediation and the Kitchen Collection litigation.
- Facility covenant and availability thresholds, including their implications for dividends and the authorized share repurchase program.