Hamilton Beach Brands Holding Company — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless stated otherwise, dollar amounts below are in millions. Hamilton Beach Brands, Inc. is the company’s sole continuing reportable business, selling consumer, commercial and specialty appliances. The Kitchen Collection (KC) is presented as discontinued operations and was dissolved on April 3, 2020. Comparative 2019 figures are restated and recast.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $110.5 | $149.5 | $369.7 | $407.2 |
| Gross profit / margin | $23.7 / 21.5% | $30.9 / 20.7% | $84.0 / 22.7% | $86.2 / 21.2% |
| Operating income (loss) | $(2.4) | $4.4 | $9.0 | $7.7 |
| Continuing-operations net income (loss) | $(2.0) | $0.6 | $4.7 | $1.8 |
| Net income (loss), including discontinued operations | $(2.0) | $(2.2) | $27.3 | $(6.2) |
- Q3 revenue fell 26.1%; management attributed the decline chiefly to lower US consumer shipments during the US ERP-system transition and transportation constraints. Some delayed sales were expected to shift into Q4. International consumer and global commercial sales also faced pandemic-related softness.
- For the first nine months, revenue declined 9.2%, while gross margin improved to 22.7%, reflecting customer and product mix and approximately $1.6 million of tariff relief. Nine-month net income included a $22.6 million discontinued-operations gain, mainly from adjustments to KC lease and other liabilities; continuing-operations income was $4.7 million.
- Other expense was $1.6 million for the nine-month period, including $2.0 million of currency losses. Net interest expense declined to $1.3 million from $2.2 million, primarily due to lower average rates and borrowings.
Cash flow, debt and liquidity
- Nine-month cash used in operating activities was $5.7 million, improved from $24.1 million used in 2019. Inventory consumed $95.7 million of cash, partly offset by a $76.0 million increase in accounts payable and a $7.6 million source from receivables. Investing activities used $3.1 million; financing activities provided $8.2 million.
- At September 30, cash and cash equivalents were $0.9 million; cash, cash equivalents and restricted cash totaled $1.8 million. Inventory was $203.4 million, versus $109.8 million at December 2019. Current assets were $316.8 million and current liabilities $296.4 million.
- Revolving borrowings were $70.4 million, all classified as current, under a $115.0 million secured facility expiring June 30, 2021. Reported excess availability was $43.0 million; the company was in compliance with financial covenants. Management said refinancing was in process and believed completion by December 31, 2020 was probable, and that available cash, the facility and operating cash flow would meet needs for the next 12 months. Expected voluntary debt repayments over the next 12 months after refinancing were $25.4 million.
- In July 2020, the company signed a 12-year distribution-center lease expected to commence July 1, 2021, with approximately $44.4 million of aggregate minimum lease payments.
Material developments, outlook and risks
- The company disclosed accounting irregularities involving former employees at Mexican subsidiaries, including unauthorized transactions, improperly deferred expenditures and revenue recognition issues. Prior financial statements were restated; the restatement reduced December 2019 stockholders’ equity from $55.1 million to $36.3 million. Separately, correction of price-concession timing errors reduced nine-month 2020 pretax income by $0.7 million and net income by $0.5 million.
- Management concluded disclosure controls were not effective as of September 30, 2020 because material weaknesses in Mexican-subsidiary financial reporting controls remained. Remediation actions were underway; management would not consider the weaknesses remediated until controls operated effectively for a sufficient period and testing supported that conclusion.
- COVID-19 demand, supply-chain disruption, transportation capacity, customer order cancellations and the ERP implementation are key uncertainties. Management could not reliably estimate the pandemic’s future effects. Q3 shipping challenges created a significant backlog of confirmed orders for which revenue had not yet been recognized; fulfillment or conversion to sales was not assured.
- Other disclosed exposures include a patent-infringement judgment with a $3.1 million accrual as of September 30 and an appeal underway; a claim seeking to hold the holding company liable for an $8.1 million judgment against KC, which the company disputes; and environmental remediation accruals of $3.6 million, with reasonably possible additional costs of up to $1.1 million.
- The business is seasonal, with a majority of revenue and operating profit typically generated in the second half. The filing provides no quantified full-year earnings or revenue guidance.
Key facts for investors to verify
- Whether the revolving-credit refinancing was completed on the anticipated timetable and on what terms.
- How much of the Q3 order backlog shipped and converted to revenue in Q4, and whether transportation and ERP constraints persisted.
- Progress and independent testing of remediation for the Mexican-subsidiary material weaknesses, and any subsequent accounting or legal developments.
- Actual working-capital needs, especially inventory levels, cash generation and facility availability during the seasonal peak.
- Developments in the patent appeal, the KC-related claim and environmental remediation estimates.