Hamilton Beach Brands Holding Company — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company operates Hamilton Beach Brands (HBB), a small-appliance and commercial-products business, and Kitchen Collection (KC), a kitchenware retailer. Amounts below are in millions of dollars unless stated otherwise. Results are unaudited. The business is seasonal, with most revenue and operating profit typically generated in the second half.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $148.4 | $157.9 | $293.8 | $304.6 |
| Gross profit / margin | $35.7 / 24.0% | $40.9 / 25.9% | $70.4 / 24.0% | $78.6 / 25.8% |
| Operating income (loss) | $(0.3) | $0.4 | $(2.4) | $(0.2) |
| Net loss | $(0.9) | $(0.9) | $(2.7) | $(1.3) |
| Loss per share, diluted | $(0.07) | $(0.06) | $(0.20) | $(0.09) |
- First-half cash from operations was $(42.1), versus $(56.2) in 2018; capital expenditures were $2.1 versus $4.6. Cash declined $5.2 during the half to $1.1.
- At June 30, total debt was $91.0, versus $105.5 a year earlier and $46.6 at December 31, 2018. Debt to total capitalization was 60.6%, compared with 69.6% a year earlier. Working-capital seasonality drove the increase from year-end.
- HBB’s credit facility had $81.5 outstanding and $31.8 excess availability; KC’s facility had $9.5 outstanding and $0.8 excess availability. Both subsidiaries reported compliance with facility financial covenants.
Changes and business drivers
- Q2 revenue fell 6.0%; first-half revenue fell 3.5%. HBB’s first-half revenue decreased 1.4%, reflecting lower volume and unfavorable currency movements. KC revenue decreased 16.3%, reflecting store closures and lower comparable-store sales.
- Gross margin declined in both segments. HBB cited increased inbound freight, lower volume and unfavorable foreign exchange; KC cited freight costs and liquidation sales at stores being closed.
- HBB first-half operating profit fell to $4.6 from $8.0. KC’s operating loss improved to $6.9 from $8.1, helped by lower corporate costs and store closures. KC operated 162 stores at June 30, compared with 199 a year earlier.
- SG&A declined year over year, including a $3.7 reduction in HBB’s environmental reserve and lower employee-related costs. The benefit was partly offset by a $3.2 patent-litigation charge recorded in Q2 and higher legal and professional fees.
Outlook, risks and unusual items
- Management expects HBB’s 2019 revenue and operating profit to grow moderately versus 2018, and expects second-half operating profit to exceed the prior-year second half. HBB cited holiday placements and promotional support, while noting customer commitments were still being finalized.
- KC expects 2019 revenue to decline because of store closures and weaker comparable sales, but expects its operating loss and pre-financing cash use to improve versus 2018. Overall, the company expects 2019 net income to increase and pre-financing cash flow to improve significantly versus 2018. HBB set a goal of exceeding $20 million in 2019 pre-financing cash flow.
- Planned 2019 capital expenditures were approximately $4.5 for HBB and $0.3 for KC. The filing also estimates $2.8 of capital expenditures for the remainder of the year.
- A jury found HBB infringed certain patents and awarded $3.2 in damages. The company recorded the charge, disputes infringement and was evaluating post-trial motions and appeal.
- Environmental remediation accruals were $4.6 at June 30, down from $8.2 at year-end following additional site assessment. The company estimated reasonably possible additional costs of zero to $3.9.
- Key risks include seasonal demand and holiday execution, consumer traffic at KC stores, freight and sourcing costs, foreign exchange and tariffs, competition and online-shopping shifts, and litigation, product-liability and environmental exposures.
Important facts for investors to verify
- Progress against HBB’s second-half sales, operating-profit and cash-flow expectations, and the status of holiday customer commitments.
- Whether KC’s store closures and cost reductions improve comparable-store trends and operating losses.
- Available borrowing capacity and covenant compliance, particularly KC’s reported $0.8 of excess availability; assess liquidity against seasonal working-capital needs.
- Developments in the patent case, including any post-trial ruling or appeal, and any changes to environmental remediation estimates.
- How much of the reported SG&A improvement came from reserve changes and other nonrecurring items versus ongoing cost reductions.