Hamilton Beach Brands Holding Company — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing includes fourth-quarter results, but is not a standalone Q4 filing. Hamilton Beach Brands Holding became an independent public company in the September 29, 2017 spin-off from NACCO Industries; historical results reflect the predecessor businesses.
Business context and financial performance
The company operates two segments: Hamilton Beach Brands, Inc. (HBB), which designs and distributes consumer, specialty and commercial appliances, and Kitchen Collection, LLC (KC), a kitchenware retailer. Figures below are in millions of dollars unless otherwise noted.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $740.7 | $745.4 | -0.6% |
| Gross profit / margin | $193.8 / 26.2% | $193.8 / 26.0% | Margin +0.2 percentage points |
| Operating profit / margin | $38.1 / 5.1% | $43.4 / 5.8% | -12.1% |
| Net income / diluted EPS | $17.9 / $1.31 | $26.2 / $1.91 | Net income -31.6% |
| Operating cash flow | $33.4 | $62.6 | -$29.1 |
| Capital expenditures | $7.4 | $6.0 | +$1.4 |
| Cash and total debt at year-end | $10.9 / $51.3 | $11.3 / $38.7 | Debt +$12.6 |
Cash flow from operations fell mainly because inventory and receivables used more cash. Year-end current assets were $268.6 million against current liabilities of $230.9 million. HBB had $51.3 million drawn on its revolving facility and $59.7 million of excess availability; KC had no borrowings and $13.6 million of availability. The company reported covenant compliance. Equity declined to $46.4 million from $65.3 million, reflecting dividends, including a $35 million pre-spin-off payment to NACCO.
Material changes and segment results
- HBB: Revenue rose 1.6% to $615.1 million, supported by new, higher-priced products and favorable currency effects. Operating profit fell 3.6% to $41.5 million as higher SG&A—including $2.5 million of spin-off expenses and increased employee costs—more than offset improved gross margin.
- KC: Revenue fell 11.0% to $128.5 million; the segment moved from $0.4 million operating profit to a $3.4 million operating loss. Lower comparable-store sales, closures and lease termination costs contributed. KC operated 210 stores at year-end, versus 223 a year earlier.
- Fourth quarter: Consolidated revenue was $265.8 million, compared with $258.9 million in Q4 2016. Operating profit was $31.0 million versus $31.1 million; net income was $13.8 million versus $18.6 million.
Outlook, risks and unusual items
- Management expected 2018 consolidated net income to increase substantially, primarily because of lower income taxes, with a projected effective tax rate of 26%–28%. The 2017 effective tax rate was 50.4%.
- HBB projected higher 2018 revenue and moderately higher operating profit, while citing product-cost inflation, strategic-investment costs and higher standalone public-company costs. Planned HBB capital spending was about $10 million.
- KC expected 2018 revenue to decline as it continued closing underperforming stores; operating and net losses were expected to be comparable to 2017. Management planned further lease and store-count optimization and forecast a use of cash before financing activities.
- The Tax Act generated a provisional $4.7 million 2017 tax charge; management said the estimate could change as its analysis and tax guidance developed. The lower federal corporate rate was expected to benefit future earnings.
- HBB recorded $8.9 million of environmental investigation and remediation liabilities and estimated reasonably possible additional costs of up to $5.3 million. The filing also describes ordinary-course legal and regulatory matters; it reports no other material legal proceeding.
- Key risks include dependence on major HBB customers (Walmart represented about 32% of HBB revenue; Amazon 12%), sourcing concentration in China, seasonal working-capital needs, currency and input-cost volatility, and KC’s exposure to declining mall traffic and store leases. The spin-off also brings transition-service and standalone-cost risks.
Most important facts for investors to verify
- Whether HBB’s sales growth and product mix can offset input-cost inflation and higher operating expenses.
- Whether KC’s store closures and lease actions reduce losses and cash usage, or accelerate revenue declines and closure costs.
- HBB’s working-capital needs, revolving-credit availability, covenant headroom and ability to sustain dividends.
- The final tax effects of the Tax Act and the resolution and cost range of environmental remediation obligations.
- Customer and supplier concentration, particularly Walmart and China sourcing, and the continued reliability of cash conversion.