Business context and reporting period
Hamilton Beach Brands Holding Company designs, markets and distributes small household and specialty appliances, as well as commercial products for restaurants, bars and hotels. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022. The business is seasonal, with most revenue and operating profit typically generated in the second half of the year.
Financial performance
Amounts are in millions except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $147.5 | $154.7 | $293.9 | $303.9 |
| Gross profit / margin | $32.0 / 21.7% | $28.4 / 18.4% | $60.2 / 20.5% | $60.1 / 19.8% |
| Operating profit / margin | $5.4 / 3.7% | $0.9 / 0.6% | $18.2 / 6.2% | $6.2 / 2.0% |
| Net income | $5.1 | $0.1 | $12.3 | $3.0 |
| Diluted EPS | $0.36 | $0.01 | $0.87 | $0.21 |
| Operating cash flow | Not separately stated | Not separately stated | $(25.5) | $8.4 |
Revenue fell 4.6% in Q2 and 3.3% in the first half. Lower consumer sales volumes and the shift to licensing in Brazil and China weighed on revenue; price increases and growth in commercial markets partly offset the declines. H1 sales comprised consumer products of $260.5 million, commercial products of $30.2 million and licensing of $3.2 million.
Gross margin improved as price increases offset higher product and transportation costs, with lower carrier storage charges also helping. H1 SG&A declined $11.9 million, primarily reflecting a $10.0 million insurance recovery recognized in Q1 for unauthorized transactions at Mexican subsidiaries, as well as lower outside services and employee costs and the absence of prior-year distribution-center relocation costs. H1 results also included $2.1 million of Brazil-related accumulated currency losses reclassified to other expense. Interest expense increased with higher average borrowings and rising rates.
Liquidity, debt and balance sheet
At June 30, 2022, cash and cash equivalents were $0.7 million, inventory was $228.4 million, and total assets were $404.7 million. Revolver borrowings were $127.0 million, up from $96.8 million at December 31, 2021. The $150 million secured revolving facility expires June 30, 2025; borrowing-base availability was $149.1 million and excess availability was $22.1 million. The company reported compliance with financial covenants and said available cash, facility capacity and operating cash flows should meet needs for the next 12 months.
H1 operating cash use was $25.5 million, mainly reflecting a $36.1 million working-capital use, including inventory growth amid longer supply-chain and transportation lead times. Investing cash use was $0.7 million, principally capital expenditures; financing provided $25.7 million, including $30.2 million of net revolver borrowings, partly offset by $2.9 million of dividends and $1.6 million of share repurchases. Cash, cash equivalents and restricted cash totaled $1.7 million at period-end. The company also sold $52.3 million of trade receivables on a non-recourse basis during H1 as part of working-capital financing.
Material changes, outlook and risks
- Management gave no specific revenue or earnings guidance in the filing. It emphasized that first-half results may not indicate full-year results because of seasonality.
- The board approved termination of the frozen U.S. defined-benefit pension plan, effective September 30, 2022. Settlement may take up to an estimated 24 months; the plan was overfunded by $16.9 million at June 30, 2022, and the company expects no further required minimum contributions. Remaining surplus is expected to go to a qualified replacement plan.
- The company repurchased 151,221 shares for $1.6 million during H1 under a program authorizing up to $25 million through December 31, 2023.
- Environmental remediation accruals were $3.4 million; additional costs of zero to $1.7 million were considered reasonably possible. In a separate legal proceeding, a plaintiff seeks to hold the company liable for the unsatisfied portion of an $8.1 million judgment against Kitchen Collection; the company says the claims are without merit and will defend them.
- Key risks include supply and transportation disruptions, inventory and sourcing constraints, inflation and freight costs, consumer demand and retail conditions, foreign exchange, COVID-19, the Ukraine conflict, and litigation, product-liability and regulatory matters. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing continues to offset cost inflation and declining consumer volumes, particularly in North American consumer markets.
- Whether inventory normalizes and operating cash flow recovers after the H1 working-capital outflow; monitor revolver borrowings and the $22.1 million of excess availability.
- How much H1 earnings depended on the one-time $10.0 million insurance recovery, and the continuing effects of Brazil-related currency losses and tax items.
- The timing, costs and treatment of surplus assets in the pension-plan termination, and developments in the legal and environmental matters.
- The impact of floating-rate debt, foreign-exchange movements and seasonal second-half performance on full-year results.