Hamilton Beach Brands Holding Company — Q2 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2021. Hamilton Beach designs, markets and distributes consumer, commercial and specialty appliances through Hamilton Beach Brands, Inc. The former Kitchen Collection business is reported as discontinued operations and was dissolved in April 2020. Results are seasonal, with most revenue and operating profit typically generated in the second half of the year.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $154.7 million | $138.3 million | $303.9 million | $259.1 million |
| Gross profit / margin | $28.4 million / 18.4% | $35.3 million / 25.5% | $60.1 million / 19.8% | $60.3 million / 23.3% |
| Operating profit / margin | $0.9 million / 0.6% | $10.9 million / 7.9% | $6.2 million / 2.0% | $11.4 million / 4.4% |
| Net income | $0.1 million | $7.8 million | $3.0 million | $29.3 million |
| EPS | $0.01 | $0.57 | $0.21 | $2.14 |
First-half 2020 net income included $22.6 million from discontinued operations; continuing-operations income was $6.7 million in that period versus $3.0 million in first-half 2021. First-half 2021 revenue grew 17.3%, while operating profit fell 46.0%.
- Revenue drivers: Q2 revenue rose 11.8%, mainly from volume and product mix in Latin America, Mexico and global commercial markets. First-half growth was driven by North American consumer demand and stronger global commercial sales. Ecommerce revenue increased 22% year over year in the first half.
- Margins and expenses: Management attributed margin pressure principally to supply-chain congestion, higher freight, container and carrier-storage costs, as well as increased material and warehouse labor expenses. Q2 SG&A rose $3.4 million; first-half SG&A rose $5.6 million, including distribution-center relocation costs.
- Cash flow: First-half operating cash flow was $8.4 million, down from $21.8 million. Capital expenditures were $7.6 million, versus $1.6 million a year earlier, primarily for the new distribution center. Financing cash use was $2.2 million; dividends paid were $2.7 million.
- Liquidity and debt: June 30 cash and cash equivalents were $1.1 million; cash, cash equivalents and restricted cash totaled $2.2 million. Revolver borrowings were $99.2 million under a $123.5 million facility, with $22.4 million excess availability. The facility expires June 30, 2025; the company reported compliance with its financial covenants. Total current assets were $274.0 million and current liabilities $131.3 million.
- Taxes: First-half effective tax rate was 38.1%, including $0.6 million of interest and penalties on unrecognized tax benefits; excluding that discrete expense, management reported a 24.8% rate.
Material changes, outlook and risks
- Revenue growth did not translate into profit growth as elevated supply-chain and operating costs compressed margins. Interest expense also increased with higher average revolver borrowings.
- The company gave no specific revenue or earnings forecast. Management said available cash, operating cash flows and revolver capacity should be sufficient for operating needs and commitments over the next 12 months, while noting that first-half results are not necessarily indicative because of seasonality.
- Management highlighted uncertainty from COVID-19, transportation constraints and costs, product shipment capacity, consumer demand, currency movements, customer and supplier risks, and execution of the distribution-center relocation.
- A patent-infringement ruling was affirmed by the Federal Circuit on July 21, 2021. The company had accrued $3.1 million at June 30; it said it had stopped selling affected products and expected no effect on sales of its current product line.
- Environmental remediation accruals were $3.5 million, with additional reasonably possible costs estimated at up to $1.4 million. A separate claim seeks to hold the holding company liable for part of an $8.1 million judgment against the dissolved Kitchen Collection; the company disputes the claim.
- The company abandoned its plan to sell its Brazilian subsidiary and instead plans to wind it down and use a licensing arrangement to serve that market. It expects to recognize $2.3 million of accumulated other comprehensive losses upon substantial liquidation, anticipated in the second half of 2021.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in income-tax accounting controls. Management reported that Mexico-related material weaknesses had been remediated as of June 30, 2021; tax-control remediation was still underway.
Important facts for investors to verify
- Whether freight, materials and labor costs ease, and whether margin recovery follows despite ongoing shipping constraints.
- Distribution-center relocation progress, costs and any effect on fulfillment or operating results.
- Remediation and testing of income-tax controls, and whether the remaining material weakness is resolved.
- Final financial impact of the patent ruling, environmental matters and the dissolved Kitchen Collection-related litigation.
- Revolver availability, borrowing-base levels and covenant compliance as seasonal working-capital needs increase.
- Timing and accounting impact of the Brazilian subsidiary wind-down and related accumulated currency losses.