Hamilton Beach Brands Holding Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Amounts below are in millions unless stated otherwise. The company designs, markets and distributes consumer and commercial small appliances. The Kitchen Collection, LLC is reported as discontinued operations and completed dissolution in April 2020.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $149.2 | $120.8 |
| Gross profit / margin | $31.7 / 21.2% | $25.0 / 20.7% |
| Operating profit / margin | $5.3 / 3.5% | $0.5 / 0.4% |
| Continuing-operations net income (loss) | $2.9 | $(1.4) |
| Net income | $2.9 | $21.5 |
| Basic and diluted EPS | $0.21 | $1.58 |
| Operating cash flow | $(1.9) | $(10.0) |
| Capital expenditures | $1.7 | $0.6 |
Revenue rose 23.5%, driven mainly by higher North American consumer sales. Consumer products contributed $139.5 million, commercial products $8.6 million and licensing $1.1 million. Ecommerce revenue increased 59% and represented 35% of revenue, versus 27% a year earlier. Commercial-market revenue declined as recovery from pandemic-related softness continued.
Gross margin improved primarily on customer and product mix. SG&A increased 8.9% to $26.4 million, including higher third-party, consulting and employee costs. Other expense fell to $0.2 million from $1.7 million, reflecting lower currency losses. The 2020 comparison included $22.9 million of discontinued-operations income, principally adjustments to Kitchen Collection lease and other liabilities; therefore, reported total net income and EPS decreased despite improved continuing operations.
Liquidity, debt and balance sheet
At March 31, 2021, cash and cash equivalents were $1.4 million; total cash, cash equivalents and restricted cash were $2.4 million. Revolving-credit borrowings were $102.6 million, classified as long-term, versus $98.4 million at year-end 2020. The facility’s borrowing base was $123.3 million, leaving $20.7 million of excess availability. Total assets were $339.3 million and stockholders’ equity was $82.7 million.
Operating cash use improved year over year, mainly due to higher earnings and a smaller use of cash from other assets. Working-capital movements remained significant. The company sold $29.8 million of U.S. trade receivables on a non-recourse basis during the quarter as part of its working-capital financing. The company paid $1.3 million in dividends, or $0.095 per share.
The $125 million secured floating-rate facility expires June 30, 2025. Its weighted-average rate was 2.77% for the quarter; $25 million of borrowings were covered by interest-rate swaps at an average fixed rate of 1.66%. The company was in compliance with financial covenants. On April 9, 2021, an amendment temporarily increased the facility to $140 million for 60 days. Management said cash, facility availability and operating cash flows should meet needs and commitments for the next 12 months.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management noted the business is seasonal, with most revenue and operating profit typically in the second half of the year.
- Management cited strong appliance demand but warned of shipping capacity and transportation constraints, supply delays and costs, and uncertainty from COVID-19. The company said COVID-19’s future impact could not be estimated reliably.
- The company plans to relocate its U.S. distribution center in the second and third quarters of 2021. Disruption, integration issues, delays and cost overruns could affect operations and operating income.
- In April 2021, the company decided to wind down its Brazilian subsidiary and use a licensing agreement to serve that market, rather than proceed with a planned sale. It expected to recognize $2.5 million of accumulated currency-translation losses in earnings upon substantial liquidation, expected in the second half of 2021.
- Contingencies include a patent-infringement judgment with a $3.1 million accrued loss that the company is appealing; a separate claim seeking to hold the holding company liable for part of a former subsidiary’s judgment; and environmental obligations accrued at $3.1 million, with possible additional costs of up to $1.7 million.
- Disclosure controls were deemed ineffective because of material weaknesses in controls at Mexican subsidiaries and in income-tax accounting. Remediation was underway but not yet fully implemented and validated.
Key facts for investors to verify
- Whether strong consumer demand can be fulfilled despite transportation, sourcing and shipping constraints, and whether ecommerce growth and margins persist.
- Facility availability, borrowing-base levels and covenant headroom as seasonal working-capital needs change; also, the terms and duration of the temporary facility increase.
- Costs and execution risks associated with the distribution-center move and Brazilian subsidiary wind-down, including timing of the currency-loss reclassification.
- Progress in remediating the disclosed internal-control material weaknesses and developments in the patent and other legal or environmental matters.
- Comparisons with Q1 2020 should distinguish continuing operations from the unusual discontinued-operations gain.