Hamilton Beach Brands Holding Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Hamilton Beach Brands, Inc. (HBB) is the company’s sole continuing reportable segment, designing, marketing and distributing small household and commercial appliances. The business is seasonal, with most revenue and operating profit typically generated in the second half of the year. The Kitchen Collection (KC) is presented as discontinued operations and completed its dissolution on April 3, 2020.
Financial performance
| Metric | Q1 2020 | Q1 2019, restated and recast |
|---|---|---|
| Revenue | $120.8 million | $126.6 million |
| Gross profit / margin | $25.0 million / 20.7% | $26.7 million / 21.1% |
| Operating profit | $0.5 million | $0.1 million |
| Continuing-operations net loss | $1.4 million | $0.7 million |
| Discontinued-operations income, net of tax | $22.9 million | Loss of $2.7 million |
| Net income (loss) / diluted EPS | $21.5 million / $1.58 | Loss of $3.4 million / $(0.25) |
| Cash used for continuing operating activities | $10.0 million | $40.2 million |
| Cash used for capital expenditures | $0.6 million | $0.9 million |
Revenue fell 4.6%, primarily from lower unit volume and product mix and foreign currency effects. U.S. and Canada Consumer revenue was flat; International Consumer and Global Commercial revenue declined. E-commerce revenue rose 23% and represented 27% of Q1 revenue. Gross margin declined 0.4 percentage points, mainly due to higher freight costs. SG&A decreased $2.0 million, including lower corporate, legal and environmental costs and a $0.9 million reduction in the patent-litigation accrual; it also included $1.9 million of charges to write off unrealizable assets tied to unauthorized transactions at a Mexican subsidiary.
Q1 net income was driven by a $22.9 million after-tax gain in discontinued operations, not by continuing business profitability. The gain included $16.5 million from an adjustment to KC’s lease termination liability and $6.6 million from an adjustment to other current liabilities based on KC’s final asset distribution.
Liquidity, debt and cash flows
At March 31, 2020, cash and cash equivalents were $2.1 million. HBB had $69.5 million of revolving-credit borrowings ($34.5 million current and $35.0 million long-term) under its $115.0 million senior secured facility. The borrowing base was $88.3 million and excess availability was $18.7 million. HBB reported compliance with facility covenants. The facility matures June 30, 2021; refinancing was underway but had not been completed, and management believed refinancing before maturity was probable.
Continuing-operations operating cash use improved by $30.2 million year over year, primarily because working capital was a $2.3 million source of cash versus a $33.1 million use in Q1 2019. Financing provided $9.9 million, mainly from net revolver borrowings, while continuing-operations cash declined by $0.8 million. The filing says funds from cash, the facility and operating cash flows should meet obligations over the next 12 months and until facility expiration.
Material changes, risks and unusual items
- COVID-19: Management reported that demand slowed across markets in March as restrictions were introduced, although U.S. demand for some at-home appliances remained strong and HBB continued operating as an essential business. The company could not reliably estimate the pandemic’s future impact. Risks include weaker demand, supply-chain disruption, higher costs, delayed customer payments, credit availability and currency volatility. No specific earnings or revenue guidance was provided.
- Restatement and control deficiencies: The company restated prior-period financial statements after finding unauthorized transactions involving former employees at a Mexican subsidiary. Corrections included asset write-offs, revenue reversals, expense reclassifications and delayed customer price concessions. Management identified material weaknesses in Mexican subsidiary controls and concluded disclosure controls were ineffective as of March 31, 2020. Remediation steps were underway; management would not consider the weaknesses remediated until controls operated effectively for a sufficient period and were tested.
- KC wind-down: KC’s retail operations ceased in 2019 and the entity dissolved in April 2020. Neither the holding company nor HBB guaranteed KC’s obligations. A landlord obtained an $8.1 million judgment against KC; the plaintiff also sued the holding company over the unpaid balance, which the company said it would contest.
- Patent litigation: A court reduced a previously recorded $3.2 million award by $0.9 million and later issued a limited injunction concerning a particular line of mixing machines. HBB appealed and planned to seek a stay. The injunction and court orders occurred after March 31.
- Environmental exposure: The company accrued $4.2 million for investigation and remediation at March 31 and estimated reasonably possible additional costs of up to $3.8 million.
- Foreign exchange: Other expense included $1.9 million of currency losses, compared with $0.2 million of currency gains in Q1 2019, largely from remeasurement of foreign-subsidiary liabilities for U.S.-dollar inventory purchases.
Investor verification priorities
- Assess the continuing business’s underlying earnings and cash generation separately from the one-time KC discontinued-operations gain.
- Review the restatement disclosures and monitor whether the Mexican subsidiary control weaknesses are remediated and independently tested.
- Verify progress and terms of refinancing the $115.0 million facility, available borrowing capacity, covenant compliance and liquidity under pandemic scenarios.
- Track COVID-19 effects on demand, e-commerce, sourcing, freight costs, customer collections and foreign exchange.
- Monitor outcomes and potential financial exposure from patent, KC landlord, securities class-action and environmental matters.