Hamilton Beach Brands Holding Company — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Hamilton Beach Brands, Inc. (HBB) is the company’s sole reportable segment, selling small household and specialty appliances and commercial products. Comparisons below use prior-period figures as restated and, where applicable, recast for discontinued operations.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $138.3 million | $131.1 million | $259.1 million | $257.7 million |
| Gross profit / margin | $35.3 million / 25.5% | $28.5 million / 21.8% | $60.3 million / 23.3% | $55.2 million / 21.4%* |
| Operating profit | $10.9 million | $3.2 million | $11.4 million | $3.3 million |
| Continuing-operations net income | $8.1 million | $1.9 million | $6.7 million | $1.2 million |
| Total net income (loss) | $7.8 million | $(0.6) million | $29.3 million | $(4.0) million |
| Total diluted EPS | $0.57 | $(0.04) | $2.14 | $(0.29) |
*Management’s six-month discussion reports the 2019 gross margin as 21.1%; the displayed statement figures imply approximately 21.4%. The filing does not reconcile this difference.
- Q2 revenue rose 5.5%, mainly on strong U.S. and Canadian consumer demand as people prepared more food and beverages at home. International consumer and commercial sales weakened; foreign exchange reduced Q2 revenue by $1.8 million.
- Q2 gross margin improved on customer and product mix and approximately $1.6 million of tariff relief. Ecommerce sales rose 77% and represented 37% of Q2 revenue; for the first half, they rose 52.6% and represented 32.8%.
- First-half revenue was nearly flat. First-quarter momentum slowed after pandemic restrictions began, while stronger second-quarter consumer demand more than offset the decline.
- First-half other expense was $1.5 million, including a $1.8 million currency loss tied to foreign subsidiaries’ U.S.-dollar inventory liabilities. Interest expense declined year over year, primarily due to lower average borrowings and interest rates.
Cash flow, debt and liquidity
- For the six months, continuing-operations operating cash flow was $21.8 million, versus cash use of $31.6 million in 2019. Management attributed the improvement to working-capital execution, including inventory management and receivables collections.
- Continuing-operations investing cash use was $2.1 million; financing cash use was $19.1 million. The cash flow statement reports a $16.7 million net reduction in revolving-credit borrowings.
- At June 30, cash and cash equivalents were $1.6 million; total cash, cash equivalents and restricted cash were $2.6 million. Revolver borrowings were $41.8 million, classified as current. The $115 million secured revolving facility expires June 30, 2021; borrowing-base availability was $102.2 million and excess availability was $54.2 million.
- The facility had not been refinanced by the filing date. Management said refinancing was probable, citing its history of successful refinancings, and believed cash, facility availability and operating cash flow would meet needs for the next 12 months. HBB was in compliance with financial covenants at June 30 and expected $6.8 million of voluntary repayments over the following 12 months.
- Total assets were $242.6 million, total liabilities $181.0 million and stockholders’ equity $61.6 million at June 30. HBB paid $0.18 per share in dividends during the first half.
Material changes, unusual items and risks
- Restatement and controls: The company restated prior financial statements after an investigation found unauthorized transactions at Mexican subsidiaries. Certain expenditures had been deferred on the balance sheet; other corrections involved revenue recognition, expense classification, customer price concessions and tax effects. First-half 2020 results also included $1.9 million of charges to write off unrealizable assets related to the transactions.
- Management identified material weaknesses in Mexican-subsidiary controls over reconciliations, journal entries, vendor spending, product costing and pricing, customer setup and price concessions. Disclosure controls were deemed ineffective as of June 30. Remediation steps were underway; management said the weaknesses would not be considered remediated until controls operated effectively for a sufficient period and were tested.
- Discontinued operations: The Kitchen Collection (KC) dissolved on April 3, 2020; neither the holding company nor HBB received a distribution or guaranteed KC obligations. First-half discontinued-operations income of $22.6 million included $16.5 million of lease-liability adjustment and $6.6 million of other-liability adjustment following the final asset distribution. This drove much of reported first-half total net income.
- COVID-19: Demand was strong for selected U.S. and Canadian consumer appliances, but the pandemic harmed international and commercial markets. Management said the outlook remained too uncertain to estimate the pandemic’s future impact. Risks include demand changes, supply-chain disruption, delayed customer payments, credit availability and foreign-exchange volatility. The business is seasonal, with most revenue and operating profit typically in the second half.
- Contingencies: In a patent case, a 2019 jury award of $3.2 million was reduced by $0.9 million in 2020. A narrow injunction concerning a particular mixing-machine line was issued in July, then stayed pending appeal. A separate plaintiff seeks to hold the parent liable for an $8.1 million KC lease-related judgment; the company disputes liability. Environmental obligations accrued were $4.2 million, with possible additional costs estimated at $0–$3.9 million.
- Other disclosed risks include successful implementation of the U.S. ERP system and its planned rollout to other subsidiaries, litigation, tariffs, sourcing and shipping disruptions, and currency movements. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Progress and independent testing of remediation for the Mexican-subsidiary material weaknesses, and whether further restatements or control deficiencies emerge.
- Completion, terms and timing of refinancing the $115 million facility before its June 2021 maturity, including covenant headroom and borrowing availability.
- Whether pandemic-era consumer demand persists and whether international and commercial markets, supply chains and customer collections recover.
- The sustainability of first-half earnings apart from the $22.6 million discontinued-operations gain from KC liability adjustments and the temporary tariff-relief benefit.
- Developments in the patent appeal and injunction, the KC-related parent-liability lawsuit, and environmental remediation costs.