Hamilton Beach Brands Holding Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company designs, markets and distributes consumer and commercial small appliances. Results are seasonal, with a majority of revenue and operating profit typically generated in the second half of the year.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $156.7 million | $110.5 million | $460.6 million | $369.7 million |
| Gross profit / margin | $33.3 million / 21.2% | $23.7 million / 21.5% | $93.4 million / 20.3% | $84.0 million / 22.7% |
| Operating profit (loss) | $7.4 million | $(2.4) million | $13.6 million | $9.0 million |
| Net income from continuing operations | $5.7 million | $(2.0) million | $8.7 million | $4.7 million |
| Diluted EPS from continuing operations | $0.41 | $(0.15) | $0.62 | $0.34 |
For the nine-month comparison, 2020 total net income was $27.3 million, including $22.6 million of income from discontinued operations related to The Kitchen Collection (KC); KC was dissolved in April 2020. The more comparable continuing-operations measure increased to $8.7 million from $4.7 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $(4.1) million, versus $(5.7) million a year earlier; capital expenditures resulted in investing cash outflow of $9.1 million, versus $3.1 million.
- Financing provided $12.3 million, primarily reflecting increased revolving-credit borrowings. Cash and cash equivalents were $1.5 million at September 30, 2021; total cash, cash equivalents and restricted cash were $2.5 million.
- Revolving-credit borrowings were $115.0 million, compared with $98.4 million at December 31, 2020. The September 2021 credit amendment increased the facility from $125 million to $150 million. Borrowing-base availability was $148.8 million, with $33.8 million excess availability.
- The facility matures June 30, 2025. 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. Dividends to the holding company are subject to availability thresholds and annual limits under the amended facility.
Period changes and management commentary
- Q3 revenue rose 41.8%; nine-month revenue rose 24.6%. Management attributed growth primarily to higher unit volume and product mix, including strong North American consumer demand and recovery in global commercial markets. Prior-year comparisons were affected by reduced shipments during the 2020 ERP implementation and pandemic-related demand softness.
- Gross margin fell 0.3 percentage points in Q3 and 2.4 points for the nine-month period. Management cited higher freight, container, carrier-storage and warehouse labor costs amid supply-chain disruption and congestion.
- Nine-month SG&A increased $5.5 million, including $2.8 million of distribution-center relocation costs and higher employee-related costs. Q3 SG&A was approximately flat year over year despite $1.6 million of relocation expenses.
- Nine-month interest expense rose $0.8 million, reflecting higher average revolving borrowings. Other expense improved year over year, including lower currency losses.
- The company reported no formal earnings or revenue guidance in the provided filing text.
Risks, contingencies and unusual items
- Management identified ongoing global transportation and sourcing constraints, freight costs, COVID-19 uncertainty, foreign-exchange movements, and customer and consumer demand as risks that could affect results. The company said the pandemic’s future impact could not be estimated with certainty.
- Disclosure controls were deemed ineffective because a material weakness in income-tax accounting controls remained unresolved. Remediation work was underway, but the weakness would continue until implementation and testing validated effective controls.
- The company is winding down its Brazilian subsidiary and plans to use a licensing agreement to serve that market. It reported $2.1 million of accumulated other comprehensive losses associated with the disposal group, expected to be recognized upon substantial liquidation, anticipated in the first half of 2022.
- Environmental remediation accruals were $3.4 million; additional reasonably possible costs were estimated at zero to $1.7 million. The company also disclosed litigation, including a claim seeking to hold the holding company liable for part of an $8.1 million judgment against KC; management considers the claim without merit and intends to defend it.
- Interest-rate swaps had a $1.2 million payable fair value at quarter-end. The filing also identifies foreign-exchange exposure and uses forward contracts to partially mitigate it.
Investor verification priorities
- Track whether freight and supply-chain pressures continue to erode gross margins, and whether revenue growth persists as prior-year comparisons normalize.
- Review working-capital cash flows, revolving borrowings, borrowing-base availability and dividend restrictions.
- Monitor remediation and validation of the income-tax control weakness, including any effect on reporting reliability.
- Check progress and timing of the Brazil wind-down, related accumulated losses, environmental remediation and KC-related litigation.
- Assess whether the 2020 discontinued-operations gain is clearly separated when comparing reported net income across periods.