Hamilton Beach Brands Holding Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company operates Hamilton Beach Brands (HBB), a small-appliance and housewares business, and The Kitchen Collection (KC), a kitchenware retailer. Results are seasonal, with the majority of revenue and operating profit typically occurring in the second half of the year.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $169.8 million | $196.9 million | $463.6 million | $501.5 million |
| Gross profit | $40.6 million | $50.4 million | $111.0 million | $129.0 million |
| Gross margin | 23.9% | 25.6% | 23.9% | 25.7% |
| Operating profit | $4.1 million | $10.8 million | $1.6 million | $10.6 million |
| Net income (loss) | $0.4 million | $8.0 million | $(2.3) million | $6.8 million |
| Basic and diluted EPS | $0.03 | $0.59 | $(0.17) | $0.49 |
- Cash flow: For the first nine months, operating cash outflow was $35.1 million, investing cash outflow $3.3 million, and financing cash inflow $33.5 million. Cash declined $4.5 million to $1.9 million.
- Debt and liquidity: Balance-sheet revolving borrowings totaled $89.7 million at September 30 ($59.7 million current and $30.0 million long term). HBB’s facility had $80.2 million outstanding, $34.2 million excess availability, and a 4.5% weighted-average rate for Q3. HBB reported compliance with its financial covenants.
- Working capital: Inventory was $181.8 million, up from $144.7 million at December 31, 2018; accounts payable was $147.2 million. The company also sells certain U.S. receivables without recourse to support working capital.
Material changes and drivers
- Consolidated Q3 revenue fell 13.8% and operating profit fell 62.4% year over year. For the first nine months, revenue declined 7.6% and operating profit declined 84.7%.
- HBB Q3 revenue fell 12.5%, primarily from lower sales volume, retailer order-pattern changes, reduced direct-import sales amid tariffs, and lost low-margin dollar-store placements. HBB gross margin declined to 20.7% from 22.3%, with higher freight, transportation and warehousing costs and tariffs cited as factors.
- KC Q3 revenue fell 21.6%, reflecting store closures and lower comparable-store sales tied to declining customer traffic. KC had an operating loss of $3.1 million in Q3 and $10.1 million for the first nine months.
- Q3 other expense included $0.8 million of currency losses. Nine-month results included a $3.2 million patent-litigation charge recorded in Q2 and a $3.7 million reduction in an environmental reserve, also recorded in Q2.
- Q3 tax expense was $2.1 million on pretax income of $2.5 million; nine-month tax expense was $1.2 million despite a pretax loss. Both included $1.9 million of deferred tax expense from a revised valuation allowance judgment for KC deferred tax assets.
Outlook, risks and unusual items
- After quarter-end, the board approved winding down KC and closing all 160 stores by year-end 2019. The company estimated Q4 expenses of $4–$6 million and wind-down cash expenditures of $6–$8 million, excluding ordinary-course cash needs. Lease termination obligations were not yet known; estimates were preliminary.
- KC’s wind-down triggered an event of default under its secured credit facility. Under an October 23 forbearance agreement, KC was to repay the facility by December 15, 2019; commitments were reduced to $15 million, default interest applied, and a $12,500 weekly fee was payable until repayment. The parent stated it had not guaranteed KC’s facility obligations.
- HBB expected to recover much of its Q3 revenue shortfall in Q4. For full-year 2019, it forecast revenue approximately even with 2018 and operating profit even to modestly lower. It expected 2020 revenue, operating profit and cash flow before financing activities to improve over 2019, while noting uncertainty around tariffs and customer response.
- Key risks include tariffs affecting a significant share of HBB purchases, retailer and consumer reaction to higher prices, foreign-exchange and freight costs, KC wind-down costs and execution, and litigation. The company recorded a $3.2 million patent-verdict loss; post-trial motions remained pending. Environmental remediation accruals were $4.5 million, with an additional reasonably possible range of $0–$3.9 million.
- The company repurchased 364,893 shares for $6.0 million during the first nine months of 2019. It reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Actual KC wind-down costs, store-closure timing, lease termination obligations and completion of repayment under the forbearance agreement.
- HBB’s ability to recover delayed sales and meet its 2019 outlook, and the effects of tariffs on costs, prices and demand.
- Whether gross-margin pressure and working-capital cash use persist, including inventory levels and receivables collection timing.
- Outcomes of the patent litigation post-trial motions and changes to environmental remediation estimates.
- Future segment reporting: the filing anticipated KC’s results would be classified as discontinued operations when its assets were abandoned, then expected during Q4 2019.