Hamilton Beach Brands Holding Company — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The company operates Hamilton Beach Brands, Inc. (HBB), a branded appliance business, and The Kitchen Collection, LLC (KC), a kitchenware retailer. Results are seasonal, with most revenue and operating profit typically earned in the second half of the year. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $145.4 | $146.6 |
| Gross profit / margin | $34.7 / 23.9% | $37.8 / 25.8% |
| Operating loss / margin | $(2.1) / (1.5)% | $(0.5) / (0.4)% |
| Net loss | $(1.8) | $(0.4) |
| Diluted loss per share | $(0.13) | $(0.03) |
| Net cash used in operating activities | $(50.1) | $(39.1) |
| Capital expenditures | $0.9 | $2.4 |
Revenue declined 0.9%. HBB revenue rose 1.0% to $126.7 million, while KC revenue fell 12.9% to $19.3 million. Gross margin contracted as HBB faced higher inbound freight costs and unfavorable currency movements, and KC conducted liquidation sales at stores being closed. SG&A decreased 3.9% to $36.5 million, primarily due to KC cost reductions, partly offset by higher HBB legal and professional fees. Higher average borrowings and interest rates increased net interest expense to $0.7 million from $0.5 million.
HBB operating profit decreased to $1.6 million from $3.8 million; its margin fell to 1.3% from 3.0%. KC’s operating loss improved to $3.7 million from $4.3 million, despite lower sales. KC had 168 stores at quarter-end, versus 199 a year earlier.
Cash, debt and liquidity
Cash was $1.7 million at March 31, down $4.6 million from year-end 2018. Operating cash outflow was driven principally by working-capital movements, including a $52.4 million decrease in accounts payable, partly offset by collections of receivables and lower inventories. Financing provided $46.4 million, including $47.6 million of net revolving-credit borrowings; the company also paid $1.2 million in dividends.
Total revolving debt was $94.2 million, up $47.6 million from December 31, 2018. HBB had $84.8 million drawn and $24.8 million of excess availability under its facility; KC had $9.4 million drawn and $3.0 million of excess availability. Both subsidiaries reported compliance with financial covenants and expected available cash, credit facilities and operating cash flows to meet needs over the next 12 months. Debt to total capitalization was 59.9%, compared with 41.6% at year-end 2018. The company uses receivables sales as a working-capital funding arrangement, derecognizing $34.5 million of receivables in Q1 2019.
Material changes and management outlook
- HBB’s U.S. sales benefited from new and higher-priced products, partly offset by lower international volume and unfavorable exchange rates. Management cited freight costs and currency as pressures on HBB gross margin.
- KC’s sales decline reflected 32 store closures since the prior-year period and lower comparable-store sales, attributed to reduced customer traffic. Management continued to target a smaller, more flexible store portfolio.
- For 2019, HBB expected moderate revenue growth and a moderate increase in full-year operating profit versus 2018, with lower operating profit in the first half and higher profit in the second half. It expected significantly higher cash flow before financing activities than in 2018. HBB’s long-term objectives are annual revenue of $750 million to $1 billion and a 9%–10% operating margin; these are objectives, not near-term guidance.
- KC expected 2019 revenue to decline, but operating loss and cash use before financing to improve versus 2018, assuming customer traffic was in line with expectations. It expected approximately 158 stores by year-end 2019 and described a longer-term aim of 100–150 adequately profitable stores.
- Consolidated management outlook called for 2019 net income to increase and cash flow before financing activities to increase significantly over 2018. Planned 2019 capital expenditures were approximately $4.5 million for HBB and $0.3 million for KC.
Risks, contingencies and other notable items
- HBB faced patent litigation alleging infringement, with the plaintiff seeking $3.8 million in damages. Management said an adverse trial-court ruling had become probable, but recorded no liability because the possible loss or range could not be estimated. The trial was scheduled to begin April 29, 2019.
- Environmental investigation and remediation accruals were $8.4 million at March 31, 2019, undiscounted; estimates may change as investigations and remediation proceed.
- Key disclosed risks include product and input costs, freight, foreign exchange and tariffs, litigation and product liability, competition and online retail shifts, and declining traffic at KC stores. A hypothetical 10% weakening of the U.S. dollar would reduce the fair value of currency-sensitive instruments by $1.3 million, according to the filing.
- Management cautioned that first-quarter results are not necessarily indicative of the full year because of seasonality. It reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether HBB’s gross-margin and operating-profit pressures from freight, currency and litigation expenses persist, and whether second-half sales support its 2019 outlook.
- Progress and financial impact of KC store closures, comparable-store traffic and expense reductions.
- Working-capital cash use, debt levels, borrowing-base availability and covenant compliance through seasonal peaks.
- Developments in the patent case, including any ruling, appeal, settlement or ability to estimate a potential loss.
- Changes in environmental remediation estimates and the timing and cost of planned capital expenditures.