Hamilton Beach Brands Holding Company — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company designs, markets and distributes consumer and commercial small appliances and housewares. Its business is seasonal, with most revenue and operating profit typically generated in the second half of the year.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $137.1 million | $147.5 million | $265.4 million | $293.9 million |
| Gross profit / margin | $27.4 million / 20.0% | $32.0 million / 21.7% | $48.3 million / 18.2% | $60.2 million / 20.5% |
| Operating income (loss) | $0.7 million | $5.4 million | $(4.3) million | $18.2 million |
| Net income (loss) | $0.1 million | $5.1 million | $(4.7) million | $12.3 million |
| Diluted EPS | $0.01 | $0.36 | $(0.33) | $0.87 |
- Cash flow: Six-month operating cash flow was $57.3 million, versus cash used of $25.5 million a year earlier, mainly reflecting a $69.0 million working-capital cash contribution. Investing used $1.6 million; financing used $54.6 million, including $51.1 million of net revolver repayments and $3.0 million of dividends.
- Liquidity and debt: June 30 cash and cash equivalents were $2.1 million. Revolver borrowings were $59.9 million, down from $110.9 million at December 31, 2022 and $127.0 million at June 30, 2022. The $150 million facility had $72.4 million of excess availability; the company reported covenant compliance. Facility maturity is June 30, 2025. Six-month weighted-average borrowing rate, including swaps, was 4.72%.
- Balance sheet: Total assets were $343.4 million and stockholders’ equity was $118.4 million at June 30, 2023. Inventory was $137.2 million, compared with $228.4 million a year earlier. Lease liabilities totaled $50.6 million, current and non-current combined.
Material changes and management commentary
- Q2 revenue fell 7.1%; first-half revenue fell 9.7%. Management attributed the declines primarily to lower volume from softer consumer demand and retailer inventory rebalancing, affecting U.S. and Latin American consumer markets and global commercial sales. Mexican consumer-market volume partly offset the declines.
- Q2 gross margin declined 1.7 percentage points, reflecting unfavorable customer and product mix, weaker fixed-cost absorption from lower volume, and a $0.5 million non-cash warehouse-consolidation lease impairment.
- First-half SG&A rose $10.6 million, largely because a $10.0 million insurance recovery recorded in Q1 2022 did not recur; employee-related costs also increased. First-half interest expense increased $0.4 million as higher rates more than offset lower average borrowings.
- Management expects to continue borrowing and making voluntary repayments under the revolver and believes cash, facility availability and operating cash flow will meet operating needs and commitments over the next 12 months. No numerical earnings or revenue guidance is provided.
Risks, contingencies and unusual items
- Key stated risks include consumer demand and economic conditions, sourcing and transportation constraints, input costs, tariffs, foreign exchange, customer or supplier losses, competition, product liability, regulatory matters and litigation. Floating-rate debt and international currency exposure are partially hedged with swaps and forward contracts.
- Environmental remediation accruals were $3.5 million at June 30, 2023; additional costs of up to $1.4 million were described as reasonably possible. The company also has ordinary-course legal and regulatory claims and says their ultimate disposition is not expected to materially affect results, while noting unfavorable outcomes remain possible.
- The company sold $59.3 million of U.S. trade receivables on a non-recourse basis during the first half. Supplier payment obligations of $48.8 million were in its supplier-finance tracking program at quarter-end.
- The U.S. defined-benefit pension plan termination process is ongoing; management expects no further required minimum contributions and expects surplus assets remaining after termination to transfer to a qualified replacement plan. Termination or settlements may accelerate recognition of deferred pension losses.
Important facts for investors to verify
- Whether second-half seasonal demand improves and retailer inventory rebalancing abates, given that first-half results were loss-making.
- Whether gross margins recover from product/customer mix and lower-volume pressures, and how the warehouse consolidation affects costs.
- How sustainable operating cash generation is after the substantial first-half working-capital release, including the effects of receivables sales and supplier-finance arrangements.
- Revolver availability, borrowing costs and covenant headroom as rates and working-capital needs change; the filing reports covenant compliance at June 30.
- Potential changes in environmental remediation estimates and the timing and accounting impact of the pension-plan termination.