Hamilton Beach Brands Holding Company — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. The company operates through Hamilton Beach Brands, Inc. (HBB), a small-appliance designer and distributor, and Kitchen Collection, LLC (KC), a specialty kitchenware retailer.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $743.2 million | $740.7 million |
| Gross profit / margin | $189.0 million / 25.4% | $193.8 million / 26.2% |
| Operating profit / margin | $32.3 million / 4.3% | $38.1 million / 5.1% |
| Net income | $21.8 million | $17.9 million |
| Diluted EPS | $1.59 | $1.31 |
| Cash from operations | $11.8 million | $33.4 million |
| Cash and equivalents at year-end | $6.4 million | $10.9 million |
| Total debt at year-end | $46.6 million | $51.3 million |
Revenue was nearly flat, up 0.3%. Lower operating profit reflected weaker KC results and higher HBB product, warehouse and transportation costs. Net income rose 21.7%, primarily because the 2017 effective tax rate was unusually high: 50.4%, including a $4.7 million provisional Tax Act charge and nondeductible spin-off costs. The 2018 effective tax rate was 22.3%.
Operating cash flow fell by $21.6 million, chiefly due to working-capital movements, including higher inventory and lower payables. Capital expenditures were $8.1 million. The company paid $4.7 million in dividends to shareholders in 2018; it made no share repurchases under its authorized $25 million program.
Segments and fourth quarter
- HBB: Revenue increased 3.0% to $633.8 million, while operating profit declined 4.6% to $39.6 million; operating margin fell to 6.2% from 6.7%. Growth reflected volume and higher-priced products, partly offset by unfavorable currency and higher costs and expenses.
- KC: Revenue declined 11.7% to $113.5 million. The operating loss widened to $7.3 million from $3.4 million, mainly due to lower store traffic and comparable sales. KC had 189 stores at year-end, versus 210 a year earlier.
- Fourth quarter: Consolidated revenue was $241.7 million versus $265.8 million in Q4 2017; operating profit was $21.1 million versus $31.0 million; net income was $15.0 million versus $13.8 million. Results are seasonal, with most revenue and operating profit typically generated in the second half.
Liquidity, debt and material items
HBB had $45.7 million outstanding on its $115 million secured revolving facility, with $68.9 million excess availability; the facility expires in June 2021. KC had no borrowings on its $20 million secured facility and $13.6 million available under its borrowing base. Both subsidiaries reported compliance with financial covenants. Management said available cash, facilities and operating cash flows should cover operating needs and commitments for the next 12 months.
Other notable items include HBB environmental investigation and remediation accruals of $8.2 million at year-end, down from $8.9 million. HBB is defending a patent-infringement claim; no liability was recorded, and the company said a possible loss range could not be estimated. The company also reported $74.6 million of future minimum operating lease payments. The filing states that financial statements and internal controls received unqualified audit opinions.
Outlook, commentary and risks
- 2019 consolidated outlook: Management expected net income and cash flow before financing activities to increase compared with 2018.
- HBB outlook: Revenue was expected to increase modestly. Management anticipated lower first-half operating profit and higher second-half operating profit year over year. Its long-term plan targets $750 million to $1 billion in sales and a 9% to 10% operating margin, without a stated timetable. HBB said tariffs affected products representing about 10% of purchases and that the impact had been virtually mitigated through pricing adjustments.
- KC outlook: Revenue was expected to decline in 2019. Management expected operating loss and cash use before financing to improve, planned to close 25 to 30 stores, and described a longer-term goal of a smaller core portfolio of 100 to 150 profitable stores.
- Principal risks: Customer concentration (Walmart represented about 33% of HBB revenue; Amazon about 11%; HBB’s five largest customers about 54%), reliance on third-party suppliers in China, tariffs and input or freight costs, currency movements, consumer demand and seasonality, e-commerce-driven mall traffic declines, KC store leases and closures, product liability and recalls, litigation, environmental remediation, pension assumptions, and HBB’s multi-year ERP implementation.
Important facts for investors to verify
- Whether HBB can sustain sales growth and recover margins amid higher product, warehouse and transportation costs.
- Whether KC’s planned closures improve losses and cash use, and whether remaining stores can maintain sales and margins.
- How working capital, particularly HBB inventory and payables, affects cash generation and borrowing needs.
- The realized effects of tariffs, pricing changes, currency movements and continued sourcing concentration in China.
- The filing gives different HBB 2019 capital-expenditure estimates: approximately $4.5 million in the outlook and $4.8 million in the capital-expenditures discussion; verify the current plan.
- Developments in the patent case, environmental remediation costs and the ERP rollout; the filing does not provide a clear possible loss estimate for the patent claim.