Hamilton Beach Brands Holding Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company operates Hamilton Beach Brands (HBB), a small-appliance business, and Kitchen Collection (KC), a kitchenware retailer. Results are seasonal, with most revenue and operating profit typically earned in the second half.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $157.9M | $153.0M | $304.6M | $293.3M |
| Gross profit | $40.9M | $38.8M | $78.6M | $73.4M |
| Operating profit (loss) | $0.6M | $2.2M | $0.3M | ($0.3M) |
| Net income (loss) | ($0.9M) | $1.2M | ($1.3M) | ($0.1M) |
| Diluted EPS | ($0.06) | $0.09 | ($0.09) | ($0.01) |
- Q2 revenue increased 3.2%; first-half revenue increased 3.9%. Gross margin was approximately 25.9% in Q2 (25.4% prior year) and 25.8% for the first half (25.0% prior year).
- Q2 operating margin fell to approximately 0.4% from 1.4%; first-half operating margin improved to approximately 0.1% from negative 0.1%. Higher SG&A and interest costs weighed on earnings.
- HBB revenue rose 6.5% in Q2 and 8.1% year to date, supported by new and higher-priced products. HBB first-half operating profit rose to $8.4M from $5.9M. KC revenue declined 12.0% in Q2 and 14.6% year to date; its first-half operating loss widened to $8.1M from $6.3M.
- First-half operating cash flow was negative $56.2M versus negative $16.3M. Working capital, particularly inventory and payable movements, was the principal use. Capital spending was $4.6M.
- At June 30, cash was $2.0M and total debt was $105.5M, up from $51.3M at December 31, 2017. Total equity was $46.0M; debt to total capitalization was 69.6%, versus 52.5% at year-end. Inventory was $165.2M, up from $134.7M at year-end.
- HBB’s $115M revolving facility had $96.3M outstanding and $18.9M excess availability; KC’s $20M facility had $9.2M outstanding and $6.2M excess availability. Both subsidiaries reported covenant compliance. The company paid $0.17 per share in dividends in the first half.
Outlook, risks and notable items
- Management expected consolidated second-half and full-year 2018 net income to increase substantially over 2017, primarily due to lower taxes and no repeat of the prior-year provisional Tax Act charge. Expected 2018 effective tax rate: 26%–28%.
- HBB forecast moderate full-year revenue and operating-profit improvement, citing product introductions, placements and pricing actions. It expected 2018 capital expenditures of about $9.7M.
- KC expected full-year revenue to decline and operating and net losses to be significantly higher than in 2017 absent improved store traffic. It was pursuing a smaller core portfolio of 100–150 profitable stores; 12 stores closed in the first half, leaving 199 at June 30.
- Risks include weakening physical-store traffic, online competition, product and transportation costs, foreign exchange, litigation, and U.S. tariffs on Chinese imports. Management said tariffs then enacted were expected to affect only a small number of HBB products, but additional trade actions could raise costs or reduce demand.
- HBB had accrued $8.5M for environmental investigation and remediation; additional reasonably possible costs were estimated at $0–$5.2M. The filing also describes ordinary-course legal matters, including product liability and patent claims, without a clear quantified exposure.
- Revenue standard ASC 606 was adopted January 1, 2018, with no material effect on timing or amount of revenue. Management stated liquidity was sufficient for the next 12 months and reported effective disclosure controls.
Important facts for investors to verify
- Whether HBB’s expected second-half growth and cash generation materialized, given substantial first-half operating cash outflow and increased borrowing.
- Whether KC’s store rationalization and expense actions can curb losses as comparable-store sales and traffic decline.
- Facility availability, borrowing-base eligibility, covenant headroom and debt costs, especially if working-capital needs remain elevated.
- Exposure to further tariffs, product-cost inflation, patent litigation and environmental remediation beyond accrued amounts.
- Tax Act estimates and the effect of the lower tax rate on reported earnings; the filing notes some tax consequences remained under review.