Hamilton Beach Brands Holding Company — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018; amounts below are in millions of dollars unless otherwise noted. The company operates Hamilton Beach Brands (HBB), a small-appliance business, and Kitchen Collection (KC), a kitchenware retailer. It was spun off from NACCO Industries in September 2017. Both businesses are seasonal, with most revenue and operating profit typically generated in the second half.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $146.6 | $140.3 |
| Gross profit / margin | $37.8 / 25.8% | $34.6 / 24.7% |
| Operating loss | $(0.3) | $(2.4) |
| Net loss | $(0.4) | $(1.4) |
| Diluted loss per share | $(0.03) | $(0.10) |
| Operating cash flow | $(39.1) | $(22.2) |
- Revenue increased 4.5%. Gross margin improved to approximately 25.8% from 24.7%; SG&A rose to $37.8 million from $36.7 million. The consolidated operating loss narrowed by $2.1 million.
- At March 31, cash was $2.4 million, current assets $260.4 million, and current liabilities $226.4 million. Total debt was $85.5 million, up $34.2 million from year-end 2017; debt to total capitalization was 64.2%, versus 52.5% at year-end.
- Operating cash use reflected working-capital needs, including a $22.9 million inventory increase. Financing provided $33.0 million, primarily from additional revolving-credit borrowings. The company paid $1.2 million in dividends, or $0.085 per share.
- HBB’s $115 million revolving facility had $83.3 million drawn and $30.4 million excess availability. KC’s $20 million facility had $2.2 million drawn and $11.2 million excess availability. Both segments reported compliance with financial covenants.
Material changes and segment performance
- HBB: Revenue rose 9.9% to $125.4 million; operating profit increased to $4.0 million from $0.8 million. Higher international volume and sales of higher-priced products supported growth; new and higher-margin products improved gross margin. Increased employee-related, warehouse, and transportation costs partly offset gains.
- KC: Revenue fell 17.1% to $22.1 million, and operating loss widened to $4.3 million from $3.3 million. Lower comparable-store sales, reduced customer traffic, lower-priced product mix, and store closures contributed. KC operated 199 stores versus 208 a year earlier and closed 11 stores in Q1.
- Consolidated net loss improved despite continued losses, principally because of HBB’s stronger results, partly offset by KC’s deterioration.
Outlook, risks, and notable items
- Management expects 2018 consolidated net income to increase substantially over 2017, primarily due to lower income taxes; the expected effective tax rate is 26%–28%. HBB expects moderate revenue and operating-profit growth, while KC expects moderately lower revenue and higher full-year operating and net losses than in 2017.
- HBB expects approximately $10.5 million of 2018 capital expenditures, with $2.3 million spent in Q1. KC expects approximately $0.5 million, with $0.1 million spent in Q1. Management expects HBB’s 2018 cash flow before financing to exceed 2017; KC expects cash use from forecast working-capital changes.
- Management cited online migration and changing consumer shopping patterns, product and transportation cost inflation, foreign exchange, competition, customer and supplier exposure, and product acceptance as risks. Announced U.S. tariffs on certain steel, aluminum, and Chinese imports, and possible retaliatory measures, could raise costs or weaken demand; the effects were uncertain.
- HBB had accrued $8.7 million for environmental investigation and remediation and estimated reasonably possible additional costs of $0–$5.3 million. The filing also describes ordinary-course legal and regulatory claims; management said it would defend them. Part II reports no legal proceedings.
- The Tax Act’s impact remained subject to analysis, including state-tax conformity and foreign earnings. A provisional $4.7 million net tax charge was recorded in 2017; no adjustment was made in Q1 2018. The company adopted ASC 606 with no material revenue-recognition impact and early-adopted ASU 2018-02, reclassifying $1.2 million from accumulated other comprehensive income to retained earnings.
Most important facts for investors to verify
- Whether HBB’s expected product growth and margin improvements continue, and whether cost inflation, tariffs, or foreign exchange offset them.
- KC’s store-closure and lease-renegotiation progress, comparable-store trends, and ability to reduce losses amid falling physical-store traffic.
- Working-capital requirements, seasonal cash use, revolving-facility availability, and covenant headroom as debt increased.
- Final Tax Act effects and any changes to the environmental remediation estimate or other contingencies.
- Management cautioned that first-quarter results are not necessarily indicative of the full year because both businesses are seasonal.