Hamilton Beach Brands Holding Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. The company was spun off from NACCO on September 29, 2017. It operates Hamilton Beach Brands (HBB), a small-appliance business, and The Kitchen Collection (KC), a specialty retailer. Results are seasonal, with a majority of revenue and operating profit typically in the second half.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $181.7 million | $188.4 million | $475.0 million | $486.4 million |
| Gross profit / margin | $48.1 million / 26.5% | $50.1 million / 26.6% | $121.5 million / 25.6% | $122.4 million / 25.2% |
| Operating profit / margin | $7.4 million / 4.1% | $13.5 million / 7.2% | $7.2 million / 1.5% | $12.3 million / 2.5% |
| Net income | $4.3 million | $8.7 million | $4.1 million | $7.5 million |
| Diluted EPS | $0.31 | $0.64 | $0.30 | $0.55 |
| Cash from operations | Not separately stated | Not separately stated | $(7.7) million | $34.5 million |
At September 30, cash was $3.1 million, total debt was $80.5 million, total assets were $329.3 million and equity was $32.3 million. Current assets were $268.4 million versus current liabilities of $224.1 million. HBB reported $35.6 million of excess availability on its revolving facility; KC reported $10.2 million. Both subsidiaries reported covenant compliance.
Changes and drivers
- Quarterly revenue fell 3.5% and nine-month revenue fell 2.4%. Consolidated operating profit and net income declined in both comparisons.
- HBB Q3 revenue decreased 2.3%, mainly from lower U.S. consumer sales and shipment timing. Its operating profit declined to $9.0 million from $14.4 million. Gross margin improved to 22.8% from 22.3%, but SG&A rose, including $2.5 million of spin-off costs and higher employee costs.
- KC Q3 revenue declined to $28.6 million from $32.9 million, reflecting lower comparable-store sales and store closures. Its operating loss widened to $1.6 million. Nine-month KC revenue fell 9.7%, and its operating loss widened to $7.9 million.
- Operating cash flow for the first nine months was a $7.7 million use, versus $34.5 million provided in 2016, primarily reflecting working-capital movements, including inventory growth. Financing included $41.7 million of net revolver borrowings and $38.0 million of dividends paid to NACCO before the spin-off.
- Total debt increased from $27.1 million at September 30, 2016 to $80.5 million, and debt-to-capitalization rose from 26% to 71%.
Outlook, risks and contingencies
- Management expected Q4 consolidated operating profit and net income to increase year over year, with full-year 2017 results comparable to 2016; 2018 consolidated net income was expected to improve modestly.
- HBB expected Q4 revenue growth to offset the nine-month decline and projected modest full-year revenue and net-income increases, conditional on expected consumer spending. For 2018, it expected revenue and net income to increase, with strategic investment, public-company, advertising and product costs partly offsetting benefits.
- KC expected 2017 revenue and results to decline, and 2018 revenue to fall further as it reduced its store base. Its goal was breakeven in 2018, subject to holiday sales, store traffic and lease-renegotiation outcomes. KC operated 209 stores at September 30.
- Risks include changes in consumer demand and shopping patterns, online competition, product and freight costs, supplier and delivery issues, foreign exchange, and the execution of product, store and lease strategies. The company cited ordinary-course legal claims and accrued $9.0 million for environmental investigation and remediation; additional costs were reasonably possible in a range of $0 to $5.3 million.
- The company planned to adopt the revenue-recognition standard in 2018 and did not expect a material financial impact, though disclosures would increase. Lease accounting changes were still under evaluation.
Investor verification points
- Assess whether Q4 performance and full-year guidance were achieved, particularly HBB’s shipment recovery and KC’s holiday sales.
- Review working-capital needs, cash generation, borrowing levels and facility availability after the $38.0 million pre-spin-off dividend.
- Track KC store closures, lease renegotiations and progress toward its 2018 breakeven goal.
- Monitor environmental remediation estimates and any developments in legal or regulatory claims.
- Review the separation agreements, tax arrangements and ongoing stand-alone company costs; the filing identifies $2.5 million of spin-off expenses in Q3.