HAMILTON BEACH BRANDS HOLDING COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in these forward-looking statements are set forth below under the heading "Forward-Looking Statements."Hamilton Beach Brands Holding Company is a holding company and operates through its wholly-owned subsidiaryHamilton Beach Brands, Inc. ("HBB") (collectively "Hamilton Beach Holding " or the "Company"). The Company previously operated through its other wholly-owned subsidiary,The Kitchen Collection, LLC ("KC"), which is reported as discontinued operations in all periods presented herein. KC completed its dissolution onApril 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist. NeitherHamilton Beach Brands Holding Company norHamilton Beach Brands, Inc. received a distribution.
HBB is the Company's single reportable segment and intercompany balances and transactions have been eliminated.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of the Company's critical accounting policies, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the Company's Annual Report on Form 10-K/A for the year endedDecember 31, 2019 as there have been no material changes from those disclosed in our Annual Report. 24
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RESULTS OF OPERATIONS
The Company's business is seasonal and a majority of revenue and operating profit typically occurs in the second half of the year when sales of small electric appliances and kitchenware historically increase significantly for the fall holiday-selling season. As described in Note 2 - Restatement of Previously Issued Financial Statements, amounts presented in prior periods have been restated. The results of operations were as follows for the three months endedMarch 31 :
First Quarter of 2020 Compared with First Quarter of 2019
THREE MONTHS ENDED MARCH 31
As Restated
and Recast
2020 % of Revenue 2019 % of Revenue $ Change % Change
Revenue $ 120,846 100.0 % $ 126,642 100.0 % $ (5,796 ) (4.6 )%
Cost of sales 95,806 79.3 % 99,940 78.9 % (4,134 ) (4.1 )%
Gross profit 25,040 20.7 % 26,702 21.1 % (1,662 ) (6.2 )%
Selling, general and
administrative expenses 24,213 20.0 % 26,246 20.7 % (2,033 ) (7.7 )%
Amortization of intangible
assets 324 0.3 % 345 0.3 % (21 ) (6.1 )%
Operating profit 503 0.4 % 111 0.1 % 392 353.2 %
Interest expense, net 603 0.5 % 663 0.5 % (60 ) (9.0 )%
Other expense (income), net 1,702 1.4 % (197 ) (0.2 )% 1,899 (964.0 )%
Income (loss) from continuing
operations before income taxes (1,802 ) (1.5 )% (355 ) (0.3 )% (1,447 ) 407.6 %
Income tax expense (benefit) (448 ) (0.4 )% 307 0.2 % (755 ) (245.9 )%
Net income (loss) from
continuing operations (1,354 ) (1.1 )% (662 ) (0.5 )% (692 ) 104.5 %
Income (loss) from discontinued
operations, net of tax 22,866 n/m (2,723 ) n/m 25,589 n/m
Net income (loss) $ 21,512 $ (3,385 ) $ 24,897
Effective income tax rate on
continuing operations 24.9 % n/m
The following table identifies the components of the change in revenue for the
three months ended
Revenue
2019 As Restated and Recast $ 126,642
Decrease from:
Unit volume and product mix (5,261 )
Foreign currency (433 )
Average sales price (102 )
2020 $ 120,846
Revenue - Revenue decreased $5.8 million , or 4.6%, due to the adverse impact of
the COVID-19 pandemic globally. Revenue from the U.S. and Canada Consumer
markets was even with the first quarter of 2019, while revenue from the
International Consumer and Global Commercial markets decreased. The first
quarter started off strong compared to the prior year, due in part to U.S.
customers increasing inventory positions in advance of expected disruptions from
the supply chain in China , which has stabilized. Momentum slowed across all
markets as government measures to control the spread of the virus were
implemented in March. Ecommerce revenue increased 23% and accounted for 27% of
total revenue in the first quarter of 2020 as many at-home consumers shifted
buying to the online channel.
Gross profit - Gross profit decreased
Selling, general and administrative expenses - Selling, general and administrative expenses decreased$2.0 million . The year-over-year decrease is due to lower overall spend including environmental expenses, legal fees, and other corporate 25
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expenses. Selling, general and administrative expenses for the first quarter of 2020 also include a reduction of$0.9 million to the accrual for the contingent loss related to the patent infringement lawsuit. Certain former employees of one of our Mexican subsidiaries engaged in unauthorized transactions with the Company's Mexican subsidiaries and in doing so, expenditures were deferred on the balance sheet of the Mexican subsidiaries beyond the period for which the costs pertained. Included in selling, general and administrative expenses are charges of$1.9 million in the first quarter of 2020 compared with charges of$1.8 million in the first quarter of 2019 to write-off unrealizable assets created as a result of these unauthorized transactions. See Note 2, Restatement of Previously Issued Financial Statements for additional information. Interest expense, net - Interest expense, net decreased$0.1 million primarily due to lower average interest rates and decreased average borrowings outstanding under HBB's revolving credit facility. Other expense (income), net - For the first quarter of 2020, other expense, net includes currency losses of$1.9 million compared with currency gains of$0.2 million in 2019. The change is primarily due to the remeasurement of liabilities related to inventory purchases denominated inU.S. dollars by HBB's foreign subsidiaries located inMexico andBrazil . Income tax expense (benefit) - For the first quarter of 2020, we recognized an income tax benefit of$0.5 million on a loss from continuing operations before income taxes of$1.8 million , an effective tax rate of 24.9%. In 2019 we recognized tax expense of$0.3 million on a loss from continuing operations before income taxes of$0.4 million . The expense in 2019 is primarily attributable to non-cash charges to write-off unrealizable assets for which the corresponding tax benefit has been substantially offset by an increase in unrecognized tax benefits. LIQUIDITY AND CAPITAL RESOURCES LiquidityHamilton Beach Brands Holding Company cash flows are provided by dividends paid or distributions made by its subsidiaries. The only material assets held by it are the investments in consolidated subsidiaries. As a result, certain statutory limitations or regulatory or financing agreements could affect the levels of distributions allowed to be made by its subsidiaries.Hamilton Beach Brands Holding Company has not guaranteed any of the obligations of its subsidiaries.
HBB's principal sources of cash to fund liquidity needs are: (i) cash generated from operations and (ii) borrowings available under the revolving credit facility, as defined below. HBB's primary use of funds consists of working capital requirements, capital expenditures, and payments of principal and interest on debt.
HBB maintains a$115.0 million senior secured floating-rate revolving credit facility (the "HBB Facility") that expires inJune 30, 2021 , within one year after the issuance of these financial statements. Given the market conditions including unfavorable pricing terms, HBB did not complete its refinancing of the HBB Facility prior toJune 30, 2020 . HBB has approved and begun the refinancing process, which is considered customary. Based on the current status of the refinancing and HBB's history of successfully refinancing its debt, HBB believes that it is probable that the HBB Facility will be refinanced before its maturity. The COVID-19 pandemic created significant economic uncertainty and volatility in the credit and capital markets during the first quarter of 2020. We are well positioned to effectively navigate the COVID-19 pandemic for a number of reasons. Demand for certain small kitchen appliances in theU.S. remains strong as consumers prepare more food and beverages at home. HBB is considered an essential business that continued to operate during state and local shutdowns and continues to operate to meet the demand. We are managing discretionary expenses, and we believe we have sufficient availability under the revolving credit facility to meet our future obligations. We have demonstrated effective management of net working capital which was a major contributor to improved borrowing activity during the first quarter with reduced net borrowings of$27.1 million as compared to prior year. Additionally, the Company is no longer impacted by KC's losses and negative cash flow. We will continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19 and closely monitor our liquidity. OnApril 3, 2020 , KC completed its dissolution with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist. NeitherHamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC.
The following table presents selected cash flow information from continuing operations:
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THREE MONTHS ENDED MARCH 31
2020 2019
Net cash used for operating activities $ (10,042 ) $ (40,239 )
Net cash used for investing activities $ (625 ) $ (854 )
Net cash provided by financing activities $ 9,876 $ 36,988
Operating activities - Net cash used for operating activities decreased $30.2
primarily due to improvements in net working capital. Net working capital was a
source of cash of $2.3 million in the first quarter of 2020 compared with a use
of cash of $33.1 million in 2019.
Investing activities - Net cash used for investing activities decreased $0.2
million primarily due to lower capital expenditures related to internal-use
software development costs.
Financing activities - Net cash provided by financing activities decreased
Capital Resources
HBB maintains a$115.0 million senior secured floating-rate revolving credit facility (the "HBB Facility") that expires inJune 2021 . The current portion of borrowings outstanding represents expected voluntary repayments to be made in the next twelve months. The obligations under the HBB Facility are secured by substantially all of HBB's assets. The approximate book value of HBB's assets held as collateral under the HBB Facility was$228.0 million as ofMarch 31, 2020 . AtMarch 31, 2020 , the borrowing base under the HBB Facility was$88.3 million and borrowings outstanding were$69.5 million . AtMarch 31, 2020 , the excess availability under the HBB Facility was$18.7 million . The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible trade receivables, inventory and trademarks of the borrowers, as defined in the HBB Facility. Borrowings bear interest at a floating rate, which can be a base rate, LIBOR or bankers' acceptance rate, as defined in the HBB Facility, plus an applicable margin. The applicable margins, effectiveMarch 31, 2020 , for base rate loans and LIBOR loans denominated inU.S. dollars were 0.0% and 1.75%, respectively. The applicable margins, effectiveMarch 31, 2020 , for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.0% and 1.75%, respectively. The HBB Facility also requires a fee of 0.25% per annum on the unused commitment. The margins and unused commitment fee under the HBB Facility are subject to quarterly adjustment based on average excess availability. The weighted average interest rate applicable to the HBB Facility for the three months endedMarch 31, 2020 was 3.66% including the floating rate margin and the effect of the interest rate swap agreements described below. To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of the HBB Facility. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate. HBB has interest rate swaps with notional values totaling$25.0 million atMarch 31, 2020 at an average fixed interest rate of 1.6%. The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends toHamilton Beach Holding , subject to achieving availability thresholds. Dividends toHamilton Beach Holding are not to exceed$5.0 million during any calendar year to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than$15.0 million . Dividends toHamilton Beach Holding are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than$25.0 million . The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. AtMarch 31, 2020 , HBB was in compliance with all financial covenants in the HBB Facility. InDecember 2015 , the Company entered into an arrangement with a financial institution to sell certainU.S. trade receivables on a non-recourse basis. The Company utilizes this arrangement as an integral part of financing working capital. See Note 4 of the unaudited condensed consolidated financial statements. HBB believes funds available from cash on hand, the HBB Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the HBB Facility. 27
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Contractual Obligations, Contingent Liabilities and Commitments
For a summary of the Company's contractual obligations, contingent liabilities and commitments, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations, Contingent Liabilities and Commitments" in the Company's Annual Report on Form 10-K/A for the year endedDecember 31, 2019 as there have been no material changes in contractual obligations for HBB from those disclosed in our Annual Report. KC completed its dissolution onApril 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist.
Off Balance Sheet Arrangements
For a summary of the Company's off balance sheet arrangements, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Off Balance Sheet Arrangements" in the Company's Annual Report on Form 10-K/A for the year endedDecember 31, 2019 as there have been no material changes from those disclosed in our Annual Report.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Such risks and uncertainties include, without limitation: (1) the unpredictable nature of the COVID-19 pandemic and its potential impact on our business; (2) changes in the sales prices, product mix or levels of consumer purchases of small electric and specialty housewares appliances, (3) changes in consumer retail and credit markets, including the increasing volume of transactions made through third-party internet sellers, (4) bankruptcy of or loss of major retail customers or suppliers, (5) changes in costs, including transportation costs, of sourced products, (6) delays in delivery of sourced products, (7) changes in or unavailability of quality or cost effective suppliers, (8) exchange rate fluctuations, changes in the import tariffs and monetary policies and other changes in the regulatory climate in the countries in which HBB buys, operates and/or sells products, (9) the impact of tariffs on customer purchasing patterns, (10) product liability, regulatory actions or other litigation, warranty claims or returns of products, (11) customer acceptance of, changes in costs of, or delays in the development of new products, (12) increased competition, including consolidation within the industry, (13) shifts in consumer shopping patterns, gasoline prices, weather conditions, the level of consumer confidence and disposable income as a result of economic conditions, unemployment rates or other events or conditions that may adversely affect the level of customer purchases of HBB products, (14) changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation, (15) risks associated with the wind down of KC including unexpected costs, contingent liabilities and the potential disruption of our other businesses, (16) the result of shareholder or governmental actions relating to the restatement of our financial statements and accounting and legal fees that we may incur in connection with the restatement, (17) our ability to successfully remediate the material weaknesses in our internal control over financial reporting disclosed in Form 10-K/A within the time periods and in the manner currently anticipated, additional material weaknesses or other deficiencies that may arise in the future or our ability to maintain an effective system of internal controls and (18) other risk factors, including those described in the Company's filings with theSecurities and Exchange Commission , including, but not limited to, the Annual Report on Form 10-K/A for the year endedDecember 31, 2019 and the Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . Furthermore, the situation surrounding COVID-19 remains fluid and the potential for a material impact on the Company's results of operations, financial condition, liquidity, and stock price increases the longer the virus impacts activity levels inthe United States and globally. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on its results of operations, financial position, liquidity and stock price. The extent of any impact will depend on the extent of new outbreaks as communities reopen, the extent to which returns to lockdown may be needed, the nature of government public health guidelines and the public's adherence to those guidelines, the impact of government economic relief on the US economy, unemployment levels, the success of businesses reopening, the timing for proven treatments and vaccines for COVID-19, consumer confidence and demand for our products. 28
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