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. 25
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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. Additionally, in the fourth quarter of 2019, KC met the requirements to be reported as a discontinued operation. The following consolidated financial tables present KC as a discontinued operation for prior year periods presented and are labeled "Recast". See Note 3, Discontinued Operations for more information. The results of operations were as follows for the three months endedJune 30 :
Second Quarter of 2020 Compared with Second Quarter of 2019
THREE MONTHS ENDED June 30,
2019 As
Restated and
2020 % of Revenue Recast % of Revenue $ Change % Change
Revenue $ 138,297 100.0 % $ 131,065 100.0 % $ 7,232 5.5 %
Cost of sales 103,043 74.5 % 102,558 78.2 % 485 0.5 %
Gross profit 35,254 25.5 % 28,507 21.8 % 6,747 23.7 %
Selling, general and
administrative expenses 24,035 17.4 % 24,976 19.1 % (941 ) (3.8 )%
Amortization of intangible
assets 324 0.2 % 346 0.3 % (22 ) (6.4 )%
Operating profit 10,895 7.9 % 3,185 2.4 % 7,710 242.1 %
Interest expense, net 366 0.3 % 789 0.6 % (423 ) (53.6 )%
Other expense (income), net (193 ) (0.1 )% (132 ) (0.1 )% (61 ) 46.2 %
Income (loss) from continuing
operations before income taxes 10,722 7.8 % 2,528 1.9 % 8,194 324.1 %
Income tax expense (benefit) 2,657 1.9 % 630 0.5 % 2,027 321.7 %
Net income (loss) from
continuing operations 8,065 5.8 % 1,898 1.4 % 6,167 324.9 %
Income (loss) from discontinued
operations, net of tax (305 ) n/m (2,516 ) n/m 2,211 n/m
Net income (loss) $ 7,760 $ (618 ) $ 8,378
Effective income tax rate on
continuing operations 24.8 % 24.9 %
The following table identifies the components of the change in revenue for the
three months ended
Revenue
2019 As Restated $ 131,065
Increase (decrease) from:
Unit volume and product mix 7,744
Average sales price 1,331
Foreign currency (1,843 )
$ 138,297 Revenue - Revenue increased
The
Canada consumer market also experienced increased demand. Demand continued to be particularly strong for the Company's countertop ovens, toasters, food processors, coffee makers, slow cookers, hand mixers, cocktail dispensers and breakfast appliances. Revenue from the international consumer and global commercial markets declined due to the ongoing adverse impact of the COVID-19 pandemic on emerging markets and on the restaurant and hotel industries. Foreign currency had a negative impact on revenue of$1.8 million . Ecommerce sales in the second quarter increased 77% and accounted for 37% of total revenue for the quarter. Gross profit - Gross profit increased$6.7 million or 23.7% primarily due to higher sales volume. Gross profit margin was 25.5% compared to 21.8% due to customer and product mix and a benefit of approximately$1.6 million for tariff relief. 26
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Selling, general and administrative expenses - Selling, general and administrative expenses decreased$0.9 million due to lower overall spend, partially offset by third party fees related to the investigation of accounting irregularities in our Mexican subsidiaries. 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 in the second quarter of 2019 are charges of$0.6 million 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$0.4 million primarily due to lower average interest rates and decreased average borrowings outstanding under HBB's revolving credit facility.
First Six Months of 2020 Compared with
SIX MONTHS ENDED June 30,
2019 As
Restated and
2020 % of Revenue Recast % of Revenue $ Change % Change
Revenue $ 259,143 100.0 % $ 257,707 100.0 % $ 1,436 0.6 %
Cost of sales 198,849 76.7 % 202,498 78.6 % (3,649 ) (1.8 )%
Gross profit 60,294 23.3 % 55,209 21.4 % 5,085 9.2 %
Selling, general and
administrative expenses 48,248 18.6 % 51,222 19.9 % (2,974 ) (5.8 )%
Amortization of intangible
assets 648 0.3 % 691 0.3 % (43 ) (6.2 )%
Operating profit 11,398 4.4 % 3,296 1.3 % 8,102 245.8 %
Interest expense, net 969 0.4 % 1,452 0.6 % (483 ) (33.3 )%
Other expense (income), net 1,509 0.6 % (329 ) (0.1 )% 1,838 (558.7 )%
Income (loss) from continuing
operations before income taxes 8,920 3.4 % 2,173 0.8 % 6,747 310.5 %
Income tax expense (benefit) 2,209 0.9 % 937 0.4 % 1,272 135.8 %
Net income (loss) from
continuing operations 6,711 2.6 % 1,236 0.5 % 5,475 443.0 %
Income (loss) from discontinued
operations, net of tax 22,561 n/m (5,239 ) n/m 27,800 n/m
Net income (loss) $ 29,272 $ (4,003 ) $ 33,275
Effective income tax rate on
continuing operations 24.8 % 43.1 %
The following table identifies the components of the change in revenue for the
six months ended June 30 :
Revenue
2019 As Restated $ 257,707
Increase (decrease) from:
Unit volume and product mix 2,113
Average sales price 1,599
Foreign currency (2,276 )
2020 $ 259,143
Revenue - Revenue increased $1.4 million . Revenue in the U.S. and Canada
consumer markets significantly outpaced prior year while the international
consumer and commercial markets declined. The six months 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 stabilized. Momentum slowed across all markets towards the end of the
first quarter as government measures to control the spread of COVID-19 were
implemented in March. The lower revenue in the first quarter was more than
offset by increased revenue in the second quarter due primarily to strong demand
in the U.S. and Canada consumer markets as
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consumers continue to stay home and cook during the pandemic. On a year-to-date basis, ecommerce sales increased 52.6% and accounted for 32.8% of total revenue. Foreign currency had a negative impact on revenue of$2.3 million . Gross profit - Gross profit increased$5.1 million or 9.2%. Gross profit margin was 23.3% compared to 21.1%. The improvement in gross profit margin is primarily due to customer and product mix. Additionally, gross profit in 2020 includes a benefit of approximately$1.6 million for tariff relief. Selling, general and administrative expenses - Selling, general and administrative expenses decreased$3.0 million . The year-to-date decrease is due to lower overall spend including environmental expenses, legal fees and other corporate expenses. Selling, general and administrative expenses for the six months endedJune 30, 2020 include a reduction of$0.9 million to the accrual for the contingent loss related to the patent infringement litigation. Included in selling, general and administrative expenses are charges of$1.9 million in 2020 and$2.4 million in the prior year to write-off unrealizable assets created as a result of the unauthorized transactions at our Mexican subsidiaries. See Note 2, Restatement of Previously Issued Financial Statements for additional information. Interest expense, net - Interest expense, net decreased$0.5 million million primarily due to decreased average borrowings outstanding under HBB's revolving credit facility and lower average interest rates. Other expense (income), net - For the six months endedJune 30, 2020 , other expense, net was$1.5 million and includes currency loss of$1.8 million due to the re-measurement of liabilities related to inventory purchases denominated inU.S. dollars by HBB's foreign subsidiaries. For the six months endedJune 30, 2019 , other income was$0.3 million . Income tax expense (benefit) - For the six months endedJune 30, 2020 , income tax expense was$2.2 million on income from continuing operations before income taxes of$8.9 million , an effective tax rate of 24.8%. Income tax expense for the six months endedJune 30, 2019 was$0.9 million , on income from continuing operations before income taxes of$2.2 million , an effective rate of 43.1%. The higher effective tax rate in 2019 is attributable to non-cash charges to write-off unrealizable assets at our Mexican subsidiaries 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 has not yet completed its refinancing of the HBB Facility and accordingly, all amounts outstanding have been classified as current liabilities. 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. 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. The COVID-19 pandemic created significant economic uncertainty and volatility in the credit and capital markets during the first quarter of 2020. We believe 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. We are managing discretionary expenses, and 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 six months of the year, with net borrowings of$40.2 million as compared to$80.5 28
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million in the 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: THREE MONTHS ENDEDJune 30 , As Restated 2020 2019
Net cash provided by (used for) operating activities
$ (31,646 ) Net cash used for investing activities$ (2,092 ) $ (1,972 ) Net cash provided by (used for) financing activities$ (19,146 )
Operating activities - Net cash provided by operating activities was$21.8 million compared to net cash used for operating activities of$31.6 million in 2019. The significant improvement is primarily due to improvements in net working capital as the result of effective inventory management and collection efforts of accounts receivable. Net working capital was a source of cash of$17.4 million compared to a use of cash of$18.2 million in the prior year. Investing activities - Net cash used for investing activities increased$0.1 million due to an increase in other investments, offset by lower capital expenditures related to internal-use software development costs.
Financing activities - Net cash used for financing activities was
Capital Resources
HBB maintains a$115.0 million senior secured floating-rate revolving credit facility (the "HBB Facility") that expires inJune 2021 . The entire outstanding balance has been classified as a current liability due to the fact the facility expires within one year and has not yet been refinanced. Expected voluntary repayments to be made in the next twelve months are$6.8 million . 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$242.6 million as ofJune 30, 2020 . AtJune 30, 2020 , the borrowing base under the HBB Facility was$102.2 million and borrowings outstanding were$41.8 million . AtJune 30, 2020 , the excess availability under the HBB Facility was$54.2 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, effectiveJune 30, 2020 , for base rate loans and LIBOR loans denominated inU.S. dollars were 0.0% and 1.50%, respectively. The applicable margins, effectiveJune 30, 2020 , for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.0% and 1.50%, 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 six months endedJune 30, 2020 was 3.23% including the floating rate margin and the effect of the interest rate swap agreements described below. 29
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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 atJune 30, 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. Under Amendment No. 6 to the HBB Facility, 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. AtJune 30, 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.
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 news release 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,
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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, (18) difficulties arising as a result of our implementation of an enterprise resource planning system in the US, and (19) 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 endedJune 30, 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. 31
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