QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38214
HAMILTON BEACH BRANDS HOLDING COMPANY
(Exact name of registrant as specified in its charter)
Delaware
31-1236686
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
4421 WATERFRONT DR.
GLEN ALLEN
VA
23060
(Address of principal executive offices)
(Zip code)
(804)
273-9777
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, Par Value $0.01 Per Share
HBB
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Smaller reporting company
☑
Emerging growth company
☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐NO þ
Number of shares of Class A Common Stock outstanding at October, 29, 2021: 9,880,767
Number of shares of Class B Common Stock outstanding at October, 29, 2021: 4,006,193
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(Tabular amounts in thousands, except as noted and per share amounts)
NOTE 1—Basis of Presentation and Recently Issued Accounting Standards
Basis of Presentation
Hamilton Beach Brands Holding Company is a holding company and operates through its wholly-owned subsidiary, Hamilton Beach Brands, Inc. (“HBB”) (collectively “Hamilton Beach Holding” or the “Company”). HBB is a leading designer, marketer, and distributor of a wide range of branded, small electric household and specialty housewares appliances, as well as commercial products for restaurants, fast food chains, bars, and hotels. HBB operates in the consumer, commercial and specialty small appliance markets.
The Company previously also 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 on April 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist. See Note 2 for further information on discontinued operations.
The financial statements have been prepared in accordance with US generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
Operating results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the remainder of the year due to the highly seasonal nature of the Company's primary markets. A majority of revenue and operating profit typically occurs in the second half of the calendar year when sales of products to retailers and consumers historically increase significantly for the fall holiday-selling season.
Accounting Standards Not Yet Adopted
The Company is an emerging growth company and has elected not to opt out of the extended transition period for complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public or nonpublic entities, the Company can adopt the new or revised standard at the time nonpublic entities adopt the new or revised standard.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires an entity to recognize assets and liabilities for the rights and obligations created by leased assets. For nonpublic entities, the amendments are currently effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted. The Company is planning to adopt ASU 2016-02 when required and is currently evaluating to what extent ASU 2016-02 will affect the Company's financial position, results of operations, cash flows and related disclosures. The Company expects to record additional assets and corresponding liabilities related to operating leases in the statement of financial position.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)," which requires an entity to recognize credit losses as an allowance rather than as a write-down. For nonpublic entities and smaller reporting companies, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company is planning to adopt ASU 2016-03 for its year beginning January 1, 2023 and subsequent interim periods and is currently evaluating to what extent ASU 2016-13 will affect the Company's financial position, results of operations, cash flows and related disclosures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new accounting rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new accounting rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new accounting rules will be effective for the Company for its year ending December 31, 2022. The Company is currently in the process of evaluating the impact of adoption of the new accounting rules on the Company’s financial condition, results of operations, cash flows and disclosures.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The new accounting rules provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this standard can be applied anytime between the first quarter of 2020 and the fourth quarter of 2022. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and disclosures.
Assets Held for Sale
During the fourth quarter of 2020, the Company committed to a plan to sell its Brazilian subsidiary and determined that it met all of the criteria to classify the assets and liabilities of this business as held for sale. In April 2021, the Company made the decision to wind down the Brazilian subsidiary and enter into a licensing agreement with a third party to service the Brazilian market. As a result, the Company is no longer committed to selling the subsidiary. The carrying amounts of the assets were reclassified to held and used during the second quarter of 2021. The disposal group had $2.1 million of accumulated other comprehensive losses at September 30, 2021, which will be recognized in net income upon substantial liquidation of the Brazilian subsidiary which is expected to occur in the first half of 2022.
Amended Credit Agreement
On September 17, 2021, the Company entered into Amendment No. 10 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties thereto as the Lenders, Hamilton Beach Brands, Inc., as Parent and U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower (the “Amendment”). Among other changes, the Amendment increases the credit facility from $125 million to $150 million, amends the pricing grid and increases the eligible inventory included in the borrowing base. Under the Amendment, dividends to Hamilton Beach Brands Holding Company are not to exceed $7.0 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 $18.0 million. Dividends to Hamilton Beach Brands Holding Company 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 $30 million. In addition, the Amendment provides mechanics relating to the transition away from LIBOR as a benchmark interest rate and the replacement of LIBOR with a replacement or alternative benchmark interest rate.
On October 10, 2019, the Board approved the wind down of KC's retail operations. Accordingly, KC is reported as discontinued operations in all periods presented. KC completed its dissolution on April 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist and was no longer consolidated by the Company. Neither Hamilton Beach Brands Holding Company nor Hamilton Beach Brands, Inc. received a distribution.
KC’s operating results are reflected as discontinued operations for all periods presented. The major line items constituting the income (loss) from discontinued operations, net of tax are as follows:
NINE MONTHS ENDED SEPTEMBER 30
2020
Revenue
$
631
Cost of sales
—
Gross profit
631
Selling, general and administrative expenses
1,346
Adjustment of lease termination liability(1)
(16,457)
Adjustment of other current liabilities(2)
(6,608)
Operating income
22,350
Other expense, net
88
Income from discontinued operations before income taxes
22,262
Income tax benefit
(299)
Income from discontinued operations, net of tax
$
22,561
(1) Represents an adjustment to the lease termination obligation based on the final distribution of KC's remaining assets on April 3, 2020.
(2) Represents an adjustment to the carrying value of substantially all of the other current liabilities based on the final distribution of KC's remaining assets on April 3, 2020.
Due to the deconsolidation of KC on April 3, 2020, there are no assets or liabilities associated with KC as of any period presented.
Neither Hamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC.
NOTE 3—Transfer of Financial Assets
The Company has entered into an arrangement with a financial institution to sell certain US trade receivables on a non-recourse basis. The Company utilizes this arrangement as an integral part of financing working capital. Under the terms of the agreement, the Company receives cash proceeds and retains no rights or interest and has no obligations with respect to the sold receivables. These transactions are accounted for as sold receivables which result in a reduction in trade receivables because the agreement transfers effective control over and risk related to the receivables to the buyer. Under this arrangement, the Company derecognized $28.1 million and $94.1 million of trade receivables during the three and nine months ending September 30, 2021, respectively, $18.2 million and $93.4 million of trade receivables during the three and nine months ending September 30, 2020, respectively, and $162.4 million during the year ending December 31, 2020. The loss incurred on sold receivables in the consolidated results of operations for the nine months ended September 30, 2021 and 2020 was not material. The Company does not carry any servicing assets or liabilities. Cash proceeds from this arrangement are reflected as operating activities in the Consolidated Statements of Cash Flows.
The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
Description
Balance Sheet Location
SEPTEMBER 30 2021
DECEMBER 31 2020
SEPTEMBER 30 2020
Assets:
Interest rate swap agreements
Current
Prepaid expenses and other current assets
$
—
$
—
$
—
Foreign currency exchange contracts
Current
Prepaid expenses and other current assets
182
—
9
$
182
$
—
$
9
Liabilities:
Interest rate swap agreements
Current
Other current liabilities
$
333
$
380
$
398
Long-term
Other long-term liabilities
864
779
828
Foreign currency exchange contracts
Current
Other current liabilities
24
518
31
$
1,221
$
1,677
$
1,257
The Company measures its derivatives at fair value using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. The Company uses a present value technique that incorporates the LIBOR swap curve, foreign currency spot rates and foreign currency forward rates to value its derivatives, including its interest rate swap agreements and foreign currency exchange contracts, and also incorporates the effect of its subsidiary and counterparty credit risk into the valuation.
Other Fair Value Measurement Disclosures
The carrying amounts of cash and cash equivalents, trade receivables and accounts payable approximate fair value due to the short-term maturities of these instruments. The fair value of the revolving credit agreement, including book overdrafts, which approximate book value, was determined using current rates offered for similar obligations taking into account subsidiary credit risk, which is Level 2 as defined in the fair value hierarchy.
There were no transfers into or out of Levels 1 or 2 during the periods presented. During the nine months ended September 30, 2021, there was one transfer out of Level 3 related to the $2.1 million of assets held for sale. There were no transfers into or out of Level 3 during the three months ended September 30, 2021.
The following table sets forth the Company's authorized capital stock information:
SEPTEMBER 30 2021
DECEMBER 31 2020
SEPTEMBER 30 2020
Preferred stock, par value $0.01 per share
Preferred stock authorized
5,000
5,000
5,000
Preferred stock outstanding
—
—
—
Class A Common stock, par value $0.01 per share
Class A Common stock authorized
70,000
70,000
70,000
Class A Common issued(1)(2)
10,245
10,006
9,980
Treasury Stock
365
365
365
Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis
Class B Common stock authorized
30,000
30,000
30,000
Class B Common issued(1)
4,007
4,045
4,055
(1) Class B Common converted to Class A Common were 18 and 38 shares during the three and nine months ending September 30, 2021, respectively, and 8 and 21 shares during the three and nine months ending September 30, 2020, respectively.
(2) The Company issued Class A Common shares of 13 and 201 during the three and nine months ending September 30, 2021, respectively, and 26 and 154 during the three and nine months ending September 30, 2020, respectively.
Accumulated Other Comprehensive Loss: The following table summarizes changes in accumulated other comprehensive loss by component and related tax effects for periods shown:
Foreign Currency
Deferred Gain (Loss) on Cash Flow Hedging
Pension Plan Adjustment
Total
Balance, January 1, 2021
$
(9,775)
$
(1,344)
$
(6,357)
$
(17,476)
Other comprehensive income (loss)
(276)
222
—
(54)
Reclassification adjustment to net income (loss)
—
182
156
338
Tax effects
(79)
(115)
(43)
(237)
Balance, March 31, 2021
(10,130)
(1,055)
(6,244)
(17,429)
Other comprehensive income (loss)
725
(800)
—
(75)
Reclassification adjustment to net income (loss)
—
145
155
300
Tax effects
(113)
196
(43)
40
Balance, June 30, 2021
(9,518)
(1,514)
(6,132)
(17,164)
Other comprehensive income (loss)
(747)
753
—
6
Reclassification adjustment to net income (loss)
—
180
190
370
Tax effects
93
(278)
(43)
(228)
Balance, September 30, 2021
$
(10,172)
$
(859)
$
(5,985)
$
(17,016)
Balance, January 1, 2020
$
(8,221)
$
(341)
$
(7,570)
$
(16,132)
Other comprehensive income (loss)
(4,985)
(171)
—
(5,156)
Reclassification adjustment to net income (loss)
—
154
239
393
Tax effects
1,132
(35)
(44)
1,053
Balance, March 31, 2020
(12,074)
(393)
(7,375)
(19,842)
Other comprehensive income (loss)
742
137
—
879
Reclassification adjustment to net income (loss)
—
(489)
140
(349)
Tax effects
(223)
97
(43)
(169)
Balance, June 30, 2020
(11,555)
(648)
(7,278)
(19,481)
Other comprehensive income (loss)
622
157
—
779
Reclassification adjustment to net income (loss)
—
(605)
158
(447)
Tax effects
(168)
136
(44)
(76)
Balance, September 30, 2020
$
(11,101)
$
(960)
$
(7,164)
$
(19,225)
NOTE 6—Revenue
Revenue is recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services, which includes an estimate for variable consideration.
HBB’s warranty program to the consumer consists generally of an assurance-type limited warranty lasting for varying periods of up to ten years for electric appliances, with the majority of products having a warranty of one to three years. There is no guarantee to the customer as HBB may repair or replace, at its option, those products returned under warranty. Accordingly, the Company determined that no separate performance obligation exists.
HBB products are not sold with a general right of return. However, based on historical experience, a portion of products sold are estimated to be returned due to reasons such as product failure and excess inventory stocked by the customer, which, subject to certain terms and conditions, HBB will agree to accept. Product returns, customer programs and incentive offerings, including special pricing agreements, price competition, promotions, and other volume-based incentives are accounted for as variable consideration.
A description of revenue sources and performance obligations for HBB are as follows:
Consumer and Commercial product revenue
Transactions with both consumer and commercial customers generally originate upon the receipt of a purchase order from the customer, which in some cases are governed by master sales agreements, specifying product(s) that the customer desires. Contracts for product revenue have an original duration of one year or less, and payment terms are generally standard and based on customer creditworthiness. Revenue from product sales is recognized at the point in time when control transfers to the customer, which is either when product is shipped from the Company's facility, or delivered to customers, depending on the shipping terms. The amount of revenue recognized varies primarily with changes in returns. In addition, the Company offers price concessions to its customers for incentive offerings, special pricing agreements, price competition, promotions or other volume-based arrangements. The Company evaluated such agreements with its customers and determined returns and price concessions should be accounted for as variable consideration.
Consumer product revenue consists of sales of small electric household and specialty housewares appliances to traditional brick and mortar and ecommerce retailers, distributors and directly to the end consumer. A majority of this revenue is in North America.
Commercial product revenue consists of sales of products to restaurants, fast-food chains, bars and hotels. Approximately one-half of commercial sales are in the U.S. and the other half is in markets across the globe.
License revenue
From time to time, the Company enters into exclusive and non-exclusive licensing agreements which grant the right to use certain of HBB’s intellectual property ("IP") in connection with designing, manufacturing, distributing, advertising, promoting and selling the licensees’ products during the term of the agreement. The IP that is licensed generally consists of trademarks, trade names, patents, trade dress, and/or logos (the “Licensed IP”). In exchange for granting the right to use the Licensed IP, HBB receives a royalty payment, which is a function of (1) the total net sales of products that use the Licensed IP and (2) the royalty percentage that is stated in the licensing agreement. HBB recognizes revenue at the later of when the subsequent sales occur or satisfying the performance obligation (over time).
The following table sets forth Company's revenue on a disaggregated basis for the three and nine months ended September 30:
Hamilton Beach Brands Holdings Company and its subsidiaries are involved in various legal and regulatory proceedings and claims that have arisen in the ordinary course of business, including product liability, patent infringement, asbestos related claims, environmental and other claims. Although it is difficult to predict the ultimate outcome of these proceedings and claims, management believes the ultimate disposition of these matters will not have a material adverse effect on the financial condition, results of operation or cash flows of the Company. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.
Proceedings and claims asserted against the Company or its subsidiaries are subject to inherent uncertainties and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company's financial position, results of operations and cash flows for the period in which the ruling occurs, or in future periods.
Hamilton Beach Brands Holding Company (HBBHC) is a defendant in a legal proceeding instituted in February 2020 in which the plaintiff seeks to hold the Company liable for the unsatisfied portion of an agreed final judgment that plaintiff obtained against KC related to KC’s failure to continue to operate forty-nine stores during the term of the store leases. In February 2020, KC agreed to the entry of a final judgment in favor of the plaintiff in the amount of $8.1 million and in April 2020 the plaintiff received $0.3 million in the final distribution of KC assets to KC creditors. The Company believes that the plaintiff’s claims are without merit and will vigorously defend against plaintiff’s claims.
Environmental matters
HBB is investigating or remediating historical environmental contamination at some current and former sites operated by HBB or by businesses it acquired. Based on the current stage of the investigation or remediation at each known site, HBB estimates the total investigation and remediation costs and the period of assessment and remediation activity required for each site. The estimate of future investigation and remediation costs is primarily based on variables associated with site clean-up, including, but not limited to, physical characteristics of the site, the nature and extent of the contamination and applicable regulatory programs and remediation standards. No assessment can fully characterize all subsurface conditions at a site. There is no assurance that additional assessment and remediation efforts will not result in adjustments to estimated remediation costs or the time frame for remediation at these sites.
HBB's estimates of investigation and remediation costs may change if it discovers contamination at additional sites or additional contamination at known sites, if the effectiveness of its current remediation efforts change, if applicable federal or state regulations change or if HBB's estimate of the time required to remediate the sites changes. HBB's revised estimates may differ materially from original estimates.
At September 30, 2021, December 31, 2020, and September 30, 2020, HBB had accrued undiscounted obligations of $3.4 million, $3.1 million and $3.6 million respectively, for environmental investigation and remediation activities. HBB estimates that it is reasonably possible that it may incur additional expenses in the range of zero to $1.7 million related to the environmental investigation and remediation at these sites.
NOTE 8—Income Taxes
The Company's provision for income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.
The effective tax rate on income from continuing operations was 25.9% and 22.7% for the nine months ended September 30, 2021, and 2020, respectively. The effective tax rate was higher for the nine months ended September 30, 2021 due to the inclusion of interest and penalties on unrecognized tax benefits as a discrete expense item, offset by the reversal of deferred taxes related to certain foreign items.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except as noted and per share data)
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 subsidiary Hamilton 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 on April 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist. Neither Hamilton Beach Brands Holding Company nor Hamilton 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 for the year ended December 31, 2020 as there have been no material changes from those disclosed in the Annual Report.
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. Additionally, in the fourth quarter of 2019, KC met the requirements to be reported as a discontinued operation. On April 3, 2020 KC completed its dissolution. See Note 2, Discontinued Operations for more information.
Third Quarter of 2021 Compared with Third Quarter of 2020
THREE MONTHS ENDED SEPTEMBER 30
Increase / (Decrease)
2021
% of Revenue
2020
% of Revenue
$ Change
% Change
Revenue
$
156,740
100.0
%
$
110,549
100.0
%
$
46,191
41.8
%
Cost of sales
123,456
78.8
%
86,801
78.5
%
36,655
42.2
%
Gross profit
33,284
21.2
%
23,748
21.5
%
9,536
40.2
%
Selling, general and administrative expenses
25,788
16.5
%
25,830
23.4
%
(42)
(0.2)
%
Amortization of intangible assets
50
—
%
323
0.3
%
(273)
(84.5)
%
Operating profit (loss)
7,446
4.8
%
(2,405)
(2.2)
%
9,851
409.6
%
Interest expense, net
662
0.4
%
339
0.3
%
323
95.3
%
Other expense (income), net
(126)
(0.1)
%
92
0.1
%
(218)
(237.0)
%
Income (loss) from continuing operations before income taxes
6,910
4.4
%
(2,836)
(2.6)
%
9,746
343.7
%
Income tax expense (benefit)
1,204
0.8
%
(826)
(0.7)
%
2,030
(245.8)
%
Net income (loss) from continuing operations
5,706
3.6
%
(2,010)
(1.8)
%
7,716
383.9
%
Income from discontinued operations, net of tax
—
n/m
—
n/m
—
n/m
Net income (loss)
$
5,706
$
(2,010)
$
7,716
Effective income tax rate on continuing operations
17.4
%
29.1
%
The following table identifies the components of the change in revenue:
Revenue
2020
$
110,549
Increase (decrease) from:
Unit volume and product mix
42,845
Foreign currency
1,365
Average sales price
1,981
2021
$
156,740
Revenue - Revenue increased $46.2 million, or 41.8%, due primarily to higher sales volume in the US Consumer, Latin American, and Global Commercial markets compared to prior year. In the US Consumer market, where demand remained strong, revenue increased compared to prior year, which had lower sales volume as the result of reduced shipping capabilities during the implementation of a new enterprise resource planning ("ERP") system in the third quarter of 2020. Sales volume more than doubled in the Global Commercial and Latin American markets, and revenue in the Mexican market increased, compared to last year's pandemic-driven demand softness.
Gross profit - As a percentage of revenue, gross profit margin decreased from 21.5% in the prior year to 21.2% in the current year due to significantly higher transportation costs. As a result of the disruption and congestion in several areas of the Company's supply chain, primarily from China to its distribution facility, the Company experienced increased freight and container costs as well as additional carrier storage charges. There was also an increase in labor costs for warehouse personnel.
Selling, general and administrative expenses - Selling, general and administrative expenses remained flat despite $1.6 million in incremental expenses related to the relocation to the Company's new distribution center. Outside services decreased $0.9 million compared to the same period in prior year. Lower overall employee-related costs, driven by a decrease in incentive compensation as a result of the Company's stock price, were partially offset by an increase in salaries and benefits. Included in selling, general and administrative expenses for the three months ended September 30, 2020 is a $0.7 million non-recurring expense related to patent litigation.
Interest expense - Interest expense increased $0.3 million due to increased average borrowings outstanding under HBB's revolving credit facility.
Income tax expense (benefit) - The effective tax rate was lower for the quarter ended September 30, 2021 when compared to the effective tax rate for the quarter ended September 30, 2020 due primarily to the reversal of deferred taxes related to certain foreign items as a discrete tax benefit.
First Nine Months of 2021 Compared with First Nine Months of 2020
NINE MONTHS ENDED SEPTEMBER 30
2021
% of Revenue
2020
% of Revenue
$ Change
% Change
Revenue
$
460,644
100.0
%
$
369,692
100.0
%
$
90,952
24.6
%
Cost of sales
367,284
79.7
%
285,650
77.3
%
81,634
28.6
%
Gross profit
93,360
20.3
%
84,042
22.7
%
9,318
11.1
%
Selling, general and administrative expenses
79,614
17.3
%
74,078
20.0
%
5,536
7.5
%
Amortization of intangible assets
150
—
%
971
0.3
%
(821)
(84.6)
%
Operating profit
13,596
3.0
%
8,993
2.4
%
4,603
51.2
%
Interest expense, net
2,080
0.5
%
1,308
0.4
%
772
59.0
%
Other expense (income), net
(179)
—
%
1,601
0.4
%
(1,780)
(111.2)
%
Income (loss) from continuing operations before income taxes
11,695
2.5
%
6,084
1.6
%
5,611
92.2
%
Income tax expense (benefit)
3,027
0.7
%
1,383
0.4
%
1,644
118.9
%
Net income (loss) from continuing operations
8,668
1.9
%
4,701
1.3
%
3,967
84.4
%
Income (loss) from discontinued operations, net of tax
—
n/m
22,561
n/m
(22,561)
(100.0)
%
Net income (loss)
$
8,668
$
27,262
$
(18,594)
Effective income tax rate on continuing operations
25.9
%
22.7
%
The following table identifies the components of the change in revenue:
Revenue
2020
$
369,692
Increase (decrease) from:
Unit volume and product mix
84,171
Average sales price
2,456
Foreign currency
4,325
2021
$
460,644
Revenue - Revenue increased by $91.0 million or 24.6% over the prior year. The Company had higher sales in the North American consumer market, driven by continued strong demand in the US, Canadian and Latin American markets. The prior year results reflect reduced shipping capabilities during the implementation of a new ERP system in the third quarter of 2020. Revenue in the Global Commercial market increased as compared to prior year as a result of strong sales in the second and third quarter of 2021 as the market rebounded from the pandemic-related demand softness in the prior year. Ecommerce revenue represents 33% of total sales for the nine months ended September 30, 2021 compared to 30% for the same period in 2020.
Gross profit - Gross profit margin decreased to 20.3% from 22.7% due to significantly higher transportation costs, as a result of the disruption and congestion in the supply chain.
Selling, general and administrative expenses - Selling, general and administrative expenses increased $5.5 million, driven primarily by $2.8 million of incremental expenses incurred during the relocation of the Company's distribution center, as well as an increase in employee-related costs. Included in selling, general and administrative expenses for the nine months ended September 30, 2020 is $1.9 million of charges to write-off unrealizable assets created as a result of the Mexico unauthorized transactions identified during the quarter ended March 31, 2020 which resulted in a restatement filed on Form 10-K/A for the year ended December 31, 2019, offset by a net $0.8 million reduction to the accruals for litigation and environmental reserves.
Interest expense - Interest expense, net increased $0.8 million due to increased average borrowings outstanding under HBB's revolving credit facility.
Other expense (income), net - Other expense (income), net includes currency losses of $0.6 million in the current year compared to currency losses of $2.0 million in the prior year. The currency losses arise from the remeasurement of liabilities related to inventory purchases by foreign subsidiaries denominated in US dollars.
Income tax expense (benefit) - The effective tax rate was 25.9% compared to 22.7% in the prior year. The effective tax rate was higher for the nine months ended September 30, 2021 due to the inclusion of interest and penalties on unrecognized tax benefits as a discrete expense item, offset by the reversal of deferred taxes related to certain foreign items.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Hamilton 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, operating expenses, capital expenditures, cash dividends, and payments of principal and interest on debt.
HBB maintains a $150.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires on June 30, 2025. 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.
On September 17, 2021, the Company entered into Amendment No. 10 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties thereto as the Lenders, Hamilton Beach Brands, Inc., as Parent and U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower (the “Amendment”). Among other changes, the Amendment increases the credit facility from $125 million to $150 million, amends the pricing grid and increases the eligible inventory included in the borrowing base. Under the Amendment, dividends to Hamilton Beach Brands Holding Company are not to exceed $7.0 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 $18.0 million. Dividends to Hamilton Beach Brands Holding Company 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 $30 million. In addition, the Amendment provides mechanics relating to the transition away from LIBOR as a benchmark interest rate and the replacement of LIBOR with a replacement or alternative benchmark interest rate.
The following table presents selected cash flow information from continuing operations:
NINE MONTHS ENDED SEPTEMBER 30
2021
2020
Net cash provided by (used for) operating activities
$
(4,106)
$
(5,731)
Net cash provided by (used for) investing activities
$
(9,109)
$
(3,096)
Net cash provided by (used for) financing activities
$
12,259
$
8,193
Operating activities - Net cash used for operating activities was $4.1 million compared to $5.7 million in the prior year. As compared to the prior year, the lower net cash used by operating activities was primarily due to higher net income, offset by changes in other assets and other liabilities, primarily income taxes payable.
Investing activities - Net cash used for investing activities increased in 2021 compared to 2020 due to capital spending for the Company's new distribution center leased facility, which is partially offset by $4.0 million in lease incentives and tenant improvement allowances classified as cash provided by operating activities.
Financing activities - Net cash provided by financing activities was $12.3 million compared to $8.2 million in 2020. The change is due to an increase in HBB's net borrowing activity on the revolving credit facility during the first nine months of 2021 as compared to the first nine months of 2020. Borrowings on the revolving credit facility are used to fund net working capital.
Capital Resources
The Company expects to continue to borrow against the HBB Facility and make voluntary repayments within the next twelve months. The obligations under the HBB Facility are secured by substantially all of HBB's assets. At September 30, 2021, the borrowing base under the HBB Facility was $148.8 million and borrowings outstanding were $115.0 million. At September 30, 2021, the excess availability under the HBB Facility was $33.8 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, effective September 30, 2021, for base rate loans and LIBOR loans denominated in US dollars were 0.0% and 1.75%, respectively. The applicable margins, effective September 30, 2021, 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 nine months ended September 30, 2021 was 2.58% 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 at September 30, 2021 at an average fixed interest rate of 1.66%. HBB also entered into delayed-start interest rate swaps during the second and third quarter of 2021. These swaps have notional values totaling $75.0 million as of September 30, 2021, with an average fixed interest rate of 1.19%.
The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends to Hamilton Beach Holding, subject to achieving availability thresholds. Under Amendment No. 10 to the HBB Facility, dividends to Hamilton Beach Holding are not to exceed $7.0 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 at least $18.0 million. Dividends to Hamilton 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 at least $30.0 million. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. At September 30, 2021, HBB was in compliance with all financial covenants in the HBB Facility.
In December 2015, the Company entered into an arrangement with a financial institution to sell certain US trade receivables on a non-recourse basis. The Company utilizes this arrangement as an integral part of financing working capital. See Note 3 of the unaudited 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.
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 for the year ended December 31, 2020 as there have been no material changes from those disclosed in the Annual Report.
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 for the year ended December 31, 2020 as there have been no material changes from those disclosed in the Annual Report.
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 Company’s ability to source and ship products to meet anticipated demand, (2) the Company’s ability to successfully manage ongoing constraints throughout the global transportation supply chain, (3) the unpredictable nature of the COVID-19 pandemic and its potential impact on the Company's business; (4) changes in the sales prices, product mix or levels of consumer purchases of small electric and specialty housewares appliances, (5) changes in consumer retail and credit markets, including the increasing volume of transactions made through third-party internet sellers, (6) bankruptcy of or loss of major retail customers or suppliers, (7) changes in costs, including transportation costs, of sourced products, (8) delays in delivery of sourced products, (9) changes in or unavailability of quality or cost effective suppliers, (10) exchange rate fluctuations, changes in the import tariffs and monetary policies and other changes in the regulatory climate in the countries in which the Company buys, operates and/or sells products, (11) the impact of tariffs on customer purchasing patterns, (12) product liability, regulatory actions or other litigation, warranty claims or returns of products, (13) customer acceptance of, changes in costs of, or delays in the development of new products, (14) increased competition, including consolidation within the industry, (15) 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, (16) changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation, (17) the Company's ability to successfully remediate the material weakness in its internal control over financial reporting related to income taxes disclosed in Item 9A of the Annual Report on Form 10-K within the time periods and in the manner currently anticipated, additional material weaknesses or other deficiencies that may arise in the future or its ability to maintain an effective system of internal controls, and (18) other risk factors, including those described in the Company's filings with the Securities and Exchange Commission, including, but not limited to, the Annual Report on Form 10-K for the year ended December 31, 2020. Furthermore, the situation surrounding COVID-19, including the mutation of variants, 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 in the US 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 scope of any new virus mutations and outbreaks, the nature of government public health guidelines and the public’s adherence to those guidelines, the availability of vaccines for COVID-19, the rate of individuals becoming fully vaccinated, the public's adherence to guidelines to receive booster shots, the success of business and economic recovery as the pandemic recedes, unemployment levels, the extent to which new shutdowns may be needed, the impact of any further government economic relief on the US economy, consumer confidence and demand for the Company's products.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
HBB enters into certain financing arrangements that require interest payments based on floating interest rates. As such, the Company's financial results are subject to changes in the market rate of interest. There is an inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of its floating rate financing arrangements. The Company does not enter into interest rate swap agreements for trading purposes. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate.
For purposes of risk analysis, the Company uses sensitivity analysis to measure the potential loss in fair value of financial instruments sensitive to changes in interest rates. The Company assumes that a loss in fair value is an increase to its receivables. The fair value of the Company's interest rate swap agreements was a payable of $1.2 million at September 30, 2021. A hypothetical 10% decrease in interest rates would cause a decrease of $0.3 million in the fair value of interest rate swap agreements. Additionally, a hypothetical 10% increase in interest rates would not have a material impact to the Company's interest expense, net of $2.1 million for the nine months ended September 30, 2021.
HBB operates internationally and enters into transactions denominated in foreign currencies, principally the Canadian dollar, the Mexican peso and, to a lesser extent, the Chinese Yuan and Brazilian Real. As such, HBB's financial results are subject to the variability that arises from exchange rate movements. The fluctuation in the value of the US dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of currency fluctuation increases as international expansion increases.
HBB uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies and not for trading purposes. These contracts generally mature within twelve months and require HBB to buy or sell the functional currency in which the applicable subsidiary operates and buy or sell US dollars at rates agreed to at the inception of the contracts.
For purposes of risk analysis, the Company uses sensitivity analysis to measure the potential loss in fair value of financial instruments sensitive to changes in foreign currency exchange spot rates. The Company assumes that a loss in fair value is either a decrease to its assets or an increase to its liabilities. The fair value of the Company's foreign currency exchange contracts was a receivable of $0.2 million at September 30, 2021. Assuming a hypothetical 10% weakening of the US dollar at September 30, 2021, the fair value of foreign currency-sensitive financial instruments, which represents forward foreign currency exchange contracts, would be decreased by $1.6 million compared with its fair value at September 30, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2021, due to the existence of the material weakness in our internal control over financial reporting related to income taxes as described below, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Material Weaknesses
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Material Weakness Related to Income Taxes
As of December 31, 2020, management determined that we did not design and maintain effective controls over our income tax accounting process to identify and accurately measure deferred tax assets, deferred tax liabilities and income taxes payable and the related income tax expense. While the control deficiency did not result in a misstatement of our previously issued consolidated financial statements, the control deficiency could result in a material misstatement of the aforementioned account balances or disclosures that would result in a material misstatement in our annual or interim consolidated financial statements that would not be prevented or detected.
Plan for Remediation of Material Weakness
We are committed to remediating the control deficiencies that gave rise to the material weakness. Management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weakness.
With oversight from the Audit Review Committee, we have developed a plan to remediate the material weakness in internal control over financial reporting related to our income taxes accounting process, which consists of:
a.Reviewing the organization structure, resources, processes, and controls in place to measure and record income taxes to enhance the effectiveness of the design and operation of those controls;
b.Enhancing monitoring activities related to income taxes; and
c.Evaluating and enhancing the level of precision in the management review controls related to income taxes.
Management made changes to the organizational structure and resources and continues to engage a third party with the relevant levels of tax experience to support the income taxes accounting process. Additionally, management has made progress in other areas of this plan during the third quarter, including performing a review of the related controls, which resulted in enhancements to the design and operation of controls in place related to income taxes.Although these remediation efforts are underway, until the actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weakness described above will continue to exist.
Changes in internal control over financial reporting
There were no changes in the Company’s internal control over financial reporting identified during the quarter ended September 30, 2021, in connection with the evaluation by the Company’s management required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The information required by this Item 1 is set forth in Note 7 "Contingencies" included in the Financial Statements contained in Part I of this Form 10-Q and is hereby incorporated herein by reference to such information.
Item 1A Risk Factors
No material changes to the risk factors for Hamilton Beach Holding or HBB, from the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
On November 5, 2019, the Company's Board adopted a new stock repurchase program for the purchase of up to $25.0 million of the Company's Class A Common outstanding starting January 1, 2020 and ending December 31, 2021.
There were no share repurchases during the nine months ended September 30, 2021 and September 30, 2020.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
