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Hamilton Beach Brands Holding Co - Quarter Report: 2021 June (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
(Mark One)  
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 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 ALLENVA23060
(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 classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, Par Value $0.01 Per ShareHBBNew 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.             Yes þ 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).                             Yes þ 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 oAccelerated filer þNon-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 July 30, 2021: 9,869,075
Number of shares of Class B Common Stock outstanding at July 30, 2021: 4,017,885


HAMILTON BEACH BRANDS HOLDING COMPANY
TABLE OF CONTENTS
   Page Number
Part I.
FINANCIAL INFORMATION
 
 
Item 1
Financial Statements
 
 
 
Item 2
Item 3
Item 4
Part II.
OTHER INFORMATION
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
Exhibits
1

Part I
FINANCIAL INFORMATION
Item 1. Financial Statements

HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30
2021		DECEMBER 31
2020		JUNE 30
2020
 (In thousands)
Assets  
Current assets
Cash and cash equivalents$1,108 $2,415 $1,616 
Trade receivables, net102,898 144,797 85,209 
Inventory151,728 173,962 90,572 
Prepaid expenses and other current assets18,220 15,118 13,358 
Total current assets273,954 336,292 190,755 
Property, plant and equipment, net30,319 23,490 23,064 
Goodwill6,253 6,253 6,253 
Other intangible assets, net1,792 1,892 2,494 
Deferred income taxes3,425 6,965 5,830 
Deferred costs14,192 13,449 11,532 
Other non-current assets3,070 2,827 2,673 
Total assets$333,005 $391,168 $242,601 
Liabilities and stockholders' equity  
Current liabilities
Accounts payable$99,353 $152,054 $92,282 
Accounts payable to NACCO Industries, Inc.34 505 496 
Revolving credit agreements— — 41,785 
Accrued compensation7,666 15,981 11,362 
Accrued product returns6,276 6,853 7,383 
Other current liabilities17,957 23,677 15,242 
Total current liabilities131,286 199,070 168,550 
Revolving credit agreements99,170 98,360 — 
Other long-term liabilities19,461 13,633 12,499 
Total liabilities249,917 311,063 181,049 
Stockholders' equity  
Class A Common stock102 100 99 
Class B Common stock41 41 41 
Capital in excess of par value60,881 58,485 56,325 
Treasury stock(5,960)(5,960)(5,960)
Retained earnings45,188 44,915 30,528 
Accumulated other comprehensive loss(17,164)(17,476)(19,481)
Total stockholders' equity83,088 80,105 61,552 
Total liabilities and stockholders' equity$333,005 $391,168 $242,601 

See notes to unaudited consolidated financial statements.
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HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 THREE MONTHS ENDED
JUNE 30		SIX MONTHS ENDED
JUNE 30
 2021 202020212020
 (In thousands, except per share data)(In thousands, except per share data)
Revenue$154,655 $138,297 $303,904 $259,143 
Cost of sales126,272 103,043 243,828 198,849 
Gross profit28,383 35,254 60,076 60,294 
Selling, general and administrative expenses27,447 24,035 53,826 48,248 
Amortization of intangible assets50 324 100 648 
Operating profit886 10,895 6,150 11,398 
Interest expense, net698 366 1,418 969 
Other expense (income), net(224)(193)(53)1,509 
Income (loss) from continuing operations before income taxes412 10,722 4,785 8,920 
Income tax expense (benefit)326 2,657 1,823 2,209 
Net income (loss) from continuing operations86 8,065 2,962 6,711 
Income (loss) from discontinued operations, net of tax— (305)— 22,561 
Net income (loss)$86 $7,760 $2,962 $29,272 
   
Basic and diluted earnings (loss) per share:
Continuing operations$0.01 $0.59 $0.21 $0.49 
Discontinued operations— (0.02)— 1.65 
Basic and diluted earnings (loss) per share$0.01 $0.57 $0.21 $2.14 
Basic weighted average shares outstanding13,875 13,644 13,865 13,635 
Diluted weighted average shares outstanding13,887 13,670 13,881 13,657 

See notes to unaudited consolidated financial statements.
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HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 THREE MONTHS ENDED
JUNE 30		SIX MONTHS ENDED
JUNE 30
 2021 202020212020
 (In thousands)(In thousands)
Net income (loss)$86 $7,760 $2,962 $29,272 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment(755)488 (77)1,545 
(Loss) gain on long-term intra-entity foreign currency transactions1,367 31 334 (4,879)
Cash flow hedging activity(560)137 (396)(25)
Reclassification of hedging activities into earnings101 (392)226 (282)
Reclassification of pension adjustments into earnings112 97 225 292 
Total other comprehensive income (loss), net of tax265 361 312 (3,349)
Comprehensive income$351  $8,121 $3,274 $25,923 

See notes to unaudited consolidated financial statements.

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HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 SIX MONTHS ENDED
JUNE 30
 2021 2020
 (In thousands)
Operating activities   
Net income (loss) from continuing operations$2,962  $6,711 
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used for) operating activities:   
Depreciation and amortization1,847  1,486 
Deferred income taxes3,925  1,037 
Stock compensation expense2,532 1,817 
Other(55) 116 
Net changes in operating assets and liabilities:   
Affiliate payable(471)— 
Trade receivables45,150  19,079 
Inventory23,159  17,222 
Other assets(6,824) (1,462)
Accounts payable(53,674) (18,871)
Other liabilities(10,126) (5,383)
Net cash provided by (used for) operating activities from continuing operations 8,425  21,752 
Investing activities   
Expenditures for property, plant and equipment(7,616) (1,592)
Other— (500)
Net cash provided by (used for) investing activities from continuing operations (7,616) (2,092)
Financing activities   
Net additions (reductions) to revolving credit agreements686  (16,692)
Cash dividends paid(2,689)(2,454)
Other financing(163)— 
Net cash provided by (used for) financing activities from continuing operations(2,166) (19,146)
Cash flows from discontinued operations
Net cash provided by (used for) operating activities from discontinued operations— (6,193)
Net cash provided by (used for) investing activities from discontinued operations— 6 
Net cash provided by (used for) financing activities from discontinued operations— — 
Cash provided by (used for) discontinued operations— (6,187)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash78  1,079 
Cash, cash equivalents and restricted cash   
Increase (decrease) for the period from continuing operations(1,279) 1,593 
Decrease for the period from discontinued operations— (6,187)
Balance at the beginning of the period3,436  7,164 
Balance at the end of the period$2,157  $2,570 
Reconciliation of cash, cash equivalents and restricted cash
Continuing operations:
Cash and cash equivalents$1,108 $1,616 
Restricted cash included in prepaid expenses and other current assets213 194 
Restricted cash included in other non-current assets836 760 
Cash and cash equivalents of discontinued operations— — 
Total cash, cash equivalents, and restricted cash$2,157 $2,570 
See notes to unaudited consolidated financial statements.
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HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
 Class A Common StockClass B Common StockCapital in Excess of Par ValueTreasury StockRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Stockholders' Equity
(In thousands, except per share data)
Balance, January 1, 2021$100 $41 $58,485 $(5,960)$44,915 $(17,476)$80,105 
Net income (loss)— — — — 2,876 — 2,876 
Issuance of common stock, net of conversions2 — (2)— — — — 
Share-based compensation expense— — 973 — — — 973 
Cash dividends, $0.095 per share
— — — — (1,302)— (1,302)
Other comprehensive income (loss), net of tax— — — — — (191)(191)
Reclassification adjustment to net income (loss)— — — — — 238 238 
Balance, March 31, 2021102 41 59,456 (5,960)46,489 (17,429)82,699 
Net income (loss)— — — — 86 — 86 
Share-based compensation expense— — 1,425 — — — 1,425 
Cash dividends, $0.10 per share
— — — — (1,387)— (1,387)
Other comprehensive income (loss), net of tax— — — — — 52 52 
Reclassification adjustment to net income (loss)— — — — — 213 213 
Balance, June 30, 2021$102 $41 $60,881 $(5,960)$45,188 $(17,164)$83,088 

Balance, January 1, 2020$98 $41 $54,509 $(5,960)$3,710 $(16,132)$36,266 
Net income (loss)— — — — 21,512 — 21,512 
Issuance of common stock, net of conversions1 — (1)— — — — 
Share-based compensation expense— — 554 — — — 554 
Cash dividends, $0.09 per share
— — — — (1,226)— (1,226)
Other comprehensive income (loss), net of tax— — — — — (4,015)(4,015)
Reclassification adjustment to net income (loss)— — — — — 305 305 
Balance, March 31, 202099 41 55,062 (5,960)23,996 (19,842)53,396 
Net income (loss)— — — — 7,760 — 7,760 
Share-based compensation expense— — 1,263 — — — 1,263 
Cash dividends, $0.09 per share
— — — — (1,228)— (1,228)
Other comprehensive income (loss), net of tax— — — — — 656 656 
Reclassification adjustment to net income (loss)— — — — — (295)(295)
Balance, June 30, 2020$99 $41 $56,325 $(5,960)$30,528 $(19,481)$61,552 

See notes to unaudited consolidated financial statements.
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HAMILTON BEACH BRANDS HOLDING COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 six months ended June 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, the amendments are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is planning to adopt ASU 2016-03 for its year ending December 31, 2022 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.

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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 $2.3 million of accumulated other comprehensive losses at June 30, 2021, which will be recognized in net income upon substantial liquidation of the Brazilian subsidiary which is expected to occur in the back half of 2021.





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NOTE 2—Discontinued Operations

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:
THREE MONTHS ENDED
JUNE 30		SIX MONTHS ENDED
JUNE 30
20202020
Revenue$— $631 
Cost of sales— — 
Gross profit— 631 
Selling, general and administrative expenses
299 1,346 
Adjustment of lease termination liability(1)
— (16,457)
Adjustment of other current liabilities(2)
— (6,608)
Operating income (loss)(299)22,350 
Other expense, net88 88 
(Loss)/Income from discontinued operations before income taxes(387)22,262 
Income tax benefit(82)(299)
(Loss)/Income from discontinued operations, net of tax$(305)$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 June 30, 2021, December 31, 2020, and June 30, 2020.
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 $36.2 million and $66.0 million of trade receivables during the three and six months ending June 30, 2021, respectively, $38.7 million and $75.2 million of trade receivables during the three and six months ending June 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 six months ended June 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.
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NOTE 4—Fair Value Disclosure

The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
DescriptionBalance Sheet LocationJUNE 30
2021		 DECEMBER 31
2020		JUNE 30
2020
Assets:
Interest rate swap agreements
CurrentPrepaid expenses and other current assets$— $— $— 
Foreign currency exchange contracts
CurrentPrepaid expenses and other current assets47 — 39 
$47 $— $39 
Liabilities:
Interest rate swap agreements
CurrentOther current liabilities$336 $380 $390 
Long-termOther long-term liabilities1,188 779 948 
Foreign currency exchange contracts
CurrentOther current liabilities390 518 — 
$1,914 $1,677 $1,338 

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 three and six months ended June 30, 2021. During the three months ended June 30, 2021, there was one transfer out of Level 3 related to the $2.1 million of assets held for sale.
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NOTE 5—Stockholders' Equity

Capital Stock 

The following table sets forth the Company's authorized capital stock information:
JUNE 30
2021		DECEMBER 31
2020		JUNE 30
2020
Preferred stock, par value $0.01 per share
Preferred stock authorized5,000 5,000 5,000 
Preferred stock outstanding— — — 
Class A Common stock, par value $0.01 per share
Class A Common stock authorized70,000 70,000 70,000 
Class A Common issued(1)(2)
10,214 10,006 9,946 
Treasury Stock365 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 authorized30,000 30,000 30,000 
Class B Common issued(1)
4,025 4,045 4,063 
(1) Class B Common converted to Class A Common were 12 and 20 shares during the three and six months ending June 30, 2021, respectively, and 10 and 13 shares during the three and six months ending June 30, 2020, respectively.

(2) The Company issued Class A Common shares of 16 and 188 during the three and six months ending June 30, 2021, respectively, and 20 and 128 during the three and six months ending June 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 CurrencyDeferred Gain (Loss) on Cash Flow Hedging Pension Plan AdjustmentTotal
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)
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 effects1,132 (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)

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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 six months ended June 30:
THREE MONTHS ENDED
JUNE 30		SIX MONTHS ENDED
JUNE 30
 2021 202020212020
Type of good or service:
  Consumer products$142,216 $130,670 $281,729 $240,387 
  Commercial products10,990 6,146 19,583 16,064 
  Licensing1,449 1,481 2,592 2,692 
     Total revenues$154,655 $138,297 $303,904 $259,143 
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NOTE 7—Contingencies

Various legal and regulatory proceedings and claims have been or may be asserted against Hamilton Beach Brands Holdings Company and certain subsidiaries relating to the conduct of its businesses, including product liability, patent infringement, asbestos related claims, environmental and other claims. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. 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.

These matters 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.

HBB is a defendant in a legal proceeding in which the plaintiff alleges that certain HBB products infringe the plaintiff’s patents. On July 21, 2021, the Federal Circuit affirmed the lower court rulings awarding plaintiff damages for infringement of certain patents and denying plaintiff’s request for attorney’s fees. HBB ceased selling products covered by the decision and expects the decision to have no impact on its ability to sell its current line of products. As of June 30, 2021, the accrual for the contingent loss is $3.1 million and is classified in other current liabilities.

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 June 30, 2021, December 31, 2020, and June 30, 2020, HBB had accrued undiscounted obligations of $3.5 million, $3.1 million and $4.2 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 $1.4 million related to the environmental investigation and remediation at these sites.





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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.

During the six months ended June 30, 2021, the Company recorded a total income tax provision of $1.8 million on a pre-tax income of $4.8 million resulting in an effective tax rate of 38.1%. The effective tax rate for this period was primarily impacted by $0.6 million of interest and penalties on unrecognized tax benefits as a discrete expense item. Excluding the impact of the discrete expense, the effective tax rate was 24.8% for the period which is consistent with the effective tax rate during the six months ended June 30, 2020.

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.

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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. 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.

Second Quarter of 2021 Compared with Second Quarter of 2020
THREE MONTHS ENDED
JUNE 30
Increase / (Decrease)
2021% of Revenue2020% of Revenue$ Change% Change
Revenue$154,655 100.0 %$138,297 100.0 %$16,358 11.8 %
Cost of sales126,272 81.6 %103,043 74.5 %23,229 22.5 %
Gross profit28,383 18.4 %35,254 25.5 %(6,871)(19.5)%
Selling, general and administrative expenses27,447 17.7 %24,035 17.4 %3,412 14.2 %
Amortization of intangible assets50 — %324 0.2 %(274)(84.6)%
Operating profit886 0.6 %10,895 7.9 %(10,009)(91.9)%
Interest expense, net698 0.5 %366 0.3 %332 90.7 %
Other expense (income), net(224)(0.1)%(193)(0.1)%(31)16.1 %
Income (loss) from continuing operations before income taxes412 0.3 %10,722 7.8 %(10,310)(96.2)%
Income tax expense (benefit)326 0.2 %2,657 1.9 %(2,331)(87.7)%
Net income (loss) from continuing operations86 0.1 %8,065 5.8 %(7,979)(98.9)%
Income (loss) from discontinued operations, net of tax— n/m(305)n/m305 (100.0)%
Net income (loss)$86 $7,760 $(7,674)
Effective income tax rate on continuing operations79.1 %24.8 %

The following table identifies the components of the change in revenue:
 Revenue
2020$138,297 
Increase (decrease) from:
Unit volume and product mix14,401 
Foreign currency2,307 
Average sales price (350)
2021$154,655 

Revenue - Revenue increased $16.4 million, or 11.8%, due primarily to higher sales volume in the Latin American, Mexican, and Global Commercial markets compared to prior year as they rebounded from the pandemic-related demand softness. The Company was able to maintain revenue in the US and Canadian consumer markets compared to prior year despite strong sales in the second quarter of 2020, which resulted from pandemic-driven growth.

Gross profit - As a percentage of revenue, gross profit margin decreased from 25.5% in the prior year to 18.4% 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, causing increased freight and container costs as well as additional carrier storage charges. The Company also experienced increased material costs and higher labor expenses, especially for warehouse personnel.

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Selling, general and administrative expenses - Selling, general and administrative expenses increased $3.4 million, driven primarily by an increase in outside services and employee-related costs, as well as incremental expenses incurred during the relocation to the Company's new distribution center.

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 higher for the quarter ended June 30, 2021 when compared to the effective tax rate for the quarter ended June 30, 2020 due primarily to the inclusion of interest and penalties on unrecognized tax benefits as a discrete expense item.

First Six Months of 2021 Compared with First Six Months of 2020
SIX MONTHS ENDED
JUNE 30
2021% of Revenue2020% of Revenue$ Change% Change
Revenue$303,904 100.0 %$259,143 100.0 %$44,761 17.3 %
Cost of sales243,828 80.2 %198,849 76.7 %44,979 22.6 %
Gross profit60,076 19.8 %60,294 23.3 %(218)(0.4)%
Selling, general and administrative expenses53,826 17.7 %48,248 18.6 %5,578 11.6 %
Amortization of intangible assets100 — %648 0.3 %(548)(84.6)%
Operating profit6,150 2.0 %11,398 4.4 %(5,248)(46.0)%
Interest expense, net1,418 0.5 %969 0.4 %449 46.3 %
Other expense (income), net(53)— %1,509 0.6 %(1,562)(103.5)%
Income (loss) from continuing operations before income taxes4,785 1.6 %8,920 3.4 %(4,135)(46.4)%
Income tax expense (benefit)1,823 0.6 %2,209 0.9 %(386)(17.5)%
Net income (loss) from continuing operations2,962 1.0 %6,711 2.6 %(3,749)(55.9)%
Income (loss) from discontinued operations, net of tax— n/m22,561 n/m(22,561)(100.0)%
Net income (loss)$2,962 $29,272 $(26,310)
Effective income tax rate on continuing operations38.1 %24.8 %

The following table identifies the components of the change in revenue:
 Revenue
2020$259,143 
Increase (decrease) from:
Unit volume and product mix41,327 
Average sales price475 
Foreign currency2,959 
2021$303,904 

Revenue - Revenue increased by $44.8 million or 17.3% over the prior year due primarily to higher sales volume in the North American consumer market, as the Company continues to see strong demand in the US, Canadian and Latin American markets. Revenue in the Global Commercial market increased as compared to prior year as a result of strong sales in the second quarter of 2021. The Company remains focused on ecommerce, as revenue from this channel increased 22% in the first half of 2021 compared to the first half of 2020.

Gross profit - Gross profit margin decreased to 19.8% from 23.3% due to significantly higher transportation costs, as a result of the disruption and congestion in the supply chain.

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Selling, general and administrative expenses - Selling, general and administrative expenses increased $5.6 million, driven by an increase in third-party and consulting services fees, employee-related costs, as well as incremental expenses incurred during the relocation of the Company's distribution center. Included in selling, general and administrative expenses for the six months ended June 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 $1.6 million reduction to the accrual for litigation and environmental reserves.

Interest expense - Interest expense, net increased $0.4 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 $0.4 million in the current year compared to currency losses of $1.8 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 38.1% compared to 24.8% in the prior year. The increase is due to the inclusion of interest and penalties on unrecognized tax benefits as a discrete expense item. Excluding the impact of the discrete expense, the effective tax rate was 24.8% for the period which is consistent with the effective tax rate during the six months ended June 30, 2020.
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 $123.5 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 April 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 and it was deconsolidated. Neither Hamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC. 

The following table presents selected cash flow information from continuing operations:
SIX MONTHS ENDED
JUNE 30
 20212020
Net cash provided by (used for) operating activities$8,425 $21,752 
Net cash provided by (used for) investing activities$(7,616)$(2,092)
Net cash provided by (used for) financing activities$(2,166)$(19,146)
Operating activities - Net cash provided by operating activities was $8.4 million compared to $21.8 million in the prior year. As compared to the prior year, the lower net cash provided by operating activities was primarily due to lower net income, an increase in working capital requirements, as well as a decrease in 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.
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Financing activities - Net cash used for financing activities was $2.2 million compared to $19.1 million in 2020.  The change is due to a decrease in HBB's net borrowing activity on the revolving credit facility during the first six months of 2021 as compared to the first six months of 2020. Borrowings on the revolving credit facility are used to fund net working capital.

Capital Resources

HBB maintains a $123.5 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires on June 30, 2025. The Company expects to continue to borrow against the 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 June 30, 2021, the borrowing base under the HBB Facility was $121.6 million and borrowings outstanding were $99.2 million. At June 30, 2021, the excess availability under the HBB Facility was $22.4 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 June 30, 2021, for base rate loans and LIBOR loans denominated in US dollars were 0.0% and 1.75%, respectively. The applicable margins, effective June 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 six months ended June 30, 2021 was 2.60% 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 June 30, 2021 at an average fixed interest rate of 1.66%. HBB also entered into delayed-start interest rate swaps during the second quarter of 2021. These swaps have notional values totaling $50.0 million as of June 30, 2021, with an average fixed interest rate of 1.7%.

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. 8 to the HBB Facility, dividends to Hamilton Beach Holding are not to exceed $6.0 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 $15.0 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 $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. At June 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.
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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 Company’s ability to ship products to meet the anticipated increase in demand, (2) the Company’s ability to successfully manage the anticipated transportation constraints, (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 HBB 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) difficulties arising as a result of the Company's implementation, integration or operation of an enterprise resource planning system in the US, (18) the Company's ability to successfully remediate the material weaknesses in its internal control over financial reporting 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, (19) the Company's ability to effectively plan and manage the relocation to its new distribution center, and (20) 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 extent of new outbreaks, the extent to which new shutdowns 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 fully, the availability of vaccines for COVID-19, the rate of individuals becoming fully vaccinated, the potential need for fully vaccinated individuals to receive booster shots, 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 $1.5 million at June 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 $1.4 million for the six months ended June 30, 2021.

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FOREIGN CURRENCY EXCHANGE RATE RISK

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 payable of $0.3 million at June 30, 2021. Assuming a hypothetical 10% weakening of the US dollar at June 30, 2021, the fair value of foreign currency-sensitive financial instruments, which represents forward foreign currency exchange contracts, would be decreased by $2.4 million compared with its fair value at June 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 June 30, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 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 Weaknesses Related to our Mexican Subsidiaries
As described in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2020, we identified two material weaknesses at our Mexican subsidiaries as of December 31, 2019 related to (1) the design and operating effectiveness of review controls for account reconciliations and manual journal entries and (2) the design and operating effectiveness of transaction level controls over authorization of spending with vendors, adjusting product costing and selling prices, new customer setup and accounting for price concessions with our customers.
Remediation of Material Weaknesses

The Company developed and implemented a plan of remediation to strengthen our internal controls over financial reporting at our Mexican subsidiary. The steps taken to remediate the Company’s material weakness included the following:

•Personnel Actions - We have terminated employees of one of our Mexican subsidiaries found to have engaged in misconduct, which included collusion between these employees and vendors and customers of our Mexican subsidiaries in which such employees had an interest. Additional training on our code of conduct has been implemented for all employees of the Mexican subsidiaries.

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•Organizational Enhancements - We have implemented organizational enhancements as follows: (i) augmented our local accounting team for our Mexican subsidiaries with additional professionals with the relevant levels of accounting and controls knowledge, experience and training in the area of account reconciliations and manual journal entries to validate that account reconciliations and manual journal entries are supported by accurate and complete information; (ii) developed a more comprehensive review process and monitoring controls over the approval for vendor payments, changes to product cost and selling prices, approval for new customer setup including related terms and accounting for price concessions with our customers at our Mexican subsidiaries; and (iii) outsourced functions at our Mexican subsidiaries where third-party service providers provide expertise or technical skillset, as appropriate

The actions described above to address the material weaknesses are fully implemented and the operational effectiveness of related internal controls has been validated through testing. Based on the actions taken, and the testing and evaluation of the effectiveness of the controls, management concluded that these controls are operating effectively and the material weaknesses described above has been remediated as of June 30, 2021.

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 has made progress on this plan during the quarter, making changes to the organizational structure and resources as well as engaging a third party with the relevant levels of tax experience to support the income taxes accounting process. 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
Other than with respect to the material weaknesses related to our Mexico subsidiaries discussed above that were identified as of December 31, 2019 and subsequently remediated as of June 30, 2021, there were no changes in the Company’s internal control over financial reporting identified during the quarter ended June 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.
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PART II
OTHER INFORMATION

Item 1    Legal Proceedings
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, except for the following, which should be read in conjunction with the risk factors in such Annual Report on Form 10-K.

Failure to adequately plan and manage the relocation of the Company's distribution center may interrupt its operations and lower its operating income.
HBB has signed a lease agreement and is in the process of relocating to a new US distribution center. The move entails risk that could cause delays and cost overruns, such as: reduced shipping capabilities; disruptions in the integration of the new distribution center with the warehouse management system; and unanticipated cost increases. There is also the risk that the Company will not adequately adjust its business processes or appropriately manage its work force during the transition. Failure to adequately plan and manage the relocation efforts could cause a disruption in its operations and lower its operating income.

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 six months ended June 30, 2021 and June 30, 2020.

Item 3    Defaults Upon Senior Securities
None.

Item 4    Mine Safety Disclosures
None.

Item 5    Other Information
None.

Item 6    Exhibits
Exhibit  
Number* Description of Exhibits
10.1
31(i)(1) 
31(i)(2) 
32 
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*    Numbered in accordance with Item 601 of Regulation S-K.
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Table of Contents

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.
 
Hamilton Beach Brands Holding Company
(Registrant)
 
Date:August 4, 2021/s/ Michelle O. Mosier
 Michelle O. Mosier
 Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)/(Principal Accounting Officer)

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