Hamilton Beach Brands Holding Co - Quarter Report: 2021 March (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 ended | March 31, 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. 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 | 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 April 30, 2021: 9,845,038
Number of shares of Class B Common Stock outstanding at April 30, 2021: 4,029,355
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)
| MARCH 31 2021 | DECEMBER 31 2020 | MARCH 31 2020 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Assets | |||||||||||||||||
| Current assets | |||||||||||||||||
| Cash and cash equivalents | $ | 1,375 | $ | 2,415 | $ | 2,078 | |||||||||||
| Trade receivables, net | 107,934 | 144,797 | 69,569 | ||||||||||||||
| Inventory | 163,831 | 173,962 | 89,986 | ||||||||||||||
| Prepaid expenses and other current assets | 13,770 | 15,118 | 16,427 | ||||||||||||||
| Current assets of discontinued operations | — | — | 324 | ||||||||||||||
| Total current assets | 286,910 | 336,292 | 178,384 | ||||||||||||||
| Property, plant and equipment, net | 24,252 | 23,490 | 22,465 | ||||||||||||||
| Goodwill | 6,253 | 6,253 | 6,253 | ||||||||||||||
| Other intangible assets, net | 1,842 | 1,892 | 2,818 | ||||||||||||||
| Deferred income taxes | 3,416 | 6,965 | 5,128 | ||||||||||||||
| Deferred costs | 13,960 | 13,449 | 11,172 | ||||||||||||||
| Other non-current assets | 2,708 | 2,827 | 2,150 | ||||||||||||||
| Total assets | $ | 339,341 | $ | 391,168 | $ | 228,370 | |||||||||||
| Liabilities and stockholders' equity | |||||||||||||||||
| Current liabilities | |||||||||||||||||
| Accounts payable | $ | 102,725 | $ | 152,054 | $ | 61,578 | |||||||||||
| Accounts payable to NACCO Industries, Inc. | 10 | 505 | 496 | ||||||||||||||
| Revolving credit agreements | — | — | 34,547 | ||||||||||||||
| Accrued compensation | 10,894 | 15,981 | 8,126 | ||||||||||||||
| Accrued product returns | 5,860 | 6,853 | 7,536 | ||||||||||||||
| Other current liabilities | 18,465 | 23,677 | 14,098 | ||||||||||||||
| Current liabilities of discontinued operations | — | — | 1,099 | ||||||||||||||
| Total current liabilities | 137,954 | 199,070 | 127,480 | ||||||||||||||
| Revolving credit agreements | 102,555 | 98,360 | 35,000 | ||||||||||||||
| Other long-term liabilities | 16,133 | 13,633 | 12,494 | ||||||||||||||
| Total liabilities | 256,642 | 311,063 | 174,974 | ||||||||||||||
| Stockholders' equity | |||||||||||||||||
| Class A Common stock | 102 | 100 | 99 | ||||||||||||||
| Class B Common stock | 41 | 41 | 41 | ||||||||||||||
| Capital in excess of par value | 59,456 | 58,485 | 55,062 | ||||||||||||||
| Treasury stock | (5,960) | (5,960) | (5,960) | ||||||||||||||
| Retained earnings | 46,489 | 44,915 | 23,996 | ||||||||||||||
| Accumulated other comprehensive loss | (17,429) | (17,476) | (19,842) | ||||||||||||||
| Total stockholders' equity | 82,699 | 80,105 | 53,396 | ||||||||||||||
| Total liabilities and stockholders' equity | $ | 339,341 | $ | 391,168 | $ | 228,370 | |||||||||||
See notes to unaudited consolidated financial statements.
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HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| THREE MONTHS ENDED MARCH 31 | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Revenue | $ | 149,249 | $ | 120,846 | |||||||
| Cost of sales | 117,556 | 95,806 | |||||||||
| Gross profit | 31,693 | 25,040 | |||||||||
| Selling, general and administrative expenses | 26,379 | 24,213 | |||||||||
| Amortization of intangible assets | 50 | 324 | |||||||||
| Operating profit | 5,264 | 503 | |||||||||
| Interest expense, net | 720 | 603 | |||||||||
| Other expense, net | 171 | 1,702 | |||||||||
| Income (loss) from continuing operations before income taxes | 4,373 | (1,802) | |||||||||
| Income tax expense (benefit) | 1,497 | (448) | |||||||||
| Net income (loss) from continuing operations | 2,876 | (1,354) | |||||||||
| Income from discontinued operations, net of tax | — | 22,866 | |||||||||
| Net income | $ | 2,876 | $ | 21,512 | |||||||
| Basic and diluted earnings (loss) per share: | |||||||||||
| Continuing operations | $ | 0.21 | $ | (0.10) | |||||||
| Discontinued operations | — | 1.68 | |||||||||
| Basic and diluted earnings (loss) per share | $ | 0.21 | $ | 1.58 | |||||||
| Basic weighted average shares outstanding | 13,855 | 13,625 | |||||||||
| Diluted weighted average shares outstanding | 13,874 | 13,625 | |||||||||
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 MARCH 31 | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Net income | $ | 2,876 | $ | 21,512 | |||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustment | 678 | 1,057 | |||||||||
| (Loss) gain on long-term intra-entity foreign currency transactions | (1,033) | (4,910) | |||||||||
| Cash flow hedging activity | 164 | (162) | |||||||||
| Reclassification of hedging activities into earnings | 125 | 110 | |||||||||
| Reclassification of pension adjustments into earnings | 113 | 195 | |||||||||
| Total other comprehensive income (loss), net of tax | 47 | (3,710) | |||||||||
| Comprehensive income | $ | 2,923 | $ | 17,802 | |||||||
See notes to unaudited consolidated financial statements.
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HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| THREE MONTHS ENDED MARCH 31 | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Operating activities | |||||||||||
| Net income (loss) from continuing operations | $ | 2,876 | $ | (1,354) | |||||||
| Adjustments to reconcile net income (loss) from continuing operations to net cash used for operating activities: | |||||||||||
| Depreciation and amortization | 896 | 792 | |||||||||
| Deferred income taxes | 3,702 | 1,182 | |||||||||
| Stock compensation expense | 1,107 | 555 | |||||||||
| Other | 405 | 343 | |||||||||
| Net changes in operating assets and liabilities: | |||||||||||
| Affiliate payable | (495) | — | |||||||||
| Trade receivables | 36,853 | 34,811 | |||||||||
| Inventory | 9,774 | 17,047 | |||||||||
| Other assets | 926 | (5,637) | |||||||||
| Accounts payable | (49,152) | (49,550) | |||||||||
| Other liabilities | (8,781) | (8,231) | |||||||||
| Net cash provided by (used for) operating activities from continuing operations | (1,889) | (10,042) | |||||||||
| Investing activities | |||||||||||
| Expenditures for property, plant and equipment | (1,746) | (625) | |||||||||
| Net cash provided by (used for) investing activities from continuing operations | (1,746) | (625) | |||||||||
| Financing activities | |||||||||||
| Net additions to revolving credit agreements | 4,129 | 11,102 | |||||||||
| Cash dividends paid | (1,302) | (1,226) | |||||||||
| Other financing | (134) | — | |||||||||
| Net cash provided by (used for) financing activities from continuing operations | 2,693 | 9,876 | |||||||||
| Cash flows from discontinued operations | |||||||||||
| Net cash provided by (used for) operating activities from discontinued operations | — | (4,968) | |||||||||
| 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 | — | (4,962) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (85) | 1,376 | |||||||||
| Cash, cash equivalents and restricted cash | |||||||||||
| Increase (decrease) for the period from continuing operations | (1,027) | 585 | |||||||||
| Decrease for the period from discontinued operations | — | (4,962) | |||||||||
| Balance at the beginning of the period | 3,436 | 7,164 | |||||||||
| Balance at the end of the period | $ | 2,409 | $ | 2,787 | |||||||
| Reconciliation of cash, cash equivalents and restricted cash | |||||||||||
| Continuing operations: | |||||||||||
| Cash and cash equivalents | $ | 1,375 | $ | 2,078 | |||||||
| Restricted cash included in prepaid expenses and other current assets | 210 | 186 | |||||||||
| Restricted cash included in other non-current assets | 824 | 378 | |||||||||
| Cash and cash equivalents of discontinued operations | — | 145 | |||||||||
| Total cash, cash equivalents, and restricted cash | $ | 2,409 | $ | 2,787 | |||||||
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 Stock | Class B Common Stock | Capital in Excess of Par Value | Treasury Stock | Retained Earnings | Accumulated 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 conversions | 2 | — | (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 | — | — | — | — | — | 238 | 238 | ||||||||||||||||
| Balance, March 31, 2021 | $ | 102 | $ | 41 | $ | 59,456 | $ | (5,960) | $ | 46,489 | $ | (17,429) | $ | 82,699 | |||||||||
| 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 conversions | 1 | — | (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 loss | — | — | — | — | — | 305 | 305 | ||||||||||||||||
| Balance, March 31, 2020 | $ | 99 | $ | 41 | $ | 55,062 | $ | (5,960) | $ | 23,996 | $ | (19,842) | $ | 53,396 | |||||||||
See notes to unaudited consolidated financial statements.
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HAMILTON BEACH BRANDS HOLDING COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 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 three months ended March 31, 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 our primary markets. A majority of revenue and operating profit typically occurs in the second half of the calendar year when sales of our 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.
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 our Brazilian subsidiary and determined that we met all of the criteria to classify the assets and liabilities of this business as held for sale. The carrying amounts of the major classes of assets that are classified as held for sale as of March 31, 2021 are as follows: $1.6 million of trade receivables, net, and $0.5 million of inventory. As of March 31, 2021, the total of these amounts are included in the prepaid expenses and other current assets line item on the Consolidated Balance Sheet. The carrying value of the disposal group approximates the fair value, which we determined based on the expected sales price.
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, we are no longer committed to selling the subsidiary. The carrying amounts of the assets will be reclassified to held and used during the second quarter of 2021. The disposal group had $2.5 million of accumulated other comprehensive losses at March 31, 2021, which will be recognized in net income upon substantial liquidation of the Brazilian subsidiary which we expect 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 MARCH 31 | ||||||||
| 2020 | ||||||||
| Revenue | $ | 631 | ||||||
| Cost of sales | — | |||||||
| Gross profit | 631 | |||||||
Selling, general and administrative expenses | 1,047 | |||||||
Adjustment of lease termination liability(1) | (16,457) | |||||||
Adjustment of other current liabilities(2) | (6,608) | |||||||
| Operating income | 22,649 | |||||||
| Income from discontinued operations before income taxes | 22,649 | |||||||
| Income tax benefit | (217) | |||||||
| Income from discontinued operations, net of tax | $ | 22,866 | ||||||
(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.
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Due to the deconsolidation of KC on April 3, 2020, there are no assets or liabilities associated with KC as of March 31, 2021 and December 31, 2020. The major classes of KC's assets and liabilities included as part of discontinued operations as of March 31, 2020 are as follows:
| MARCH 31 2020 | |||||
| Assets | |||||
| Cash and cash equivalents | $ | 145 | |||
| Prepaid expenses and other current assets | 179 | ||||
| Current assets of discontinued operations | $ | 324 | |||
| Liabilities | |||||
| Accounts payable | $ | 63 | |||
| Lease termination liability | 791 | ||||
| Other current liabilities | 245 | ||||
| Current liabilities of discontinued operations | $ | 1,099 | |||
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 $29.8 million and $36.5 million of trade receivables during the three months ending March 31, 2021 and 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 three months ended March 31, 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:
| Description | Balance Sheet Location | MARCH 31 2021 | DECEMBER 31 2020 | MARCH 31 2020 | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Interest rate swap agreements | ||||||||||||||||||||||||||
| Current | Prepaid expenses and other current assets | $ | — | $ | — | $ | — | |||||||||||||||||||
| Foreign currency exchange contracts | ||||||||||||||||||||||||||
| Current | Prepaid expenses and other current assets | — | — | 767 | ||||||||||||||||||||||
| $ | — | $ | — | $ | 767 | |||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Interest rate swap agreements | ||||||||||||||||||||||||||
| Current | Other current liabilities | $ | 333 | $ | 380 | $ | 362 | |||||||||||||||||||
| Long-term | Other long-term liabilities | 591 | 779 | 818 | ||||||||||||||||||||||
| Foreign currency exchange contracts | ||||||||||||||||||||||||||
| Current | Other current liabilities | 249 | 518 | — | ||||||||||||||||||||||
| $ | 1,173 | $ | 1,677 | $ | 1,180 | |||||||||||||||||||||
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, 2 or 3 during the three months ended March 31, 2021.
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NOTE 5—Stockholders' Equity
Capital Stock
The following table sets forth the Company's authorized capital stock information:
| MARCH 31 2021 | DECEMBER 31 2020 | MARCH 31 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) | 10,186 | 10,006 | 9,917 | ||||||||||||||
| 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) | 4,037 | 4,045 | 4,074 | ||||||||||||||
(1) Class B Common converted to Class A Common were 8 and 3 shares during the three months ending March 31, 2021 and 2020, respectively.
(2) The Company issued Class A Common shares of 172 and 108 during the three months ending March 31, 2021 and 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) | |||||||||||||||
| 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) | |||||||||||||||
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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 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 our customers for incentive offerings, special pricing agreements, price competition, promotions or other volume-based arrangements. We evaluated such agreements with our 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 for restaurants, fast-food chains, bars and hotels. Approximately one-half of our 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 months ended March 31:
| THREE MONTHS ENDED MARCH 31 | |||||||||||
| 2021 | 2020 | ||||||||||
| Type of good or service: | |||||||||||
| Consumer products | $ | 139,513 | $ | 109,717 | |||||||
| Commercial products | 8,593 | 9,918 | |||||||||
| Licensing | 1,143 | 1,211 | |||||||||
| Total revenues | $ | 149,249 | $ | 120,846 | |||||||
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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 May 3, 2019, the jury returned its verdict finding that the Company had infringed certain patents of the plaintiff and, as a result, awarded the plaintiff damages in the amount of $3.2 million. On May 2, 2020, the Company’s motion for judgment as a matter of law for non-infringement of certain claims of one of the patents in the case was granted. Since May 2, 2020, the court has also issued orders denying plaintiff’s motion for attorney’s fees and reducing plaintiff’s award. In August 2020, the court entered an order awarding the plaintiff additional sales posttrial and interest on the damages award through July 31, 2020 and continuing interest in a de minimis amount until the judgment is satisfied. As of March 31, 2021, the accrual for the contingent loss is $3.1 million. HBB continues to vigorously pursue the appeal of the judgment and adverse lower court rulings with the US Court of Appeals for the Federal Circuit, as HBB maintains it does not infringe any valid patent claim and the damages award is not supported by the evidence.
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 March 31, 2021, December 31, 2020, and March 31, 2020, HBB had accrued undiscounted obligations of $3.1 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 $1.7 million related to the environmental investigation and remediation at these sites.
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NOTE 8—Income Taxes
The effective tax rate on income from continuing operations was 34.2% and 24.9% for the three months ended March 31, 2021 and 2020, respectively. The effective tax rate was higher for the three months ended March 31, 2021 due to the inclusion of $0.4 million related to interest and penalties on unrecognized tax benefits as a discrete expense item.
NOTE 9—Subsequent Events
On April 9, 2021, the Company entered into Amendment No. 9 to the 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”). Due to the highly seasonal nature of the Company’s primary markets, Amendment No. 8 dated November 23, 2020 provided for increases in advance rates used to determine the borrowing base during periods of the second half of the calendar year. Amendment No. 9 increases the credit facility from $125 million to $140 million for a period of sixty days from its effective date to provide similar flexibility as demand for small kitchen appliances is expected to remain strong in the first half of 2021. The Amendment did not result in any other changes to the terms or due date of the credit facility.
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 our 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. See Note 2, Discontinued Operations for more information.
First Quarter of 2021 Compared with First Quarter of 2020
| THREE MONTHS ENDED MARCH 31 | |||||||||||||||||||||||||||||||||||
| Increase / (Decrease) | |||||||||||||||||||||||||||||||||||
| 2021 | % of Revenue | 2020 | % of Revenue | $ Change | % Change | ||||||||||||||||||||||||||||||
| Revenue | $ | 149,249 | 100.0 | % | $ | 120,846 | 100.0 | % | $ | 28,403 | 23.5 | % | |||||||||||||||||||||||
| Cost of sales | 117,556 | 78.8 | % | 95,806 | 79.3 | % | 21,750 | 22.7 | % | ||||||||||||||||||||||||||
| Gross profit | 31,693 | 21.2 | % | 25,040 | 20.7 | % | 6,653 | 26.6 | % | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | 26,379 | 17.7 | % | 24,213 | 20.0 | % | 2,166 | 8.9 | % | ||||||||||||||||||||||||||
| Amortization of intangible assets | 50 | — | % | 324 | 0.3 | % | (274) | (84.6) | % | ||||||||||||||||||||||||||
| Operating profit | 5,264 | 3.5 | % | 503 | 0.4 | % | 4,761 | n/m | |||||||||||||||||||||||||||
| Interest expense, net | 720 | 0.5 | % | 603 | 0.5 | % | 117 | 19.4 | % | ||||||||||||||||||||||||||
| Other expense, net | 171 | 0.1 | % | 1,702 | 1.4 | % | (1,531) | (90.0) | % | ||||||||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | 4,373 | 2.9 | % | (1,802) | (1.5) | % | 6,175 | n/m | |||||||||||||||||||||||||||
| Income tax expense (benefit) | 1,497 | 1.0 | % | (448) | (0.4) | % | 1,945 | n/m | |||||||||||||||||||||||||||
| Net income (loss) from continuing operations | 2,876 | 1.9 | % | (1,354) | (1.1) | % | 4,230 | n/m | |||||||||||||||||||||||||||
| Income from discontinued operations, net of tax | — | n/m | 22,866 | n/m | (22,866) | n/m | |||||||||||||||||||||||||||||
| Net income | $ | 2,876 | $ | 21,512 | $ | (18,636) | |||||||||||||||||||||||||||||
| Effective income tax rate on continuing operations | 34.2 | % | 24.9 | % | |||||||||||||||||||||||||||||||
The following table identifies the components of the change in revenue:
| Revenue | |||||
| 2020 | $ | 120,846 | |||
| Increase from: | |||||
| Unit volume and product mix | 26,925 | ||||
| Foreign currency | 652 | ||||
| Average sales price | 826 | ||||
| 2021 | $ | 149,249 | |||
Revenue - Revenue increased $28.4 million, or 23.5%, due primarily to higher sales volume in the North American consumer market, as we continue to see strong demand for small kitchen appliances in the US, Canadian and Latin American markets. Revenue in the Global Commercial market decreased as compared to prior year as recovery from the pandemic-related demand softness continues. The Company remains focused on ecommerce, as revenue from this channel increased 59% and accounted for 35% of total revenue in the first quarter of 2021 compared to 27% of total revenue in the first quarter of 2020.
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Gross profit - Gross profit increased due to the higher sales volume. As a percentage of revenue, gross profit margin increased from 20.7% in the prior year to 21.2% primarily due to customer and product mix.
Selling, general and administrative expenses - Selling, general and administrative expenses increased $2.2 million, driven primarily by an increase in third-party and consulting services fees as well as increased employee-related costs. Included in selling, general and administrative expenses for the first quarter of 2020 is $1.9 million charges to write-off unrealizable assets created as a result of the Mexico unauthorized transactions, offset by a $1.6 million reduction to the accrual for litigation and environmental reserves.
Interest expense - Interest expense increased $0.1 million due to increased average borrowings outstanding under HBB's revolving credit facility.
Other expense, net - For the first quarter of 2021, other expense includes currency losses of $0.4 million compared with currency losses of $1.9 million in 2020. 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 Company recognized an income tax expense of $1.5 million on income from continuing operations before income taxes of $4.4 million, an effective tax rate of 34.2% compared to income tax benefit of $0.5 million on loss from continuing operations before income taxes of $1.8 million in the prior year, an effective tax rate of 24.9%. The effective tax rate was higher for the quarter ended March 31, 2021 due to the inclusion of $0.4 million related to interest and penalties on unrecognized tax benefits as a discrete expense item.
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, and payments of principal and interest on debt.
HBB maintains a $125.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires on June 30, 2025, therefore all borrowings are classified as long term debt as of March 31, 2021. 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 9, 2021, the Company entered into Amendment No. 9 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”). Due to the highly seasonal nature of the Company’s primary markets, Amendment No. 8 dated November 23, 2020 provided for increases in advance rates used to determine the borrowing base during periods of the second half of the calendar year. Amendment No. 9 increases the credit facility from $125 million to $140 million for a period of sixty days from its effective date to provide similar flexibility as demand for small kitchen appliances is expected to remain strong in the first half of 2021.
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.
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The following table presents selected cash flow information from continuing operations:
| THREE MONTHS ENDED MARCH 31 | |||||||||||
| 2021 | 2020 | ||||||||||
| Net cash provided by (used for) operating activities | $ | (1,889) | $ | (10,042) | |||||||
| Net cash provided by (used for) investing activities | $ | (1,746) | $ | (625) | |||||||
| Net cash provided by (used for) financing activities | $ | 2,693 | $ | 9,876 | |||||||
Operating activities - Net cash used for operating activities was $1.9 million compared to $10.0 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 and changes in other assets, which provided a source of cash of $0.9 million in 2021 compared to a use of cash of $5.6 million in 2020.
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 lease, which will begin in the third quarter of 2021.
Financing activities - Net cash provided by financing activities was $2.7 million compared to $9.9 million in 2020. The change is due to a decrease in HBB's net borrowing activity on the revolving credit facility during the first quarter of 2021 as compared to the first quarter of 2020. Borrowings on the revolving credit facility are used to fund net working capital.
Capital Resources
HBB maintains a $125.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires on June 30, 2025. Therefore, all borrowings are classified as long term debt as of March 31, 2021.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 March 31, 2021, the borrowing base under the HBB Facility was $123.3 million and borrowings outstanding were $102.6 million. At March 31, 2021, the excess availability under the HBB Facility was $20.7 million.
The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible trade receivables, inventory and trademarks of the borrowers, as defined in the HBB Facility. Borrowings bear interest at a floating rate, which can be a base rate, LIBOR or bankers' acceptance rate, as defined in the HBB Facility, plus an applicable margin. The applicable margins, effective March 31, 2021, for base rate loans and LIBOR loans denominated in US dollars were 0.0% and 2.00%, respectively. The applicable margins, effective March 31, 2021, for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.0% and 2.00%, respectively. The HBB Facility also requires a fee of 0.25% per annum on the unused commitment. The margins and unused commitment fee under the HBB Facility are subject to quarterly adjustment based on average excess availability. The weighted average interest rate applicable to the HBB Facility for the three months ended March 31, 2021 was 2.77% including the floating rate margin and the effect of the interest rate swap agreements described below.
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To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of the HBB Facility. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate. HBB has interest rate swaps with notional values totaling $25.0 million at March 31, 2021 at an average fixed interest rate of 1.66%.
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 March 31, 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 our 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 our Annual Report.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Such risks and uncertainties include, without limitation: (1) the 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 our 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 our implementation, integration or operation of an enterprise resource planning system in the US, (18) our ability to successfully remediate the material weaknesses in our internal control over financial reporting disclosed in Item 9A of the
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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 our ability to maintain an effective system of internal controls, (19) the Company's ability to effectively plan and manage the relocation to our 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 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 timing for proven treatments and the availability of vaccines for COVID-19, consumer confidence and demand for our 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 $0.9 million at March 31, 2021. A hypothetical 10% decrease in interest rates would cause a decrease of less than $0.1 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 $0.7 million for the three months ended March 31, 2021.
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 $0.2 million at March 31, 2021. Assuming a hypothetical 10% weakening of the US dollar at March 31, 2021, the fair value of foreign currency-sensitive financial instruments, which represents forward foreign currency exchange contracts, would be decreased by $2.5 million compared with its fair value at March 31, 2021.
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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 March 31, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2021, due to the existence of the material weaknesses in our internal control over financial reporting at our Mexican subsidiaries and over 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 in Internal Control over Financial Reporting: 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.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2020 due to the material weaknesses as described below.
Mexican subsidiaries
As of December 31, 2019, we identified two material weaknesses at our Mexican subsidiaries 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.
Income taxes
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.
We have concluded that each of these deficiencies constitutes a material weakness in our internal control over financial reporting.
Remediation of Material Weaknesses: We are committed to remediating the control deficiencies that gave rise to the material weaknesses. 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 weaknesses.
Mexican subsidiaries
With oversight from the Audit Review Committee, we have taken significant steps to remediate the internal control deficiencies at our Mexican subsidiaries by redesigning our controls, many of which operated for the first time during the fourth quarter of 2020. Our efforts have consisted primarily of strengthening our organization and designing a suite of controls that address the material weaknesses. Until the remediation actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weaknesses described above will continue to exist.
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Income taxes
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.
Until the remediation 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.
We are committed to achieving and maintaining a strong internal control environment and believe the remediation measures will strengthen our internal control over financial reporting and remediate the material weakness identified.
Changes in internal control over financial reporting: During the three months ended March 31, 2021, there have been no changes in the Company's internal control over financial reporting 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 our 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 our distribution center may interrupt our operations and lower our operating income.
HBB has signed a lease agreement and will be relocating to a new US distribution center during the second and third quarter of 2021. The planned move entails risk that could cause delays and cost overruns, such as: reduced shipping capabilities; unforeseen construction or scheduling problems; disruptions in the integration of the new distribution center with our warehouse management system; and unanticipated cost increases. There is also the risk that we will not adequately adjust our business processes or appropriately manage our work force during the transition. Failure to adequately plan and manage the relocation efforts could cause a disruption in our operations and lower our 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 three months ended March 31, 2021 and 2020.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
None.
Item 5 Other Information
None.
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Item 6 Exhibits
| Exhibit | ||||||||
| Number* | Description of Exhibits | |||||||
| 31(i)(1) | ||||||||
| 31(i)(2) | ||||||||
| 32 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 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 | |||||||
* Numbered in accordance with Item 601 of Regulation S-K.
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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: | May 5, 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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