UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K10-K/A
Amendment No. 1
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(Mark One) | | |
þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended December 31, 20172019 |
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¨ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-38214001-38214
HAMILTON BEACH BRANDS HOLDING COMPANY
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) | | 31-1236686 (I.R.S. Employer Identification No.) |
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4421 Waterfront Dr. Glen Allen, VA (Address of principal executive offices) | | 23060 (Zip Code) |
Registrant's telephone number, including area code: (804) 273-9777
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock, Par Value $0.01 Per Share | HBB | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock, Par Value $0.01 Per Share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ¨ NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES ¨ NO þ
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 £þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
YES þ NO £¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ | Accelerated filer ¨þ
| Non-accelerated filer þ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨þ | Emerging growth company þ |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
YES ¨ NO þ
Aggregate market value of Class A Common Stock and Class B Common Stock held by non-affiliates as of June 30, 20172019 (the last business day of the registrant's most recently completed second fiscal quarter): Not applicable$130,361,017
Number of shares of Class A Common Stock outstanding at March 2, 2018: 9,155,508July 17, 2020: 9,607,176
Number of shares of Class B Common Stock outstanding at March 2, 2018: 4,532,664July 17, 2020: 4,062,422
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 20182020 annual meeting of stockholders are incorporated herein by reference in Part III of this Form 10-K.10-K/A.
HAMILTON BEACH BRANDS HOLDING COMPANY
PART I
Explanatory Note
This Amendment No. 1 to Form 10-K (this "Amendment" or "Form 10-K/A") amends the Hamilton Beach Brands Holding Company's Annual Report on Form 10-K for the year ended December 31, 2019 originally filed with the Securities and Exchange Commission ("SEC") on February 26, 2020 by the Company (the "Original Filing"). This Amendment restates the Company's previously issued consolidated financial statements as of and for the years ended December 31, 2019, 2018 and 2017. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information. The relevant unaudited interim financial information for each of the quarters during the years ended December 31, 2019 and 2018 has also been restated. See Note 16, Quarterly Results of Operations (Unaudited), in Item 8, Financial Statements and Supplementary Data, for such restated information.
In connection with such restatement, the Company has also revised the selected financial information for the fiscal years ended December 31, 2016 and 2015, to correct errors that the Company has determined to be immaterial, both individually and in the aggregate. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data and Item 6, Selected Financial Data.
Restatement Background
During the quarter ended March 31, 2020, the Company discovered certain accounting irregularities at its Mexican subsidiaries. The Company’s Audit Review Committee of the Board of Directors (the “Audit Review Committee”) commenced an internal investigation, with the assistance of outside counsel and other third party experts.
The Audit Review Committee, after discussion with management of the Company and Ernst & Young LLP, the Company’s independent registered public accounting firm, concluded that the Company’s previously issued consolidated financial statements as of December 31, 2019 and 2018, for the years ended December 31, 2019, 2018 and 2017, each of the quarters during the years ended December 31, 2019 and 2018, and other financial data relating to these periods, including the financial data tables furnished to the SEC on Form 8-K, should no longer be relied upon.
Impact of the Restatement
As a result of this investigation, the Company, along with the Audit Review Committee and its third party experts, concluded that certain former employees at one of the Company’s Mexican subsidiaries engaged in unauthorized transactions with the Company’s Mexican subsidiaries that resulted in expenditures being deferred on the balance sheet beyond the period for which the costs pertained. As a result, the Company recorded a non-cash write-off for certain amounts included in the Company’s historical consolidated financial statements in trade receivables and prepaid expenses and other current assets, among other corrections, related to these transactions, and restated its consolidated financial statements as of December 31, 2019 and 2018, for the years ended December 31, 2019, 2018, and 2017, and each of the quarters during the years ended December 31, 2019 and 2018. The impact of these adjustments was a reduction to net income from continuing operations of $10.0 million for the year ended December 31, 2019, $4.1 million for the year ended December 31, 2018, and $2.0 million for the year ended December 31, 2017. The findings from the internal investigation did not identify any misconduct by any member of the Company's senior management team. During the course of the investigation, certain expenses at the Mexican subsidiaries were found to be incorrectly classified within the consolidated statement of operations and have also been corrected in the restatement.
Other Adjustments
The restatement also includes corrections for other errors identified as immaterial, individually and in the aggregate, to our consolidated financial statements. See Note 2, Restatement of Previously Issued Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data for additional information regarding the corrections.
Control Considerations
In connection with the restatement that resulted from wrongdoing by certain former employees at one of the Company's Mexican subsidiaries and the deficiencies identified at the Mexican subsidiaries, management of the Company has determined that material weaknesses existed in the Company’s internal control over financial reporting as of December 31, 2019. As a result, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2019, and the Company’s management has concluded that its
internal control over financial reporting was not effective as of December 31, 2019. See Item 9A, Controls and Procedures, for additional information related to these material weaknesses in internal control over financial reporting and the related remedial measures.
Items Amended in this Form 10-K/A
For reasons discussed above, we are filing this Amendment in order to amend the following items in our Original Filing to the extent necessary to reflect the adjustments discussed above and make corresponding revisions to our financial data cited elsewhere in this Amendment.
Part I, Item 1A. Risk Factors.
Part II, Item 6. Selected Financial Data.
Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Part II, Item 8. Financial Statements and Supplementary Data.
Part II, Item 9A. Controls and Procedures.
However, for the convenience of the reader, this Amendment sets forth the Original Filing in its entirety, as amended to reflect the restatement.
This Amendment speaks as of the filing date of the Original Filing and does not reflect events occurring after the filing date of the Original Filing.
The Company has not filed, and does not intend to file, amendments to (i) the Annual Reports on Form 10-K for the years ended December 31, 2018 or 2017, or (ii) the Quarterly Reports on Form 10-Q for the quarters of the years ended December 31, 2019 or 2018. Accordingly, investors should rely only on the financial information and other disclosures regarding the restated periods in this Form 10-K/A or in future filings with the SEC (as applicable), and not on any previously issued or filed reports, earnings releases or similar communications relating to these periods.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), new certifications by the Company’s principal executive officer and principal financial officer are filed herewith as exhibits to this Amendment pursuant to Rule 13a-14(a) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
Item 1. BUSINESS
General
Hamilton Beach Brands Holding Company is an operating holding company and operates through its two wholly-owned subsidiaries Hamilton Beach Brands, Inc. (“HamiltonHBB”) and The Kitchen Collection, LLC (“KC”) (collectively “Hamilton Beach Holding” or the “Company”) is an operating holding company for two separate businesses: consumer, commercial. On October 10, 2019, the Company’s board of directors (the “Board”) approved the wind down of KC and specialty small appliancesits retail operations. By December 31, 2019, all KC stores were closed and specialty retail.the reportable segment qualifies to be reported as discontinued operations. On January 21, 2020, the Board approved the dissolution of the KC legal entity and a Certificate of Dissolution of Ohio Limited Liability Company was filed with the Ohio Secretary of State.
The only material assets held by Hamilton Beach Brands Inc. (“HBB”)Holding Company are its investments in its consolidated subsidiaries. Substantially all of its cash flows are provided by dividends paid or distributions made by its subsidiaries. Hamilton Beach Brands Holding Company has not guaranteed any obligations of its subsidiaries.
KC is reported as discontinued operations in all periods presented. HBB is the Company's single reportable segment.
HBB is a leading designer, marketer, and distributor of branded, small electric household and specialty housewares appliances, as well as commercial products for restaurants, bars, and hotels. The Kitchen Collection, LLC (“KC”) is a nationalHBB operates in the consumer, commercial and specialty retailersmall appliance markets.
On September 29, 2017, NACCO Industries, Inc. ("NACCO"), Hamilton Beach Holding's former parent company, spun-off the Company to NACCO stockholders. In the spin-off, NACCO stockholders, in addition to retaining their shares of NACCO common stock, received one share of Hamilton Beach Brands Holding Company Class A common stock ("Class A Common") and one share of Hamilton Beach Brands Holding Company Class B common stock ("Class B Common") for each share of NACCO Class A or Class B common stock. In accordance with applicable authoritative accounting guidance, the Company accounted for the spin-off from NACCO based on the historical carrying value of assets and liabilities. As a result of the distribution of one share of Hamilton Beach Holding Class A common stockCommon and one share of Hamilton Beach Holding Class B common stockCommon for each share of NACCO Class A or NACCO Class B common stock, the earnings per share amounts for the Company for periods prior to the spin-off have been calculated based upon the number of shares distributed in the spin-off. NACCO did not receive any proceeds from the spin-off.
Additional information relating to financial and operating data on a segment basis and by geographic region is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II of this Form 10-K and in Note 14 to the Consolidated Financial Statements contained in this Form 10-K.
As of December 31, 2017, the Company had approximately 1,600 employees.
The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports available, free of charge, through its website, www.hamiltonbeachbrands.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).
The content of our website is not incorporated by reference into this annual report on Form 10-K/A or in any other report or document we file with the SEC, and any references to our website is intended to be inactive textual references only.
A. Hamilton Beach Brands, Inc.
General
HBB is a leading designer, marketer and distributor of small electric household and specialty housewares appliances, as well as commercial products for restaurants, bars and hotels. HBB’s products are marketed primarily to retail merchants and wholesale distributors.
Sales and Marketing
HBB designs, markets and distributes a wide range of branded, small electric household and specialty housewares small appliances, including, but not limited to, blenders, can openers, coffeemakers, food processors, indoor electric grills, irons, mixers, slow cookers, toasters and toaster ovens. In addition, HBB designs, markets and distributes commercial products for restaurants, bars and hotels. HBB generally markets its “better” and “best” products under the Hamilton Beach® brand and uses the Proctor Silex® brand for the “good” and opening price point products. HBB participates in the “only-the-best” market with the Hamilton Beach Professional brand, under a licensing agreement to sell a line of counter top appliances and kitchen tools under the Wolf Gourmet® brand, and with the new CHI®-branded, garment-care line under a multi-year licensing deal that began initial shipments in 2017. HBB markets a range of game and garden food processing equipment including, but not limited to, meat grinders, bag sealers, dehydrators and meat slicers under the Weston® brand, as well as several private-label brands. HBB supplies additional private-label products on a limited basis throughout North America.
Sales promotion activities are primarily focused on cooperative advertising. In addition, HBB promotes certain of its innovative products through the use of television, internet and print advertising. HBB also licenses certain of its trademarks to various licensees primarily for use with microwave ovens, compact refrigerators, water dispensers, among others.
Customers
Consumer sales in North America are generated predominantly by a network of inside sales employees to mass merchandisers, e-commerce retailers, national department stores, variety store chains, drug store chains, specialty home retailers, distributors and other retail outlets. Wal-Mart accounted for approximately 32% of HBB’s revenues in each of 2017, 2016 and 2015. Amazon accounted for approximately 12%, 10%, and 8% of HBB's revenues in 2017, 2016 and 2015, respectively. HBB’s five largest customers accounted for approximately 55%, 54% and 52% of HBB’s revenues for the years ended December 31, 2017, 2016 and 2015, respectively. The loss of or significant reduction in sales to any key customer could result in significant decreases in HBB’s revenues and profitability and its ability to sustain or grow its business.
Backlog
Because of the seasonal nature of the markets for small electric household appliances, HBB’s management believes backlog is not a meaningful indicator of performance and is not a significant indicator of annual sales. Backlog represents customer orders, which may be cancelled at any time prior to shipment. Backlog for HBB was approximately $18.8 million and $14.1 million at December 31, 2017 and 2016, respectively.
Product Warranties
HBB’s warranty program to the consumer consists generally of a limited warranty lasting for varying periods of up to ten years for electric appliances, with the majority of products having a warranty of one year. Under its warranty program, HBB may repair or replace, at its option, those products returned under warranty.
Working Capital
The market for small electric household and specialty housewares appliances is highly seasonal in nature. Revenues and operating profit for HBB are traditionally greater in the second half of the year as sales of small electric appliances to retailers and consumers increase significantly with the fall holiday-selling season. Because of the seasonality of purchases of its products, HBB generally uses a substantial amount of cash or short-term debt to finance inventories and accounts receivable in anticipation of the fall holiday-selling season.
Patents, Trademarks, Copyrights and Licenses
HBB holds patents and trademarks registered in the U.S. and foreign countries for various products. HBB believes its business is not dependent upon any individual patent, copyright or license, but that the Hamilton Beach®, Proctor Silex®, Hamilton Beach Commercial®, and Weston® trademarks are material to its business.
Product Design and Development
HBB spent $10.4 million, $9.7 million and $9.6 million in 2017, 2016 and 2015, respectively, on product design and development activities.
Key Suppliers and Raw Material
HBB’s products are supplied to its specifications by third-party suppliers located primarily in China. HBB does not maintain long-term purchase contracts with suppliers and operates mainly on a purchase order basis. HBB generally negotiates the purchases from its foreign suppliers in U.S. dollars.
During 2017, HBB purchased 98% of its finished products from suppliers in China. HBB purchases its inventory from approximately 49 suppliers, two of which represented more than 10% of purchases during the year ended December 31, 2017. HBB believes the loss of any one supplier would not have a long-term material adverse effect on its business because there are adequate supplier choices available that can meet HBB’s production and quality requirements. However, the loss of a supplier could, in the short term, adversely affect HBB’s business until alternative supply arrangements are secured.
The principal raw materials used by HBB’s third-party suppliers to manufacture its products are plastic, glass, steel, copper, aluminum and packaging materials. HBB believes adequate quantities of raw materials are available from various suppliers.
Competition
The small electric household appliance industry does not have substantial entry barriers. As a result, HBB competes with many small manufacturers and distributors of housewares products. Based on publicly available information about the industry, HBB believes it is one of the largest full-line distributors and marketers of small electric household and specialty housewares appliances in North America based on key product categories.
HBB also competes to a lesser degree in Europe through its commercial product lines, and in South America and China. The competition in these geographic markets is more fragmented than in North America, and HBB is not yet a significant participant in these retail markets.
As brick and mortar retailers generally purchase a limited selection of branded, small electric appliances, HBB competes with other suppliers for retail shelf space. In the e-commerce channel, HBB must compete with a broad list of competitors. HBB conducts consumer advertising for the Hamilton Beach® brand and the Weston® brand. HBB believes the principal areas of competition with respect to its products are product design and innovation, quality, price, product features, supply chain excellence, merchandising, promotion and warranty.
Government Regulation
HBB is subject to numerous federal and state health, safety and environmental regulations. HBB’s management believes the impact of expenditures to comply with such laws will not have a material adverse effect on HBB.
As a marketer and distributor of consumer products, HBB is subject to the Consumer Products Safety Act and the Federal Hazardous Substances Act, which empower the U.S. Consumer Product Safety Commission (“CPSC”) to seek to exclude products that are found to be unsafe or hazardous from the market. Under certain circumstances, the CPSC could require HBB to repair, replace or refund the purchase price of one or more of HBB’s products, or HBB may voluntarily do so.
Throughout the world, electrical appliances are subject to various mandatory and voluntary standards, including requirements in some jurisdictions that products be listed by Underwriters’ Laboratories, Inc. (“UL”) or other similar recognized laboratories. HBB also uses Intertek Testing Services for certification and testing of compliance with UL standards, as well as other nation and industry specific standards. HBB endeavors to have its products designed to meet the certification requirements of, and to be certified in, each of the jurisdictions in which they are sold.
Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") requires public companies to disclose whether certain minerals, commonly known as "conflict minerals," are necessary to the functionality or production of a product manufactured by those companies and if those minerals originated in the Democratic Republic of the Congo ("DRC") or an adjoining country. Our compliance with these disclosure requirements could adversely affect the sourcing, availability, and pricing of minerals used in the manufacture of certain components used in HBB's products. In addition, the supply-chain due diligence investigation required by the conflict minerals rules requires expenditures of resources and management attention, regardless of the results of the investigation.
Employees
As of December 31, 2017, HBB’s work force consisted of approximately 650 employees, none of whom are represented by unions except for 16 hourly employees at HBB’s Picton, Ontario distribution facility. These employees are represented by an employee association which performs a consultative role on employment matters. None of HBB’s U.S. employees are unionized. HBB believes its current labor relations with both union and non-union employees are satisfactory.
B. Kitchen Collection
General
KC is a national specialty retailer of kitchenware in outlet and traditional malls throughout the United States.
Sales and Marketing
KC operated 210 retail stores asHBB designs, markets and distributes a wide range of December 31, 2017 in outletbranded, small electric household and traditional malls throughoutspecialty housewares appliances, including, but not limited to, air fryers, blenders, coffee makers, food processors, indoor electric grills, irons, juicers, mixers, slow cookers, toasters and toaster ovens. The Company also sells TrueAir® air purifiers. HBB also designs, markets and distributes commercial products for restaurants, fast food chains, bars and hotels. In 2019, HBB introduced sonic rechargeable toothbrushes under the United States. The stores sell kitchenware from a number of highly recognizable name-brands, including Hamilton BeachBrightline®TM brand name through the ecommerce channel. HBB generally markets its “better” and “best” consumer products under the Hamilton Beach® brand and uses the Proctor Silex®. KC sales accountedSilex® brand for 17.4%, 19.4%the “good” and 19.7%value price points. HBB participates in the premium or “only-the-best” market with the Hamilton Beach® Professional brand and the Weston® brand game and garden food processing equipment. Additionally, the Company has multiyear licensing agreements to sell a line of countertop appliances and kitchen tools under the Wolf Gourmet® brand and a line of premium garment care products under the CHI® brand. In 2019, HBB began selling the Bartesian® premium cocktail delivery system through an exclusive multiyear agreement. HBB markets its commercial products under the Hamilton Beach Holding’s annual revenuesCommercial® and the Proctor Silex Commercial® brands. HBB supplies private label products on a limited basis. HBB also licenses certain of its trademarks to various licensees, primarily for use with microwave ovens, compact refrigerators, and water dispensers, among others.
Sales promotion activities are primarily focused on digital marketing channels. HBB promotes certain of its innovative products through the use of television, internet and print advertising.
Customers
Sales in North America are generated predominantly by a network of inside sales employees to mass merchandisers, ecommerce retailers, national department stores, variety store chains, drug store chains, specialty home retailers, distributors, restaurants, bars, hotels and other retail outlets. Wal-Mart Inc. and its global subsidiaries accounted for approximately 33%, 33% and 32% of the HBB’s revenue in 2019, 2018 and 2017, 2016respectively. Amazon.com, Inc. and 2015,its subsidiaries accounted for approximately 14%, 10% and 12% of the HBB's revenue in 2019, 2018 and 2017, respectively. HBB’s five largest customers accounted for approximately 58%, 53%, and 54% of the HBB’s revenue for the years ended December 31, 2019, 2018 and 2017, respectively.
SeasonalityProduct Warranty
RevenuesHBB'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 consumer as HBB may repair or replace, at its option, those products returned under warranty.
Working Capital
The market for small electric household and specialty housewares appliances is highly seasonal in nature. The majority of HBB's revenue and operating profit for KC are traditionally greatertypically occurs in the second half of the year as salesdue to consumers increase significantly with the fall holiday-selling season. Because ofDue to the seasonality of purchases of its products, KC incursHBB generally uses a substantial amount of cash or short-term debt to finance inventoriesinventory in anticipation of the fall holiday-selling season.
Patents, Trademarks, Copyrights and Licenses
KCHBB holds a trademarkpatents and trademarks registered in the United States ("U.S.") and foreign countries for the KC store name andvarious products. HBB believes its business is not dependent upon any individual patent, copyright or license, but that the trademark isHamilton Beach®, Proctor Silex®, Hamilton Beach® Professional, and Weston® trademarks are material to its business.
Product Design and Development
KC, a retailer, has limited expenditures forHBB incurred $12.1 million, $11.0 million and $10.4 million in 2019, 2018 and 2017, respectively, on product design and development activities.
Product SourcingKey Suppliers and DistributionRaw Material
KCHBB’s products are supplied to its specifications by third-party suppliers located primarily in China. HBB does not maintain long-term purchase contracts with suppliers and operates mainly on a purchase order basis. HBB generally negotiates the purchases from its foreign suppliers in U.S. dollars.
During 2019, HBB purchased substantially all inventory centrally, which allows it to take advantage of volume purchase discounts and monitor controls over inventory and product mix. KCits finished products from suppliers in China. HBB purchases its inventory from approximately 19963 suppliers, one of which represented approximately 21%more than 10% of purchases during the year ended December 31, 2017. No other supplier represents more than 10% of purchases. KC2019. HBB believes that the loss of any one supplier would not have a long-term material adverse effect on its business because there are adequate supplier choices available that can meet KC’sHBB’s production and quality requirements. However, the loss of a supplier could, in the short term, adversely affect KC’sHBB’s business until alternative supply arrangements are secured.
KC currently maintainsThe principal raw materials used by HBB’s third-party suppliers to manufacture its inventoryproducts are plastic, glass, steel, copper, aluminum and packaging materials. HBB believes adequate quantities of raw materials are available from various suppliers.
Competition
The small electric household appliance industry does not have substantial entry barriers. As a result, HBB competes with many manufacturers and distributors of housewares products. Based on publicly available information about the industry, HBB believes it is one of the largest full-line distributors and marketers of small electric household and specialty housewares appliances in North America based on key product categories.
To a lesser degree, HBB product lines compete in South America, Europe, and certain emerging markets such as Brazil and China. The competition in these geographic markets is also fragmented and HBB is not yet a significant participant although our commercial business has generated a strong position in these markets.
As brick and mortar retailers generally purchase a limited selection of branded, small electric appliances, HBB competes with other suppliers for distributionretail shelf space. In the ecommerce channel, HBB must compete with a broad list of competitors. HBB believes the principal areas of competition with respect to its stores atproducts are product design and innovation, quality, price, product features, supply chain excellence, merchandising, promotion and warranty.
Government Regulation
HBB is subject to numerous federal and state health, safety and environmental regulations. HBB believes the impact of expenditures to comply with such laws will not have a distribution center located near its corporate headquarters in Chillicothe, Ohio.material adverse effect on HBB.
Competition
KC competes againstAs a diverse groupmarketer and distributor of retailers, including specialty stores, department stores, discount stores, e-commerce competitorsconsumer products, HBB is subject to the Consumer Products Safety Act and catalog retailers. The retail environment continuesthe Federal Hazardous Substances Act, which empower the U.S. Consumer Product Safety Commission (“CPSC”) to seek to exclude products that are found to be extremely competitive. Widespread Chinese sourcingunsafe or hazardous from the market. Under certain circumstances, the CPSC could require HBB to repair, replace or refund the purchase price of one or more of HBB’s products, allows many retailersor HBB may voluntarily do so.
Throughout the world, electrical appliances are subject to offer value-priced kitchen products. Whilevarious mandatory and voluntary standards, including requirements in some jurisdictions that products be listed by Underwriters’ Laboratories, Inc. (“UL”) or other similar recognized laboratories. HBB also uses Intertek Testing Services for certification and testing of compliance with UL standards, as well as other national and industry specific standards. HBB endeavors to have its products designed to meet the certification requirements of, and to be certified in, each of the jurisdictions in which they are sold.
Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") requires public companies to disclose whether certain minerals, commonly known as "conflict minerals," are necessary to the functionality or production of a number of very low-endproduct manufactured by those companies and very high-end kitchenware retailers participateif those minerals originated in the marketplace, KC believes there continuesDemocratic Republic of the Congo ("DRC") or an adjoining country. HBB conducts supply-chain due diligence investigations required by the conflict minerals rules and makes disclosures required by the Dodd Frank Act. Our compliance with these investigation and disclosure requirements could adversely affect our ability to be an opportunitysell products to customers that HBB is unable to designate as "DRC conflict free."
Transactions with Related Parties
Mr. Alfred M. Rankin is the former executive chairman of the Company and current non-executive chairman of the Board of the Company. Mr. Rankin provides consulting services to the Company under the terms of a consulting agreement pursuant to
which Mr. Rankin supports the president and chief executive officer of the Company upon request. Fees for stores offering mid-priced, high-quality kitchenware.consulting services rendered by Mr. Rankin were $0.5 million for the year ended December 31, 2019. There were no fees for consulting services rendered by Mr. Rankin in 2018.
Employees
As of December 31, 2017, KC’s2019, HBB’s work force consisted of approximately 950680 employees. None
Information about our Executive Officers
There exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was selected.
The following tables set forth, as of KC’s employees are unionized. KC believes itsFebruary 26, 2020, the name, age, current labor relations with employees are satisfactory.position and principal occupation and employment during the past five years of the Company’s executive officers.
EXECUTIVE OFFICERS OF THE COMPANY |
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Name | | Age | | Current Position | | Other Positions |
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Gregory H. Trepp | | 58 |
| | President and Chief Executive Officer of Hamilton Beach Holding (from September 2017); President and Chief Executive Officer of HBB (from prior to 2014); Chief Executive Officer of KC (from prior to 2014) | | |
Gregory E. Salyers | | 59 |
| | Senior Vice President, Global Operations of HBB (from prior to 2014) | | |
R. Scott Tidey | | 55 |
| | Senior Vice President, North America Sales and Marketing of HBB (from prior to 2014) | | |
Michelle O. Mosier | | 54 |
| | Senior Vice President, Chief Financial Officer and Treasurer of Hamilton Beach Holding (since January 2020); Successor Vice President and Chief Financial Officer of HBB (since October 2018) | | Chief Financial Officer of United Sporting Companies (from September 2015 to June 2018) a subsidiary of SportsCo Holding, Inc. which filed for Chapter 11 bankruptcy in June 2019, and Controller for Reynolds Groups Holdings Limited (from September 2011 to August 2015). |
Dana B. Sykes | | 58 |
| | Senior Vice President, General Counsel and Secretary of Hamilton Beach Holding (from January 2020); Vice President, General Counsel and Secretary of HBB (from September 2015); Assistant Secretary of KC (from May 2015) | | From July 2014 to September 2015, Associate General Counsel, Assistant Secretary and Senior Director, Human Resources of HBB. From prior to 2014 to July 2014, Assistant General Counsel and Director, Human Resources of HBB. |
Item 1A. RISK FACTORS
Hamilton Beach Brands, Inc.
The restatement of our financial statements may lead to, among other things, shareholder litigation, loss of investor confidence, negative impacts on our stock price and certain other risks.
We have restated our previously issued consolidated financial statements as of December 31, 2019 and 2018, for the years ended December 31, 2019, 2018 and 2017, and the relevant unaudited interim financial information for each of the quarters during the years ended December 31, 2019 and 2018 to correct misstatements principally related to the write-off of unrealizable assets. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information. As a result of the circumstances giving rise to the restatement, we have become subject to a number of additional risks and uncertainties, including unanticipated costs for accounting and legal fees in connection with or related to the restatement, shareholder litigation and government investigations. Any such proceeding could result in substantial defense costs regardless of the outcome of the litigation or investigation. If we do not prevail in any such litigation, we could be required to pay substantial damages or settlement costs. In addition, the restatement and related matters could impair our reputation and could cause our counterparties to lose confidence in us. Each of these occurrences could have an adverse effect on our business, results of operations, financial condition and stock price.
We have identified material weaknesses in our internal control over financial reporting which, if not timely remediated, may adversely affect the accuracy and reliability of our financial statements, and our reputation, business and stock price, as well as lead to a loss of investor confidence in us.
As described under Item 9A, Controls and Procedures, below, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that material weaknesses in our internal control over financial reporting existed at our Mexican
subsidiaries as of December 31, 2019 and, accordingly, our internal control over financial reporting and our disclosure controls and procedures were not effective as of such date. We intend to remediate these material weaknesses. While we believe these steps will improve the effectiveness of our internal control over financial reporting and remediate the identified deficiencies, if our remediation efforts are insufficient to address the material weaknesses or we identify additional material weaknesses in our internal control over financial reporting in the future, our ability to analyze, record and report financial information accurately, to prepare our financial statements within the time periods specified by the rules and forms of the SEC and to otherwise comply with our reporting obligations under the federal securities laws will likely be adversely affected. The occurrence of, or failure to remediate, these material weaknesses and any future material weaknesses in our internal control over financial reporting may adversely affect the accuracy and reliability of our financial statements and have other consequences that could materially and adversely affect our business, including an adverse impact on the market price of our common stock, potential actions or investigations by the SEC or other regulatory authorities, shareholder lawsuits, a loss of investor confidence and damage to our reputation.
HBB’s business is sensitive to the strength of the North American consumer markets and weakness in these markets could
adversely affect its business.
The strength of the economy in the United States,U.S., and to a lesser degree in Canada and Mexico, has a significant impact on HBB’s performance. Weakness in consumer confidence and poor financial performance by mass merchandisers, e-commerceecommerce retailers, warehouse clubs, department stores or any of HBB’s other customers could result in reduced revenuesrevenue and profitability. A general slowdown in the consumer sector could result in additional pricing and marketing support pressures on HBB.
The market for HBB’s products is highly seasonal and dependent on consumer spending, which could result in significant variations in our revenues and profitability.
Sales of HBB’s products are related to consumer spending. A downturn in the general economy or a shift in consumer spending away from small electric household and specialty housewares appliances could adversely affect its business. In addition, the market for small electric household and specialty housewares appliances is highly seasonal in nature. HBB generally recognizes a substantial portion of its sales in the last half of the year as sales of small electric appliances and specialty housewares appliances increase significantly with the fall holiday-selling season. Accordingly, quarter-to-quarter comparisons of past operating results of HBB are meaningful only when comparing equivalent time periods, if at all. Any economic downturn, decrease in consumer spending or shift in consumer spending away from small electric household and specialty housewares appliances may significantly reduce revenues and profitability.
HBB is dependent on key customers and the loss of, or significant decline in business from, one or more of its key customers could materially reduce its revenuesrevenue and profitability and its ability to sustain or grow its business.
HBB relies on several key customers. Although HBB has long-established relationships with many customers, it does not have any long-term supply contracts with these customers, and purchases are generally made using individual purchase orders. A loss of or significant reduction in sales to any key customer could result in significant decreases in HBB’s revenuesrevenue and profitability and an inability to sustain or grow its business.
HBB must receive a continuous flow of new orders from its large, high-volume retail customers; however, it may be unable to continually meet the needs of those customers. In addition, failure to obtain anticipated orders or delays or cancellations of orders or significant pressure to reduce prices from key customers could impair its ability to sustain or grow its business.
As a result of dependence on its key customers, HBB could experience a material adverse effect on its revenuesrevenue and profitability if any of the following were to occur:
the insolvency or bankruptcy of any key customer;
a declining market in which customers materially reduce orders or demand lower prices; or
a strike or work stoppage at a key customer facility, which could affect both its suppliers and customers.
If HBB were to lose, or experience a significant decline in business from any major customer, or if any major customers were to go bankrupt, HBB might be unable to find alternate distribution outlets.
HBB depends on third-party suppliers for the manufacturing of all of its products, which subjects it to risks, including unanticipated increases in expenses, decreases in revenues and disruptions in the supply chain.
HBB is dependent on third-party suppliers for the manufacturing of all of its products. HBB’s ability to select reliable suppliers that provide timely deliveries of quality products will impact its success in meeting customer demand. Any inability of HBB’s suppliers to timely deliver products that meet HBB’s specifications or any unanticipated changes in suppliers could be disruptive and costly to HBB. Any significant failure by HBB to obtain quality products on a timely basis at an affordable cost or any significant delays or interruptions of supply would have a material adverse effect on our revenues and profitability. Because HBB’s suppliers are primarily based in China, international operations subject HBB to additional risks including, among others:
currency fluctuations;
labor unrest;
potential political, economic and social instability;
restrictions on transfers of funds;
import and export duties and quotas;
changes in domestic and international customs and tariffs, including embargoes and customs restrictions;
uncertainties involving the costs to transport products;
long distance shipping routes dependent upon a small group of shipping and rail carriers and import facilities;
unexpected changes in regulatory environments;
regulatory issues involved in dealing with foreign suppliers and in exporting and importing products;
protection of intellectual property;
difficulty in complying with a variety of foreign laws;
difficulty in obtaining distribution and administrative support; and
potentially adverse tax consequences, including significant changes in tax law.
The foregoing factors could have a material adverse effect on HBB’s ability to maintain or increase the supply of products, which may result in material increases in expenses and decreases in revenues and profitability.
HBB is subject to foreign currency exchange risk.
HBB’s products are supplied by third-party suppliers located primarily in China. HBB generally negotiates the purchases from its foreign suppliers in U.S. dollars. A weakening of the U.S. dollar against local currencies could result in certain non-U.S. manufacturers increasing the U.S. dollar prices for future product purchases.
TableAs a result of Contentsour international operations, we are exposed to foreign currency risks that arise from our normal business operations, including risks in connection with our transactions that are denominated in foreign currencies. In addition, we translate sales and other results denominated in foreign currencies into U.S. dollars for purposes of our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and profitability, while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and profitability.
In addition, a portion of HBB’s revenue is derived from international operations, and HBB anticipates that a portion of sales will continue to come from outside the U.S. in the future. HBB’s international revenues may be adversely affected by fluctuations in foreign currency exchange rates. Any hedging activities HBB engages in may only offset a portion of the adverse financial impact resulting from unfavorable changes in foreign currency exchange rates. HBB cannot predict with any certainty changes in foreign currency exchange rates or the degree to which HBB can mitigate these risks.
Increases in costs of products may materially reduce our profitability.
Factors that are largely beyond ourHBB's control, such as movements in in-bound transportation rates and commodity prices for the raw materials needed by suppliers of HBB’s products, may affect the cost of products, and HBB may not be able to pass those costs on to its customers. As an example, HBB’s products require a substantial amount of plastic. Because the primary resource used in plastic is petroleum, the cost and availability of plastic varies to a great extent with the price of petroleum. When the prices of petroleum, as well as steel, aluminum and copper, increase significantly, theysupplier price increases may materially reduce our profitability.
The increasing concentration of HBB’s branded small electric household and specialty housewares appliance sales among a few retailers and the trend toward private label brands could materially reduce revenuesrevenue and profitability.
With the growing trend towards the concentration of HBB’s branded small electric household and specialty housewares appliance sales among a fewfewer retailers, HBB is increasingly dependent upon fewer customers whose bargaining strength is growing as a result of this concentration. HBB sells a substantial quantity of products to mass merchandisers, e-commerceecommerce retailers, national department stores, variety store chains, drug store chains, specialty home retailers and other retail outlets. TheseAs a result, these retailers generally have a large selection of small electric household and specialty housewares appliance suppliers to choose from. As a result, HBB competes for retail shelf space with its competitors. In addition, certain of HBB’s larger customers use their own private label brands on household appliances that compete directly with some of HBB’s products. As the retailers in the small electric household appliance industry become more concentrated, competition for sales to these retailers may increase, which could materially reduce our revenuesrevenue and profitability.
The small electric household, specialty housewares appliances and commercial appliance industry is consolidating, which could reduce HBB’s ability to successfully secure product placements at key customers and limit our ability to sustain a cost competitive position in the industry.
Over the past several years, the small electric household, specialty housewares appliances and commercial appliance industry has undergone consolidation, and further consolidation is likely. As a result of this consolidation, the small electric household, specialty housewares appliances and commercial appliance industry primarily consists of a limited number of large distributors. HBB’s ability to gain or maintain share of sales in the small electric household, specialty housewares appliances and commercial appliance industry or maintain or enhance HBB’s relationships with key customers may be limited as a result of actions by competitors, including as a result of increased consolidation in the small electric household, specialty housewares appliances and commercial appliance industry.
If HBB is unable to continue to enhance existing products, as well as develop and market new products that respond to customer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products,
which could materially reduce revenuesrevenue and profitability, which have historically benefited from sales of new products.
One of HBB’s strategic initiatives is to enhance placements through consumer-driven innovative products to generate revenue growth. HBB may not be able to compete as effectively with competitors, and ultimately satisfy the needs and preferences of customers, unless HBB can continue to enhance existing products and develop new innovative products for the markets in which HBB competes. Product development requires significant financial, technological, and other resources. Product improvements and new product introductions also require significant research, planning, design, development, engineering, and testing at the technological and product process levels and HBB may not be able to timely develop and introduce product improvements or new products. Competitors’ new products may beat HBB’s products to market, be higher quality or more reliable, be more effective with more features, obtain better market acceptance, or render HBB’s products obsolete. Any new products that HBB develops may not receive market acceptance or otherwise generate any meaningful revenuesrevenue or profits for usprofit relative to our expectations based on, among other things, commitments to fund advertising, marketing, promotional programs and development.
HBB’s inability to compete effectively with competitors in its industry including large established companies with greater resources, could result in lost market share and decreased revenues.revenue.
The small electric household, specialty housewares appliances and commercial appliance industry does not have substantial entry barriers. As a result, HBB competes with many small manufacturers and distributors of housewares products. Additional competitors may also enter this market and cause competition to intensify. For example, some of HBB’s customers have expressed interest in sourcing, or expanding the extent of sourcing, small electric household and commercial appliances directly from manufacturers in Asia. We believe competition is based upon several factors, including product design and innovation, quality, price, product features, merchandising, promotion and warranty. If HBB fails to compete effectively with these manufacturers and distributors, it could lose market share and experience a decrease in revenues,revenue, which would adversely affect our results of operations.
HBB also competes with established companies, a number of which have substantially greater facilities, personnel, financial and other resources. In addition, HBB competes with its own retail customers, who use their own private label brands, and importers and foreign manufacturers of unbranded products. Some competitors may be willing to reduce prices and accept lower profit margins to compete. As a result of this competition, HBB could lose market share and revenues.revenue.
Changes in consumer shopping trends and changes in distribution channels could result in lost market share and decreased revenue and profitability.
Traditional brick-and-mortar retail channels have experienced low growth or declines in recent years, while the ecommerce channel has experienced significant growth. Consumer shopping preferences have shifted, and may continue to shift in the
future, to distribution channels other than traditional brick-and-mortar retail channels. Success in the ecommerce channel requires providing products at the right price, products that earn strong ratings and reviews and meaningful engagement with online shoppers. HBB has invested in industry leading selling and marketing capabilities, while maintaining its presence in traditional brick-and-mortar retail channels. However, if we are not successful in developing and utilizing ecommerce channels that future consumers may prefer, we may experience a loss in market share and decreased revenue and profitability.
HBB may become subject to claims under foreign laws and regulations, which may be expensive, time-consuming and distracting.
Because HBB has employees, property and business operations outside of the United States,U.S., HBB is subject to the laws and the court systems of many jurisdictions. HBB may become subject to claims outside the United StatesU.S. for violations or alleged violations of laws with respect to the current or future foreign operations of HBB. In addition, these laws may be changed or new laws may be enacted in the future. International litigation is often expensive, time-consuming and distracting. As a result, any of these risks could significantly reduce HBB’s profitability and its ability to operate its businesses effectively.
HBB’s actual liabilitiesobligations relating to environmental matters may exceed our expectations.
HBB is subject to laws and regulations relating to the protection of the environment, including those governing the
management and disposal of hazardous substances. If HBB fails to comply with these laws, then we could incur substantial costs, including cleanup costs, fines and civil and criminal sanctions. In addition, future changes to environmental laws could require HBB to incur significant additional expense.
HBB is investigating or remediating historical contamination at some current and former sites related to HBB’s prior manufacturing operations or the operations of businesses HBB acquired. The costs of investigating and remediating historical contamination may increase based on the findings of investigations and the effectiveness of remediation methods. In addition, the discovery of additional contamination at these or other sites could result in significant cleanup costs that could have a material adverse effect on HBB’s financial conditions and results of operations. Future changes to environmental laws could require HBB to incur significant additional expense.
HBB could, under some circumstances, also be held financially liable for or suffer other adverse effects due to environmental violations or contamination caused by prior owners of businesses HBB has acquired. In certain circumstances, HBB’s financial liability for cleanup costs takes into account agreements with an unrelated third party. HBB’s liability for these costs could increase if the unrelated third party does not, or cannot, perform its obligations under those agreements. In addition, under some of the agreements through which HBB has sold real estate, HBB has retained responsibility for certain contingent environmental liabilities arising from pre-closing operations. These liabilities may not arise, if at all, until years after HBB sold these operations and could require us to incur significant additional expenses, which could materially adversely affect HBB’s results of operations and financial condition.
The Company is subject to litigation risk which could adversely affect our financial condition, results of operations and liquidity.
From time to time we are subject to claims involving product liability, infringement of intellectual property and patent rights of third parties and other matters. Any such claims, with or without merit, could be time consuming and expensive, and may require the Company to incur substantial costs and divert the resources of management. Due to the uncertainties of litigation, 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 of the period in which the ruling occurs, or in future periods.
To the extent that HBB relies on newly acquired businesses or new product lines to expand its business, these acquisitions or new product lines may not contribute positively to HBB’s earnings because anticipated sales volumes and synergies may not materialize, cost savings may be less than expected or acquired businesses may carry unexpected liabilities.
HBB may acquire partial or full ownership in businesses or may acquire rights to market and distribute particular products or lines of products. The acquisition of a business or of the rights to market specific products or use specific product names may involve a financial commitment by HBB, either in the form of cash or stock consideration. HBB may not be able to acquire businesses and develop products that will contribute positively to HBB’s earnings. Anticipated synergies may not materialize, cost savings may be less than expected, sales of products may not meet expectations or acquired businesses may carry unexpected liabilities.
HBB’s business involves the potential for product recalls, which could affect HBB’s salesrevenue and profitability.
As a marketer and distributor of consumer products, HBB is subject to the Consumer Products Safety Act and the Federal Hazardous Substances Act, which empower the CPSC to seek to exclude from the market those products that are found to be unsafe or hazardous. Under certain circumstances, the CPSC could require HBB to repair, replace or refund the purchase price of one or more of our products, or HBB may voluntarily do so. Electrical appliances are subject to various mandatory and voluntary standards. Any repurchases or recalls of our products could be costly to us and could damage our reputation or the value of our brands. If HBB is required to remove, or HBB voluntarily removes our products from the market, our reputation or brands could be tarnished, and HBB might have large quantities of finished products that could not be sold. Furthermore, failure to timely notify the CPSC of a potential safety hazard can result in fines being assessed against HBB. Additionally, laws regulating certain consumer products exist in some states, as well as in other countries in which HBB sells our products, and more restrictive laws and regulations may be adopted in the future. HBB’s results of operations are also susceptible to adverse publicity regarding the quality and safety of our products. In particular, product recalls may result in a decline in sales for a particular product.
HBB’s business subjects it to product liability claims, which could affect the reputation, salesrevenue and profitability of HBB and, potentially, KC.HBB.
HBB faces exposure to product liability claims if one of our products is alleged to have caused property damage, bodily injury or other adverse effects. HBB bears all costs associated with product liability claimseffects up to a defined self-insured loss limit per claim and maintains product liability insurance for claims above this self-insured level. If a product liability claim is brought against HBB, our salesrevenue and profitability could be affected adversely as a result of negative publicity related to the claim, costs associated with any replacement of the product or expenses related to defending these claims. This could be true even if the claims themselves are ultimately settled for immaterial amounts. In addition, HBB may not be able to maintain product liability insurance on terms acceptable to HBB in the future. If the number of product liability claims HBB experiences exceeds historical amounts, if HBB is unable to maintain product liability insurance or if HBB’s product liability claims exceed the amount of our insurance coverage, HBB’s results of operations and financial condition could be affected adversely. The sales and profitability of KC, as an affiliate of HBB and a seller of certain HBB products, could also be affected adversely in the event of negative HBB publicity.
Government regulations could impose costly requirements on HBB.
The SEC adopted conflict mineral rules under Section 1502 of the Dodd-Frank Act on August 22, 2012. The rules require disclosure of the use of certain minerals, commonly known as “conflict minerals,” which are mined from the DRC and adjoining countries. HBB may incur additional costs and expenses to comply with these rules, including (i) due diligence to verify the sources of such conflict minerals; and (ii) any changes that HBB may make to its products, processes, or sources of supply as a result of such diligence and verification activities. Since HBB’s supply chain is complex, ultimately it may not be able to designate all products as “DRC conflict free” which may adversely affect its reputation with certain customers. In such event, HBB may also face difficulties in satisfying customers who require products purchased from HBB to be “DRC conflict free”. If HBB is not able to meet such requirements, customers may choose not to purchase HBB products, which could adversely affect sales and the value of portions of HBB’s inventory. Further, there may be only a limited number of suppliers offering products containing only DRC conflict free parts, components and subassemblies and, as a result, HBB cannot be sure that it will be able to satisfy its purchase requirements from such suppliers in sufficient quantities or at competitive prices. Any one or a combination of these various factors could harm HBB’s business, and materially and adversely affect HBB’s results of operations.
HBB is subject in the ordinary course of its business, in the United StatesU.S. and elsewhere, to many statutes, ordinances, rules and regulations that, if violated by HBB or its affiliates, partners or vendors, could have a material adverse effect on HBB’s business. HBB is required to comply with the United StatesU.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery, anti-corruption and anti-kickback laws adopted in many of the countries in which HBB does business which prohibit HBB from engaging in bribery or making other prohibited payments to foreign officials for the purpose of obtaining or retaining business and also require maintenance of adequate record-keeping and internal accounting practices to accurately reflect transactions. Under the FCPA, companies operating in the United StatesU.S. may be held liable for actions taken by their strategic or local partners or representatives. If HBB does not properly implement and maintain practices and controls with respect to compliance with applicable anti-corruption, anti-bribery and anti-kickback laws, or if HBB fails to enforce those practices and controls properly, HBB may be held responsible for their actions and may become subject to regulatory sanctions, including administrative costs related to governmental and internal investigations, civil and criminal penalties, injunctions and restrictions on HBB’s business and capital raising activities, any of which could materially and adversely affect HBB’s business, results of operations and financial condition.
HBB may be subject to risks relating to increasing cash requirements of certain employee benefits plans, which may affect its financial position.
Because HBB’s defined benefit pension plans are frozen and no longer provide for the accrual of future benefits, the expenses recorded for, and cash contributions required to be made to its defined benefit pension plans are dependent on, changes in market interest rates and the value of plan assets, which, in turn, are dependent on actual investment returns. Significant changes in market interest rates, decreases in the value of plan assets or investment losses on plan assets may require HBB to increase the cash contributed to its defined benefit pension plans which may affect its financial position.
The Kitchen Collection, LLC9
HBB depends on third-party suppliers for all of our products, which subjects the Company to risks, including unanticipated increases in expenses, decreases in revenue and disruptions in the supply chain.
HBB is dependent on third-party suppliers for the manufacturing and distribution of our products. Our ability to select reliable suppliers that provide timely deliveries of quality products will impact our success in meeting customer demand. Any supplier inability to timely deliver products that meet desired specifications or any unanticipated changes in suppliers could be disruptive and costly. Any significant failure by HBB to obtain quality products, in sufficient quantities, on a timely basis, and at an affordable cost or any significant delays or interruptions of supply would have a material adverse effect on revenue and profitability. As consumer shopping habits change, foot trafficcertain suppliers are primarily based in China, international operations are subject to brickadditional risks including, among others:
currency fluctuations;
labor unrest;
potential political, economic and mortar storessocial instability;
restrictions on transfers of funds;
import and export duties and quotas;
changes in domestic and international customs and tariffs, including embargoes and customs restrictions;
uncertainties involving the costs to transport products;
long distance shipping routes dependent upon a small group of shipping and rail carriers and import facilities;
unexpected changes in regulatory environments;
regulatory issues involved in dealing with foreign suppliers and in exporting and importing products;
protection of intellectual property;
difficulty in complying with a variety of foreign laws;
difficulty in obtaining distribution and administrative support;
natural or human induced disasters such as earthquakes, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, power or water shortages, telecommunications failures, and medical epidemics or pandemics, including potential consequences from the coronavirus; and
potentially adverse tax consequences, including significant changes in tax law.
The foregoing factors could continuehave a material adverse effect on our ability to decline andmaintain or increase the supply of products, which may result in a loss of
market share, revenuesmaterial increases in expenses and profitability, and store closures at a more rapid pace thandecreases in the past.
The continuing and accelerating shift in consumer shopping patterns from traditional brick and mortar stores to e-commerce has resulted in declining mall traffic which has impacted most retailers. Our stores are located in outlet and traditional malls and our success depends in part on the overall ability of these malls to successfully generate and maintain customer foot traffic. We cannot control the success of individual malls, or store closures by other retailers, which may lead to mall vacancies and reduced customer foot traffic. Reduced customer foot traffic could result in reduced revenuesrevenue and profitability.
The marketmarkets for KC’sHBB's products isare highly seasonal and dependent on consumer spending, which could result in significant variations in our revenuesrevenue and profitability.
Sales of HBB products sold at KC stores are subject to a number of factors related to consumer spending, including general economic conditions affecting disposable consumer income such as unemployment rates, business conditions, interest rates, levels of consumer confidence, energy prices, mortgage rates, the level of consumer debt and taxation. In addition, KCthe retail market for small electric household and specialty housewares appliances are highly seasonal in nature. Accordingly, HBB generally recognizes a substantial portion of its revenues and operating profitour revenue in the lastsecond half of the year as sales to consumers increase significantly with the fall holiday-selling season. Accordingly, anyquarter-to-quarter comparisons of past operating results of HBB are meaningful only when comparing equivalent time periods, if at all. Any economic downturn, decrease in consumer spending or a shift in consumer spending away from KC’s products couldsmall electric household and specialty housewares appliances may significantly reduce or cause significant variations in, KC’s revenuesrevenue and profitability.
KC faces an extremely competitive specialty retail market, and such competition could result in a reduction of KC’s prices and loss of market share.
The retail market is highly competitive. KC competes against a diverse group of retailers, including specialty stores, department stores, discount stores and internet and catalog retailers. Widespread sourcing of Chinese products allows many retailers to offer value-priced kitchen products. Many of KC’s competitors are larger and have significantly greater financial, marketing and other resources. This competition could result in the reduction of KC product prices and a loss of market share, revenues and profitability.
KC may not be able to forecast customer preferences accurately in its merchandise selections.
KC’s success depends in part on its ability to anticipate the tastes of its customers and to provide merchandise that appeals to their preferences. KC’s strategy requires merchandising staff to introduce products that meet current customer preferences and that are affordable and distinctive in quality and design. KC’s failure to anticipate, identify or react appropriately to changes in consumer trends could cause excess inventories and higher mark-downs or a shortage of products and could harm KC’s business and operating results.
KC depends on third-party suppliers for most of its products, which subjects KC to risks, including unanticipated increases in expenses, decreases in revenues and disruptions in the supply chain.
KC is dependent on third-party suppliers for all of its products. KC’s inability to select reliable suppliers who provide timely deliveries of quality products could reduce its success in meeting customer demand. Any inability of KC’s suppliers to timely deliver products or any unanticipated changes in suppliers could be disruptive and costly to KC. The loss of a supplier could, in the short term, adversely affect KC’s business until alternative supply arrangements are secured. In addition, KC may not be able to acquire desired merchandise in sufficient quantities on acceptable terms in the future. KC’s business could also be adversely affected by delays in product shipments due to freight difficulties, strikes or other difficulties at its principal transport providers. Any significant failure by KC to obtain products on a timely basis at an affordable cost or any significant delays or interruptions of supply could have a material adverse effect on KC’s profitability.
KC may be forced to close a significant number of stores, which could adversely impact its profitability.
Although we have slowed the opening of new KC retail stores and have continued to close underperforming stores, the continuing and accelerating shift in consumer shopping patterns from traditional brick and mortar stores to e-commerce has resulted in declining outlet and traditional mall traffic, which has impacted most retailers. In the past, we have closed stores that did not generate acceptable profitability, and we may close additional stores in the future at a more rapid pace than in the past.
In addition, continued consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future. Should significant consolidation continue, a large proportion of KC’s stores could be concentrated with one or a few entities that could then be in a position to dictate unfavorable terms to KC due to their significant negotiating leverage. If KC is unable to negotiate favorable lease terms with these entities or if KC decides to close stores in the future and is unable to negotiate favorable terms with the landlords regarding the remaining lease obligations, KC could be liable for significant lease termination costs, which could have a material adverse effect on KC’s financial results.
Hamilton Beach Holding
Hamilton Beach Holding has no history operating as an independent public company prior to the spin-off on which you can evaluate Hamilton Beach Holding’s business strategy.
Hamilton Beach Holding has no operating history as an independent public company prior to the spin-off. Accordingly, Hamilton Beach Holding’s public company business strategy may not be successful on a stand-alone basis.
Hamilton Beach HoldingCompany is dependent on key personnel and the loss of these key personnel could significantly reduce its consolidated profitability.
Hamilton Beach HoldingThe Company is highly dependent on the skills, experience and services of its and its subsidiaries’ key personnel and the loss of key personnel could have a material adverse effect on its consolidated business, operating results and financial condition. Employment and retention of qualified personnel is important to the successful conduct of Hamilton Beach Holding’s business. Therefore, Hamilton Beach Holding’sthe Company's success also depends upon its ability to recruit, hire, train and retain current and additional skilled
and experienced management personnel. Hamilton Beach Holding’sThe Company's inability to hire and retain personnel with the requisite skills could impair its ability to manage and operate its consolidated business effectively and could significantly reduce its consolidated profitability.
Hamilton Beach Holding accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which it is now subject as an independent company. If Hamilton Beach Holding is not able to achieve and maintain effective internal controls, its business, financial condition, resultsThe financing arrangement of operations and cash flows could be materially adversely affected.
As a result of the spin-off, Hamilton Beach Holding is now directly subject to reporting and other obligations under the Securities Exchange Act of 1934 (the “Exchange Act”). These reporting and other obligations may place significant demands on Hamilton Beach Holding management and administrative and operational resources, including accounting resources. To comply with these requirements, Hamilton Beach Holding may need to implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. Hamilton Beach Holding may incur additional annual expenses related to these steps. If Hamilton Beach Holding is unable to upgrade the financial and management controls, reporting systems, information technology and procedures in a timely and effective fashion, its ability to comply with the financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on its business, financial condition, results of operations and cash flows.
Hamilton Beach Holding’s financing arrangements will subject Hamilton Beach Holding toHBB contains various restrictions that could limit operating flexibility.
HBB’s and KC’s respective credit facilities containfacility contains covenants and other restrictions that, among other things, require HBB and KC to satisfy certain financial tests, maintain certain financial ratios and restrict HBB’s and KC’s ability to incur additional indebtedness. The restrictions and covenants in HBB’s and KC’s respective credit facilities,facility, and other future financing arrangements may limit HBB’s and KC’s ability to respond to market conditions, provide for capital investment needs or take advantage of business opportunities by limiting the amount of additional borrowings HBB and KC may incur.
Hamilton Beach Holding’sThe Company’s business could suffer if HBB’s or KC’s information technology systems are disrupted, cease to operate effectively or become subject to a security breach.
Hamilton Beach Holding and its subsidiaries relyThe Company relies heavily on information technology systems to operate websites; record and process transactions; respond to customer inquiries; manage inventory; purchase, sell and ship merchandise on a timely basis; and maintain cost-efficient operations. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of computer hardware and software systems and maintain cyber security. Despite our cyber securitycybersecurity. The Audit Review Committee of the Company is regularly briefed on cybersecurity matters, however despite the cybersecurity efforts, our information technology systems may be vulnerable from time to time to damage or interruption from computer viruses, power outages, third-party intrusions and other technical malfunctions. If our systems are damaged, or fail to function properly, we may have to make monetary investments to repair or replace the systems and could endure delays in operations.
In addition, we regularly evaluate information technology systems and requirements and from time to time implement modifications and/or upgrades to our information technology systems. Modifications include replacing existing systems with successor systems, making changes to existing systems and acquiring new systems with new functionality. There are inherent risks associated with replacingHBB is currently engaged in a multi-year implementation of an enterprise resource planning (“ERP”) system. Such an implementation is a major undertaking from a financial, management, and modifying these systems, including inaccuratepersonnel perspective. The implementation of the ERP system information, system disruptionsmay prove to be more difficult, costly, or time consuming than expected, and user acceptance and understanding. We believe we are taking appropriate action to mitigate the risks but there can be no assurance that our actionsthis system will be successfulbeneficial to the extent anticipated. Any disruptions, delays or sufficient.deficiencies in the design and implementation of our new ERP system could adversely affect our financial position, results of operations and cash flows in addition to the effectiveness of our internal controls over financial reporting.
Any material disruption or slowdown of our systems, including a disruption or slowdown caused by a security breach or our failure to successfully upgrade its systems, could cause information, including data related to customer orders, to be lost or delayed. Such a loss or delay could reduce demand and cause our sales and/or profitability to decline.
Through sales and marketing activities and business operations, we collect and store confidential information and certain personal information from its customers, vendors and employees. For example, KC handles, collects and stores personal information in connection with customers’ purchasing products or services, or otherwise communicating or interacting with KC. KC also accepts payments using a variety of methods, including debit and credit cards, gift cards, electronic transfer of funds and others. Although KC has taken steps designedFailure to safeguard such information, there can be no assurance that such information will be protected against unauthorized access, use or disclosure. Unauthorized parties may attempt to penetrate our and our vendors’ network security and, if successful, misappropriate such information. Additionally, methods to obtain unauthorized access to confidential information change frequently and may be difficult to detect, which can impact our ability to respond appropriately. We could be subject to liability for failure to comply withmaintain data privacy and information security laws, for failing to protect personal information or for failing to respond appropriately. Loss, unauthorized access to, or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have ana material adverse effect on our business, financial condition and results of operations.
The transition services agreement Hamilton Beach Holding entered intoCompany is subject to certain laws, rules and regulations enacted to protect businesses and personal data (“Privacy Laws”), which may include the General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act (“CCPA”), as well as industry self-regulatory codes that create new compliance obligations. The administration, enforcement and regulation of Privacy Laws are quickly evolving and subject to changes in interpretation. Future changes in Privacy Laws may require the Company to incur additional and unexpected expenses and may subject the Company to additional compliance risk. Any failure to comply with NACCO contains early termination provisions that, if exercised by NACCO,Privacy Laws could prevent Hamilton Beach Holding from operating Hamilton Beach Holding’s business inhave a cost-efficient mannermaterial adverse impact on our financial condition and could disrupt Hamilton Beach Holding’sresults of operations.
U.S. government trade actions could have a material adverse effect on Hamilton Beach Brands Holding entered into a transition services agreement with NACCO on September 29, 2017. Under the termsCompany’s subsidiaries, financial position, and results of the transition services agreement, the Company obtains certain services from NACCO on a transition basis for varying periods after the spin-off date, none of which is expected to exceed one year, with the option to extend the transition periods for one or more services. The transition services agreement is subject to early termination provisions. For instance, either Hamilton Beach Holding or NACCO may terminate the agreement if:operation.
The U.S. government has taken a number of trade actions that impact or could impact our operations, including imposing tariffs on certain goods imported into the other party has violated any material provision of the agreement and such violation has not been remedied within 30 days after written notice thereof; or
the other party has filed, or has had filed against it, a petition seeking relief under any bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditor’s rights.
United States. In addition, both NACCOseveral governments, including the European Union, China and Hamilton Beach Holding may terminate any transition serviceIndia, have imposed tariffs on certain goods imported from the United States. As the majority of our products are imported into the United States from China, many of our product lines are subject to the tariffs imposed under Section 301 of US trade law that is being provided at any timehave been applied to separate lists of Chinese goods. The Section 301 tariffs on goods covered by giving such party 30 days’ prior written noticelists 1, 2, 3 and 4a affect approximately 25% of its intentiontotal HBB purchases on an annualized basis. On December 13, 2019, the United States Trade Representative (USTR) announced a “Phase One” agreement with China pursuant to do so. NACCO and Hamilton Beach Holding may also terminatewhich the agreement by mutual written agreement. Early termination of this agreement by NACCO could increase Hamilton Beach Holding’s transition-related costs and could disrupt our new public company operations.
U.S. government
Hamilton Beach Holding may experience increasedagreed to suspend the 15% tariffs on List 4b products. On January 15, 2020, USTR issued a Federal Register notice reducing the rate of Section 301 tariffs on List 4a products to 7.5%, effective February 14, 2020. We are continually evaluating the impact of the current and any possible new tariffs on our supply chain, costs, sales and profitability and are considering strategies to mitigate such impact, including reviewing sourcing options, filing requests for exclusion from the tariffs for certain product lines and working with our suppliers and customers. We can provide no assurance that any strategies we implement to mitigate the impact of such tariffs or decreased operational efficiencies as a result of its needing to replace corporate functions previously provided by NACCO.
NACCO has historically assisted with certain Hamilton Beach Holding operations, including accounting, finance, tax administration, internal auditother trade actions will be successful. Given the uncertainty regarding the scope and strategic development. Pursuant to the transition services agreement, NACCO will provide support to Hamilton Beach Holding with respect to someduration of these functions, including:
general accounting support;
support in responding to requests from regulatory and compliance agencies;
tax compliance and consulting support;
internal audit services and internal audit consulting and advisory services;
general legal support;
employee benefit and human resources legal and consulting support;
compensation support; and
investor relations support,
trade actions by the U.S. government or other countries, as well as the potential for varying periods afteradditional trade actions, the spin-off date, none of which is expected to exceed one year, with the option to extend the transition periods for one or more services. Hamilton Beach Holding will need to replicate certain personnel and services to which Hamilton Beach Holding will no longer have access after our spin-off from NACCO. Hamilton Beach Holding may incur additional costs to implement and support these functions.
In addition, there may be an adverse operational impact on Hamilton Beach Holding’s businesses as a result of the significant Hamilton Beach Holding managementour operations and employee time that will be dedicated to building these capabilities during the first few years after the spin-off. If Hamilton Beach Holding begins to operate these functions independently, without implementing adequate business functions of our own, Hamilton Beach Holding may not be able to operate effectively and its profitability may decline.
We might not be able to engage in desirable strategic transactions and equity issuances because of certain restrictions relating to requirements for tax-free distributions.
Our ability to engage in equity transactions could be limited or restricted in order to preserve, for U.S. federal income tax purposes, the tax-free nature of the spin-off. Even if the spin-off otherwise qualifies for tax-free treatment under the Code, it may result in corporate-level taxable gain to NACCO under the Code if there is a 50% or greater change in ownership, by vote or value, of shares of our stock or NACCO’s stock occurring as part of a plan or series of related transactions that includes the spin-off. Any acquisitions or issuances of our stock or NACCO’s stock within two years before or two years after the spin-off are generally presumed to be part of such a plan, although we or NACCO may be able to rebut that presumption. It is unclear whether any increase in voting power by holders of our Class B Common Stock by reason of the conversion by other holders of Hamilton Beach Holding Class B Common Stock to Hamilton Beach Holding Class A Common Stock should be considered an acquisition of voting power as part of a plan or series of related transactions. However, even if so treated, any such voting shift would not alone cause an acquisition of 50% or more of the voting power of our Common Stock and, as a result, would not, by itself, cause the spin-off to be taxable to NACCO under Section 355(e) of the Code.
Under the Tax Allocation Agreement entered into with NACCO, we are prohibited from taking or failing to take any action that prevents the spin-off from being tax-free. Further, during the two-year period following the spin-off, without obtaining the consent of NACCO, a private letter ruling from the Internal Revenue Service or an unqualified opinion of a nationally recognized law firm, we may be prohibited from:
approving or allowing any transaction that results in a change in ownership of 35% or more of the value or 5% or more of the voting power of our common stock;
redeeming equity securities;
selling or otherwise disposing of more than 35% of the value of our assets;
acquiring a business or assets with equity securities to the extent one or more persons would acquire 35% or more of the value or 5% or more of the voting power of our common stock; and
engaging in certain internal transactions.
These restrictions may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that could maximize the value of our business.remains uncertain.
The amount and frequency of dividend payments made on Hamilton Beach Holding’s common stock could change.
Hamilton Beach Holding’s board of directors (the "Board")The Company's Board has the power to determine the amount and frequency of the payment of dividends. Decisions regarding whether or not to pay dividends and the amount of any dividends are based on earnings, capital, and future expense requirements, financial conditions, contractual limitations and other factors our Board may consider.
Certain members of the Company's extended founding family of NACCO own a substantial amount of Hamilton Beach Holding’s Class A Common and Class B common stock,Common, and if they were to act in concert, could control the outcome of director elections and other stockholder votes on significant actions.
Hamilton Beach Holding has two classes of common stock: Class A common stock ("Class A Common")Common and Class B common stock ("Class B Common").Common. Holders of Class A Common will be entitled to cast one vote per share and, as of December 31, 2017,2019, accounted for approximately 15.57%18.80% of the voting power of Hamilton Beach Holding. Holders of Class B Common are entitled to cast ten votes per share and, as of December 31, 2017,2019, accounted for the remaining voting power of Hamilton Beach Holding. As of December 31, 2017,2019, certain members of NACCO’sthe Company's extended founding family held approximately 37.96%34.78% of Hamilton Beach Holding’s Class A Common and 69.99%80.13% of Hamilton Beach Holding’s Class B Common. On the basis of this common stock ownership, certain members of NACCO’sthe Company's extended founding family could exercise 65.01%71.6% of Hamilton Beach Holding’sthe Company's total voting power. Although there is no voting agreement among such family members, in writing or otherwise, if they were to act in concert, they would exert significant control over the outcome of director elections and other stockholder votes on significant actions, such as certain amendments to Hamilton Beach Holding’sthe Company's amended and restated certificate of incorporation and salessale of Hamilton Beach Holdingthe Company or substantially all of its assets. Because such family members could prevent other stockholders from exercising significant influence over significant corporate actions, Hamilton Beach Holdingthe Company may be a less attractive takeover target, which could adversely affect the market price of its common stock.
Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt that stockholders may consider favorable.
Our certificate of incorporation and bylaws provisions, as amended and restated in connection with us becoming a public company, may have the effect of delaying, deferring or discouraging a prospective acquiror from making a tender offer for our shares or otherwise attempting to obtain control of us. These provisions, among other things, establish that our Board fixes the number of members of the Board, and establish advance notice requirements for nomination of candidates for election to the Board or for proposing matters that can be acted on by stockholders at stockholder meetings. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares. Moreover, these provisions could discourage accumulations of large blocks of our common stock, thus depriving stockholders of any advantages that large accumulations of stock might provide.
Any provision of our amended and restated certificate of incorporation or our amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
We areThe Company is an “emerging growth company” and as a result of the reduced disclosure requirements applicable to emerging growth companies, our common stock may be less attractive to investors and the reduced disclosures may make it more difficult to compare our performance with other public companies.companies.
We are an “emerging growth company”, as defined in the Jumpstart ourOur Business Startups Act ("of 2012 (“JOBS Act"Act”). For as long as we continue to be an emerging growth company,, and we may choose to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging“emerging growth companies, which include, among other things:
exemption fromcompanies” including, but not limited to, not being required to comply with the auditor attestation requirements underof Section 404 of the Sarbanes-Oxley Act, of 2002;
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;
exemptionstatements, and exemptions from the requirements of holding non-binding stockholder votesa nonbinding advisory vote on executive compensation arrangements; and
exemption from shareholder approval of any rules of the Public Accounting Oversight Board (PCAOB) requiring mandatory audit firm rotation and auditor discussion and analysis and, unless the SEC otherwise determines, any future audit rules that may be adopted by the PCAOB.golden parachute payments not previously approved.
We could beIn addition, the JOBS Act also provides that an emerging growth company until the last daycan take advantage of the fiscal year following the fifth anniversary of the consummation of the spin-off date, or until the earliest of (i) the last day of the fiscal year in which we have annual gross revenue of $1.07 billion or more, (ii) the date on which we have, during the previous three yearan extended transition period issued more than $1 billion in non-convertible debt or (iii) the date on which we are deemed to be a large accelerated filer under the federal securities laws. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.
Under the JOBS Act, emerging growth companies are also permitted to elect to delay adoption ofcomplying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until companies that are not subject to periodic reporting obligations are required to comply with those standards if such accounting standardswould otherwise apply to non-reportingprivate companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with those of another public company whichthat is neither (i) an emerging growth company nor (ii) an emerging growth company whichthat has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.
We cannot predictwill remain an emerging growth company for up to five years, although we will lose that status sooner if investors will find our common stock less attractiverevenues exceed $1.07 billion, if we relyissue more than $1 billion in non-convertible debt in a three-year period, or if we are deemed to be a large accelerated filer under the federal securities laws.
There are risks associated with the winddown of KC.
On October 10, 2019, the Board approved the wind down of KC and its retail operations. At December 31, 2019, all stores were closed for business. The Company expects the wind down to continue through the first half of 2020 to facilitate the settlement of remaining liabilities. KC may incur additional costs until the wind down is complete, which may include, contract assignment and termination costs, primarily with respect to store operating leases. The final outcome is dependent upon various factors, many of which are outside of our control, including, without limitation, the actual outcomes of discussions and negotiations with landlords and the counterparties to the contracts we intend to terminate. In addition, the wind down of the KC business involves numerous risks to us, including but not limited to:
potential disruption of the operations of the rest of our businesses and diversion of management’s attention from such businesses and operations;
exposure to unknown, contingent or other liabilities, including litigation arising in connection with the KC wind down;
negative impact on our business relationships, including current relationships with our customers, suppliers, vendors, lessors, licensees and employees; and
unintended negative consequences from changes to our business profile.
If any of these exemptions. If some investors find our common stock less attractiveor other factors impair the successful implementation of the wind down, we may not be able to realize other business opportunities as a result, therewe may be a less active trading market for our common stockrequired to spend additional time and incur additional expense relating to the pricewind down that otherwise would be used on the development and expansion of our common stock may be more volatile.other businesses, which could adversely impact the Company’s business, operational results, financial position and cash flows.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
A. Hamilton Beach Brands
The following table presents the principal distribution and office facilities owned or leased by HBB:leased:
|
| | | | |
| | Owned/ | | |
Facility Location | | Leased | | Function(s) (2) |
Glen Allen, Virginia | | Leased | | Corporate headquarters |
Geel, Belgium | | (1) | | Distribution center |
Shenzhen, People's Republic of China | | (1) | | Distribution center |
Mexico City, Mexico | | Leased | | Mexico sales and administrative headquarters |
Olive Branch, Mississippi | | Leased | | Distribution center |
Picton, Ontario, Canada | | Leased | | Distribution center |
Belleville, Ontario, Canada | | Leased | | Distribution center |
Southern Pines, North Carolina | | Owned | | Service center for customer returns; catalog distribution center; parts distribution center |
Shenzhen, People's Republic of China | | Leased | | Administrative office |
Markham, Ontario, Canada | | Leased | | Canada sales and administration headquarters |
City of Sao Paulo, Sao Paulo, Brazil | | Leased | | Brazil sales and administrative headquarters |
Jundiai, Sao Paulo,Joinville, Santa Catarina, Brazil | | (1) | | Distribution center |
Shanghai, People's Republic of China | | Leased | | Sales office |
Shanghai,Suzhou, People's Republic of China | | (1) | | Distribution center |
Independence, Ohio | | Leased | | Weston Brands sales office |
Tultitlan, Mexico | | (1) | | Distribution center |
| |
(1) | This facility is not owned or leased by HBB. This facility is managed by a third-party distribution provider. |
| |
(2) | Sales offices are also leased in several cities in the United States,U.S., Canada, China and Mexico. |
B. The Kitchen Collection
KC leases its corporate headquarters building and the KC warehouse/distribution facility in Chillicothe, Ohio. KC leases its retail stores. A typical store is approximately 3,000 square feet. At December 31, 2017, KC operated 210 stores.
Item 3. LEGAL PROCEEDINGS
Neither the Company nor anyThe information required by this Item 3 is set forth in Note 12 "Contingencies" included in our Financial Statements and Supplementary Data contained in Part IV of its subsidiariesthis Form 10-K/A and is a partyhereby incorporated herein by reference to any material legal proceeding other than ordinary routine litigation incidental to its respective business.
such information.
Item 4. MINE SAFETY DISCLOSURES
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information under this Item is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
There exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was elected. Each executive officer serves until his or her successor is elected and qualified.
The following tables set forth as of March 7, 2018 the name, age, current position and principal occupation and employment during the past five years of the Company’s executive officers.
EXECUTIVE OFFICERS OF THE COMPANY |
| | | | | | | |
Name | | Age | | Current Position | | Other Positions |
| | | | | | |
Alfred M. Rankin, Jr. | | 75 |
| | Executive Chairman of Hamilton Beach Holding (from October 1, 2017) | | Chairman, President and Chief Executive Officer of Hyster-Yale (from prior to 2013), Chairman of Hyster-Yale Group, formerly NACCO Materials Handling Group, Inc. (from prior to 2013), Non-Executive Chairman of NACCO Industries, Inc. (from September 2017), Chairman of NACoal (from prior to 2013). From prior to 2013 to September 2017, Chairman, President and CEO of NACCO. From prior to 2013 to 2014, Director of The Vanguard Group. |
Gregory H. Trepp | | 56 |
| | President and Chief Executive Officer of Hamilton Beach Holding (from September 2017); President and Chief Executive Officer of HBB (from prior to 2013); Chief Executive Officer of KC (from prior to 2013)
| | Interim President of KC (from November 2013 to December 2014).
|
Keith B. Burns | | 61 |
| | Vice President, Engineering and Information Technology of HBB (from prior to 2013) | | |
Gregory E. Salyers | | 57 |
| | Senior Vice President, Global Operations of HBB (from prior to 2013) | | |
Dana B. Sykes | | 56 |
| | Vice President, General Counsel and Secretary of Hamilton Beach Holding (from September 2017); Vice President, General Counsel and Secretary of HBB (from September 2015); Assistant Secretary of KC (from May 2015) | | From July 2014 to September 2015, Associate General Counsel, Assistant Secretary and Senior Director, Human Resources of HBB. From prior to 2013 to July 2014, Assistant General Counsel and Director, Human Resources of HBB. From prior to 2013, Assistant General Counsel of HBB.
|
James H. Taylor | | 60 |
| | Vice President, Chief Financial Officer and Treasurer of Hamilton Beach Holding (from September 2017); Vice President and Chief Financial Officer of HBB (from prior to 2013) | | |
R. Scott Tidey | | 53 |
| | Senior Vice President, North America Sales and Marketing of HBB (from prior to 2013) | | |
Robert O. Strenski | | 61 |
| | President of KC (from January 2015) | | Vice President, General Merchandise Manager of KC (from February 2014 to December 2014); General Merchandise Manager of KC (from June 2013 to January 2014); Vice President, Divisional Merchandise Manager, Consumables, Biglots Stores, Inc. (from prior to 2013 to January 2013). |
PRINCIPAL OFFICERS OF THE COMPANY’S SUBSIDIARIES
A. HBB
|
| | | | | | | |
Name | | Age | | Current Position | | Other Positions |
D. Scott Butler | | 66 |
| | Senior Director, Controller of HBB (from October 2017) | | From prior to 2013 to October 2017, Corporate Controller |
| | | | | | |
Richard E. Moss | | 54 |
| | Senior Director, Finance &Treasurer of HBB (from prior to 2013) | | |
| | | | | | |
Derek R. Redmond | | 41 |
| | Assistant Secretary of Hamilton Beach Holding (from September 2017); Assistant Secretary and Senior Counsel of HBB (from September 2017); Assistant Secretary of KC (from September 2017) | | Senior Counsel of HBB (from prior to 2013) |
B. KC
|
| | | | | | |
Name | | Age | | Current Position | | Other Positions |
L.J. Kennedy | | 47 | | Director of Finance, Treasurer and Secretary of KC (from September 2016) | | From prior to 2013 to September 2016, Treasurer and Secretary of KC. |
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Hamilton Beach Holding'sThe Company's Class A Common is traded on the New York Stock Exchange under the ticker symbol “HBB.” Because of transfer restrictions, no trading market has developed, or is expected to develop, for the Company's Class B Common. The Class B Common is convertible into Class A Common on a one-for-one basis. The Company currently intends to pay regular quarterly dividends.
The declaration of future dividends, and the establishment of the per share amount, record dates and payout dates for such future dividends will be at the discretion of the Company's Board and will depend on various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that the Company's Board deems relevant.
The high and low sales prices for the Class A Common and dividends per share for both classes of common stock for each quarter since the Company was spun-off and the Class A Common became publicly traded is presented in the table below: |
| | | | | | | | | | | |
| 2017 |
| Sales Price | | |
| High | | Low | | Cash Dividend |
Fourth quarter | $ | 39.89 |
| | $ | 24.97 |
| | $ | 0.0850 |
|
At December 31, 2017,2019 and 2018, there were 789780 and 772, respectively, Class A Common stockholders of record and 864902 and 892, respectively, Class B common stockholders of record.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In May 2018, the Company approved a stock repurchase program for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through December 31, 2019. As of December 31, 2019, the Company repurchased 364,893 shares for an aggregate purchase price of $6.0 million. There were no stock repurchases during the three months ended December 31, 2019 and the twelve months ended December 31, 2018 and 2017.
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.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected historical financial data as of and for each of the periods indicated. The Company derivedExcept where indicated, the summary historicalresults of operations, financial dataposition, and cash flows of KC are reflected as discontinued operations for all periods reported. Certain amounts have been restated for the correction of misstatements discussed in Note 2, Restatement of Previously Issued Consolidated Financial Statements and corrected for each of the three years ended December 31, 2017 from the Company's audited consolidated financial statements.additional identified out-of-period and uncorrected errors that were not material. This information is only a summary and should be read in conjunction with the historical consolidated financial statements and the related notes and “Management’s“Explanatory Note” immediately preceding Item 1 of this Annual Report on Form 10-K/A, with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.”
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (In thousands, except per share data) |
Operating Statement Data: | | | | | |
Revenues | $ | 740,749 |
| | $ | 745,357 |
| | $ | 767,862 |
|
Operating profit | $ | 38,135 |
| | $ | 43,374 |
| | $ | 35,554 |
|
Net income | $ | 17,905 |
| | $ | 26,179 |
| | $ | 19,711 |
|
| | | | | |
Basic earnings per share (1) | $ | 1.31 |
|
| $ | 1.91 |
|
| $ | 1.44 |
|
| | | | | |
Diluted earnings per share (1) | $ | 1.31 |
|
| $ | 1.91 |
|
| $ | 1.44 |
|
December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017, are derived from our audited consolidated financial statements included in this Annual Report on Form 10-K/A. The selected financial data as of December 31, 2017, 2016 and 2015 and for the years ended December 31, 2016 and 2015 are derived from unaudited consolidated financial statements, which were prepared on the same basis as our audited consolidated financial statements and reflect the impact of adjustments to our previously filed financial information.
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (In thousands, except per share data, share amounts and employee data) |
Balance Sheet Data at December 31: | | | | | |
Total assets | $ | 326,233 |
| | $ | 310,833 |
| | $ | 310,128 |
|
Long-term portion of revolving credit agreements | $ | 20,000 |
| | $ | 26,000 |
| | $ | 50,000 |
|
Stockholders' equity | $ | 46,408 |
| | $ | 65,268 |
| | $ | 82,824 |
|
| | | | | |
Cash Flow Data: | | | | | |
Provided by operating activities | $ | 33,440 |
| | $ | 62,563 |
| | $ | 26,488 |
|
Used for investing activities | $ | (7,353 | ) | | $ | (5,925 | ) | | $ | (6,543 | ) |
Used for financing activities | $ | (26,602 | ) | | $ | (61,837 | ) | | $ | (10,088 | ) |
| | | | | |
Other Data: | | | | | |
Cash dividends paid to NACCO | $ | (38,000 | ) | | $ | (42,000 | ) | | $ | (15,000 | ) |
Per share data: | | | | | |
Cash dividends on Class A Common and Class B Common (2) | $ | 0.085 |
| | n/a |
| | n/a |
|
Market value at December 31 (2) | $ | 25.69 |
| | n/a |
| | n/a |
|
Stockholders' equity at December 31 | $ | 3.39 |
| | $ | 4.77 |
| | $ | 6.06 |
|
| | | | | |
Actual shares outstanding at December 31 (1) | 13,673 |
| | 13,673 |
| | 13,673 |
|
Basic weighted average shares outstanding (1) | 13,673 |
| | 13,673 |
| | 13,673 |
|
Diluted weighted average shares outstanding (1) | 13,685 |
| | 13,673 |
| | 13,673 |
|
Total employees at December 31 | 1,600 |
| | 1,600 |
| | 1,700 |
|
|
| | | | | | | | | | | | | | | | | | | |
| As Restated (2) | | As Revised (3) |
| Year Ended December 31 |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (In thousands, except per share amounts) |
Operating Statement Data: | | | | | | | | | |
Revenue | $ | 611,786 |
| | $ | 630,082 |
| | $ | 612,056 |
| | $ | 601,006 |
| | $ | 616,874 |
|
Operating profit | $ | 26,794 |
| | $ | 33,550 |
| | $ | 37,956 |
| | $ | 39,561 |
| | $ | 32,115 |
|
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|
| | |
Income from continuing operations, net of tax | $ | 15,093 |
| | $ | 23,059 |
| | $ | 18,109 |
| | $ | 24,277 |
| | $ | 18,086 |
|
Income (loss) from discontinued operations, net of tax | $ | (28,600 | ) | | $ | (5,361 | ) | | $ | (2,225 | ) | | $ | 259 |
| | $ | 545 |
|
Net income (loss) | $ | (13,507 | ) | | $ | 17,698 |
| | $ | 15,884 |
| | $ | 24,536 |
| | $ | 18,631 |
|
|
| |
| |
| |
| | |
Basic and diluted earnings (loss) per share: |
| |
| |
| |
| | |
Continuing operations | $ | 1.10 |
| | $ | 1.68 |
|
| $ | 1.32 |
|
| $ | 1.78 |
|
| $ | 1.32 |
|
Discontinued operations | (2.09 | ) | | (0.39 | ) |
| (0.16 | ) |
| 0.01 |
|
| 0.04 |
|
Basic and diluted earnings (loss) per share | $ | (0.99 | ) | | $ | 1.29 |
|
| $ | 1.16 |
|
| $ | 1.79 |
|
| $ | 1.36 |
|
|
| |
| |
| |
| | |
Actual shares outstanding at December 31 (1) | 13,516 |
| | 13,713 |
| | 13,673 |
| | 13,673 |
| | 13,673 |
|
Basic weighted average shares outstanding (1) | 13,690 |
| | 13,699 |
| | 13,673 |
| | 13,673 |
| | 13,673 |
|
Diluted weighted average shares outstanding (1) | 13,726 |
| | 13,731 |
| | 13,685 |
| | 13,673 |
| | 13,673 |
|
| |
(1) | On September 29, 2017, NACCO, Hamilton Beach Holding's former parent company, spun-off the Company to NACCO stockholders. In the spin-off, NACCO stockholders, in addition to retaining their shares of NACCO common stock, received one share of Hamilton Beach Holding Class A Common and one share of Hamilton Beach Holding Class B Common for each share of NACCO Class A Common or Class B Common. The basic and diluted earnings (loss) per share amounts for the Company for all periods prior to the spin-off have been calculated based upon the number of shares distributed in the spin-off for all periods prior to the spin-off. |
| |
(2) | The Company restated previously disclosed consolidated financial data for fiscal years 2019, 2018 and 2017, as well as the related balance sheet dates, to correct misstatements principally related to the write-off of unrealizable assets. The restatement also includes corrections for other errors previously identified as immaterial, individually and in the aggregate, to our consolidated financial statements. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information. |
| |
(3) | In connection with the restatement, the Company has also revised the selected financial information for the fiscal years ended December 31, 2016 and 2015, to correct for misstatements identified during the investigation. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and |
Supplementary Data, for additional information regarding the nature of the misstatements. Revisions to the consolidated statement of operations decreased operating profit and net income by $1.6 million and decreased diluted earnings per share by $0.12 for the year ended December 31, 2016. Revisions to the consolidated statement of operations decreased operating profit and net income by $1.1 million and decreased diluted earnings per share by $0.08 for the year ended December 31, 2015.
|
| | | | | | | | | | | | | | | | | | | |
| As Restated (3) | | As Revised (4) |
| Year Ended December 31 |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (In thousands, except per share amounts and employee data) |
Balance Sheet Data at December 31: | | | | | | | | | |
Net working capital(2) | $ | 106,839 |
|
| $ | 101,898 |
|
| $ | 91,111 |
|
| $ | 95,088 |
|
| $ | 116,839 |
|
Total assets | $ | 288,664 |
|
| $ | 321,419 |
|
| $ | 325,276 |
|
| $ | 310,141 |
|
| $ | 310,643 |
|
Short-term portion of revolving credit agreements | $ | 23,497 |
|
| $ | 11,624 |
|
| $ | 31,346 |
|
| $ | 12,714 |
|
| $ | 8,365 |
|
Long-term portion of revolving credit agreements | $ | 35,000 |
|
| $ | 35,000 |
|
| $ | 20,000 |
|
| $ | 26,000 |
|
| $ | 50,000 |
|
Stockholders' equity | $ | 36,267 |
|
| $ | 56,819 |
|
| $ | 42,027 |
|
| $ | 62,948 |
|
| $ | 81,970 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Data: |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations | $ | 221 |
|
| $ | 17,955 |
|
| $ | 28,303 |
|
| $ | 58,025 |
|
| $ | 13,535 |
|
Net cash used for investing activities from continuing operations | $ | (4,122 | ) |
| $ | (7,759 | ) |
| $ | (6,177 | ) |
| $ | (4,788 | ) |
| $ | (4,775 | ) |
Net cash provided by (used for) financing activities from continuing operations | $ | 1,062 |
|
| $ | (9,255 | ) |
| $ | (26,532 | ) |
| $ | (61,837 | ) |
| $ | (10,088 | ) |
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
Cash dividends paid to NACCO Industries, Inc. | $ | — |
|
| $ | — |
|
| $ | 38,000 |
|
| $ | 42,000 |
|
| $ | 15,000 |
|
Cash dividends paid(1) | $ | 4,851 |
|
| $ | 4,658 |
|
| $ | 1,162 |
|
| n/a |
|
| n/a |
|
Purchase of treasury stock | $ | 5,960 |
|
| $ | — |
|
| $ | — |
|
| n/a |
|
| n/a |
|
Per share data: |
|
|
|
|
|
|
|
|
|
Cash dividends paid(1) | $ | 0.36 |
|
| $ | 0.34 |
|
| $ | 0.09 |
|
| n/a |
|
| n/a |
|
Market value at December 31 (1) | $ | 19.10 |
|
| $ | 23.46 |
|
| $ | 25.69 |
|
| n/a |
|
| n/a |
|
Stockholders' equity at December 31 | $ | 2.68 |
|
| $ | 4.14 |
|
| $ | 3.07 |
|
| $ | 4.60 |
|
| $ | 6.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employees at December 31 for continuing operations | 680 |
|
| 670 |
|
| 650 |
|
| 600 |
|
| 600 |
|
| |
(1) | This information is only included for periods subsequent to the spin-off from NACCO. |
| |
(2) | Net working capital is defined as trade receivables, net plus inventory less accounts payable. |
| |
(3) | The Company restated previously disclosed consolidated financial data for fiscal years 2019, 2018 and 2017, as well as the related balance sheet dates, to correct misstatements principally related to the write-off of unrealizable assets. The restatement also includes corrections for other errors previously identified as immaterial, individually and in the aggregate, to our consolidated financial statements. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information. |
| |
(4) | In connection with the restatement, the Company has also revised the selected financial information for the fiscal years ended December 31, 2016 and 2015, to correct for misstatements identified during the investigation. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information regarding the nature of the misstatements. The impact of restatement was a decrease to total assets of $1.0 million and a decrease to stockholders' equity of $4.4 million as of December 31, 2017. The impact of revisions was a decrease to total assets of $0.7 million and a decrease to stockholders' equity of |
OVERVIEW
Hamilton Beach Brands Holding Company (“Hamilton Beach Holding” or the “Company”) is$2.3 million as of December 31, 2016 million and an operating holding company for two separate businesses: consumer, commercialincrease to total assets of $0.5 million and specialty small appliances and specialty retail. Hamilton Beach Brands, Inc. (“HBB”) is a leading designer, marketer and distributordecrease to stockholders' equity of branded small electric household and specialty housewares appliances$1.1 million as well as commercial products for restaurants, bars and hotels. The Kitchen Collection, LLC (“KC”) is a national specialty retailer of kitchenware operating retail stores in outlet and traditional malls throughout the United States. Results of operations and financial condition are discussed separately by segment, which corresponds with the industry groupings.December 31, 2015.
On September 29, 2017, NACCO Industries, Inc. ("NACCO"), Hamilton Beach Holding's former parent company, spun-off the Company to NACCO stockholders. In the spin-off, NACCO stockholders, in addition to retaining their shares of NACCO common stock, received one share of Hamilton Beach Holding Class A common stock and one share of Hamilton Beach Holding Class B common stock for each share of NACCO Class A or Class B common stock. In accordance with applicable authoritative accounting guidance, the Company accounted for the spin-off from NACCO based on the historical carrying value of assets and liabilities. As a result of the distribution of one share of Hamilton Beach Holding Class A common stock and one share of Hamilton Beach Holding Class B common stock for each share of NACCO Class A or NACCO Class B common stock, the earnings per share amounts for the Company for periods prior to the spin-off have been calculated based upon the number of shares distributed in the spin-off. NACCO did not receive any proceeds from the spin-off.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018, and 2017, included elsewhere in this Annual Report on Form 10-K/A. This Annual Report on Form 10-K/A restates amounts included in the 2019 Annual Report as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information. The relevant unaudited interim financial information for each of the quarters during the years ended December 31, 2019 and 2018 has also been restated. See Note 16, Quarterly Results of Operations (Unaudited), in Item 8, Financial Statements and Supplementary Data, for such restated information.
The restatement also includes corrections for other errors previously identified as immaterial, individually and in the aggregate, to our consolidated financial statements. The impact of the restatement is reflected in Management’s Discussion and Analysis of Financial Condition and Results of Operations below.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S.accounting principles generally accepted accounting principles.in the United States (“GAAP”). The preparation of these financial statements requires the Companymanagement to make estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenues andrevenue, expenses and related disclosure of contingent assets and liabilities (if any). On an ongoing basis, the Company evaluates its estimates based on historical experience, actuarial valuations and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results maycould differ from those estimates.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Emerging Growth Company:Revenue Recognition: Section 102(b)(1)Revenue is recognized when control of the JOBS Act exempts emerging growth companiespromised 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. Sales taxes are excluded from being required to complyrevenue. At contract inception, the Company assesses the goods and services promised in its contracts with newcustomers and identifies a performance obligation for each promised good or revised financial accounting standards until private companies (thatservice that is those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but an election to opt out is irrevocable.distinct. The Company has elected to account for shipping and handling activities performed after a customer obtains control of the goods as activities to fulfill the promise to transfer the goods, and therefore these activities are not assessed as a separate service to opt outcustomers. The amount of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies,revenue recognized varies primarily with changes in returns. In addition, the Company as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
Revenue recognition: Revenues are recognized when title transfers and risk of loss passesoffers price concessions to the customer. Revenues at HBB are recognized when customer orders are completed and shipped. Revenues at KC are recognized at the point of sale when payment is made andour customers take possession of the merchandise in stores. Reserves for discounts and returns are maintained for anticipated future claims at HBB and KC.
Product discounts: The Company records estimated reductions to revenues for customer programs and incentive offerings, including special pricing agreements, price competition, promotions andor other volume-based incentives. At HBB, revenues represent gross sales less cooperative advertising, other volume-based incentives, estimated returns and allowances for defective products. At KC, retail markdownsarrangements. We determine whether price concessions offered to its customers are incorporated into KC’s retail method of accounting for cost of sales. If market conditions were to decline or if competition were to increase, the Company may take actions to increase customer incentive offerings, possibly resulting in an incrementala reduction of revenues at the timetransaction price and revenue or are advertising expense, depending on whether we receive a distinct good or service from our customers and, if so, whether we can reasonably estimate the incentive is offered. Iffair value of that distinct good or service. We evaluated such agreements with our customers and determined they should be accounted for as variable consideration. As of December 31, 2019, we have determined that customer price concessions recorded as a reduction of revenue, certain of which were previously recorded in other current liabilities, meet all of the Company's accrued cooperative advertising balancecriteria specified in ASC 210-20, "Balance Sheet Offsetting". Accordingly, amounts related to such arrangements have been classified as a reduction of trade receivables, net as of December 31, 20172019 (prior periods have not been adjusted as all the criteria in ASC 210-20 had not previously been met).
To estimate variable consideration, the Company applies both the expected value method and most likely amount method based on the form of variable consideration, according to which method would provide the better prediction. The expected value method involves a probability weighted determination of the expected amount, whereas the most likely amount method identifies the single most likely outcome in a range of possible amounts.
The Company monitors its estimates of variable consideration, which includes returns and price concessions, and periodically makes adjustments to the carrying amounts as appropriate. During 2019, there were no material adjustments to increase by one percent, the reserve for product discounts would increaseaforesaid estimates and revenues would be reduced by $0.1 million. Thethe Company's past results of operations have not been materially affected by a change in the estimate of product discounts, and althoughthese estimates. Although there can be no assurances, the Company is not aware of any circumstances that would be reasonably likely to materially change these estimates in the future.
Product returns: HBB products generally are not sold with the right of return. However, based on the Company's historical experience, a portion of KC and HBB products sold are estimated to be returned due to reasons such as buyer remorse, duplicate gifts received, product failure and excess inventory stocked by the customer which, subject to certain terms and conditions, the Company will agree to accept. The Company records estimated reductions to revenues at the time of sale based on this historical experience and the limited right of return provided to certain customers. If future trends were to change significantly from those experienced in the past, incremental reductions to revenues may result based on this new experience. If the Company's estimate of average return rates as of December 31, 2017 were to increase by one percent, the reserves for product returns would increase and revenues would be reduced by $0.1 million. The Company's past results of operations have not been materially affected by a change in the estimate of product returns and although there can be no assurances, the Company is not aware of any circumstances that would be reasonably likely to materially change these estimates in the future.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Retirement benefit plans:Benefit Plans: The Company maintains two defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. All eligible employees, including employees whose pension benefits are frozen, receive retirement benefits under defined contribution retirement plans. The Company's policy is to periodically make contributions to fund the defined benefit pension plans within the range allowed by applicable regulations. The defined benefit pension plan assets consist primarily of publicly traded stocks and government and corporate bonds. There is no guarantee the actual return on the plans’ assets will equal the expected long-term rate of return on plan assets or that the plans will not incur investment losses.
The expected long-term rate of return on defined benefit plan assets reflects management’s expectations of long-term rates of return on funds invested to provide for benefits included in the projected benefit obligations. In establishing the expected long-term rate of return assumption for plan assets, the Company considers the historical rates of return over a period of time that is consistent with the long-term nature of the underlying obligations of these plans as well as a forward-looking rate of return. The historical and forward-looking rates of return for each of the asset classes used to determine the Company's estimated rate of return assumption are based upon the rates of return earned or expected to be earned by investments in the equivalent benchmark market indices for each of the asset classes.
Expected returns for the U.S. pension plansplan are based on a calculated market-related value for U.S. pension plan assets. Under this methodology, asset gains and losses resulting from actual returns that differ from the Company's expected returns which are recognized ratably in the market-related value of assets over three years. Expected returns for the non-U.S. pension plansplan are based on fair market value for non-U.S. pension plan assets.
The basis for the selection of the discount rate for each plan is determined by matching the timing of the payment of the expected obligations under the defined benefit plans and health care plans against the corresponding yield of high-quality corporate bonds of equivalent maturities.
Changes to the estimate of any of these factors could result in a material change to the Company's pension obligation causing a related increase or decrease in reported net operating results in the period of change in the estimate. Because the 20172019 assumptions are used to calculate 20182020 pension expense amounts, a one percentage-point change in the expected long-term rate of return on plan assets would result in a change in pension expense for 20182020 of approximately $0.3 million for the plans. A one percentage-point change in the discount rate would result in a change in pension expense for 20182020 by approximatelyless than $0.1 million. A one percentage-point increase in the discount rate would have lowered the plans’ projected benefit obligation as of the end of 20172019 by approximately $2.0$1.6 million; while a one percentage-point decrease in the discount rate would have raised the plans’ projected benefit obligation as of the end of 20172019 by approximately $2.3$1.8 million.
Environmental Liabilities: HBB and environmental consultants are investigating or remediating historical environmental contamination at some current and former sites operated by HBB or by businesses it acquired. Liabilities for environmental matters are recorded in the period when it is determined to be probable and reasonably estimable that the Company will incur costs. When only a range of amounts is reasonably estimable and no amount within the range is more probable than another, the Company records the low end of the range. Environmental liabilities are recorded on an undiscounted basis and recorded in selling, general, and administrative expenses. When a recovery of a portion of an environmental liability is probable, such amounts are recognized as a reduction to selling, general, and administrative expenses and included in prepaid expenses and other current assets (current portion) and other non-current assets until settled. If the Company's environmental liability balance as of December 31, 2019 were to increase by one percent, the reserve and selling, general, and administrative expenses would increase by less than $0.1 million.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
RESULTS OF OPERATIONS
The restatement did not significantly impact the drivers of our consolidated results of operations. See Note 13 to the2, Restatement of Previously Issued Consolidated Financial Statements, in this Form 10-KItem 8, Financial Statements and Supplementary Data, for further discussionadditional information.
Discussion related to the restated quarterly information is included in Note 16, Quarterly Results of Operations (Unaudited).
The results of operations for Hamilton Beach Holding were as follows for the years ended December 31:
2019 Compared with 2018
|
| | | | | | | | | | | | | | | | | | | | |
| As Restated |
| Year Ended December 31 |
| 2019 | | % of Revenue | | 2018 | | % of Revenue | | $ Change | | % Change |
Revenue | $ | 611,786 |
|
| 100.0 | % |
| $ | 630,082 |
|
| 100.0 | % |
| $ | (18,296 | ) |
| (2.9 | )% |
Cost of sales | 483,234 |
|
| 79.0 | % |
| 491,030 |
|
| 77.9 | % |
| (7,796 | ) |
| (1.6 | )% |
Gross profit | 128,552 |
|
| 21.0 | % |
| 139,052 |
|
| 22.1 | % |
| (10,500 | ) |
| (7.6 | )% |
Selling, general and administrative expenses | 100,381 |
|
| 16.4 | % |
| 104,121 |
|
| 16.5 | % |
| (3,740 | ) |
| (3.6 | )% |
Amortization of intangible assets | 1,377 |
|
| 0.2 | % |
| 1,381 |
|
| 0.2 | % |
| (4 | ) |
| (0.3 | )% |
Operating profit (loss) | 26,794 |
|
| 4.4 | % |
| 33,550 |
|
| 5.3 | % |
| (6,756 | ) |
| (20.1 | )% |
Interest expense, net | 2,975 |
|
| 0.5 | % |
| 2,916 |
|
| 0.5 | % |
| 59 |
|
| 2.0 | % |
Other expense (income), net | (358 | ) |
| (0.1 | )% |
| 149 |
|
| — | % |
| (507 | ) |
| (340.3 | )% |
Income (loss) from continuing operations before income taxes | 24,177 |
|
| 4.0 | % |
| 30,485 |
|
| 4.8 | % |
| (6,308 | ) |
| (20.7 | )% |
Income tax expense | 9,084 |
|
| 1.5 | % |
| 7,426 |
|
| 1.2 | % |
| 1,658 |
|
| 22.3 | % |
Net income from continuing operations | 15,093 |
|
| 2.5 | % |
| 23,059 |
|
| 3.7 | % |
| (7,966 | ) |
| (34.5 | )% |
Loss from discontinued operations, net of tax | (28,600 | ) |
| n/m |
|
| (5,361 | ) |
| n/m |
|
| (23,239 | ) |
| n/m |
|
Net (loss) income | $ | (13,507 | ) |
|
|
|
| $ | 17,698 |
|
|
|
|
| $ | (31,205 | ) |
|
|
|
|
| | | | | | | | | | | | | |
Effective income tax rate on continuing operations | 37.6 | % |
|
|
| 24.4 | % | | | | | | |
The following table identifies the components of the Company's retirement benefit plans.
Self-insurance liabilities: The Company is generally self-insured for product liability, environmental liability, medical claims and certain workers’ compensation claims. For product liability, catastrophic insurance coverage is retained for potentially significant individual claims. An estimated provision for claims reported and for claims incurred but not yet reported under the self-insurance programs is recorded and revised periodically based on industry trends, historical experience and management judgment. In addition, industry trends are considered within management's judgment for valuing claims. Changes in assumptions for such matters as legal judgments and settlements, inflation rates, medical costs and actual experience could cause estimates to change in the near term. Changes in any of these factors could materially change the Company's estimatesrevenue for these self-insurance obligations causing a related increase2019 compared with 2018: |
| | | |
| As Restated |
| Revenue |
2018 | $ | 630,082 |
|
(Decrease) increase from: |
|
Unit volume and product mix | (19,613 | ) |
Foreign currency | (1,688 | ) |
Average sales price | 3,005 |
|
2019 | $ | 611,786 |
|
Revenue - Revenue decreased $18.3 million, or decrease in reported net operating results2.9%. The decline is primarily due to lower sales volume in the periodU.S. consumer, international consumer and global commercial markets. Globally, our ecommerce business grew 27%; however, these gains were more than offset by the adverse impact of changetariffs, a loss of placements in the estimate.dollar store channel resulting from HBB's decision not to maintain very low margin business, ongoing foot traffic challenges at some retailers and other pressure points facing individual retail companies. Revenue in the global commercial market decreased due primarily to lower volume driven by the adverse impact of tariffs.
Inventory reserves: HBB inventories are stated at the lower of cost or net realizable value. The first-in, first-out (“FIFO”) method is used for HBB's inventory. KC retail inventories are stated at the lower of cost or market using the retail inventory method. Adjustments to the carrying value are recorded for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. An impairment in value of one percent of net inventories would result in additional expense of approximately $1.3 million.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Allowances for doubtful accounts: The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of its customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. An impairment in value of one percent of net accounts receivable would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $1.1 million.
Income taxes:Gross profit - The U.S. operating resultsdecline in gross profit of $10.5 million, or 7.6%, is primarily due to lower sales volume. As a percentage of revenue, gross profit margin declined from 22.1% to 21.0% primarily due to increased inbound freight expenses, the Company will be included in the consolidated federal income tax return filed by NACCO through the spin-off date. The Company's allocationadverse impact of taxes through the spin-off date will be in accordance with the Tax Allocation Agreement. In general, the Tax Allocation Agreement between the Companytariffs and NACCO provides that federal income taxes are computed by the Company as if it had filed a tax return on a standalone basis calculated using the separate return method. Subsequent to the spin-off, the Company will file a separate federal tax return in the U.S. for the period subsequent to the spin-off date.unfavorable foreign currency movements.
Tax law requires certain items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible for tax purposes, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities using currently enacted tax rates. The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date. Management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted law and tax rates for the appropriate tax jurisdictions to determine the amount of such deferred tax assets and liabilities. Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances, including statutory income tax rate changes, statutory tax law changes, or changes in the Company's structure or tax status.
The Company's tax assets, liabilities, and tax expense are supported by historical earnings and losses and the Company's best estimates and assumptions of future earnings. The Company assesses whether a valuation allowance should be established against the Company's deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates the Company is using to manage the underlying businesses. When the Company determines, based on all available evidence, that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established.
Since significant judgment is requiredSelling, general and administrative expenses - The decrease in selling, general and administrative expenses was mainly attributable to assess the future tax consequences of events that have been recognizeda $5.2 million decline in the Company's financial statements or tax returns, the ultimate resolution of these events could result in adjustments to the Company's financial statements and such adjustments could be material. The Company believes the current assumptions, judgments and other considerations used to estimate the current year accrued and deferred tax positions are appropriate. If the actual outcome of future tax consequences differs from these estimates and assumptions, due to changes or future events, the resulting change to the provision for income taxes could have a material impact on the Company's results of operations and financial position.
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (the “Tax Act”), which significantly revises U.S. tax law. The Tax Act will positively impact the Company’s future effective income tax rateenvironmental expense due to the reduction to the environmental reserve at one site of $3.2 million related to a change in the expected type and extent of investigation and remediation activities and to a $1.5 million reduction in environmental expense due to the probable recovery of investigation and remediation costs associated with the same site from a responsible party in exchange for release from all future obligations by that party. Additionally, advertising expenses declined $3.1 million and employee-related costs decreased $2.0 million due to reduced incentive compensation expense. These decreases were partially offset by a one-time charge of $3.2 million recorded in the second quarter of 2019 for a contingent loss related to patent litigation. Additionally, certain former employees of one of our Mexican subsidiaries engaged in unauthorized transactions with the Company’s Mexican subsidiaries and in doing so, expenditures were deferred on the balance sheet of the U.S. federal corporate tax rate from 35 percentCompany's Mexican subsidiaries beyond the period for which the costs pertained. Included in selling, general and administrative expenses are charges of $6.9 million in 2019 compared with charges of $4.9 million in 2018 to 21 percent, effective January 1, 2018.write-off unrealizable assets created as a result of these unauthorized transactions. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information.
In additionOther expense (income), net - Other income in 2019 includes currency gains of $0.4 million compared with other expense in 2018 related to currency losses of $0.5 million as the reductionMexican peso strengthened against the U.S. dollar.
Income tax expense - The Company recognized income tax expense of $9.1 million on income from continuing operations before income taxes of $24.2 million, an effective tax rate of 37.6% compared to income tax expense of $7.4 million, an effective tax rate of 24.4%. The increase in the U.S. federal corporateeffective tax rate mentioned above, other significant changesis primarily due to existing$2.0 million of deferred tax law include (1)expense related to a deduction received on dividendschange in judgment regarding the valuation allowance recorded against certain deferred tax assets of foreign earningsKC.
Additionally, certain former employees of one of our Mexican subsidiaries engaged in unauthorized transactions with a related tax for the deemed repatriation of unremitted foreign earnings; (2) limitationsCompany’s Mexican subsidiaries and in doing so expenditures were deferred on the deductibilitybalance sheet of certain executive compensationthe Mexican subsidiaries beyond the period for publicly traded companies; (3) accelerated expensing of capital investment, subjectwhich the costs pertained. Included in selling, general and administrative expenses are non-cash charges to phase out beginningwrite-off unrealizable assets for which the corresponding tax benefit has been substantially offset by an increase in 2023; (4) a new limitation on deductible interest expense; and (5) a new U.S. minimumunrecognized tax on earnings of foreign subsidiaries.benefits.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides a measurement period of up to one year after the enactment date for companies to finalize the recognition of the income tax effects of the Tax Act. As a result of the Tax Act and pursuant to SAB 118, the Company recorded a provisional net tax charge of $4.7 million in the period ending December 31, 2017. The provisional expense is primarily attributable to the corporate rate reduction on existing deferred tax assets and liabilities. Included in the provisional income tax charge is $0.4 million for excess executive renumeration expense expected to be under the Company's long-term incentive plan payments in future years, as certain covered employee recipients are expected to exceed the $1 million disallowance threshold, and $0.2 million for the net impact related to repatriation of unremitted foreign earnings. The ultimate impact of the Tax Act may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and the computation of state income taxes as there is uncertainty on conformity to the U.S. federal tax system following the Tax Act.2018 Compared with 2017
CONSOLIDATED FINANCIAL SUMMARY
Hamilton Beach Holding is an operating holding company for two separate businesses that operate in the consumer, commercial and specialty small appliances market (HBB) and the specialty retail market (KC). Hamilton Beach Holding includes the required intercompany eliminations between HBB and KC and certain federal tax attributes. Costs incurred as a stand-alone public entity are allocated to the HBB segment. The only material assets held by Hamilton Beach Holding are its investments in consolidated subsidiaries, and substantially all of its cash flows are provided by dividends paid or distributions made by its subsidiaries. The cash to pay dividends to Hamilton Beach Holding’s stockholders is derived from these cash flows. As a result, certain statutory limitations or regulatory or financing agreements could affect the levels of distributions allowed to be made by its subsidiaries. See Note 6 to the Consolidated Financial Statements in this Form 10-K for further discussion of certain of these limitations.
Selected consolidated results of operations for Hamilton Beach Holding were as follows:follows for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| As Restated | | | | As Restated | | | | | | |
| 2018 | | % of Revenue | | 2017 | | % of Revenue | | $ Change | | % Change |
Revenue | $ | 630,082 |
|
| 100.0 | % |
| $ | 612,056 |
|
| 100.0 | % |
| $ | 18,026 |
|
| 2.9 | % |
Cost of sales | 491,030 |
|
| 77.9 | % |
| 475,939 |
|
| 77.8 | % |
| 15,091 |
|
| 3.2 | % |
Gross profit | 139,052 |
|
| 22.1 | % |
| 136,117 |
|
| 22.2 | % |
| 2,935 |
|
| 2.2 | % |
Selling, general and administrative expenses | 104,121 |
|
| 16.5 | % |
| 96,780 |
|
| 15.8 | % |
| 7,341 |
|
| 7.6 | % |
Amortization of intangible assets | 1,381 |
|
| 0.2 | % |
| 1,381 |
|
| 0.2 | % |
| — |
|
| — | % |
Operating profit | 33,550 |
|
| 5.3 | % |
| 37,956 |
|
| 6.2 | % |
| (4,406 | ) |
| (11.6 | )% |
Interest expense, net | 2,916 |
|
| 0.5 | % |
| 1,572 |
|
| 0.3 | % |
| 1,344 |
|
| 85.5 | % |
Other expense (income), net | 149 |
|
| — | % |
| (692 | ) |
| (0.1 | )% |
| 841 |
|
| (121.5 | )% |
Income from continuing operations before income taxes | 30,485 |
|
| 4.8 | % |
| 37,076 |
|
| 6.1 | % |
| (6,591 | ) |
| (17.8 | )% |
Income tax expense | 7,426 |
|
| 1.2 | % |
| 18,967 |
|
| 3.1 | % |
| (11,541 | ) |
| (60.8 | )% |
Net income from continuing operations | 23,059 |
|
| 3.7 | % |
| 18,109 |
|
| 3.0 | % |
| 4,950 |
|
| 27.3 | % |
Loss from discontinued operations, net of tax | (5,361 | ) |
| n/m |
|
| (2,225 | ) |
| n/m |
|
| (3,136 | ) |
| n/m |
|
Net income | $ | 17,698 |
|
|
|
|
| $ | 15,884 |
|
|
|
|
| $ | 1,814 |
|
|
|
|
|
| | | | | | | | | | | | | |
| | | | | | | | | | | |
Effective income tax rate on continuing operations | 24.4 | % |
|
|
| 51.2 | % | | | | | | |
The following table identifies the components of the change in revenue for 2018 compared with 2017: |
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Revenues | | | | | |
HBB | $ | 615,071 |
| | $ | 605,170 |
| | $ | 620,977 |
|
KC | 128,520 |
| | 144,351 |
| | 150,988 |
|
Eliminations | (2,842 | ) | | (4,164 | ) | | (4,103 | ) |
Consolidated revenues | $ | 740,749 |
| | $ | 745,357 |
| | $ | 767,862 |
|
| | | | | |
Operating profit | | | | | |
HBB | $ | 41,487 |
| | $ | 43,033 |
| | $ | 34,801 |
|
KC | (3,418 | ) | | 376 |
| | 165 |
|
Eliminations | 66 |
| | (35 | ) | | 588 |
|
Consolidated operating profit | $ | 38,135 |
| | $ | 43,374 |
| | $ | 35,554 |
|
| | | | | |
Net income | |
| | |
| | |
HBB | $ | 21,117 |
| | $ | 26,557 |
| | $ | 19,749 |
|
KC | (3,272 | ) | | (355 | ) | | (420 | ) |
Eliminations | 60 |
| | (23 | ) | | 382 |
|
Consolidated net income | $ | 17,905 |
| | $ | 26,179 |
| | $ | 19,711 |
|
|
| | | |
| As Restated |
| Revenue |
2017 | $ | 612,056 |
|
Increase (decrease) from: |
|
Unit volume and product mix | 12,910 |
|
Average sales price | 6,485 |
|
Foreign currency | (1,369 | ) |
2018 | $ | 630,082 |
|
Revenue - Revenue increased $18.0 million, or 2.9%, primarily due to higher sales volume in the international consumer retail market and increased sales of new and higher-priced products, mainly in the U.S consumer and global commercial markets. Unfavorable foreign currency movements partially offset the increase in revenue as the Mexican peso, Brazilian Real and Canadian dollar weakened against the U.S. dollar during 2018.
Gross profit - Gross profit increased mainly due to higher sales volume in the international consumer retail market and increased sales of new and higher-priced products, mainly in the U.S consumer and global commercial markets. As a percentage of revenue, gross profit declined from 22.2% to 22.1% primarily due to increased warehouse, transportation, and product costs.
Selling, general and administrative expenses - The increase in selling, general and administrative expenses was primarily due to increased legal and professional service fees of $2.7 million, higher employee-related expenses of $2.8
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
million and increased advertising expenses of $2.5 million, which were partially offset by the absence of $2.5 million of one-time costs incurred in the prior year to effect the spin-off from NACCO. Legal and professional service fees increased mainly due to patent litigation expenses and the increase in employee-related expenses was mainly due to merit compensation increases, as well as additional headcount to support HBB's strategic initiatives. Advertising expenses increased primarily due to increased consumer advertising campaigns to support the fall holiday-selling season. Included in selling, general and administrative expenses are charges of $4.9 million in 2018 compared with charges of $1.3 million in 2017 to write-off expenditures deferred on the balance sheet as a result of unauthorized transactions entered into by certain former employees of one of our Mexican subsidiaries. See Note 2, Restatement of Previously Issued Consolidated Financial Statements, in Item 8, Financial Statements and Supplementary Data, for additional information.
Interest expense, net - Interest expense, net increased $1.3 million primarily due to an increase in average borrowings outstanding under HBB's revolving credit facility.
Other expense, net - Other expense, net increased $0.8 million primarily due to foreign currency gains as the Mexican peso strengthened against the U.S. dollar during the period.
Income tax expense - The Company recognized income tax expense of $7.4 million on income from continuing operations before income taxes of $30.5 million (an effective tax rate of 24.4%). The effective income tax rate on continuing operations decreased from 51.2% in 2017 primarily due to a $4.7 million provisional tax charge resulting from the reduction in the U.S. federal corporate tax rate in 2018 as a result of the Tax Cuts and Jobs Act (the "Tax Act") and the absence of non-deductible spin-off related expenses incurred in the prior year to effect the spin-off from NACCO.
LIQUIDITY AND CAPITAL RESOURCES
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, capital expenditures, and payments of principal and interest on debt. At December 31, 2019, the Company had cash and cash equivalents for continuing operations of $2.1 million, compared to $4.4 million at December 31, 2018.
Historically, Hamilton Beach Brands Holding Company would rely on cash flows from KC as well as HBB. However, given that all of the KC stores have been closed and the Board approved the dissolution of the KC legal entity, KC is no longer considered a source of cash for Hamilton Beach Brands Holding Company. As of December 31, 2019, KC reported current liabilities in excess of current assets of $24.3 million. Neither Hamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC.
The following table identifies, by segment, the components of change in Revenues, Operating profit and Net income:presents selected cash flow information from continuing operations:
|
| | | | | | | | | | | |
| Revenues | | Operating profit | | Net income |
| | | | | |
Consolidated results for the year ended December 31, 2015 | $ | 767,862 |
| | $ | 35,554 |
| | $ | 19,711 |
|
Increase (decrease) in 2016 | |
| | |
| | |
|
HBB | (15,807 | ) | | 8,232 |
| | 6,808 |
|
KC | (6,637 | ) | | 211 |
| | 65 |
|
Eliminations | (61 | ) | | (623 | ) | | (405 | ) |
Consolidated results for the year ended December 31, 2016 | $ | 745,357 |
| | $ | 43,374 |
| | $ | 26,179 |
|
| | | | | |
Consolidated results for the year ended December 31, 2016 | $ | 745,357 |
| | $ | 43,374 |
| | $ | 26,179 |
|
Increase (decrease) in 2017 | |
| | |
| | |
|
HBB | 9,901 |
| | (1,546 | ) | | (5,440 | ) |
KC | (15,831 | ) | | (3,794 | ) | | (2,917 | ) |
Eliminations | 1,322 |
| | 101 |
| | 83 |
|
Consolidated results for the year ended December 31, 2017 | $ | 740,749 |
| | $ | 38,135 |
| | $ | 17,905 |
|
|
| | | | | | | | | | | |
| As Restated |
| Year Ended December 31 |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Net cash provided by operating activities from continuing operations | $ | 222 |
|
| $ | 17,955 |
|
| $ | 28,303 |
|
Net cash used for investing activities from continuing operations | $ | (4,122 | ) |
| $ | (7,759 | ) |
| $ | (6,177 | ) |
Net cash provided by (used for) financing activities from continuing operations | $ | 1,062 |
|
| $ | (9,255 | ) |
| $ | (26,532 | ) |
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
December 31, 2019 Compared with December 31, 2018
Operating activities - Net cash provided by operating activities decreased $17.7 million in 2019 compared to the prior year primarily due to increased trade receivables, partially offset by a decline in inventory. Trade receivables increased primarily due to the timing of collections and increased fourth quarter sales in 2019 compared with prior year. The decline in inventory is primarily due to the continued efficient management of inventory levels.
Investing activities - Net cash used for investing activities from continuing operations decreased $3.6 million in 2019 primarily due to lower capital expenditures related to HBB internal-use software development costs and tooling for new products.
Financing activities - Net cash provided by financing activities from continuing operations was $1.1 million in 2019 compared to a use of cash of $9.3 million in 2018 primarily due to an increase in HBB's net borrowing activity on the revolving credit facility. The increase in borrowings was used to fund net working capital and stock repurchases.
December 31, 2018 Compared with December 31, 2017
Operating activities - Net cash provided by operating activities decreased by $10.3 million in 2018 primarily due to the net changes in operating assets and liabilities. The decrease is primarily due to the changes in working capital and the decline in the accounts payable to NACCO. The change in working capital is attributable to a decrease in accounts payable in 2018 compared with a large increase in 2017, which was partially offset by a decrease in accounts receivable in 2018 compared with a large increase in 2017 and a larger increase in inventory during 2017 compared with 2018. The change in accounts payable is mainly due to the timing of purchases and the change in accounts receivable, after consideration for the effect of the adoption of the new revenue standard in 2018, is mainly attributable to the timing of collections. The increase in inventory is primarily due to lower sales in the second half of 2018 compared with the sales forecast and higher product costs compared to 2017. The decline in the accounts payable to NACCO is primarily due to payments made to NACCO during 2018 under the tax allocation agreement.
Investing activities - Net cash used for investing activities increased primarily due to an increase in capital expenditures for internal-use software development costs and corporate office leasehold improvements.
Financing activities - Net cash used for financing activities decreased $17.3 million primarily due to the absence of the 2017 cash dividends of $38.0 million paid to NACCO, partially offset by a reduction in the revolving credit facility and dividend payments to stockholders.
Capital Resources
HBB maintains a $115.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires in June 2021. The current portion of borrowings outstanding represents expected voluntary repayments to be made in the next twelve months. The obligations under the HBB Facility are secured by substantially all of HBB's assets. The approximate book value of HBB's assets held as collateral under the HBB Facility was $297.2 million as of December 31, 2019. At December 31, 2019, the borrowing base under the HBB Facility was $114.4 million and borrowings outstanding were $58.3 million. At December 31, 2019, the excess availability under the HBB Facility was $56.1 million.
The componentsmaximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible trade receivables, inventory and trademarks of changethe 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 December 31, 2019, for base rate loans and LIBOR loans denominated in U.S. dollars were 0.0% and 1.75%, respectively. The applicable margins, effective December 31, 2019, 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 discussed below in “Segment Results”.subject to quarterly adjustment based on average excess availability. The weighted average interest rate applicable to the HBB Facility for the year ended December 31, 2019 was 3.82%, including the floating rate margin and the effect of the interest rate swap agreements described below.
Liquidity
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
(Tabular Amounts in Thousands, Except Per Share and Capital Resources of Hamilton Beach HoldingPercentage Data)
Although Hamilton Beach Holding’s subsidiaries haveTo reduce the exposure to changes in the market rate of interest, HBB has entered into borrowinginterest rate swap agreements Hamilton Beach Holdingfor 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 not guaranteed any borrowings of its subsidiaries. Dividends from its subsidiaries (to the extent permitted by its subsidiaries’ borrowing agreements) will be used to enable Hamilton Beach Holding to pay dividends to its stockholders. The Company's current intention is to pay regular quarterly dividends. Hamilton Beach Holding's Board,interest rate swaps with notional values totaling $35.0 million at its first regularly scheduled meeting in November, declared a regular cash dividend of $0.085 per share. The dividend was declared on both the Class A Common and Class B Common, and was paid on December 15, 2017 to stockholders of record31, 2019 at the close of business on December 1, 2017. The declared cash dividend was equal to an annualaverage fixed interest rate of $0.34 per share.1.5%. HBB also has delayed-start interest rate swaps with notional values totaling $10.0 million as of December 31, 2019, with fixed rates of 1.7%.
The declaration of future dividends and the establishment of the per share amount, record dates and payout dates for such future dividends will be at the discretion of the Board and will depend on various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect toHBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends restrictions imposedto Hamilton Beach Holding, subject to achieving availability thresholds. Under Amendment No. 6 to the HBB Facility, dividends to Hamilton Beach Holding are not to exceed $5.0 million during any calendar year to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $15.0 million. Dividends 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 not less than $25.0 million. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. At December 31, 2019, 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 U.S. trade receivables on a non-recourse basis. The Company utilizes this arrangement as an integral part of financing working capital.
HBB believes funds available from cash on hand, the HBB Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the HBB Facility.
KC maintained a separate revolving line of credit facility (the "KC Facility") that was secured by applicable law, general business conditionssubstantially all of the assets of KC. The Company's decision to wind down KC and other factors thatits retail operations constituted an event of default under the board deems relevant.KC Facility. As a result, on October 23, 2019, KC and its lender entered into a Forbearance Agreement (the “Forbearance Agreement”). Under the terms of the Forbearance Agreement, the lender agreed to forebear from exercising its rights and remedies as a result of the events of default pending accelerated payment in full of the obligations under the KC facility on or before December 15, 2019. All obligations under the KC Facility were paid in full in accordance with the Forbearance Agreement and the KC Facility was terminated on December 3, 2019.
Contractual Obligations, Contingent Liabilities and Commitments
AsFollowing is a holding company,table which summarizes the contractual obligations of Hamilton Beach Holding has no contractual obligations, contingent liabilities and commitments.as of December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
Contractual Obligations | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
HBB: | | | | | | | | | | | | | |
Revolving credit agreements | $ | 58,497 |
| | 192 |
| | 58,305 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Variable interest payments on HBB Facility | 4,140 |
| | 2,244 |
| | 1,896 |
| | — |
| | — |
| | — |
| | — |
|
Purchase and other obligations | 212,312 |
| | 209,040 |
| | 3,157 |
| | 69 |
| | 46 |
| | — |
| | — |
|
Operating lease obligations | 31,710 |
| | 6,114 |
| | 4,089 |
| | 1,816 |
| | 1,574 |
| | 1,590 |
| | 16,527 |
|
KC: | | | | | | | | | | | | | |
Purchase and other obligations | 12,475 |
| | 12,475 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Operating lease obligations | 26,493 |
| | 10,942 |
| | 5,863 |
| | 4,027 |
| | 2,458 |
| | 1,534 |
| | 1,669 |
|
Total contractual cash obligations | $ | 345,627 |
| | $ | 241,007 |
| | $ | 73,310 |
| | $ | 5,912 |
| | $ | 4,078 |
| | $ | 3,124 |
| | $ | 18,196 |
|
Not included in the table above, HBB has a long-term liability of approximately $0.4 million for unrecognized tax benefits, including interest and penalties, as of December 31, 2019. At this time, the Company is unable to make a reasonable estimate of the timing of payments due to, among other factors, the uncertainty of the timing and outcome of its audits.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
HBB’s variable interest payments are calculated based upon HBB's anticipated payment schedule and the December 31, 2019 base rate and applicable margins, as defined in the HBB Facility. A 1/8% increase in the base rate would increase HBB’s estimated total annual interest payments on the HBB Facility by approximately $0.5 million.
HBB's purchase and other obligations are primarily for accounts payable, open purchase orders and accrued payroll and incentive compensation. KC's purchase and other obligations are primarily for accounts payable and accrued employee related costs.
An event of default, as defined in the HBB Facility and in HBB's operating lease agreements, could cause an acceleration of the payment schedule. No such event of default for HBB has occurred or is anticipated to occur.
KC is in default of the lease agreements for KC stores, which could result in acceleration of the payment schedule for those store leases.
Pension funding can vary significantly each year due to plan amendments, changes in the market value of plan assets, legislation and the Company’s decisions to contribute above the minimum regulatory funding requirements. As a result, pension funding has not been included in the table above. HBB does not expect to contribute to its pension plans in 2020. Pension benefit payments are made from assets of the pension plans.
Off Balance Sheet Arrangements
As a holding company, Hamilton Beach Holding has not entered into any off balance sheet financing arrangements. See HBB's and KC's contractual obligations tables in each of the HBB and KC segment results.
Capital Structure
Hamilton Beach Holding's consolidated capital structure at December 31, 2017 compared with December 31, 2016 is presented below:
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
December 31, 2017 Compared with December 31, 2016 |
| | | | | | | | | | | |
| DECEMBER 31 2017 | | DECEMBER 31 2016 | | Change |
Cash and cash equivalents | $ | 10,906 |
| | $ | 11,340 |
| | $ | (434 | ) |
Other net tangible assets | 74,695 |
| | 79,107 |
| | (4,412 | ) |
Goodwill and intangible assets, net | 12,153 |
| | 13,535 |
| | (1,382 | ) |
Net assets | 97,754 |
| | 103,982 |
| | (6,228 | ) |
Total debt | (51,346 | ) | | (38,714 | ) | | (12,632 | ) |
Total equity (1) | $ | 46,408 |
| | $ | 65,268 |
| | $ | (18,860 | ) |
Debt to total capitalization | 53 | % | | 37 | % | | 16 | % |
(1) Hamilton Beach Holding paid a $35.0 million cash dividend to NACCO prior to the spin-off and also a $1.2 million cash dividends on Class A Common and Class B Common to stockholders during the three months and year ended December 31, 2017.
The components of change are discussed below in "Segment Results".
OUTLOOK
In the current market environment and including the various factors noted in the HBB and KC segment outlooks discussed below in "Segment Results", Hamilton Beach Holding expects 2018 consolidated net income to increase substantially over 2017 primarily due to lower income tax expense. As a result of the Tax Act, Hamilton Beach Holding expects its effective income tax rate to be in the range of 26% to 28% in 2018.
SEGMENT RESULTS
Hamilton Beach Brands, Inc.
HBB is a leading designer, marketer and distributor of small electric household and specialty housewares appliances, as well as commercial products for restaurants, bars and hotels. HBB’s products are marketed primarily to retail merchants and wholesale distributors. HBB’s business is seasonal and a majority of revenues and operating profit typically occurs in the second half of the year when sales of small electric appliances to retailers and consumers increase significantly for the fall holiday-selling season.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Financial Review
Operating Results
2017 Compared with 2016
The results of operations for HBB were as follows for the years ended December 31:
|
| | | | | | | | | | | | | |
| Year Ended December 31 | | % of Sales Revenue, net |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | $ | 615,071 |
| | $ | 605,170 |
| | 100.0 | % | | 100.0 | % |
Cost of sales | 479,367 |
| | 476,756 |
| | 77.9 | % | | 78.8 | % |
Gross profit | 135,704 |
| | 128,414 |
| | 22.1 | % | | 21.2 | % |
Operating expenses (1) | 94,217 |
| | 85,381 |
| | 15.3 | % | | 14.1 | % |
Operating profit | 41,487 |
| | 43,033 |
| | 6.7 | % | | 7.1 | % |
Interest expense | 1,577 |
| | 1,165 |
| | 0.3 | % | | 0.2 | % |
Other expense, net | 166 |
| | 770 |
| | — | % | | 0.1 | % |
Income before income taxes | 39,744 |
| | 41,098 |
| | 6.5 | % | | 6.8 | % |
Income tax expense (2) | 18,627 |
| | 14,541 |
| | 3.0 | % | | 2.4 | % |
Net income | $ | 21,117 |
| | $ | 26,557 |
| | 3.4 | % | | 4.4 | % |
| | | | | | | |
Effective income tax rate (2) | 46.9 | % | | 35.4 | % | | | | |
| |
(1)
| Operating expenses include Selling, general and administrative expenses, amortization of intangibles and (gain)/loss on sale of assets. |
| |
(2)
| As a result of the Tax Act and pursuant to SAB 118, HBB recorded a provisional discrete tax charge of $4.1 million in 2017 primarily for remeasurement of deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, the non-deductible nature of certain employee compensation and one-time transition tax on deemed repatriation of certain unremitted earnings of non-U.S. subsidiaries.
|
The following table identifies the components of change in revenues for 2017 compared with 2016: |
| | | |
| Revenues |
2016 | $ | 605,170 |
|
Increase (decrease) from: | |
Unit volume and product mix | 9,181 |
|
Foreign currency | 1,085 |
|
Average sales price | (365 | ) |
2017 | $ | 615,071 |
|
Revenues for 2017 increased $9.9 million, or 1.6%, compared with 2016 primarily due to an increase in sales of new, higher-priced products, mainly in the International consumer retail market, and favorable foreign currency movements as the Canadian dollar strengthened against the U.S. dollar during 2017.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The following table identifies the components of change in operating profit for 2017 compared with 2016:
|
| | | |
| Operating Profit |
2016 | $ | 43,033 |
|
Increase (decrease) from: | |
Selling, general and administrative expenses | (8,836 | ) |
Gross profit | 6,719 |
|
Foreign currency | 571 |
|
2017 | $ | 41,487 |
|
HBB's operating profit decreased $1.5 million, or 3.6%, in 2017 compared with 2016 primarily as a result of an $8.8 million increase in Selling, general and administrative expenses, partially offset by a $6.7 million increase in gross profit. The improvement in gross profit was due to a $9.9 million increase in revenues, partially offset by a $2.6 million increase in cost of sales.
The improvement in gross margin, which was 22.1% at December 31, 2017 compared with 21.2% at December 31, 2016, was primarily due to $6.6 million in lower product costs and a $3.2 million favorable shift in sales to higher-margin and higher-priced products. Increased warehouse and transportation costs of $1.8 million and inventory adjustments of $1.2 million partially offset the improvement in gross margin.
The increase in Selling, general and administrative expenses was primarily due to the recognition of $2.5 million of expenses related to the spin-off and $2.8 million of higher employee-related costs. The increase in employee-related costs was primarily due to additional headcount to support HBB's strategic initiatives.
HBB's interest expense increased $0.4 million in 2017 compared with 2016 due to higher average borrowings in 2017 under HBB's revolving credit facility. Other (income) expense, net, changed by $0.6 million primarily due to foreign currency gains.
HBB recognized income tax expense of $18.6 million on income before income taxes of $39.7 million, or an effective tax rate of 46.9% for 2017. In 2016, income tax expense was $14.5 million on income before income taxes of $41.1 million, or an effective tax rate of 35.4%. The increase in income tax expense and the effective tax rate in 2017 was primarily due to the impact of the Tax Act and the nondeductible nature of certain costs incurred related to the spin-off. As a result of the Tax Act and pursuant to SAB 118, HBB recorded a provisional discrete tax charge of $4.1 million in 2017 primarily for the remeasurement of deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, the non-deductible nature of certain executive compensation and the one-time transition tax on deemed repatriation of certain unremitted earnings of non-U.S. subsidiaries. In addition, HBB recognized a $0.6 million tax benefit related to the reversal of a reserve previously established for an uncertain tax position due to favorable resolution of a state tax matter in 2016.
As a result of the factors discussed above, HBB's net income decreased to $21.1 million at December 31, 2017 compared with net income of $26.6 million at December 31, 2016.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
2016 Compared with 2015
The results of operations for HBB were as follows for the years ended December 31:
|
| | | | | | | | | | | | | |
| Year Ended December 31 | | % of Sales Revenue, net |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues | $ | 605,170 |
| | $ | 620,977 |
| | 100.0 | % | | 100.0 | % |
Cost of sales | 476,756 |
| | 497,838 |
| | 78.8 | % | | 80.2 | % |
Gross profit | 128,414 |
| | 123,139 |
| | 21.2 | % | | 19.8 | % |
Operating expenses (1) | 85,381 |
| | 88,338 |
| | 14.1 | % | | 14.2 | % |
Operating profit | 43,033 |
| | 34,801 |
| | 7.1 | % | | 5.6 | % |
Interest expense | 1,165 |
| | 1,831 |
| | 0.2 | % | | 0.3 | % |
Other expense, net | 770 |
| | 1,470 |
| | 0.1 | % | | 0.2 | % |
Income before income taxes | 41,098 |
| | 31,500 |
| | 6.8 | % | | 5.1 | % |
Income tax expense | 14,541 |
| | 11,751 |
| | 2.4 | % | | 1.9 | % |
Net income | $ | 26,557 |
| | $ | 19,749 |
| | 4.4 | % | | 3.2 | % |
| | | | | | | |
Effective income tax rate | 35.4 | % | | 37.3 | % | | | | |
| |
(1)
| Operating expenses include Selling, general and administrative expenses, amortization of intangibles and (gain)/loss on sale of assets. |
The following table identifies the components of change in revenues for 2016 compared with 2015:
|
| | | |
| Revenues |
2015 | $ | 620,977 |
|
Increase (decrease) from: | |
Unit volume and product mix | (9,259 | ) |
Foreign currency | (7,700 | ) |
Average sales price | 1,152 |
|
2016 | $ | 605,170 |
|
Revenues for 2016 decreased 2.5% compared with 2015 primarily due to decreased sales volumes, mainly in the U.S. consumer retail market, and unfavorable foreign currency movements as both the Mexican peso and Canadian dollar weakened against the U.S. dollar.
The following table identifies the components of change in operating profit for 2016 compared with 2015:
|
| | | |
| Operating Profit |
2015 | $ | 34,801 |
|
Increase (decrease) from: | |
Gross profit | 6,543 |
|
Selling, general and administrative expenses | 2,957 |
|
Foreign currency | (1,268 | ) |
2016 | $ | 43,033 |
|
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
HBB’s operating profit increased $8.2 million, or 23.7%, in 2016 compared with 2015 primarily as a result of a $22.4 million decrease in cost of sales, partially offset by $15.8 million in decreased revenues and $1.3 million in unfavorable foreign currency movements as the Mexican peso weakened against the U.S. dollar. A $3.0 million decrease in Selling, general and administrative expenses also contributed to the increase in operating profit.
The decrease in cost of sales and the improvement in gross margin, which was 21.2% in 2016 compared with 19.8% in 2015, resulted from a $8.4 million shift in sales mix to higher-priced and higher-margin products and $3.6 million in lower product costs, partially offset by $3.9 million in reduced sales volumes. Selling, general and administrative expenses decreased as a result of lower professional and outside service fees ($1.9 million), decreased advertising and marketing expenses ($1.5 million) and a reduction in environmental expenses in 2016 compared with 2015. HBB recorded $1.5 million in 2015 for environmental investigation and remediation at HBB’s Picton, Ontario facility. These decreases in Selling, general and administrative expenses were partially offset by higher employee-related costs of $2.9 million for higher incentive compensation and salaries.
The improvement in operating profit, a reduction in Interest expense of $0.7 million due to fewer borrowings and lower Other expense, net, of $0.8 million due to foreign currency fluctuations also contributed to the increase in net income. These favorable variances were partially offset by $2.8 million in increased Income tax expense due to higher Income before income taxes. Despite the increase in Income tax expense, HBB had a lower effective income tax rate in 2016 compared with 2015 as HBB realized a $0.6 million tax benefit related to the reversal of a reserve previously established for an uncertain tax position due to favorable resolution of a state tax matter in 2016. Net income increased to $26.6 million in 2016 compared with $19.7 million in 2015 primarily due to these factors.
LIQUIDITY AND CAPITAL RESOURCES OF HBB
Cash Flows
The following tables detail the change in cash flow for the years ended December 31: |
| | | | | | | | | | | |
| 2017 | | 2016 | | Change |
Operating activities: | | | | | |
Net income | $ | 21,117 |
| | $ | 26,557 |
| | $ | (5,440 | ) |
Depreciation and amortization | 4,072 |
| | 4,681 |
| | (609 | ) |
Other | 4,754 |
| | 1,279 |
| | 3,475 |
|
Working capital changes | (1,156 | ) | | 26,214 |
| | (27,370 | ) |
Net cash provided by operating activities | 28,787 |
| | 58,731 |
| | (29,944 | ) |
| | | | | |
Investing activities: | | | | | |
Expenditures for property, plant and equipment | (6,198 | ) | | (4,814 | ) | | (1,384 | ) |
Other | 21 |
| | 26 |
| | (5 | ) |
Net cash used for investing activities | (6,177 | ) | | (4,788 | ) | | (1,389 | ) |
| | | | | |
Cash flow before financing activities | $ | 22,610 |
| | $ | 53,943 |
| | $ | (31,333 | ) |
Net cash provided by operating activities decreased by $29.9 million during 2017 compared to 2016 primarily due to changes in working capital for inventory and accounts receivable. Inventory increased in 2017 compared with a decrease in 2016, primarily due to higher sales forecasts during 2017. Accounts receivable had a larger increase in 2017 compared with 2016, primarily attributable to higher sales and a shift in the timing of sales and collections.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
|
| | | | | | | | | | | |
| 2017 | | 2016 | | Change |
Financing activities: | | | | | |
Net additions (reductions) to revolving credit agreements | $ | 12,630 |
| | $ | (19,651 | ) | | $ | 32,281 |
|
Cash dividends paid to Hamilton Beach Holding | (36,162 | ) | | (32,000 | ) | | (4,162 | ) |
Other | — |
| | (186 | ) | | 186 |
|
Net cash used for financing activities | $ | (23,532 | ) | | $ | (51,837 | ) | | $ | 28,305 |
|
The change in net cash used for financing activities is primarily the result of increased borrowings under the revolving credit facility in 2017 to fund working capital.
Financing Activities
HBB has a $115.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires in June 2021. The obligations under the HBB Facility are secured by substantially all of HBB's assets. The approximate book value of HBB's assets held as collateral under the HBB Facility was $281.0 million as of December 31, 2017. At December 31, 2017, the borrowing base under the HBB Facility was $111.1 million and borrowings outstanding were $51.3 million. At December 31, 2017, the excess availability under the HBB Facility was $59.7 million.
The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible accounts receivable, inventory and trademarks of the borrowers, as defined in the HBB Facility. Adjustments to reserves booked against these assets, including inventory reserves, will change the eligible borrowing base and thereby impact the liquidity provided by the HBB Facility. A portion of the availability is denominated in Canadian dollars to provide funding to HBB's Canadian subsidiary. 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 December 31, 2017, for base rate loans and LIBOR loans denominated in U.S. dollars were 0.00% and 1.50%, respectively. The applicable margins, effective December 31, 2017, for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.00% and 1.50%, respectively. The HBB Facility also requires a fee of 0.25% per annum on the unused commitment. The margins and unused commitment fee under the HBB Facility are subject to quarterly adjustment based on average excess availability. The weighted average interest rate applicable to the HBB Facility at December 31, 2017 was 3.83% including the floating rate margin and the effect of the interest rate swap agreements.
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 $20.0 million at December 31, 2017 at a fixed interest rate of 1.4%. HBB also has delayed start interest rate swaps with notional values totaling $25.0 million at December 31, 2017, with fixed rates of 1.6% and 1.7%. See Note 2 and Note 7 to the Consolidated Financial Statements in this Form 10-K for further discussion of HBB's interest rate swap agreements.
The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends to Hamilton Beach Holding, subject to achieving availability thresholds. HBB declared and paid a $35 million dividend to Hamilton Beach Holding which was subsequently paid to NACCO prior to the spin-off in September 2017, which under Amendment No. 5 to the HBB Facility, has been excluded from the covenants. Other than the $35 million dividend in September 2017, 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 not less than $25.0 million. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. At December 31, 2017, HBB was in compliance with all financial covenants in the HBB Facility.
HBB believes funds available from cash on hand, the HBB Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the HBB Facility.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Contractual Obligations, Contingent Liabilities and Commitments
Following is a table which summarizes the contractual obligations of HBB as of December 31, 2017: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
Contractual Obligations | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
HBB Facility | $ | 51,346 |
| | $ | 31,346 |
| | $ | — |
| | $ | — |
| | $ | 20,000 |
| | $ | — |
| | $ | — |
|
Variable interest payments on HBB Facility | 7,043 |
| | 1,613 |
| | 1,730 |
| | 2,413 |
| | 1,287 |
| | — |
| | — |
|
Purchase and other obligations | 266,152 |
| | 256,177 |
| | 3,736 |
| | 3,301 |
| | 2,938 |
| | — |
| | — |
|
Operating leases | 36,863 |
| | 5,926 |
| | 5,677 |
| | 5,529 |
| | 3,759 |
| | 1,815 |
| | 14,157 |
|
Total contractual cash obligations | $ | 361,404 |
| | $ | 295,062 |
| | $ | 11,143 |
| | $ | 11,243 |
| | $ | 27,984 |
| | $ | 1,815 |
| | $ | 14,157 |
|
Not included in the table above, HBB has a long-term liability of approximately $0.6 million for unrecognized tax benefits, including interest and penalties, as of December 31, 2017. At this time, the Company is unable to make a reasonable estimate of the timing of payments due to, among other factors, the uncertainty of the timing and outcome of its audits.
An event of default, as defined in the HBB Facility and in HBB’s operating agreements, could cause an acceleration of the payment schedule. No such event of default has occurred or is anticipated to occur.
HBB’s variable interest payments are calculated based upon HBB's anticipated payment schedule and the December 31, 2017 base rate and applicable margins, as defined in the HBB Facility. A 1/8% increase in the base rate would increase HBB’s estimated total annual interest payments on the HBB Facility by approximately $0.5 million.
The purchase and other obligations are primarily for accounts payable, open purchase orders and accrued payroll and incentive compensation.
Pension funding can vary significantly each year due to plan amendments, changes in the market value of plan assets, legislation and the Company’s decisions to contribute above the minimum regulatory funding requirements. As a result, pension funding has not been included in the table above. HBB does not expect to contribute to its U.S. and non-U.S. pension plans in 2018. Pension benefit payments are made from assets of the pension plans.
Off Balance Sheet Arrangements
HBB has not entered into any off balance sheet financing arrangements, other than operating leases, which are disclosed in the contractual obligations table above.
Capital Expenditures
Following is a table which summarizes actual and planned capital expenditures (in millions): |
| | | | | | | | | | | |
| Planned | | Actual | | Actual |
| 2018 | | 2017 | | 2016 |
HBB | $ | 9.9 |
| | $ | 6.2 |
| | $ | 4.8 |
|
Planned expenditures for 2018 are primarily for improvements to HBB’s information technology infrastructure, tooling for new products and distribution warehouse improvements. These expenditures are expected to be funded from internally generated funds and bank borrowings.
Capital Structure
Working capital is significantly affected by the seasonality of HBB’s business. The following is a discussion of the changes in HBB’s capital structure at December 31, 2017 compared with December 31, 2016 and December 31, 2016 compared with December 31, 2015.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
December 31, 2017 Compared with December 31, 2016 |
| | | | | | | | | | | |
| December 31 | | |
| 2017 | | 2016 | | Change |
Cash and cash equivalents | $ | 1,480 |
| | $ | 2,321 |
| | $ | (841 | ) |
Other net tangible assets | 69,122 |
| | 66,916 |
| | 2,206 |
|
Goodwill and intangible assets, net | 12,153 |
| | 13,535 |
| | (1,382 | ) |
Net assets | 82,755 |
| | 82,772 |
| | (17 | ) |
Total debt | (51,346 | ) | | (38,714 | ) | | (12,632 | ) |
Total equity | $ | 31,409 |
| | $ | 44,058 |
| | $ | (12,649 | ) |
Debt to total capitalization | 62 | % | | 47 | % | | 15 | % |
Other net tangible assets increased $2.2 million from December 31, 2016 primarily due to an increase in receivables attributable to higher sales in 2017 compared to 2016.
Total debt increased $12.6 million from December 31, 2016 primarily to fund working capital.
Total equity decreased $12.6 million primarily due to $36.2 million of cash dividends paid to Hamilton Beach Holding and a $2.5 million decrease in Accumulated Other Comprehensive Income (Loss), mainly due to pension plan adjustments. The total decrease in equity was partially offset by HBB’s 2017 net income of $21.1 million.
December 31, 2016 Compared with December 31, 2015 |
| | | | | | | | | | | |
| December 31 | | |
| 2016 | | 2015 | | Change |
Cash and cash equivalents | $ | 2,321 |
| | $ | 474 |
| | $ | 1,847 |
|
Other net tangible assets | 66,916 |
| | 94,353 |
| | (27,437 | ) |
Goodwill and intangible assets, net | 13,535 |
| | 14,915 |
| | (1,380 | ) |
Net assets | 82,772 |
| | 109,742 |
| | (26,970 | ) |
Total debt | (38,714 | ) | | (58,365 | ) | | 19,651 |
|
Total equity | $ | 44,058 |
| | $ | 51,377 |
| | $ | (7,319 | ) |
Debt to total capitalization | 47 | % | | 53 | % | | (6 | )% |
Net assets decreased $27.0 million from December 31, 2015 primarily due to increases in accounts payable, other current liabilities and accrued payroll. The increase in Accounts payable was primarily due to a change in the timing of payments in 2016 compared with 2015. The Other current liabilities increase is primarily attributable to changes in accrued cooperative advertising in 2016 compared with 2015.
Total debt decreased $19.7 million primarily due to the timing of working capital payments partially offset by dividends paid to NACCO during 2016.
Total equity decreased $7.3 million primarily due to $32.0 million of dividends paid to NACCO during 2016 and a $2.8 million increase in accumulated other comprehensive loss, mainly due to changes in the foreign currency translation adjustment, partially offset by HBB’s 2016 Net income of $26.6 million.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
OUTLOOK
Changing consumer buying patterns, including the shift of sales from in-store channels to internet sales channels, continue to create uncertainty about the overall growth prospects for the U.S. retail market for small appliances. Despite this uncertainty, the consumer retail market for small kitchen appliances grew modestly in 2017 and is also expected to grow modestly in 2018 compared with 2017. The international and commercial markets in which HBB participates are expected to continue to grow moderately.
HBB continues to focus on strengthening the consumer market position of its various product lines through product innovation, promotions, increased placements and branding programs. HBB will continue to leverage its strong brand portfolio by introducing new innovative products, as well as upgrades to certain existing products across a wide range of brands, price points and categories in both consumer and commercial marketplaces. The company continues to pursue opportunities to create or add product lines and brands that can be distributed in high-end or specialty stores and on the Internet, including new products under its CHI®-branded garment care line and Wolf Gourmet-branded product line, both of which are gaining traction and generating incremental revenue. HBB also expects its growing global commercial business to benefit from broader distribution of several newer products, including its new QuantumTM high-performance commercial blender. HBB's robust commercial and consumer product pipeline is expected to affect both revenues and operating profit positively in 2018 and in future periods.
As a result of the current market environment, new or enhanced product introductions and an expected increase in higher-priced, higher-margin product placements resulting from the execution of the company's strategic initiatives, HBB's revenues are expected to increase in 2018 compared with 2017. Improvements in revenues are expected in all business divisions, which include U.S. Consumer, International consumer and Commercial. HBB expects product demand in the first half of the year to increase based on current customer commitments. Firmer commitments for the second half of the year and the holiday-selling season are expected to occur in the second and third quarters. As a result, HBB expects moderate revenue growth in the first half of 2018, with modest growth in the second half of the year, but as better visibility is gained, expectations could be revised.
Benefits of these increased revenues are expected to be partly offset by product cost inflation, which is expected to be mitigated by adjustments to product placements and pricing, costs to implement HBB's strategic initiatives and the full year effect of incremental public company costs the Company will incur as a standalone public entity. As a result, HBB's 2018 operating profit is expected to increase moderately compared with 2017. Operating profit in the first half of 2018, particularly in the first quarter, is expected to be moderately higher than the first half of 2017, while operating results in the second half of the year are expected to be comparable to the second half of 2017 due to the timing of product cost increases. HBB continues to monitor currency effects, as well as commodity and other input costs, closely and intends to continue to adjust product prices and product placements as market conditions permit.
While 2018 operating profit is expected to be moderately higher than in 2017, net income is expected to increase substantially over 2017 as a result of a lower effective corporate income tax rate, as well as the absence of the provisional charge that was recorded in 2017 for the Tax Act.Accounting Standards Adopted
In 2018, cash flow before financing activities is expected to be higher thanMarch 2017, and capital expenditures are expected to be approximately $10 million.
Longer term, HBB continues to work to improve return on sales through economies of scale derived from market growth and its strategic revenue growth initiatives. These initiatives are focused on enhancing HBB's placementsthe FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)," which amends the requirements in the North American consumer business, enhancing sales in the e-commerce market, expanding its participation in the "only-the-best" market by investing in new products to be sold under the Wolf Gourmet®, Weston®, Hamilton Beach® Professional and CHI® brand names, expanding internationally in emerging growth markets, increasing its global commercial presence through enhanced global product lines for chains and distributors serving the global food service and hospitality markets and leveraging its other strategic initiatives to drive category and channel expansion.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Effects of Foreign Currency
HBB operates internationally and enters into transactions denominated in foreign currencies. As a result, HBB is subjectGAAP related to the variability that arises from exchange rate movements. The effects of foreign currency on HBB's operating results are discussed above. The Company's use of foreign currency derivative contracts is discussed in “Quantitative and Qualitative Disclosures about Market Risk” below.
The Kitchen Collection, LLC
KC is a national specialty retailer of kitchenware in outlet and traditional malls throughout the United States. KC's business is seasonal, and a majority of its revenues and operating profit is typically earned in the second halfincome statement presentation of the year when salescomponents of kitchenware to consumers increase significantlynet periodic benefit cost for an entity's sponsored defined benefit pension and other post-retirement plans. The Company adopted this guidance on January 1, 2019. The change in presentation of the fall holiday-selling season.
At December 31, 2017, KC operated 210 stores compared with 223 stores at December 31, 2016.
Financial Review
Operating Results
2017 Compared with 2016
The resultscomponents of operations for KC were as followsnet periodic pension cost was applied retrospectively which resulted in $0.7 million and $0.9 million of net periodic pension income for the years ended end December 31,:
|
| | | | | | | | | | | | | |
| Year Ended December 31 | | % of Sales Revenue, net |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenues | $ | 128,520 |
| | $ | 144,351 |
| | 100.0 | % | | 100.0 | % |
Cost of sales | 70,470 |
| | 78,960 |
| | 54.8 | % | | 54.7 | % |
Gross profit | 58,050 |
| | 65,391 |
| | 45.2 | % | | 45.3 | % |
Operating expenses (1) | 61,468 |
| | 65,015 |
| | 47.8 | % | | 45.0 | % |
Operating (loss) profit | (3,418 | ) | | 376 |
| | (2.7 | )% | | 0.3 | % |
Interest expense | 254 |
| | 209 |
| | 0.2 | % | | 0.1 | % |
Other expense | 61 |
| | 67 |
| | — | % | | — | % |
Income (loss) before income taxes | (3,733 | ) | | 100 |
| | (2.9 | )% | | 0.1 | % |
Income tax (benefit) expense | (461 | ) | | 455 |
| | (0.4 | )% | | 0.3 | % |
Net loss | $ | (3,272 | ) | | $ | (355 | ) | | (2.5 | )% | | (0.2 | )% |
| | | | | | | |
Effective income tax rate | n/m |
| | n/m |
| | | | |
(1) Operating expenses include Selling, 2018, and 2017, respectively, being reclassified from selling, general and administrative expenses and (gain)/loss on sale of assets.The following table identifies the components of change in revenues for 2017 compared with 2016: |
| | | |
| Revenues |
2016 | $ | 144,351 |
|
Increase (decrease) from: | |
Comparable stores | (10,049 | ) |
Closed stores | (9,752 | ) |
New stores | 3,373 |
|
Other | 597 |
|
2017 | $ | 128,520 |
|
to other expense (income), net.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Revenues decreased 11.0% in 2017 compared with 2016. The decrease is primarily due to a decline in comparable store sales and the loss of sales from closing unprofitable stores during 2017 and 2016. The decrease in comparable store sales is mainly attributable to fewer customer visits and a reduction in store transactions as a result of reduced consumer traffic as well as a decline in the average sales transaction value for 2017 compared with 2016. These decreases were partially offset by sales at newly opened stores.
KC's cost of sales for 2017 decreased $8.5 million compared with 2016 as a result of the decrease in sales as gross margin was comparable in 2017 and 2016.
The following table identifies the components of change in operating profit (loss) for 2017 compared with 2016: |
| | | |
| Operating profit (loss) |
2016 | $ | 376 |
|
Increase (decrease) from: | |
Comparable stores | (3,695 | ) |
New stores | (507 | ) |
Lease termination costs
| (435 | ) |
Selling, general and administrative expenses and other | 692 |
|
Closed stores | 151 |
|
2017 | $ | (3,418 | ) |
KC reported an operating loss of $3.4 million in 2017 compared with operating profit of $0.4 million in 2016 primarily as a result of a decline in sales at comparable stores and lease termination costs incurred for the closure of unprofitable stores. These decreases were partially offset by lower Selling, general and administrative expenses at corporate headquarters, primarily due to a $0.7 million reduction in employee-related expenses.
KC recognized a net loss of $3.3 million in 2017 compared to a net loss of $0.4 million in 2016 primarily due to the factors affecting the operating loss discussed above, partially offset by the change in income tax (benefit) expense. KC’s income tax (benefit) expense in 2017 and 2016 does not correlate with its income before tax due to the non-deductible Affordable Care Act ("ACA") penalty and the remeasurement of KC's net deferred tax assets in 2017 as a result of the Tax Act, which resulted in the recognition of a $0.6 million tax charge.
2016 Compared with 2015
The results of operations for KC were as follows for the years ended December 31:
|
| | | | | | | | | | | | | |
| Year Ended December 31 | | % of Sales Revenue, net |
| 2016 | | 2015 | | 2016 | | 2015 |
Revenues | $ | 144,351 |
| | $ | 150,988 |
| | 100.0 | % | | 100.0 | % |
Cost of sales | 78,960 |
| | 83,988 |
| | 54.7 | % | | 55.6 | % |
Gross profit | 65,391 |
| | 67,000 |
| | 45.3 | % | | 44.4 | % |
Operating expenses (1) | 65,015 |
| | 66,835 |
| | 45.0 | % | | 44.3 | % |
Operating profit | 376 |
| | 165 |
| | 0.3 | % | | 0.1 | % |
Interest expense | 209 |
| | 131 |
| | 0.1 | % | | 0.1 | % |
Other expense | 67 |
| | 86 |
| | — | % | | 0.1 | % |
Income (loss) before income taxes | 100 |
| | (52 | ) | | 0.1 | % | | — | % |
Income tax expense | 455 |
| | 368 |
| | 0.3 | % | | 0.2 | % |
Net income (loss) | $ | (355 | ) | | $ | (420 | ) | | (0.2 | )% | | (0.3 | )% |
| | | | | | | |
Effective income tax rate | n/m |
| | n/m |
| | | | |
(1) Operating expenses include Selling, general and administrative expenses and (gain)/loss on sale of assets.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The following table identifies the components of change in revenues for 2016 compared with 2015: |
| | | |
| Revenues |
2015 | $ | 150,988 |
|
Increase (decrease) from: | |
Closed stores | (7,907 | ) |
Comparable stores | (3,981 | ) |
New stores | 5,028 |
|
Other | 223 |
|
2016 | $ | 144,351 |
|
Revenues decreased 4.4% in 2016 compared with 2015. The decrease was primarily the result of the loss of sales from closing unprofitable stores during 2016 and 2015 and a decline in comparable store sales. The decrease in comparable store sales resulted from fewer customer visits and a reduction in store transactions as a result of reduced consumer traffic, partially offset by an increase in the average sales transaction value for 2016 compared with 2015. These decreases were also offset by sales at newly opened stores.
KC’s cost of sales for 2016 decreased $5.0 million compared with 2015, primarily as a result of the decrease in sales, but also due to a shift in sales mix which resulted in a 0.9% improvement in gross margin.
The following table identifies the components of change in Operating profit for 2016 compared with 2015: |
| | | |
| Operating profit |
2015 | $ | 165 |
|
Increase (decrease) from: | |
Closed stores | 369 |
|
Comparable stores | 101 |
|
Selling, general and administrative expenses and other | 31 |
|
ACA penalty | (156 | ) |
New stores | (134 | ) |
2016 | $ | 376 |
|
KC’s operating profit increased $0.2 million in 2016 compared with 2015 primarily as a result of closing unprofitable stores. Selling, general and administrative expenses were comparable in both 2016 and 2015.
KC reported a net loss of $0.4 million in both 2016 and 2015 as the $0.2 million improvement in operating profit in 2016 was offset by higher interest expense of $0.1 million and increased income tax expense of $0.1 million. KC’s income tax expense does not correlate with its income before tax as income before tax includes recognition of the ACA penalty that is not deductible for tax purposes.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The following tables detail the change in cash flow for the years ended December 31: |
| | | | | | | | | | | |
| 2017 | | 2016 | | Change |
Operating activities: | | | | | |
Net loss | $ | (3,272 | ) | | $ | (355 | ) | | $ | (2,917 | ) |
Depreciation | 1,539 |
| | 1,545 |
| | (6 | ) |
Other | 393 |
| | (219 | ) | | 612 |
|
Working capital changes | 5,995 |
| | 2,862 |
| | 3,133 |
|
Net cash provided by operating activities | 4,655 |
| | 3,833 |
| | 822 |
|
| | | | | |
Investing activities: | | | | | |
Expenditures for property, plant and equipment | (1,176 | ) | | (1,188 | ) | | 12 |
|
Other | — |
| | 51 |
| | (51 | ) |
Net cash used for investing activities | (1,176 | ) | | (1,137 | ) | | (39 | ) |
| | | | | |
Cash flow before financing activities | $ | 3,479 |
| | $ | 2,696 |
| | $ | 783 |
|
Net cash provided by operating activities increased $0.8 million during 2017 compared with 2016 primarily due to the change in working capital partially offset by the increase in net loss. The change in working capital was attributable to a decrease in inventory during 2017 compared with an increase during 2016, partially offset by a decrease in accounts payable during 2017 compared with an increase during 2016. The decrease in inventory during 2017 was primarily due to the 2017 retail store closures and lower inventory per store at December 31, 2017. Additionally, the decrease in accounts payable during 2017 was due to the timing of inventory purchases. |
| | | | | | | | | | | |
| 2017 | | 2016 | | Change |
Financing activities: | | | | | |
Cash dividends paid to NACCO | $ | (3,000 | ) | | $ | (10,000 | ) | | $ | 7,000 |
|
Other | (70 | ) | | — |
| | (70 | ) |
Net cash used for financing activities | $ | (3,070 | ) | | $ | (10,000 | ) | | $ | 6,930 |
|
The $6.9 million change in net cash used for financing activities during 2017 compared with 2016 was primarily the result of cash dividends paid to NACCO prior to the spin-off.
Financing Activities
KC has a $20.0 million secured revolving line of credit that expires in October 2022 (the “KC Facility”). The obligations under the KC Facility are secured by substantially all assets of KC. The approximate book value of KC's assets held as collateral under the KC Facility was $43.4 million as of December 31, 2017. At December 31, 2017, the borrowing base and excess availability under the KC Facility were $13.6 million. KC had no borrowings outstanding under the KC Facility as of December 31, 2017.
The maximum availability under the KC Facility is derived from a borrowing base formula using KC's eligible inventory and eligible credit card accounts receivable, as defined in the KC Facility. Borrowings bear interest at a floating rate plus a margin based on the excess availability under the agreement, as defined in the KC Facility, which can be either a base rate plus a margin of 0.75% or LIBOR plus a margin of 1.75% as of December 31, 2017. The KC Facility also requires a fee of 0.25% per annum on the unused commitment.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The KC Facility allows for the payment of dividends to Hamilton Beach Holding, subject to certain restrictions based on availability and meeting a fixed charge coverage ratio as described in the KC Facility. Dividends are limited to (i) $6.0 million in any twelve-month period, so long as KC has excess availability, as defined in the KC Facility, of at least $5.0 million after giving effect to such payment and maintaining a minimum fixed charge coverage ratio of 1.1 to 1.0, as defined in the KC Facility; (ii) $2.0 million in any twelve-month period, so long as KC has excess availability, as defined in the KC Facility, of at least $5.0 million after giving effect to such payment and (iii) in such amounts as determined by KC, so long as KC has excess availability under the KC Facility of $10.0 million after giving effect to such payment. At December 31, 2017, KC was in compliance with all financial covenants in the KC Facility.
KC believes funds available from cash on hand, the KC Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the KC Facility.
Contractual Obligations, Contingent Liabilities and Commitments
Following is a table which summarizes the contractual obligations of KC as of December 31, 2017: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
Contractual Obligations | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter |
Purchase and other obligations | $ | 28,100 |
| | $ | 28,100 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Operating leases | 54,087 |
| | 17,707 |
| | 12,104 |
| | 8,738 |
| | 5,528 |
| | 3,894 |
| | 6,116 |
|
Total contractual cash obligations | $ | 82,187 |
| | $ | 45,807 |
| | $ | 12,104 |
| | $ | 8,738 |
| | $ | 5,528 |
| | $ | 3,894 |
| | $ | 6,116 |
|
An event of default, as defined in KC’s operating lease agreements, could cause an acceleration of the payment schedule. No such event of default has occurred or is anticipated to occur.
The purchase and other obligations are primarily for accounts payable, open purchase orders and accrued payroll.
Off Balance Sheet Arrangements
KC has not entered into any off balance sheet financing arrangements, other than operating leases, which are disclosed in the contractual obligations table above.
Capital Expenditures
Following is a table which summarizes actual and planned capital expenditures (in millions): |
| | | | | | | | | | | |
| Planned | | Actual | | Actual |
| 2018 | | 2017 | | 2016 |
KC | $ | 0.5 |
| | $ | 1.2 |
| | $ | 1.2 |
|
Planned expenditures in 2018 for property, plant and equipment are primarily for improvements to KC’s information technology infrastructure, store remodels and existing store fixtures. These expenditures are expected to be funded from internally generated funds and bank borrowings.
Capital Structure
Working capital is significantly affected by the seasonality of KC’s business. The following is a discussion of the changes in KC’s capital structure at December 31, 2017 compared with December 31, 2016 and December 31, 2016 compared with December 31, 2015.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
December 31, 2017 Compared with December 31, 2016 |
| | | | | | | | | | | |
| December 31 | | |
| 2017 | | 2016 | | Change |
Cash and cash equivalents | $ | 9,419 |
| | $ | 9,010 |
| | $ | 409 |
|
Other net tangible assets | 5,702 |
| | 12,384 |
| | (6,682 | ) |
Net assets | 15,121 |
| | 21,394 |
| | (6,273 | ) |
Total debt | — |
| | — |
| | — |
|
Total equity | $ | 15,121 |
| | $ | 21,394 |
| | $ | (6,273 | ) |
Debt to total capitalization | (a) |
| | (a) |
| | (a) |
|
| |
(a) | Debt to total capitalization is not meaningful as KC has no outstanding debt at December 31, 2017 or December 31, 2016. |
Other net tangible assets decreased $6.7 million from December 31, 2016 primarily due to decreased inventory partially offset by an increase in accounts payable. The decrease in inventory during 2017 was primarily due to the 2017 retail store closures and lower inventory per store at December 31, 2017. Additionally, the decrease in accounts payable during 2017 was due to the timing of inventory purchases.
December 31, 2016 Compared with December 31, 2015 |
| | | | | | | | | | | |
| December 31 | | |
| 2016 | | 2015 | | Change |
Cash and cash equivalents | $ | 9,010 |
| | $ | 16,314 |
| | $ | (7,304 | ) |
Other net tangible assets | 12,384 |
| | 15,436 |
| | (3,052 | ) |
Net assets | 21,394 |
| | 31,750 |
| | (10,356 | ) |
Total debt | — |
| | — |
| | — |
|
Total equity | $ | 21,394 |
| | $ | 31,750 |
| | $ | (10,356 | ) |
Debt to total capitalization | (a) |
| | (a) |
| | (a) |
|
| |
(a) | Debt to total capitalization is not meaningful as KC has no outstanding debt at December 31, 2016 or December 31, 2015. |
Other net tangible assets decreased $3.1 million from December 31, 2015 primarily due to an increase in accounts payable partially offset by an increase in inventory. The increases in accounts payable and inventory are primarily attributable to timing and an increase in average inventory per store at December 31, 2016 compared with December 31, 2015.
OUTLOOK
The retail environment at physical store locations continues to be challenged as changing consumer shopping patterns have led to declining consumer traffic to physical locations and reduced in-store transactions as consumers buy more over the Internet or utilize the Internet for comparison shopping. These factors are expected to continue to reduce KC's target consumers' spending on housewares and small appliances in mall locations. Given this market environment, KC continues to focus on optimizing its store count for current foot traffic trends.
Over the past several years the pace of new Kitchen Collection® store openings has slowed and the number of store closings has increased. During 2017 KC closed 19 stores and opened six. The Company expects this trend to continue. Currently, approximately 75% of KC's store portfolio is in outlet mall locations and 25% is in traditional malls. In 2018, KC plans to continue to aggressively manage its store portfolio through natural lease expirations and ongoing renegotiations of rent commitments, as well as early lease terminations if sales at certain stores continue to deteriorate. By the end of 2018, KC has a goal of having approximately two-thirds of its stores with leases of one year or less, while also maintaining its focus on decreasing the number of stores to a smaller core group of profitable outlet stores in more favorable outlet mall locations. If KC cannot reach acceptable terms with its landlords as leases come up for renewal, the pace of store closings could increase.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
As a result of these initiatives, KC expects revenues in 2018 to decrease compared with 2017 as it continues to prudently close non-performing stores. KC plans to continue to focus on maintaining strong gross margins, reducing operating expenses and optimizing working capital. However, without an increase in store traffic, the company expects the 2018 operating and net losses to be comparable to 2017 despite the absence of the 2017 lease termination and tax reform charges. However, net losses in the first half of 2018 are expected to be higher than in the prior year and the second half of the year as a smaller tax benefit will be realized on the seasonally higher first half losses due to a lower effective income tax rate under the new Tax Act.
Due to forecasted working capital changes and capital expenditures, cash flow before financing activities is expected to result in a use of cash in 2018. Capital expenditures are expected to be approximately $0.5 million.
KC aims to provide consumers with highly desirable products at affordable prices. KC's continued focus on increasing the average sale per transaction, the average closure rate and the number of items per transaction through the continued refinement of its format and improved customer interactions to enhance customers' store experience is expected to generate sales growth over time. Additionally, improved product offerings, a focus on sales of higher-margin products, merchandise mix and displays, closure of underperforming stores and optimizing its expense structure are expected to generate improved operating profit over time. As a result, KC believes its smaller core store portfolio is well positioned to take advantage of any future traffic recovery.
Accounting Standards Not Yet Adopted: 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 private companies,nonpublic entities, the Company can adopt the new or revised standard at the time private companiesnonpublic entities adopt the new or revised standard.
In May 2014, the FASB codified in ASC 606, "Revenue Recognition - Revenue from Contracts with Customers," which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers and provide additional disclosures. The effective date for nonpublic entities is annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. The Company will adopt the standard on January 1, 2018.
The Company will use the modified retrospective method with the cumulative effect of initially applying the standard recognized as an adjustment to equity. The Company completed the execution of its project plan with respect to its implementation of this standard, including identification of revenue streams and review of contracts and procedures currently in place. Hamilton Beach Holding’s revenue is primarily generated from the sale of finished product to customers. Those sales are recognized at a single point in time when ownership, risks and rewards transfer. The amount and timing of revenue recognition is not materially impacted by the new standard, thus no cumulative adjustment will be recognized upon adoption. As the amount and timing of revenue recognition is not materially impacted by the new standard, the adoption of the standard is not expected to have a material impact to the Company’s financial position, results of operations or cash flows. The adoption of this guidance will result in increased disclosures to help users of financial statements understand the nature, amount and timing of revenue and cash flows arising from contracts.
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 effective for fiscal years beginning after December 15, 2019,2020, and interim periods within fiscal years beginning after December 15, 2020.2021. Early adoption is permitted. The Company is planning to adopt ASU 2016-02 for its fiscal year ending December 31, 20202021 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, and interim periods within fiscal years beginning after December 15, 2021. 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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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY |
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Act from accumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating when it will adopt ASU 2018-02 and how and to what extent ASU 2018-02 will affect the Company's financial position, results of operations, cash flows and related disclosures.
FORWARD-LOOKING STATEMENTS
The statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this Annual Report on Form 10-K10-K/A 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 with respect to each subsidiary's operations include, without limitation:
HBB: (1) changes in the sales prices, product mix or levels of consumer purchases of small electric and specialty housewares appliances, (2) changes in consumer retail and credit markets, including the increasing volume of transactions made through third-party internet sellers, (3) bankruptcy of or loss of major retail customers or suppliers, (4) changes in costs, including transportation costs, of sourced products, (5) delays in delivery of sourced products, (6) changes in or unavailability of quality or cost effective suppliers, (7) 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, (8) the impact of tariffs on customer purchasing patterns, (9) product liability, regulatory actions or other litigation, warranty claims or returns of products, (9)(10) customer acceptance of, changes in costs of, or delays in the development of new products, (10)(11) increased competition, including consolidation within the industry, (11)(12) 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'sHBB products, (12)(13) changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation, (14) risks associated with the wind down of KC including unexpected costs, contingent liabilities and (13) the actual impactpotential disruption of our other businesses, (15) the unpredictable nature of the Tax Actcoronavirus and its potential impact on our business, (16) the result of shareholder or governmental actions relating to the restatement of our financial statements and accounting and legal fees that we may affect future earnings asincur in connection with the amounts reflectedrestatement, (17) our ability to successfully remediate the material weaknesses in 2017 are preliminary estimatesour internal control over financial reporting disclosed in this Form 10-K/A within the time periods and exact amounts will not be determined until a later date, and there may bein the manner currently anticipated, additional material weaknesses or other judicial or regulatory interpretations of the Tax Actdeficiencies that may also impact these estimatesarise in the future or our ability to maintain an effective system of internal controls and future financial results.(18) other risk factors, including those described in the Company's filings with the Securities and Exchange Commission, including, but not limited to, the Annual Report on Form 10-K/A for the year ended December 31, 2019.
KC: (1) decreased levels of consumer visits to brick and mortar stores, (2) increased competition, including through online channels, (3) 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 number of customers visiting Kitchen Collection® stores, (4) changes in the sales prices, product mix or levels of consumer purchases of kitchenware and small electric appliances, (5) changes in costs of inventory, including transportation costs, (6) delays in delivery or the unavailability of inventory, (7) customer acceptance of new products, (8) the anticipated impact of the opening of new stores, the ability to renegotiate existing leases and effectively and efficiently close under-performing stores, (9) changes in the import tariffs and monetary policies and other changes in the regulatory climate in the countries in which KC buys, operates and/or sells products, and (10) the actual impact of the Tax Act may affect future earnings as the amounts reflected in 2017 are preliminary estimates and exact amounts will not be determined until a later date, and there may be other judicial or regulatory interpretations of the Tax Act that may also impact these estimates and future financial results.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's subsidiaries, HBB and KC, have enteredenters 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 the subsidiariesHBB to receive a variable interest rate and pay a fixed interest rate. See Note 2 and Note 7 to the Consolidated Financial Statements in this Form 10-K.
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 liabilities. The fair value of the Company's interest rate swap agreements was a net receivablepayable of $0.9$0.1 million at December 31, 2017.2019. A hypothetical 10% decrease in interest rates would cause a decrease of $0.2 million in the fair value of interest rate swap agreements and the resulting fair value would be a receivablepayable of $0.7$0.3 million. Additionally, a hypothetical 10% increase in interest rates would not have a material impact to the Company's interest expense, net of $1.8$3.0 million at December 31, 2017.2019.
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 U.S. dollar against other currencies affects the reported amounts of revenues,revenue, 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 U.S. dollars at rates agreed to at the inception of the contracts. See Note 2 and Note 7 to the Consolidated Financial Statements in this Form 10-K.
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 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 net receivablepayable of $0.2$0.3 million at December 31, 2017.2019. Assuming a hypothetical 10% weakening of the U.S. dollar compared with the Canadian dollar at December 31, 2017,2019, the fair value of foreign currency-sensitive financial instruments, which represents forward foreign currency exchange contracts, would be decreased by $1.3$1.1 million compared with its fair value at December 31, 2017. It is important to note that the change in fair value indicated in this sensitivity analysis would be somewhat offset by changes in the fair value of the underlying receivables and payables.2019.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is set forth in the Financial Statements and Supplementary Data contained in Part IV of this Form 10-K10-K/A and is hereby incorporated herein by reference to such information.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with accountants on accounting and financial disclosure for the three-year period ended December 31, 20172019. that would require disclosure pursuant to this Item 9.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controlsDisclosure Controls and procedures:Procedures An evaluation was carried out under the supervision and:Our management, with the participation of the Company's management, including the principal executive officerour Chief Executive Officer and the principal financial officer, ofChief Financial Officer, has evaluated the effectiveness of the Company'sour disclosure controls and procedures as of December 31, 2019. At the endtime of our Original Filing, our Chief Executive Officer and Chief Financial Officer had concluded that our disclosure controls and procedures were effective as of December 31, 2019. Subsequent to the period coveredevaluation made in connection with the Original Filing, our Chief Executive Officer and Chief Financial Officer have re-evaluated the effectiveness of our disclosure controls and procedures in connection with the restatement of our consolidated financial statements that resulted from wrongdoing by this report.certain former employees of one of our Mexican subsidiaries. Based on that evaluation, these officersour Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2019, due to the Company'sexistence of the material weaknesses in our internal control over financial reporting at our Mexican subsidiaries as described below, our disclosure controls and procedures are effective.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.
Management's reportManagement’s Report on internal controlInternal Control over financial reporting:Financial Reporting: Management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of management, including the principal executive officerour Chief Executive Officer and principal financial officer,our Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control —- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)Framework). Based on this evaluation, under the framework, management concluded that the Company'swe did not maintain effective internal control over financial reporting was effective as of December 31, 20172019 due to the material weaknesses at our Mexican subsidiaries described below..
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.
We identified deficiencies at our Mexican subsidiaries as follows:
Review controls performed at our Mexican subsidiaries did not operate effectively as account reconciliations and manual journal entries were not supported by accurate and complete information, which resulted in expenditures being deferred on the balance sheet beyond the period for which the costs pertained and the failure to detect unauthorized transactions deferred on the balance sheet as a result of wrongdoing by certain former employees of one of our Mexican subsidiaries; and
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 at our Mexican subsidiaries were not sufficiently designed or operating effectively to provide reasonable assurance regarding the prevention and timely detection of misappropriation of assets.
We have concluded that each of these deficiencies at our Mexican subsidiaries constitutes a material weakness in our internal control over financial reporting.
The Company's effectiveness of internal control over financial reporting as of December 31, 20172019 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report, which is included in Item 15 of this Form 10-K10-K/A and incorporated herein by reference.
Remediation of Material Weaknesses: We have evaluated the material weaknesses and have developed a plan of remediation to strengthen our internal controls over financial reporting at our Mexican subsidiaries which include the remediation efforts summarized below. Some remediation efforts have been implemented, while others are in the process of being implemented. The remediation efforts are intended to address the deficiencies and enhance our overall internal control environment:
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 will be implemented for all employees of our Mexican subsidiaries.
Organizational Enhancements - We have implemented and are in the process of implementing organizational enhancements as follows: (i) augmenting 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) developing 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) outsourcing functions at our Mexican subsidiaries where third-party service providers provide expertise or technical skillset, as appropriate.
We believe the measures described above along with other elements of our remediation plan will remediate the material weaknesses identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and have begun to implement the steps described above. We will also continue to review, optimize and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies or we may modify certain of the remediation measures described above. We will not consider our material weaknesses remediated until the applicable remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in internal control:Internal Control over Financial Reporting: There have been no changes in the Company's internal control over financial reporting, that occurred during the fourth quarter of 2017,2019, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to Directors of the Company will be set forth in the 20182020 Proxy Statement under the subheadings “Part II — Proposals To Be Voted On At The 20182020 Annual Meeting — Proposal 1 — Election of Directors — Director Nominee Information,” which information is incorporated herein by reference.
Information with respect to the audit review committee and the audit review committee financial expert will be set forth in the 20182020 Proxy Statement under the subheadingsubheadings “Part I — Corporate Governance Information — Directors' MeetingsBoard Committees,” and “Part I — Corporate Governance Information — Description of Committees,” which information is incorporated herein by reference.
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 by the Company's Directors, executive officers and holders of more than ten percent of the Company's equity securities will be set forth in the 20182020 Proxy Statement under the subheading “Part IV — Other Important Information — Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference.
Information regarding the executive officers of the Company is included in this Form 10-K10-K/A as Item 44A of Part I as permitted by Instruction 3 to Item 401(b) of Regulation S-K.
The Company has adopted a code of business conduct and ethics applicable to all Company personnel, including the principal executive officer, principal financial officer, principal accounting officer or controller, or other persons performing similar functions. The code of business conduct and ethics, entitled the “Code of Corporate Conduct,” is posted on the Company's website at www.hamiltonbeachbrands.com under “Governance.”www.hamiltonbeachbrands.com/investors/corporate-governance.
Item 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation will be set forth in the 20182020 Proxy Statement under the headings “Part III — Executive Compensation Information” which information is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management will be set forth in the 20182020 Proxy Statement under the subheading “Part IV — Other Important Information — Beneficial Ownership of Class A Common and Class B Common,” which information is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to certain relationships and related transactions will be set forth in the 20182020 Proxy Statement under the subheadings “Part I — Corporate Governance Information — Review and Approval of Related Person Transactions,” which information is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accountant fees and services will be set forth in the 20182020 Proxy Statement under the heading “Part II — Proposals To Be Voted On At The 20182020 Annual Meeting — Proposal 24 — Ratification of the Appointment of Ernst & Young LLP as the Company's Independent Registered Public Accounting Firm for 2018,2020,” which information is incorporated herein by reference.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Documents that are filed as part of this report
The response to Item 15(a)(1) is set forth beginning at page F-2 of this Form 10-K.10-K/A. (a)(2) Financial Statement Schedules
The response to Item 15(a)(2) is set forth beginning at page F-2F-34 of this Form 10-K.10-K/A. (a)(3) and (b) Exhibits required by Item 601 of Regulation S-K
The response to Item 15(a)(3) and (b) is set forth as follows:
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
(3) Articles of Incorporation and By-laws.
(4) Instruments defining the rights of security holders, including indentures.
(10) Material Contracts.
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10.1 | | |
10.2 | | |
10.3 | | |
10.4 | | |
10.5* | | |
10.6* | | |
10.7* | | |
10.8* | | |
10.9* | | |
10.10* | | |
10.11* | | |
10.12* | | |
10.13* | | |
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10.14* | | |
10.15* | | |
10.16*10.6* | | |
10.17*10.7* | | |
10.18*10.8* | | |
10.1910.9 | | Credit Agreement, dated as of April 29, 2010, among The Kitchen Collection, Inc., the borrowers and guarantors thereto, Wells Fargo Retail Finance, LLC and the other lenders thereto is incorporated herein by reference to Exhibit 10.27 to the NACCO Industries, Inc. Quarterly Report on Form 10-Q/A, filed by NACCO Industries, Inc. on March 20, 2013, Commission File Number 1-9172. |
10.2010.10 | | First Amendment to Credit Agreement, dated as of August 7, 2012, among The Kitchen Collection, LLC, as successor to The Kitchen Collection, Inc., the borrowers and guarantors thereto, Wells Fargo Bank, National Association, as successor to Wells Fargo Retail Finance, LLC, and the other lenders thereto is incorporated herein by reference to Exhibit 10.28 to the NACCO Industries, Inc. Quarterly Report on Form 10-Q/A, filed by NACCO Industries, Inc. on March 20, 2013, Commission File Number 1-9172. |
10.2110.11 | | Second Amendment to Credit Agreement, dated as of September 19, 2014, among The Kitchen Collection, LLC, as successor to The Kitchen Collection, Inc., the borrowers and guarantors thereto, Wells Fargo Bank, National Association, as successor to Wells Fargo Retail Finance, LLC, is incorporated herein by reference to Exhibit 10.1 to NACCO Industries, Inc. Current Report on Form 8-K, filed by NACCO Industries, Inc. on September 19, 2014, Commission File Number 1-9172. |
10.2210.12 | | Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, Wells Fargo Capital Finance, LLC, as Sole Lead Arranger and Sole Lead Bookrunner, the Lenders that are Parties thereto as the Lenders, Hamilton Beach Brands, Inc. (as US Borrower), and Hamilton Beach Brands Canada, Inc. (as Canadian Borrower), as Borrowers, dated as of May 31, 2012 is incorporated herein by reference to Exhibit 10.1 to NACCO Industries, Inc. Current Report on Form 8-K, filed by NACCO Industries, Inc. on June 6, 2012, Commission File Number 1-9172. |
10.2310.13 | | Amended and Restated Guaranty and Security Agreement, dated as of May 31, 2012, among Hamilton Beach Brands, Inc. and Hamilton Beach, Inc., as Grantors, and Wells Fargo Bank, National Association, as Administrative Agent is incorporated herein by reference to Exhibit 10.2 to the NACCO Industries, Inc. Current Report on Form 8-K, filed by NACCO Industries, Inc. on June 6, 2012, Commission File Number 1-9172. |
10.2410.14 | | Amended and Restated Canadian Guarantee and Security Agreement, dated as of May 31, 2012, among Hamilton Beach Brands Canada, Inc., as Grantor, and Wells Fargo Bank, National Association, as Administrative Agent is incorporated herein by reference to Exhibit 10.3 to the NACCO Industries, Inc. Current Report on Form 8-K, filed by NACCO Industries, Inc. on June 6, 2012, Commission File Number 1-9172. |
10.2510.15 | | Amendment No.1 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties Hereto as the Lenders, Hamilton Beach Brands, Inc. (as US Borrower), and Hamilton Beach Brands Canada, Inc. (as Canadian Borrower), as Borrowers, dated as of July 29, 2014 is incorporated herein by reference to Exhibit 10.1 to the NACCO Industries, Inc. Quarterly Report on Form 10-Q, filed by NACCO Industries, Inc. on July 30, 2014, Commission File Number 1-9172. |
10.26 |
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10.16 | | Amendment No.2 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties Hereto as the Lenders, Hamilton Beach Brands, Inc. (as US Borrower), and Hamilton Beach Brands Canada, Inc. (as Canadian Borrower), as Borrowers, dated as of November 20, 2014 is incorporated herein by reference to Exhibit 10.66 to NACCO Industries, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2014, Commission File Number 1-9172. |
10.2710.17 | | Amendment No. 3 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties Hereto as the Lenders, Hamilton Beach Brands, Inc. (as Parent), and Weston Brands, LLC (as Weston) (collectively referred to as US Borrowers), and Hamilton Beach Brands Canada, Inc. (as Canadian Borrower), dated December 23, 2015 is incorporated herein by reference to Exhibit 10.72 to the NACCO Industries, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2015, Commission File 1-9172. |
10.2810.18 | | Amendment No. 4 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties Hereto as the Lenders, Hamilton Beach Brands, Inc. (as Parent), and Weston Brands, LLC (as Weston) (collectively referred to as US Borrowers), and Hamilton Beach Brands Canada, Inc. (as Canadian Borrower), dated June 30, 2016 is incorporated herein by reference to Exhibit 10.1 to NACCO Industries, Inc. Quarterly Report on Form 10-Q, file by NACCO Industries, Inc. on August 2, 2016, Commission File Number I-9172. |
10.2910.19 | | Amendment No. 5 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties Hereto as the Lenders, Hamilton Beach Brands, Inc. (as Parent), and Weston Brands, LLC (as Weston) (collectively referred to as US Borrowers), and Hamilton Beach Brands Canada, Inc. (as Canadian Borrower), dated September 13, 2017, is incorporated by reference to Exhibit 10.29 of Amendment No. 2 of the Hamilton Beach Brands Holding Company’s S-1 Registration Statement filed on September 18, 2017. |
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10.4010.29 | | Third Amendment to Credit Agreement by and among The Kitchen Collection, LLC, as Lead Borrower, Borrowers hereto, Guarantors hereto, Lenders hereto and Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and Swing Line Lender, dated as of October 20, 2017 is incorporated by reference to Exhibit 10.13 of the Hamilton Beach Brands Holding Company’s Form 10-Q filed on November 1, 2017. |
10.30 | | Amendment No. 6 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties Hereto as the Lenders, Hamilton Beach Brands, Inc., as Parent, and Weston Brands, LLC, as US Borrowers, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower, dated May 14, 2018, is incorporated by reference to Exhibit 10.1 of Hamilton Beach Brands Holding Company's Current Report on Form 10-Q, filed on August 1, 2018. |
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10.36 | | Forbearance Agreement, dated as of October 23, 2019, by and between Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent, Swing Line Lender, and Lender and The Kitchen Collection, LLC is incorporated by reference to Exhibit 10.1 of Hamilton Beach Brands Holding Company's Current Report on Form 8-K, filed on October 25, 2019. |
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(21) Subsidiaries of the registrant.
(23) Consents of experts and counsel.
(31) Rule 13a-14(a)/15d-14(a) Certifications. |
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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 |
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* | | Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item15(b) of this Annual Report on Form 10-K.10-K/A. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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| Hamilton Beach Brands Holding Company | | | | |
| (Registrant) | | | | |
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| Signature | | Title | | Date |
By: | /s/ James H. TaylorMichelle O. Mosier | | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)/(Principal Accounting Officer) | | March 7, 2018July 23, 2020 |
| James H. TaylorMichelle O. Mosier | | | | |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Hamilton Beach Brands Holding Company hereby appoints James H. TaylorMichelle O. Mosier as the true and lawful attorney or attorney-in-fact, with full power of substitution and revocation, for the undersigned and in the name, place and stead of the undersigned, to sign on behalf of the undersigned as director of Hamilton Beach Brands Holding Company, a Delaware corporation, an Annual Report pursuant to Section 13 of the Securities Exchange Act of 1934 on Form 10-K10-K/A for the fiscal year ended December 31, 20172019 and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorney or attorney-in-fact full power and authority to do so and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorney or attorney-in-fact substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Signature | | Title | | Date |
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/s/ Gregory H. Trepp | | | | |
Gregory H. Trepp | | President and Chief Executive Officer (Principal Executive Officer), Director | | March 7, 2018July 23, 2020 |
| | | | |
/s/ James H. TaylorMichelle O. Mosier | | | | |
James H. TaylorMichelle O. Mosier | | Senior Vice President, Chief Financial Officer and Treasurer (Principal (Principal Financial Officer)/(Principal Accounting Officer)
| | March 7, 2018July 23, 2020 |
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/s/ Mark R. Belgya | | | | |
Mark R. Belgya | | Director | | March 7, 2018July 23, 2020 |
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/s/ J.C. Butler, Jr. | | | | |
J.C. Butler, Jr. | | Director | | March 7, 2018July 23, 2020 |
| | | | |
/s/ John P. JumperPaul D. Furlow | | | | |
John P. JumperPaul D. Furlow | | Director | | March 7, 2018July 23, 2020 |
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Signature | | Title | | Date |
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/s/ John P. Jumper | | | | |
John P. Jumper | | Director | | July 23, 2020 |
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/s/ Dennis W. LaBarre | | | | |
Dennis W. LaBarre | | Director | | March 7, 2018July 23, 2020 |
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/s/ Michael S. Miller | | | | |
Michael S. Miller | | Director | | March 7, 2018 |
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/s/ Roger F. Rankin | | | | |
Roger F. Rankin | | Director | | March 7, 2018July 23, 2020 |
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/s/ Alfred M. Rankin, Jr. | | | | |
Alfred M. Rankin, Jr. | | Director | | March 7, 2018July 23, 2020 |
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/s/ Thomas T. Rankin | | | | |
Thomas T. Rankin | | Director | | March 7, 2018July 23, 2020 |
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/s/ James A. Ratner | | | | |
James A. Ratner | | Director | | March 7, 2018July 23, 2020 |
| | | | |
/s/ David F. TaplinClara R. Williams | | | | |
David F. TaplinClara R. Williams | | Director | | March 7, 2018July 23, 2020 |
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 15(a)(1) AND (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 20172019
HAMILTON BEACH BRANDS HOLDING COMPANY
GLEN ALLEN, VIRGINIA
FORM 10-K
ITEM 15(a)(1) AND (2)
HAMILTON BEACH BRANDS HOLDING COMPANY
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Hamilton Beach Brands Holding Company are incorporated by reference in Item 8:
The following consolidated financial statement schedule of Hamilton Beach Brands Holding Company is included in Item 15(a)(2):
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable, or the required information is shown in the consolidated financial statements, and therefore have been omitted.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hamilton Beach Brands Holding Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hamilton Beach Brands Holding Company (the Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive income (loss), cash flows and equity for each of the three years in the period ended December 31, 2017,2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 7, 2018February 26, 2020, except for the effect of the material weaknesses described in the second and third paragraphs as to which the date is July 23, 2020, expressed an unqualifiedadverse opinion thereon.
Restatement of 2019, 2018 and 2017 Financial Statements
As discussed in Note 2 to the consolidated financial statements, the 2019, 2018 and 2017 consolidated financial statements have been restated to correct certain misstatements.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2017 |
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| | | /s/ Ernst & Young LLP |
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We have served as the Company’s auditor since 2017. | |
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Cleveland, Ohio | | | |
March 7, 2018 | | | |
Cleveland, Ohio
February 26, 2020, except for the effect of the restatement disclosed in Note 2,
as to which the date is July 23, 2020
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hamilton Beach Brands Holding Company
Opinion on Internal Control over Financial Reporting
We have audited Hamilton Beach Brands Holding Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weaknesses described below on the achievement of the objectives of the control criteria, Hamilton Beach Brands Holding Company (the Company) has not maintained effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
In our report dated February 26, 2020, we expressed an unqualified opinion that the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria. Management has subsequently identified deficiencies in the design and operating effectiveness of its controls related to (1) the Company’s Mexican subsidiaries' review controls as account reconciliations and manual journal entries were not supported by accurate and complete information and failed to detect unauthorized transactions and (2) controls at the Company’s Mexican subsidiaries over authorizations for spending with vendors, adjusting product costs and selling prices, new customer setup and accounting for price concessions with customers, and has further concluded that such deficiencies represented material weaknesses as of December 31, 2019. As a result, management has revised its assessment, as presented in the accompanying Management's Report on Internal Control over Financial Reporting; to conclude that the Company’s internal control over financial reporting was not effective as of December 31, 2019. Accordingly, our present opinion on the effectiveness of December 31, 2019’s internal control over financial reporting as of December 31, 2019, as expressed herein, is different from that expressed in our previous report.
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 the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment. Management has identified material weaknesses in controls related to the Company's Mexican subsidiaries' (1) review controls over account reconciliations and manual journal entries and (2) controls at its Mexican subsidiaries over authorizations for spending with vendors, adjusting product costs and selling prices, new customer setup and accounting for price concessions with customers.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 20172019 consolidated financial statements of the CompanyCompany. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report dated March 7, 2018February 26, 2020, except for the effect of the restatement disclosed in Note 2 as to which the date is July 23, 2020, which expressed an unqualified opinion thereon.on those financial statements.
Basis for Opinion
The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s report on internal control over financial reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
| | | |
| | | /s/ Ernst & Young LLP |
Cleveland, Ohio | | | |
March 7, 2018 | | | |
Cleveland, Ohio
February 26, 2020, except for the effect of the material weaknesses
described in the second and third paragraphs above,
as to which the date is July 23, 2020
HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (In thousands, except per share data) |
Revenues | $ | 740,749 |
| | $ | 745,357 |
| | $ | 767,862 |
|
Cost of sales | 546,928 |
| | 551,586 |
| | 577,134 |
|
Gross profit | 193,821 |
| | 193,771 |
| | 190,728 |
|
Operating expenses | | | | | |
Selling, general and administrative expenses | 154,305 |
| | 149,016 |
| | 153,793 |
|
Amortization of intangible assets | 1,381 |
| | 1,381 |
| | 1,381 |
|
| 155,686 |
| | 150,397 |
| | 155,174 |
|
Operating profit | 38,135 |
| | 43,374 |
| | 35,554 |
|
Other expense | | | | | |
Interest expense | 1,831 |
| | 1,374 |
| | 1,962 |
|
Other, net, including interest income | 227 |
| | 837 |
| | 1,556 |
|
| 2,058 |
| | 2,211 |
| | 3,518 |
|
Income before income tax provision | 36,077 |
| | 41,163 |
| | 32,036 |
|
Income tax provision | 18,172 |
| | 14,984 |
| | 12,325 |
|
Net income | $ | 17,905 |
| | $ | 26,179 |
| | $ | 19,711 |
|
| | | | | |
Basic earnings per share | $ | 1.31 |
|
| $ | 1.91 |
|
| $ | 1.44 |
|
| | | | | |
Diluted earnings per share | $ | 1.31 |
|
| $ | 1.91 |
|
| $ | 1.44 |
|
| | | | | |
Basic weighted average shares outstanding | 13,673 |
| | 13,673 |
| | 13,673 |
|
Diluted weighted average shares outstanding | 13,685 |
| | 13,673 |
| | 13,673 |
|
See notes to consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Net income | $ | 17,905 |
| | $ | 26,179 |
| | $ | 19,711 |
|
Foreign currency translation adjustment | 689 |
| | (2,078 | ) | | (2,756 | ) |
Current period cash flow hedging activity, net of $293 tax benefit in 2017, $152 tax expense in 2016, and $168 tax expense in 2015 | (749 | ) | | 168 |
| | 399 |
|
Reclassification of hedging activities into earnings, net of $275 tax benefit in 2017, $67 tax benefit in 2016, and $235 tax expense in 2015 | 641 |
| | 105 |
| | (382 | ) |
Current period pension plan adjustment, net of $936 tax expense in 2017, $176 tax benefit in 2016, and $488 tax benefit in 2015 | 1,510 |
| | (385 | ) | | (757 | ) |
Reclassification of pension adjustments into earnings, net of $205 tax benefit in 2017, $195 tax benefit in 2016, and $236 tax benefit in 2015 | 306 |
| | 313 |
| | 512 |
|
Total other comprehensive income (loss) | $ | 2,397 |
| | $ | (1,877 | ) | | $ | (2,984 | ) |
Comprehensive income | $ | 20,302 |
| | $ | 24,302 |
| | $ | 16,727 |
|
|
| | | | | | | | | | | |
| As Restated |
| Year Ended December 31 |
| 2019 | | 2018 | | 2017 |
| (In thousands, except per share data) |
Revenue | $ | 611,786 |
| | $ | 630,082 |
| | $ | 612,056 |
|
Cost of sales | 483,234 |
| | 491,030 |
| | 475,939 |
|
Gross profit | 128,552 |
| | 139,052 |
| | 136,117 |
|
Selling, general and administrative expenses | 100,381 |
| | 104,121 |
| | 96,780 |
|
Amortization of intangible assets | 1,377 |
| | 1,381 |
| | 1,381 |
|
Operating profit | 26,794 |
| | 33,550 |
| | 37,956 |
|
Interest expense, net | 2,975 |
| | 2,916 |
| | 1,572 |
|
Other expense (income), net | (358 | ) | | 149 |
| | (692 | ) |
Income from continuing operations before income taxes | 24,177 |
| | 30,485 |
| | 37,076 |
|
Income tax expense | 9,084 |
| | 7,426 |
| | 18,967 |
|
Net income from continuing operations | 15,093 |
| | 23,059 |
| | 18,109 |
|
Loss from discontinued operations, net of tax | (28,600 | ) | | (5,361 | ) | | (2,225 | ) |
Net income (loss) | $ | (13,507 | ) | | $ | 17,698 |
| | $ | 15,884 |
|
|
| |
| |
|
Basic and diluted earnings (loss) per share: |
|
| |
|
| |
|
|
Continuing operations | $ | 1.10 |
|
| $ | 1.68 |
|
| $ | 1.32 |
|
Discontinued operations | (2.09 | ) |
| (0.39 | ) |
| (0.16 | ) |
Basic and diluted earnings (loss) per share | $ | (0.99 | ) |
| $ | 1.29 |
|
| $ | 1.16 |
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding | 13,690 |
| | 13,699 |
| | 13,673 |
|
Diluted weighted average shares outstanding | 13,726 |
| | 13,731 |
| | 13,685 |
|
See notes to consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | |
| December 31 |
| 2017 | | 2016 |
| (In thousands, except share data) |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 10,906 |
| | $ | 11,340 |
|
Accounts receivable, net of allowances of $15,341 and $15,512 in 2017 and 2016, respectively | 114,100 |
| | 104,074 |
|
Inventories, net | 134,744 |
| | 128,415 |
|
Prepaid expenses and other | 8,835 |
| | 8,586 |
|
Total current assets | 268,585 |
| | 252,415 |
|
Property, plant and equipment, net | 19,083 |
| | 15,943 |
|
Goodwill | 6,253 |
| | 6,253 |
|
Other intangibles, net | 5,900 |
| | 7,282 |
|
Deferred income taxes | 12,825 |
| | 17,504 |
|
Deferred costs | 10,466 |
| | 7,968 |
|
Other non-current assets | 3,121 |
| | 3,468 |
|
Total assets | $ | 326,233 |
| | $ | 310,833 |
|
LIABILITIES AND EQUITY | | | |
Current liabilities | | | |
Accounts payable | $ | 143,012 |
| | $ | 121,253 |
|
Accounts payable to NACCO Industries, Inc. | 9,189 |
| | 9,705 |
|
Revolving credit agreements | 31,346 |
| | 12,714 |
|
Accrued payroll | 17,302 |
| | 17,443 |
|
Accrued cooperative advertising | 11,418 |
| | 15,056 |
|
Other current liabilities | 18,679 |
| | 13,779 |
|
Total current liabilities | 230,946 |
| | 189,950 |
|
Revolving credit agreements | 20,000 |
| | 26,000 |
|
Other long-term liabilities | 28,879 |
| | 29,615 |
|
Total liabilities | 279,825 |
| | 245,565 |
|
Stockholders’ equity |
| | |
Common stock, par value $1.00 per share, 1,000 shares authorized, 100 shares outstanding as of December 31, 2016 | — |
| | — |
|
Preferred stock, par value $0.01 per share, 5 million shares authorized, no shares outstanding as of December 31, 2017 | — |
| | — |
|
Class A, par value $0.01 per share, 70 million shares authorized, 8,865,207 shares outstanding as of December 31, 2017 and no shares outstanding as of December 31, 2016 | 88 |
| | — |
|
Class B, par value $0.01 per share, convertible into Class A on a one-for-one basis, 30 million shares authorized, 4,808,225 shares outstanding as of December 31, 2017 and no shares outstanding as of December 31, 2016 | 48 |
| | — |
|
Capital in excess of par value | 47,773 |
| | 75,031 |
|
Retained earnings | 12,603 |
| | 6,738 |
|
Accumulated other comprehensive loss | (14,104 | ) | | (16,501 | ) |
Total stockholders’ equity | 46,408 |
| | 65,268 |
|
Total liabilities and equity | $ | 326,233 |
| | $ | 310,833 |
|
|
| | | | | | | | | | | |
| As Restated |
| Year Ended December 31 |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Net income (loss) | $ | (13,507 | ) | | $ | 17,698 |
| | $ | 15,884 |
|
Other comprehensive income (loss), net of tax: |
| |
| |
|
Foreign currency translation adjustment | 510 |
| | (73 | ) | | 648 |
|
Loss on long-term intra-entity foreign currency transactions | (79 | ) | | (1,006 | ) | | — |
|
Cash flow hedging activity | (1,569 | ) | | 100 |
| | (749 | ) |
Reclassification of hedging activities into earnings | 349 |
| | 153 |
| | 641 |
|
Pension plan adjustment | 1,410 |
| | (1,920 | ) | | 1,510 |
|
Reclassification of pension adjustments into earnings | 348 |
| | 556 |
| | 306 |
|
Total other comprehensive income (loss), net of tax | $ | 969 |
| | $ | (2,190 | ) | | $ | 2,356 |
|
Comprehensive income (loss) | $ | (12,538 | ) | | $ | 15,508 |
| | $ | 18,240 |
|
See notes to consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS |
| | | | | | | |
| As Restated |
| December 31 |
| 2019 | | 2018 |
| (In thousands) |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 2,142 |
| | $ | 4,420 |
|
Trade receivables, net | 108,381 |
| | 98,361 |
|
Inventory | 109,806 |
| | 122,808 |
|
Prepaid expenses and other current assets | 11,345 |
| | 15,396 |
|
Current assets of discontinued operations | 5,383 |
| | 27,879 |
|
Total current assets | 237,057 |
| | 268,864 |
|
Property, plant and equipment, net | 22,324 |
| | 20,842 |
|
Goodwill | 6,253 |
| | 6,253 |
|
Other intangible assets, net | 3,141 |
| | 4,519 |
|
Deferred income taxes | 6,248 |
| | 5,794 |
|
Deferred costs | 10,941 |
| | 7,868 |
|
Other non-current assets | 2,085 |
| | 2,672 |
|
Non-current assets of discontinued operations | 614 |
| | 4,606 |
|
Total assets | $ | 288,663 |
| | $ | 321,418 |
|
Liabilities and stockholders' equity |
| |
|
Current liabilities |
| |
|
Accounts payable | $ | 111,348 |
| | $ | 119,271 |
|
Accounts payable to NACCO Industries, Inc. | 496 |
| | 2,416 |
|
Revolving credit agreements | 23,497 |
| | 11,624 |
|
Accrued compensation | 15,027 |
| | 15,878 |
|
Accrued product returns | 8,697 |
| | 10,698 |
|
Other current liabilities | 12,534 |
| | 22,922 |
|
Current liabilities of discontinued operations | 29,723 |
| | 22,820 |
|
Total current liabilities | 201,322 |
| | 205,629 |
|
Revolving credit agreements | 35,000 |
| | 35,000 |
|
Other long-term liabilities | 16,075 |
| | 22,011 |
|
Non-current liabilities of discontinued operations | — |
| | 1,960 |
|
Total liabilities | 252,397 |
| | 264,600 |
|
Stockholders’ equity |
| |
|
Preferred stock, par value $0.01 per share | — |
| | — |
|
Class A Common stock, par value $0.01 per share; 9,805 and 9,291 shares issued as of December 31, 2019 and 2018, respectively | 98 |
| | 93 |
|
Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis; 4,076 and 4,422 shares issued as of December 31, 2019 and 2018, respectively | 41 |
| | 44 |
|
Capital in excess of par value | 54,509 |
| | 51,714 |
|
Treasury stock | (5,960 | ) | | — |
|
Retained earnings | 3,710 |
| | 22,068 |
|
Accumulated other comprehensive loss | (16,132 | ) | | (17,101 | ) |
Total stockholders’ equity | 36,266 |
| | 56,818 |
|
Total liabilities and stockholders' equity | $ | 288,663 |
| | $ | 321,418 |
|
| | | |
| | | |
See notes to consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| Year Ended December 31 |
| 2017 | | 2016 | | 2015 |
| (In thousands) |
Operating Activities | | | | | |
Net income | $ | 17,905 |
| | $ | 26,179 |
| | $ | 19,711 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 5,611 |
| | 6,226 |
| | 6,308 |
|
Amortization of deferred financing fees | 204 |
| | 225 |
| | 244 |
|
Deferred income taxes | 3,942 |
| | 1,787 |
| | (1,679 | ) |
Other | (822 | ) | | (952 | ) | | (155 | ) |
Working capital changes, excluding the effect of business acquisitions: | | | | | |
Affiliate receivable/payable | (516 | ) | | 992 |
| | 3,630 |
|
Accounts receivable | (10,026 | ) | | (1,747 | ) | | 7,842 |
|
Inventories | (6,329 | ) | | (1,806 | ) | | 14,423 |
|
Other current assets | (247 | ) | | (707 | ) | | 667 |
|
Accounts payable | 21,759 |
| | 26,890 |
| | (23,861 | ) |
Other liabilities | 1,959 |
| | 5,476 |
| | (642 | ) |
Net cash provided by operating activities | 33,440 |
| | 62,563 |
| | 26,488 |
|
Investing Activities | | | | | |
Expenditures for property, plant and equipment | (7,374 | ) | | (6,002 | ) | | (6,171 | ) |
Acquisition of business | — |
| | — |
| | (413 | ) |
Proceeds from the sale of assets | 21 |
| | 77 |
| | 41 |
|
Net cash used for investing activities | (7,353 | ) | | (5,925 | ) | | (6,543 | ) |
Financing Activities | | | | | |
Net additions (reductions) to revolving credit agreements | 12,630 |
| | (19,651 | ) | | 4,912 |
|
Cash dividends to NACCO Industries, Inc. | (38,000 | ) | | (42,000 | ) | | (15,000 | ) |
Cash dividends on Class A Common and Class B Common | (1,162 | ) | | — |
| | — |
|
Financing fees paid | (70 | ) | | (186 | ) | | — |
|
Net cash used for financing activities | (26,602 | ) | | (61,837 | ) | | (10,088 | ) |
Effect of exchange rate changes on cash | 81 |
| | (259 | ) | | (46 | ) |
Cash and Cash Equivalents | | | | | |
Increase (decrease) for the year | (434 | ) | | (5,458 | ) | | 9,811 |
|
Balance at the beginning of the year | 11,340 |
| | 16,798 |
| | 6,987 |
|
Balance at the end of the year | $ | 10,906 |
| | $ | 11,340 |
| | $ | 16,798 |
|
|
| | | | | | | | | | | |
| As Restated |
| Year Ended December 31 |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Operating activities | | | | | |
Net income from continuing operations | $ | 15,093 |
| | $ | 23,059 |
| | $ | 18,109 |
|
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: |
| |
| |
|
Depreciation and amortization | 4,002 |
| | 4,277 |
| | 4,072 |
|
Deferred income taxes | 1,487 |
| | 5,474 |
| | 3,475 |
|
Stock compensation expense | 2,797 |
| | 3,618 |
| | 323 |
|
Other | 616 |
| | 837 |
| | (1,167 | ) |
Net changes in operating assets and liabilities: |
| |
| |
|
Affiliate payable | (1,920 | ) | | (5,300 | ) | | 866 |
|
Trade receivables | (22,769 | ) | | 18,529 |
| | (8,128 | ) |
Inventory | 13,674 |
| | (12,255 | ) | | (16,566 | ) |
Other assets | 1,127 |
| | (4,586 | ) | | (1,295 | ) |
Accounts payable | (7,043 | ) | | (7,719 | ) | | 25,009 |
|
Other liabilities | (6,842 | ) | | (7,979 | ) | | 3,605 |
|
Net cash provided by operating activities from continuing operations | 222 |
| | 17,955 |
| | 28,303 |
|
Investing activities |
| |
| |
|
Expenditures for property, plant and equipment | (4,122 | ) | | (7,759 | ) | | (6,198 | ) |
Other | — |
| | — |
| | 21 |
|
Net cash used for investing activities from continuing operations | (4,122 | ) | | (7,759 | ) | | (6,177 | ) |
Financing activities |
| |
| |
|
Net additions (reductions) to revolving credit agreements | 11,873 |
| | (4,597 | ) | | 12,630 |
|
Purchase of treasury stock | (5,960 | ) | | — |
| | — |
|
Cash dividends paid | (4,851 | ) | | (4,658 | ) | | (1,162 | ) |
Cash dividends to NACCO Industries, Inc. | — |
| | — |
| | (38,000 | ) |
Net cash provided by (used for) financing activities from continuing operations | 1,062 |
| | (9,255 | ) | | (26,532 | ) |
Cash flows from discontinued operations |
|
| |
|
| |
|
|
Net cash provided by (used for) operating activities from discontinued operations | 3,953 |
| | (5,499 | ) | | 5,137 |
|
Net cash provided by (used for) investing activities from discontinued operations | 585 |
| | (305 | ) | | (1,176 | ) |
Net cash used for financing activities from discontinued operations | (103 | ) | | — |
| | (70 | ) |
Cash provided by (used for) discontinued operations | 4,435 |
| | (5,804 | ) | | 3,891 |
|
Effect of exchange rate changes on cash | (785 | ) | | 309 |
| | 81 |
|
Cash and Cash Equivalents |
| |
| |
|
(Decrease) increase for the year from continuing operations | (3,623 | ) | | 1,250 |
| | (4,325 | ) |
Increase (decrease) for the year from discontinued operations | 4,435 |
| | (5,804 | ) | | 3,891 |
|
Balance at the beginning of the year | 6,352 |
| | 10,906 |
| | 11,340 |
|
Balance at the end of the year | $ | 7,164 |
| | $ | 6,352 |
| | $ | 10,906 |
|
See notes to consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF EQUITY | | | | | Accumulated Other Comprehensive Income (Loss) | | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value (1) | Treasury Stock | Retained Earnings (1) | Accumulated Other Comprehensive Income (Loss)(1) | Total Stockholders' Equity (1) |
| Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings | Foreign Currency Translation Adjustment | Deferred Gain (Loss) on Cash Flow Hedging | Pension Plan Adjustment | Total Stockholders' Equity | (In thousands, except per share data) |
| (In thousands, except per share data) | |
Balance, January 1, 2015 | $ | — |
| $ | — |
| $ | 75,031 |
| $ | 17,848 |
| | $ | (3,789 | ) | | $ | 326 |
| | $ | (8,177 | ) | $ | 81,239 |
| |
Net income | — |
| — |
| — |
| 19,711 |
| | — |
| | — |
| | — |
| 19,711 |
| |
Cash dividends to NACCO Industries, Inc. | — |
| — |
| — |
| (15,000 | ) | | — |
| | — |
| | — |
| (15,000 | ) | |
Current period other comprehensive (loss) income | — |
| — |
| — |
| — |
| | (2,756 | ) | | 399 |
| | (757 | ) | (3,114 | ) | |
Reclassification adjustment to net income | — |
| — |
| — |
| — |
| | — |
| | (382 | ) | | 512 |
| 130 |
| |
Balance, December 31, 2015 | $ | — |
| $ | — |
| $ | 75,031 |
| $ | 22,559 |
|
| $ | (6,545 | ) |
| $ | 343 |
|
| $ | (8,422 | ) | $ | 82,966 |
| |
Net income | — |
| — |
| — |
| 26,179 |
| | — |
| | — |
| | — |
| 26,179 |
| |
Cash dividends to NACCO Industries, Inc. | — |
| — |
| — |
| (42,000 | ) | | — |
| | — |
| | — |
| (42,000 | ) | |
Current period other comprehensive (loss) income | — |
| — |
| — |
| — |
| | (2,078 | ) | | 168 |
| | (385 | ) | (2,295 | ) | |
Reclassification adjustment to net income | — |
| — |
| — |
| — |
| | — |
| | 105 |
| | 313 |
| 418 |
| |
Balance, December 31, 2016 | $ | — |
| $ | — |
| $ | 75,031 |
| $ | 6,738 |
|
| $ | (8,623 | ) | | $ | 616 |
|
| $ | (8,494 | ) | $ | 65,268 |
| |
Balance, January 1, 2017 (As previously reported) | | $ | — |
| $ | — |
| $ | 75,031 |
| $ | — |
| $ | 6,738 |
| $ | (16,501 | ) | $ | 65,268 |
|
Cumulative restatement adjustments | | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (2,722 | ) | $ | 402 |
| $ | (2,320 | ) |
Balance as Restated, January 1, 2017 | | $ | — |
| $ | — |
| $ | 75,031 |
| $ | — |
| $ | 4,016 |
| $ | (16,099 | ) | $ | 62,948 |
|
Net income | — |
| — |
| — |
| 17,905 |
| | — |
| | — |
| | — |
| 17,905 |
| — |
| — |
| — |
| — |
| 15,884 |
| — |
| 15,884 |
|
Issuance of common stock, net of conversions | 88 |
| 48 |
| (136 | ) | — |
| | — |
| | — |
| | — |
| — |
| 88 |
| 48 |
| (136 | ) | — |
| — |
| — |
| — |
|
Cash dividends to NACCO Industries, Inc. | — |
| — |
| (27,122 | ) | (10,878 | ) | | — |
| | — |
| | — |
| (38,000 | ) | — |
| — |
| (27,122 | ) | — |
| (10,878 | ) | — |
| (38,000 | ) |
Cash dividends on Class A Common and Class B Common: $0.085 per share | — |
| — |
| — |
| (1,162 | ) | | — |
| | — |
| | — |
| (1,162 | ) | |
Current period other comprehensive income (loss) | — |
| — |
| — |
| — |
| | 689 |
| | (749 | ) | | 1,510 |
| 1,450 |
| |
Cash dividends, $0.085 per share | | — |
| — |
| — |
| — |
| (1,162 | ) | — |
| (1,162 | ) |
Other comprehensive income | | — |
| — |
| — |
| — |
| — |
| 1,409 |
| 1,409 |
|
Reclassification adjustment to net income | — |
| — |
| — |
| — |
| | — |
| | 641 |
| | 306 |
| 947 |
| — |
| — |
| — |
| — |
| — |
| 947 |
| 947 |
|
Balance, December 31, 2017 | $ | 88 |
| $ | 48 |
| $ | 47,773 |
| $ | 12,603 |
|
| $ | (7,934 | ) | | $ | 508 |
|
| $ | (6,678 | ) | $ | 46,408 |
| |
Balance as Restated, December 31, 2017 | | $ | 88 |
| $ | 48 |
| $ | 47,773 |
| $ | — |
| $ | 7,860 |
| $ | (13,743 | ) | $ | 42,026 |
|
Net income | | — |
| — |
| — |
| — |
| 17,698 |
| — |
| 17,698 |
|
Issuance of common stock, net of conversions | | 5 |
| (4 | ) | 323 |
| — |
| — |
| — |
| 324 |
|
Stock compensation expense | | — |
| — |
| 3,618 |
| — |
| — |
| — |
| 3,618 |
|
Cash dividends, $0.34 per share | | — |
| — |
| — |
| — |
| (4,658 | ) | — |
| (4,658 | ) |
Reclassification due to adoption of ASU 2018-02 | | — |
| — |
| — |
| — |
| 1,168 |
| (1,168 | ) | — |
|
Other comprehensive loss | | — |
| — |
| — |
| — |
| — |
| (2,899 | ) | (2,899 | ) |
Reclassification adjustment to net income | | — |
| — |
| — |
| — |
| — |
| 709 |
| 709 |
|
Balance as Restated, December 31, 2018 | | $ | 93 |
| $ | 44 |
| $ | 51,714 |
| $ | — |
| $ | 22,068 |
| $ | (17,101 | ) | $ | 56,818 |
|
Net loss | | — |
| — |
| — |
| — |
| (13,507 | ) | — |
| (13,507 | ) |
Issuance of common stock, net of conversions | | 5 |
| (3 | ) | (2 | ) | — |
| — |
| — |
| — |
|
Purchase of treasury stock | | — |
| — |
| — |
| (5,960 | ) | — |
| — |
| (5,960 | ) |
Stock compensation expense | | — |
| — |
| 2,797 |
| — |
| — |
| — |
| 2,797 |
|
Cash dividends, $0.355 per share | | — |
| — |
| — |
| — |
| (4,851 | ) | — |
| (4,851 | ) |
Other comprehensive income | | — |
| — |
| — |
| — |
| — |
| 272 |
| 272 |
|
Reclassification adjustment to net income (loss) | | — |
| — |
| — |
| — |
| — |
| 697 |
| 697 |
|
Balance as Restated, December 31, 2019 | | $ | 98 |
| $ | 41 |
| $ | 54,509 |
| $ | (5,960 | ) | $ | 3,710 |
| $ | (16,132 | ) | $ | 36,266 |
|
See notes to consolidated financial statements.
(1) As Restated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 1—Principles of Consolidation and1 - Nature of Operations and Summary of Significant Accounting Policies
The accompanying Consolidated Financial Statements include the accountsNature of Operations
Hamilton Beach Brands Holding Company ("is an operating holding company and operates through its two wholly-owned subsidiaries Hamilton Beach Brands, Inc. (“HBB”) and The Kitchen Collection, LLC (“KC”) (collectively “Hamilton Beach Holding” or the “Company”). On October 10, 2019, the Company’s board of directors (the “Board”) approved the wind down of KC and its retail operations. By December 31, 2019, all KC stores were closed and the reportable segment qualifies to be reported as discontinued operations. On January 21, 2020, the Board approved the dissolution of the KC legal entity and a Certificate of Dissolution of Ohio Limited Liability Company was filed with the Ohio Secretary of State. See Note 3 for further information on discontinued operations.
Hamilton Beach Holding is an operating holding company for two separate businesses. The Company includes the required intercompany eliminations between the two separate businesses and certain federal tax attributes. Costs incurred as a stand-alone public entity are allocated to the HBB segment. The only material assets held by Hamilton Beach Brands Holding Company are its investments in its consolidated subsidiaries, and substantiallysubsidiaries. Substantially all of its cash flows are provided by dividends paid or distributions made by its subsidiaries. The Company's subsidiaries operate in the following principal industries: consumer, commercial and specialty small appliances and specialty retail. The Company manages its subsidiaries primarily by segment.
Hamilton Beach Brands Inc. (“HBB”)Holding Company has not guaranteed any obligations of its subsidiaries.
HBB is a leading designer, marketer, and distributor of branded, small branded electric household and specialty housewares appliances, as well as commercial products for restaurants, bars, and hotels. The Kitchen Collection, LLC (“KC”) is a nationalHBB operates in the consumer, commercial and specialty retailer of kitchenware operating under stores in outlet and traditional malls throughout the United States.small appliance markets.
On September 29, 2017, NACCO Industries, Inc. ("NACCO"), Hamilton Beach Holding's former parent company, spun-off the Company to NACCO stockholders. In the spin-off, NACCO stockholders, in addition to retaining their shares of NACCO common stock, received one share of Hamilton Beach Brands Holding Company Class A common stock ("Class A Common") and one share of Hamilton Beach Brands Holding Company Class B common stock ("Class B Common") for each share of NACCO Class A or Class B common stock. In accordance with applicable authoritative accounting guidance, the Company accounted for the spin-off from NACCO based on the historical carrying value of assets and liabilities. As a result of the distribution of one share of Hamilton Beach Holding Class A common stockCommon and one share of Hamilton Beach Holding Class B common stockCommon for each share of NACCO Class A or NACCO Class B common stock, the earnings per share amounts for the Company for periods prior to the spin-off have been calculated based upon the number of shares distributed in the spin-off. NACCO did not receive any proceeds from the spin-off.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the financial statements of the Company and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Intercompany balances and transactions have been eliminated.
Prior period non-trade customer receivable amounts of $9.5 million have been reclassified from trade receivables, net to prepaid expenses and other current assets to conform to the current period presentation.
Segment Information
As of December 31, 2019, HBB is the Company’s single reportable operating segment. This is supported by the operational structure of HBB which is designed and managed to share resources across the entire suite of products offered by the business. Such resources include research and development, product design, marketing, operations, and administrative functions. The Company's chief operating decision maker does not regularly review financial information for individual product categories, sales channels, or geographic regions that would allow decisions to be made about allocation of resources or performance. Since the Company operates in one reportable segment, all required financial segment information can be found in the consolidated financial statements.
NOTE 2—Significant Accounting PoliciesNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Discontinued Operations
A component of an entity that is disposed of by sale or abandonment is reported as discontinued operations if the transaction represents a strategic shift that will have a major effect on an entity's operations and financial results. The results of discontinued operations are aggregated and presented separately in the Consolidated Statement of Operations. Assets and liabilities of the discontinued operations are aggregated and reported separately as assets and liabilities of discontinued operations in the Consolidated Balance Sheet, including the comparative prior year period. KC’s cash flows are reflected as cash flows from discontinued operations within the Company’s Consolidated Statements of Cash Flows for each period presented.
Amounts presented in discontinued operations have been derived from our consolidated financial statements and accounting records using the historical basis of assets, liabilities, and historical results of KC. The discontinued operations exclude general corporate allocations.
Use of Estimates:Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principlesGAAP requires management to make estimates and judgments. These estimates and judgmentsassumptions that affect the reported amounts of assets, and liabilities, revenue, expenses and the disclosure of contingent assets and liabilities (if any) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.. Actual results could differ from those estimates.
Cash and Cash Equivalents:Equivalents
Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less.
Accounts Receivable, Net of Allowances:
Trade Receivables
Allowances for doubtful accounts are maintained against accounts receivabletrade receivables for estimated losses resulting from the inability of customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. Accounts are written off against the allowance when it becomes evident collection will not occur.
HBB maintains significant trade receivables balances with several large retail customers. At December 31, 2019 and 2018, receivables from HBB’s five largest customers represented 69% and 57%, respectively, of HBB's net trade receivables. HBB’s significant credit concentration is uncollateralized; however, historically, minimal credit losses have been incurred.
Transfer of Financial Assets: The CompanyAssets
HBB has entered into an arrangement with a financial institution to sell certain U.S. accounts receivabletrade receivables on a non-recourse basis. The CompanyHBB utilizes this arrangement as an integral part of financing working capital. Under the terms of the agreement, the CompanyHBB 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 sales andsold receivables which result in a reduction in accounts receivabletrade receivables because the agreement transfers effective control over and risk related to the receivables to the buyer. Under this arrangement, the CompanyHBB derecognized $162.7 million, $165.4 million, and $164.0 million of trade receivables during 2019, 2018 and $149.3 million of accounts receivable during 2017, and 2016, respectively. The losslosses incurred on sold receivables in the consolidated results of operations for the years ended December 31, 2019, 2018, and 2017 2016, and 2015 waswere not material. The Company does not carry any servicing assets or liabilities. Cash proceeds from this arrangement are reflected as operating activities.
Inventories: HBB inventories are
Inventory
Inventory is stated at the lower of cost or net realizable value. Thevalue with cost determined under the first-in, first-out (“FIFO”) method is used for HBB's inventory. KC retail inventories are stated at the lower of cost or market using the retail inventory method. Adjustments to the carrying value are recorded for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated marketnet realizable value based upon assumptions about future demand and market conditions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Long-Lived Assets: The Company periodically evaluates long-lived assets for impairment when changes in circumstances or the occurrence of certain events indicate the carrying amount of an asset may not be recoverable. Upon identification of indicators of impairment, the Company evaluates the carrying value of the asset by comparing the estimated future undiscounted cash flows generated from the use of the asset and its eventual disposition with the asset’s net carrying value. If the carrying value of an asset is considered impaired, an impairment charge is recorded for the amount that the carrying value of the long-lived asset exceeds its fair value. Fair value is estimated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Property, Plant and Equipment Net:
Property, plant and equipment are initially recordedmeasured at cost.cost less accumulated depreciation, amortization and accumulated impairment losses. Depreciation and amortization are provided in amounts sufficient to amortize the cost of the assets, over their estimated useful livesrecorded generally using the straight-line method.method over the estimated useful lives of the assets. Estimated lives for buildings are up to 40 years, and for machinery, equipment and furniture and fixtures range from three to seven years. Leasehold improvements are depreciated over the shorter of the estimated useful life or the term of the lease. The units-of-production method is used to amortize certain tooling for sourced products. Costs incurred to develop software for internal use are capitalized and amortized over the estimated useful life of the software. Gains or losses from the sale of assets are included in selling, general and administrative expenses. Repairs and maintenance costs are generally expensed whencharged to expense as incurred. Interest is capitalized for qualifying long-term capital asset projects as a part of the historical cost of acquiring the asset.
The Company evaluates long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset. Fair value is estimated at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Goodwill and Intangible Assets: Assets
Goodwill represents the excess of the purchase price of all acquisitions over the estimated fair value of the net assets acquired. Goodwill is testednot amortized but evaluated at least annually for impairment. The Company conducts its annual test for impairment as of October 1 of each year and it may be testedconducted more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. Using a qualitative assessment in the current year, wethe Company determined that it was not more-likely-than-not that the goodwill was impaired and a quantitative test for impairment was not required.
Intangible assets with finite lives are amortized over their estimated useful lives, which represent the period over which the asset is expected to contribute directly or indirectly to future cash flows. Intangible assets with finite lives are reviewed for impairment whenever events and circumstances indicate the carrying value of such assets may not be recoverable and exceed their fair value. If an impairment loss exists, the carrying amount of the intangible asset is adjusted to a new cost basis. The new cost basis is amortized over the remaining useful life of the asset. As of December 31, 2017, 2016, and 2015, no
No impairment has been recognized onfor identifiable intangible assets or goodwill.goodwill for any period presented.
Self-insurance Liabilities: The Company is generally self-insuredEnvironmental Liabilities
HBB and environmental consultants are investigating or remediating historical environmental contamination at some current and former sites operated by HBB or by businesses it acquired. Liabilities for product liability, environmental liability, medical claims, and certain workers’ compensation claims. For product liability, catastrophic insurance coverage is retained for potentially significant individual claims. An estimated provision for claims reported and for claims incurred but not yet reported under the self-insurance programs ismatters are recorded and revised periodically based on industry trends, historical experience and management judgment. In addition, industry trends are considered within management's judgment for valuing claims. Changes in assumptions for such matters as legal judgments and settlements, inflation rates, medical costs and actual experience could cause estimates to change in the near term.
Revenue Recognition: Revenues are recognizedperiod when title transfersit is determined to be probable and riskreasonably estimable that the Company will incur costs. When only a range of loss passes toamounts is reasonably estimable and no amount within the customer. Revenues at HBB are recognized when customer orders are completed and shipped. Revenues at KC are recognized atrange is more probable than another, the point of sale when payment is made and customers take possessionCompany records the low end of the merchandiserange. Environmental liabilities are recorded on an undiscounted basis and recorded in stores.
HBB products are not sold with the rightselling, general, and administrative expenses. When recovery of return. Based on the Company’s historical experience, a portion of KC and HBB products soldan environmental liability is probable, such amounts are estimated to be returned due to reasons such as buyer remorse, duplicate gifts received, product failure and excess inventory stocked by the customer, which, subject to certain terms and conditions, the Company will agree to accept. The Company records estimated reductions to revenues at the time of the sale based upon this historical experience and the limited right of return provided to the Company’s customers.
The Company also records estimated reductions to revenues for customer programs and incentive offerings, including special pricing agreements, price competition, promotions and other volume-based incentives. At HBB, revenues represent gross sales less cooperative advertising, other volume-based incentives, estimated returns and allowances. At KC, retail markdowns are incorporated into KC’s retail method of accounting for cost of sales.
Advertising Costs: Advertising costs, except for direct response advertising, are expensed as incurred. Total advertising expense was $26.9 million, $22.7 million, and $21.8 million in 2017, 2016, and 2015 respectively. Included in these advertising costs are amounts related to cooperative advertising programs at HBB that are recordedrecognized as a reduction of revenuesto selling, general, and administrative expenses and included in the Consolidated Statements of Operations as related revenues are recognized. Direct response advertising, which consists primarily of costs to produce television commercials for HBB products, is capitalizedprepaid expenses and amortized over the expected period of future benefits. Noother current assets related to direct response advertising were capitalized at December 31, 2017, 2016, or 2015.(current portion) and other non-current assets until settled.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Revenue Recognition
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. Sales taxes are excluded from revenue. At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service that is distinct. The Company has elected to account for shipping and handling activities performed after a customer obtains control of the goods as activities to fulfill the promise to transfer the goods, and therefore these activities are not assessed as a separate service to customers. 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 determine whether price concessions offered to its customers are a reduction of the transaction price and revenue or are advertising expense, depending on whether we receive a distinct good or service from our customers and, if so, whether we can reasonably estimate the fair value of that distinct good or service. We evaluated such agreements with our customers and determined they should be accounted for as variable consideration. As of December 31, 2019, we have determined that customer price concessions recorded as a reduction of revenue, certain of which were previously recorded in other current liabilities, meet all of the criteria specified in ASC 210-20, "Balance Sheet Offsetting". Accordingly, amounts related to such arrangements have been classified as a reduction of trade receivables, net as of December 31, 2019 (prior periods have not been adjusted as all the criteria in ASC 210-20 had not previously been met).
To estimate variable consideration, the Company applies both the expected value method and most likely amount method based on the form of variable consideration, according to which method would provide the better prediction. The expected value method involves a probability weighted determination of the expected amount, whereas the most likely amount method identifies the single most likely outcome in a range of possible amounts.
Product Development Costs:Costs
Expenses associated with the development of new products and changes to existing products are charged to expense as incurred. These costs, included in selling, general and administrative expenses, amounted to $12.1 million, $11.0 million, and $10.4 million $9.7 million,in 2019, 2018, and $9.6 million in 2017, 2016, and 2015, respectively.
Shipping and Handling Costs: Shipping and handling costs billed to customers are recognized as revenue and shipping and handling costs incurred by the Company are included in cost of sales.
Taxes Collected from Customers and Remitted to Governmental Authorities: The Company collects various taxes and fees as an agent in connection with the sale of products and remits these amounts to the respective taxing authorities. These taxes and fees have been presented on a net basis in the Consolidated Statements of Operations and are recorded as a liability until remitted to the respective taxing authority.Foreign Currency
Foreign Currency:
Assets and liabilities of foreign operations are translated into U.S. dollars at the fiscal year-end exchange rate. The related translation adjustments are recorded as a separate component of stockholders’ equity. RevenuesRevenue and expenses of all foreign operations are translated using average monthly exchange rates prevailing during the year. The related translation adjustments, including translation on long-term intra-entity foreign currency transactions, are recorded as a separate component of stockholders’ equity.
Financial Instruments and Derivative Financial Instruments:
Financial instruments held by the Company include cash and cash equivalents, accounts receivable,trade receivables, accounts payable, revolving credit agreements, interest rate swap agreements and forward foreign currency exchange contracts. The Company does not hold or issue financial instruments or derivative financial instruments for trading purposes. Interest rate swap agreements and forward foreign currency exchange contracts held by the Company have been designated as hedges of forecasted cash flows. The Company holds these derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one institution. The Company does not currently hold any nonderivative instruments designated as hedges or any derivatives designated as fair value hedges.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The Company uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies. The Company offsets fair value amounts related to foreign currency exchange contracts executed with the same counterparty. These contracts hedge firm commitments and forecasted transactions relating to cash flows associated with sales and purchases denominated in currencies other than the subsidiaries’ functional currencies. Changes in the fair value of forward foreign currency exchange contracts that are effective as hedges are recorded in Accumulated Other Comprehensive Income (Loss)accumulated other comprehensive income (loss) (“AOCI”). Deferred gains or losses are reclassified from AOCI to the Consolidated Statements of Operations in the same period as the gains or losses from the underlying transactions are recorded and are generally recognized in cost of sales. The ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings and generally recognized in cost of sales.
The Company uses interest rate swap agreements to partially reduce risks related to floating rate financing agreements that are subject to changes in the market rate of interest. Terms of the interest rate swap agreements require the Company to receive a variable interest rate and pay a fixed interest rate. The Company’s interest rate swap agreements and its variable rate financings are predominately based upon LIBOR (London Interbank Offered Rate). Changes in the fair value of interest rate swap agreements that are effective as hedges are recorded in AOCI. Deferred gains or losses are reclassified from AOCI to the Consolidated Statements of Operations in the same period as the gains or losses from the underlying transactions are recorded and are generally recognized in interest expense.expense, net. The ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings and included on the line “Other, net, includingin interest income” in the “Other expense” section of the Consolidated Statements of Operations.
Interest rate swap agreements and forward foreign currency exchange contracts held by the Company have been designated as hedges of forecasted cash flows. The Company does not currently hold any nonderivative instruments designated as hedges or any derivatives designated as fair value hedges.
expense, net. The Company periodically enters into foreign currency exchange contracts that do not meet the criteria for hedge accounting. These derivatives are used to reduce the Company’s exposure to foreign currency risk related to forecasted purchase or sales transactions or forecasted intercompany cash payments or settlements. Gains and losses on these derivatives are included on the line “Other, net, including interest income” in the “Other income (expense)” section of the Consolidated Statements of Operations.other expense, net.
Cash flows from hedging activities are reported in the Consolidated Statements of Cash Flows in the same classification as the hedged item, generally as a component of cash flows from operations.
See Note 7 for further discussion of derivative financial instruments.
Fair Value Measurements: Measurements
The Company accounts fordefines the fair value measurement of its financial assets and liabilities in accordance with U.S. generally accepted accounting principles, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
A fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
Described below are the three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3 - Unobservable inputs are used when little or no market data is available.
The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The classification of fair value measurements within the hierarchy is based upon the lowest level of input that is significant to the measurement.
See Note 8
Stock Compensation
Pursuant to the Executive Long-Term Equity Incentive Plan (the "Executive Plan") established in September 2017, the Company grants stock of Class A Common, subject to transfer restrictions, as a means of retaining and rewarding selected employees for further discussionlong-term performance. Stock awarded under the Executive Plan are fully vested and entitle the stockholder to all rights of common stock ownership except that shares may not be assigned, pledged or otherwise transferred during the restriction period. In general, the restriction period ends after three, five or ten years from the award date or at the earliest of (i) three years after the participant's retirement date, or (ii) the participant's death or permanent disability. The Company issued 118,688 and 5,512 shares of stock of Class A Common in the years ended December 31, 2019 and 2018, respectively. No stock was issued in the year ended December 31, 2017 under the Executive Plan. Stock compensation expense related to the Executive Plan was $1.6 million and $2.7 million for the years ended December 31, 2019 and 2018, respectively, and was based on the fair value measurements.of Class A Common on the grant date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Treasury Stock
The Company records the aggregate purchase price of treasury stock at cost and includes treasury stock as a reduction to stockholders' equity.
Income Taxes
Tax law requires certain items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible for tax purposes, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities using currently enacted tax rates. The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date. Management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted law and tax rates for the appropriate tax jurisdictions to determine the amount of such deferred tax assets and liabilities. Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances, including statutory income tax rate changes, statutory tax law changes, or changes in the Company's structure or tax status.
The Company's tax assets, liabilities, and tax expense are supported by historical earnings and losses and the Company's best estimates and assumptions of future earnings. The Company assesses whether a valuation allowance should be established against the Company's deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates the Company is using to manage the underlying businesses. When the Company determines, based on all available evidence, that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established.
Accounting Standards Adopted
In March 2017, the FASB issued ASU 2017-07, "Compensation - Retirement Benefits (Topic 715)," which amends the requirements in GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity's sponsored defined benefit pension and other post-retirement plans. The Company adopted this guidance on January 1, 2019. The change in presentation of the components of net periodic pension cost was applied retrospectively which resulted in $0.7 million and $0.9 million of net periodic pension income for the years end December 31, 2018, and 2017, respectively, being reclassified from selling, general and administrative expenses to other expense (income), net.
Accounting Standards Not Yet Adopted: 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 private companies,nonpublic entities, the Company can adopt the new or revised standard at the time private companiesnonpublic entities adopt the new or revised standard.
In May 2014, the FASB codified in ASC 606, "Revenue Recognition - Revenue from Contracts with Customers," which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers and provide additional disclosures. The effective date for nonpublic entities is annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. The Company will adopt the standard on January 1, 2018.
The Company will use the modified retrospective method with the cumulative effect of initially applying the standard recognized as an adjustment to equity. The Company completed the execution of its project plan with respect to its implementation of this standard, including identification of revenue streams and review of contracts and procedures currently in place. Hamilton Beach Holding’s revenue is primarily generated from the sale of finished product to customers. Those sales are recognized at a single point in time when ownership, risks and rewards transfer. The amount and timing of revenue recognition is not materially impacted by the new standard, thus no cumulative adjustment will be recognized upon adoption. As the amount and timing of revenue recognition is not materially impacted by the new standard, the adoption of the standard is not expected to have a material impact to the Company’s financial position, results of operations or cash flows. The adoption of this guidance will result in increased disclosures to help users of financial statements understand the nature, amount and timing of revenue and cash flows arising from contracts.
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 effective for fiscal years beginning after December 15, 2019,2020, and interim periods within fiscal years beginning after December 15, 2020.2021. Early adoption is permitted. The Company is planning to adopt ASU 2016-02 for its fiscal year ending December 31, 20202021 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
In February 2018,June 2016, the FASB issued ASU 2018-02, "Income Statement2016-13, “Financial Instruments - Reporting Comprehensive IncomeCredit Losses (Topic 220)326),". The guidance in ASU 2018-02 allows which requires an entity to elect to reclassifyrecognize credit losses as an allowance rather than as a write-down. For nonpublic entities, the stranded tax effects related to the Tax Cuts and Jobs Act (the "Tax Act") of 2017 from accumulated other comprehensive income into retained earnings. ASU 2018-02 isamendments are effective for fiscal years beginning after December 15, 2018, with early2021, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating when it willplanning to adopt ASU 2018-022016-03 for its year ending December 31, 2022 and how andis currently evaluating to what extent ASU 2018-022016-13 will affect the Company's financial position, results of operations, cash flows and related disclosures.
NOTE 2 - Restatement of Previously Issued Consolidated Financial Statements
Restatement
During the quarter ended March 31, 2020, the Company discovered certain accounting irregularities at its Mexican subsidiaries. The Company’s Audit Review Committee commenced an internal investigation, with the assistance of outside counsel and other third party experts. As a result of this investigation, the Company, along with the Audit Review Committee and its third party experts, concluded that certain former employees of one of the Company’s Mexican subsidiaries engaged in unauthorized transactions with the Company’s Mexican subsidiaries that resulted in expenditures being deferred on the balance sheet beyond the period for which the costs pertained. As a result, the Company recorded a non-cash write-off for certain amounts included in the Company’s historical consolidated financial statements in trade receivables and prepaid expenses and other current assets, among other corrections, related to these transactions, and restated its consolidated financial statements as of and for the years ended December 31, 2019, 2018, and 2017 and each of the quarters during the years ended December 31, 2019 and 2018. During the course of the investigation, certain expenses at the Company's Mexican subsidiaries were found to be incorrectly classified within the consolidated statement of operations and have also been corrected in the restatement. These misstatements are described in restatement reference (a) through (d) below. The restated interim financial information for the relevant unaudited interim financial information for the quarterly periods of 2019 and 2018, is included in Note 16, Quarterly Results of Operations (Unaudited).
The restatement also includes corrections for other errors identified as immaterial, individually and in the aggregate, to our consolidated financial statements.
Description of Misstatements
(a) Write-off of Assets: Certain former employees of one of the Company's Mexican subsidiaries engaged in unauthorized transactions with the Company’s Mexican subsidiaries and vendors in which the employees had an interest. In doing so, expenditures were deferred on the balance sheet beyond the period for which the costs pertained. The amounts were recorded as trade receivables, prepaid expenses and other current assets, and reductions in accrued liabilities. The amounts have been written off to selling, general and administrative expenses. Where these write-offs caused the balance in prepaid expenses and other current assets to become a liability, the balance has been reclassified from prepaid expenses and other assets to other current liabilities.
(b) Reversal of Revenue: Certain former employees of one of our Mexican subsidiaries engaged in sales activities to customers in which the employees had an interest. The Company concluded that these unauthorized transactions did not meet the criteria for revenue recognition at the time of sale and the revenue has been reversed.
(c) Correction of misclassification of Selling and Marketing Expenses: Certain former employees of one of our Mexican subsidiaries engaged a third-party, in which the employees had an interest, to perform selling and marketing activities on behalf of the Mexican subsidiaries. Amounts paid for the selling and marketing activities had previously been treated as variable consideration and reflected as a reduction to revenue; however, the amounts should be reflected as selling, general and administrative expenses.
(d) Correction for the timing of recognition of customer price concessions: Customer price concessions at our Mexican subsidiaries were not accrued timely in order to obscure the increased expenses due to unauthorized transactions as described above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
(e) Tax adjustments for corrections: The tax impacts of the corrections have been recorded.
(f) Correction of other immaterial errors
Description of Restatement Tables
The following tables present the impact of the restatement on our previously reported consolidated statements of operations, statements of comprehensive income (loss), balance sheets, statements of equity, and statements of cash flows for the years ended December 31, 2019 and December 31, 2018 and the impact of the restatement on our previously reported consolidated statements of operations, statements of comprehensive income (loss), statements of equity, and statements of cash flows for the year ended December 31, 2017. The values as previously reported were derived from our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed on February 26, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 3—InventoriesCONSOLIDATED STATEMENTS OF OPERATIONS |
| | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| As Previously Reported | | Restatement Impacts | | Restatement References | | As Restated |
| (In thousands, except per share data) |
Revenue | $ | 612,843 |
| | $ | (1,057 | ) | | a,b,c,d,f | | $ | 611,786 |
|
Cost of sales | 483,298 |
| | (64 | ) | | f | | 483,234 |
|
Gross profit | 129,545 |
| | (993 | ) | |
| | 128,552 |
|
Selling, general and administrative expenses | 91,302 |
| | 9,079 |
| | a,c,f | | 100,381 |
|
Amortization of intangible assets | 1,377 |
| | — |
| |
| | 1,377 |
|
Operating profit | 36,866 |
| | (10,072 | ) | |
| | 26,794 |
|
Interest expense, net | 2,975 |
| | — |
| |
| | 2,975 |
|
Other expense (income), net | (502 | ) | | 144 |
| | f | | (358 | ) |
Income from continuing operations before income taxes | 34,393 |
| | (10,216 | ) | |
| | 24,177 |
|
Income tax expense | 9,315 |
| | (231 | ) | | e | | 9,084 |
|
Net income from continuing operations | 25,078 |
| | (9,985 | ) | |
| | 15,093 |
|
Loss from discontinued operations, net of tax | (28,600 | ) | | — |
| |
| | (28,600 | ) |
Net income (loss) | $ | (3,522 | ) | | $ | (9,985 | ) | |
| | $ | (13,507 | ) |
|
| |
| |
| |
|
Basic and diluted earnings (loss) per share: |
|
| |
|
| |
| |
|
|
Continuing operations | $ | 1.83 |
| | $ | (0.73 | ) | |
| | $ | 1.10 |
|
Discontinued operations | (2.09 | ) | | — |
| |
| | (2.09 | ) |
Basic and diluted earnings (loss) per share | $ | (0.26 | ) | | $ | (0.73 | ) | |
| | $ | (0.99 | ) |
|
|
| |
|
| |
| |
|
|
Basic weighted average shares outstanding | 13,690 |
| |
|
| |
| | 13,690 |
|
Diluted weighted average shares outstanding | 13,726 |
| |
|
| |
| | 13,726 |
|
(a) Write-off of Assets: The correction of these misstatements resulted in a decrease to revenue of $0.4 million and an increase to selling, general and administrative ("SG&A") expense of $6.9 million
(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to revenue of $1.1 million
(c) Correction of misclassification of Selling and Marketing Expenses: The correction of these misstatements resulted in an increase to revenue and an increase to SG&A expense of $1.6 million
(d) Correction for the timing of recognition of customer price concessions: The correction of these misstatements resulted in a decrease to revenue of $1.3 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in a decrease to income tax expense of $0.2 million
(f) Correction of other immaterial errors: The correction of these misstatements resulted in an increase to revenue of $0.1 million, a decrease to cost of sales of $0.1 million, an increase to SG&A expense of $0.6 million, and an increase in other expense of $0.1 million
Inventories are summarized as follows: |
| | | | | | | |
| December 31 |
| 2017 | | 2016 |
Sourced inventories - HBB | $ | 111,493 |
| | $ | 95,008 |
|
Retail inventories - KC | 23,251 |
| | 33,407 |
|
Total inventories | $ | 134,744 |
| | $ | 128,415 |
|
NOTE 4—Property, Plant and Equipment, Net
Property, plant and equipment, net includes the following: |
| | | | | | | |
| December 31 |
| 2017 | | 2016 |
Real estate: | | | |
HBB | $ | 226 |
| | $ | 226 |
|
Plant and equipment: | | | |
HBB | 59,024 |
| | 53,495 |
|
KC | 25,560 |
| | 25,149 |
|
| 84,584 |
| | 78,644 |
|
Property, plant and equipment, at cost | 84,810 |
| | 78,870 |
|
Less allowances for depreciation and amortization | 65,727 |
| | 62,927 |
|
| $ | 19,083 |
| | $ | 15,943 |
|
Total depreciation and amortization expense on property, plant and equipment was $4.2 million, $4.8 million, and $4.9 million during 2017, 2016, and 2015, respectively.
NOTE 5—Intangible Assets
Intangible assets other than goodwill, which are subject to amortization, consist of the following:
|
| | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Balance |
Balance at December 31, 2017 | | | | | |
HBB: | | | | | |
Customer relationships | $ | 5,760 |
| | $ | (2,920 | ) | | $ | 2,840 |
|
Trademarks | 3,100 |
| | (608 | ) | | 2,492 |
|
Other intangibles | 1,240 |
| | (672 | ) | | 568 |
|
| $ | 10,100 |
| | $ | (4,200 | ) | | $ | 5,900 |
|
| | | | | |
Balance at December 31, 2016 | | | | | |
HBB: | | | | | |
Customer relationships | $ | 5,760 |
| | $ | (1,960 | ) | | $ | 3,800 |
|
Trademarks | 3,100 |
| | (408 | ) | | 2,692 |
|
Other intangibles | 1,240 |
| | (450 | ) | | 790 |
|
| $ | 10,100 |
| | $ | (2,818 | ) | | $ | 7,282 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| As Previously Reported | | Restatement Impacts | | Restatement References | | As Restated |
Revenue | $ | 629,710 |
| | $ | 372 |
| | c,f | | $ | 630,082 |
|
Cost of sales | 492,195 |
| | (1,165 | ) | | f | | 491,030 |
|
Gross profit | 137,515 |
| | 1,537 |
| | | | 139,052 |
|
Selling, general and administrative expenses | 97,964 |
| | 6,157 |
| | a,c,f | | 104,121 |
|
Amortization of intangible assets | 1,381 |
| | — |
| | | | 1,381 |
|
Operating profit | 38,170 |
| | (4,620 | ) | | | | 33,550 |
|
Interest expense, net | 2,916 |
| | — |
| | | | 2,916 |
|
Other expense (income), net | 293 |
| | (144 | ) | | f | | 149 |
|
Income from continuing operations before income taxes | 34,961 |
| | (4,476 | ) | | | | 30,485 |
|
Income tax expense | 7,816 |
| | (390 | ) | | e | | 7,426 |
|
Net income from continuing operations | 27,145 |
| | (4,086 | ) | | | | 23,059 |
|
Loss from discontinued operations, net of tax | (5,361 | ) | | — |
| | | | (5,361 | ) |
Net income (loss) | $ | 21,784 |
| | $ | (4,086 | ) | | | | $ | 17,698 |
|
|
| |
|
| | | |
|
Basic and diluted earnings (loss) per share: |
|
| |
|
|
| | | |
|
|
Continuing operations | $ | 1.98 |
| | $ | (0.30 | ) | | | | $ | 1.68 |
|
Discontinued operations | (0.39 | ) | | — |
| | | | (0.39 | ) |
Basic and diluted earnings (loss) per share | $ | 1.59 |
| | $ | (0.30 | ) | | | | $ | 1.29 |
|
|
|
| |
|
|
| | | |
|
|
Basic weighted average shares outstanding | 13,699 |
| |
|
| | | | 13,699 |
|
Diluted weighted average shares outstanding | 13,731 |
| |
|
| | | | 13,731 |
|
(a) Write-off of Assets: The correction of these misstatements resulted in an increase to selling, general and administrative ("SG&A") expense of $4.9 million
(c) Correction of misclassification of Selling and Marketing Expenses: The correction of these misstatements resulted in an increase to revenue and an increase to SG&A expense of $1.5 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in a decrease to income tax expense of $0.4 million
(f) Correction of other immaterial errors: The correction of these misstatements resulted in a decrease to revenue of $1.1 million, a decrease to cost of sales of $1.2 million, a decrease to SG&A expense of $0.2 million, and a decrease in other expense of $0.1 million
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | | | | | | | | | | | |
| Year Ended December 31, 2017 |
| As Previously Reported | | Restatement Impacts | | Restatement References | | As Restated |
Revenue | $ | 612,229 |
| | $ | (173 | ) | | c,d,f | | $ | 612,056 |
|
Cost of sales | 477,220 |
| | (1,281 | ) | | f | | 475,939 |
|
Gross profit | 135,009 |
| | 1,108 |
| | | | 136,117 |
|
Selling, general and administrative expenses | 93,700 |
| | 3,080 |
| | a,c,f | | 96,780 |
|
Amortization of intangible assets | 1,381 |
| | — |
| | | | 1,381 |
|
Operating profit | 39,928 |
| | (1,972 | ) | | | | 37,956 |
|
Interest expense, net | 1,572 |
| | — |
| | | | 1,572 |
|
Other expense (income), net | (692 | ) | | — |
| | | | (692 | ) |
Income from continuing operations before income taxes | 39,048 |
| | (1,972 | ) | | | | 37,076 |
|
Income tax expense | 18,918 |
| | 49 |
| | e | | 18,967 |
|
Net income from continuing operations | 20,130 |
| | (2,021 | ) | | | | 18,109 |
|
Loss from discontinued operations, net of tax | (2,225 | ) | | — |
| | | | (2,225 | ) |
Net income (loss) | $ | 17,905 |
| | $ | (2,021 | ) | | | | $ | 15,884 |
|
|
| |
|
| | | |
|
Basic and diluted earnings (loss) per share: |
|
| |
|
|
| | | |
|
|
Continuing operations | $ | 1.47 |
| | $ | (0.15 | ) | | | | $ | 1.32 |
|
Discontinued operations | (0.16 | ) | | — |
| | | | (0.16 | ) |
Basic and diluted earnings (loss) per share | $ | 1.31 |
| | $ | (0.15 | ) | | | | $ | 1.16 |
|
|
|
| |
|
|
| | | |
|
|
Basic weighted average shares outstanding | 13,673 |
| |
|
| | | | 13,673 |
|
Diluted weighted average shares outstanding | 13,685 |
| |
|
| | | | 13,685 |
|
(a) Write-off of Assets: The correction of these misstatements resulted in an increase to selling, general and administrative ("SG&A") expense of $1.3 million
(c) Correction of misclassification of Selling and Marketing Expenses: The correction of these misstatements resulted in an increase to revenue and an increase to SG&A expense of $1.6 million
(d) Correction for the timing of recognition of customer price concessions: The correction of these misstatements resulted in a decrease to revenue of $0.3 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to income tax expense of $0.1 million
(f) Correction of other immaterial errors: The correction of these misstatements resulted in a decrease to revenue of $1.5 million, a decrease to cost of sales of $1.3 million, and an increase to SG&A expense of $0.2 million
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| | | | | | | | | | | |
| Year Ended December 31, 2019 |
| As Previously Reported | | Restatement Impacts | | As Restated |
| (In thousands) |
Net income (loss) | $ | (3,522 | ) | | $ | (9,985 | ) | | $ | (13,507 | ) |
Other comprehensive income (loss), net of tax: |
|
| | — |
| |
|
|
Foreign currency translation adjustment | 1,101 |
| | (591 | ) | | 510 |
|
(Loss) gain on long-term intra-entity foreign currency transactions | (79 | ) | | — |
| | (79 | ) |
Cash flow hedging activity | (1,713 | ) | | 144 |
| | (1,569 | ) |
Reclassification of hedging activities into earnings | 349 |
| | — |
| | 349 |
|
Pension plan adjustment | 1,410 |
| | — |
| | 1,410 |
|
Reclassification of pension adjustments into earnings | 254 |
| | 94 |
| | 348 |
|
Total other comprehensive income (loss), net of tax | 1,322 |
| | (353 | ) | | 969 |
|
Comprehensive income (loss) | $ | (2,200 | ) | | $ | (10,338 | ) | | $ | (12,538 | ) |
See description of the net income (loss) impacts in the consolidated statement of operations for the year ended December 31, 2019 section above.
The decrease to foreign currency translation adjustments is the result of the translation impacts of restatements in the write-off of assets, reversal of revenue and timing of recognition of customer pricing concessions categories.
The increases to cash flow hedging and the reclassification of pension adjustments are from the correction of other immaterial errors.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| | | | | | | | | | | |
| Year Ended December 31, 2018 |
| As Previously Reported | | Restatement Impacts | | As Restated |
Net income (loss) | $ | 21,784 |
| | $ | (4,086 | ) | | $ | 17,698 |
|
Other comprehensive income (loss), net of tax: |
|
| | — |
| |
|
|
Foreign currency translation adjustment | (159 | ) | | 86 |
| | (73 | ) |
(Loss) gain on long-term intra-entity foreign currency transactions | (1,006 | ) | | — |
| | (1,006 | ) |
Cash flow hedging activity | 244 |
| | (144 | ) | | 100 |
|
Reclassification of hedging activities into earnings | 153 |
| | — |
| | 153 |
|
Pension plan adjustment | (1,920 | ) | | — |
| | (1,920 | ) |
Reclassification of pension adjustments into earnings | 650 |
| | (94 | ) | | 556 |
|
Total other comprehensive loss, net of tax | (2,038 | ) | | (152 | ) | | (2,190 | ) |
Comprehensive income (loss) | $ | 19,746 |
| | $ | (4,238 | ) | | $ | 15,508 |
|
See description of the net income (loss) impacts in the consolidated statement of operations for the year ended December 31, 2018 section above.
The increase to foreign currency translation adjustments is the result of the translation impacts of restatements in the write-off of assets category.
The decreases to cash flow hedging and the reclassification of pension adjustments are from the correction of other immaterial errors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
| | | | | | | | | | | |
| Year Ended December 31, 2017 |
| As Previously Reported | | Restatement Impacts | | As Restated |
Net income (loss) | $ | 17,905 |
| | $ | (2,021 | ) | | $ | 15,884 |
|
Other comprehensive income (loss), net of tax: |
|
| | — |
| |
|
|
Foreign currency translation adjustment | 689 |
| | (41 | ) | | 648 |
|
(Loss) gain on long-term intra-entity foreign currency transactions | — |
| | — |
| | — |
|
Cash flow hedging activity | (749 | ) | | — |
| | (749 | ) |
Reclassification of hedging activities into earnings | 641 |
| | — |
| | 641 |
|
Pension plan adjustment | 1,510 |
| | — |
| | 1,510 |
|
Reclassification of pension adjustments into earnings | 306 |
| | — |
| | 306 |
|
Total other comprehensive income (loss), net of tax | 2,397 |
| | (41 | ) | | 2,356 |
|
Comprehensive income (loss) | $ | 20,302 |
| | $ | (2,062 | ) | | $ | 18,240 |
|
See description of the net income (loss) impacts in the consolidated statement of operations for the year ended December 31, 2017 section above.
The decrease to foreign currency translation adjustments is the result of the translation impacts of restatements in the write-off of assets category.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED BALANCE SHEETS |
| | | | | | | | | | | | | |
| December 31, 2019 |
| As Previously Reported |
| Restatement Impacts |
| Restatement Reference |
| As Restated |
| (In thousands) |
Assets | |
| |
|
|
|
|
Current assets | |
| |
|
|
|
|
Cash and cash equivalents | $ | 2,142 |
|
| $ | — |
|
|
|
| $ | 2,142 |
|
Trade receivables, net | 113,781 |
|
| (5,400 | ) |
| a,b,d |
| 108,381 |
|
Inventory | 109,621 |
|
| 185 |
|
| f |
| 109,806 |
|
Prepaid expenses and other current assets | 23,102 |
|
| (11,757 | ) |
| a,b,f |
| 11,345 |
|
Current assets of discontinued operations | 5,383 |
|
| — |
|
|
|
| 5,383 |
|
Total current assets | 254,029 |
|
| (16,972 | ) |
|
|
| 237,057 |
|
Property, plant and equipment, net | 22,324 |
|
| — |
|
|
|
| 22,324 |
|
Goodwill | 6,253 |
|
| — |
|
|
|
| 6,253 |
|
Other intangible assets, net | 3,141 |
|
| — |
|
|
|
| 3,141 |
|
Deferred income taxes | 3,853 |
|
| 2,395 |
|
| e |
| 6,248 |
|
Deferred costs | 10,941 |
|
| — |
|
|
|
| 10,941 |
|
Other non-current assets | 2,085 |
|
| — |
|
|
|
| 2,085 |
|
Non-current assets of discontinued operations | 614 |
|
| — |
|
|
|
| 614 |
|
Total assets | $ | 303,240 |
|
| $ | (14,577 | ) |
|
|
| $ | 288,663 |
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accounts payable | $ | 111,117 |
|
| $ | 231 |
|
| f |
| $ | 111,348 |
|
Accounts payable to NACCO Industries, Inc. | 496 |
|
| — |
|
|
|
| 496 |
|
Revolving credit agreements | 23,497 |
|
| — |
|
|
|
| 23,497 |
|
Accrued compensation | 14,277 |
|
| 750 |
|
| f |
| 15,027 |
|
Accrued product returns | 8,697 |
|
| — |
|
|
|
| 8,697 |
|
Other current liabilities | 12,873 |
|
| (339 | ) |
| a,e |
| 12,534 |
|
Current liabilities of discontinued operations | 29,723 |
|
| — |
|
|
|
| 29,723 |
|
Total current liabilities | 200,680 |
|
| 642 |
|
|
|
| 201,322 |
|
Revolving credit agreements | 35,000 |
|
| — |
|
|
|
| 35,000 |
|
Other long-term liabilities | 12,501 |
|
| 3,574 |
|
| e |
| 16,075 |
|
Total liabilities | 248,181 |
|
| 4,216 |
|
|
|
| 252,397 |
|
Stockholders’ equity |
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share | — |
|
| — |
|
|
|
| — |
|
Class A Common stock, par value $0.01 per share; 9,805 shares issued as of December 31, 2019 | 98 |
|
| — |
|
|
|
| 98 |
|
Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis; 4,076 shares issued as of December 31, 2019 | 41 |
|
| — |
|
|
|
| 41 |
|
Capital in excess of par value | 54,344 |
|
| 165 |
|
| f |
| 54,509 |
|
Treasury stock | (5,960 | ) |
| — |
|
|
|
| (5,960 | ) |
Retained earnings | 22,524 |
|
| (18,814 | ) |
| a,b,d,e,f |
| 3,710 |
|
Accumulated other comprehensive loss | (15,988 | ) |
| (144 | ) |
| a,b,d,e |
| (16,132 | ) |
Total stockholders’ equity | 55,059 |
|
| (18,793 | ) |
|
|
| 36,266 |
|
Total liabilities and stockholders' equity | $ | 303,240 |
|
| $ | (14,577 | ) |
|
|
| $ | 288,663 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
(a) Write-off of Assets: The correction of these misstatements resulted in a decrease to trade receivables of $2.5 million, a reduction to prepaid expenses and other current assets of $12.4 million, and an increase to other current liabilities of $0.9 million
(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to trade receivables of $1.3 million and an increase to prepaid expenses and other current assets of $0.2 million
(d) Correction for the timing of recognition of customer price concessions: The correction of these misstatements resulted in a decrease to trade receivables of $1.6 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to deferred income taxes of $2.4 million, a decrease to other current liabilities of $1.2 million, and an increase to other long-term liabilities of $3.6 million
(f) Correction of other immaterial errors: The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $0.5 million, an increase to inventory of $0.2 million, an increase to accounts payable of $0.2 million, an increase to accrued compensation of $0.7 million, and an increase to capital in excess of par of $0.2 million
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED BALANCE SHEETS |
| | | | | | | | | | | | | |
` | December 31, 2018 |
| As Previously Reported | | Restatement Impacts | | Restatement Reference | | As Restated |
Assets | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | $ | 4,420 |
| | $ | — |
| | | | $ | 4,420 |
|
Trade receivables, net | 100,821 |
| | (2,460 | ) | | a,f | | 98,361 |
|
Inventory | 122,697 |
| | 111 |
| | f | | 122,808 |
|
Prepaid expenses and other current assets | 22,332 |
| | (6,936 | ) | | a | | 15,396 |
|
Current assets of discontinued operations | 27,879 |
| | — |
| | | | 27,879 |
|
Total current assets | 278,149 |
| | (9,285 | ) | |
| | 268,864 |
|
Property, plant and equipment, net | 20,842 |
| | — |
| | | | 20,842 |
|
Goodwill | 6,253 |
| | — |
| | | | 6,253 |
|
Other intangible assets, net | 4,519 |
| | — |
| | | | 4,519 |
|
Deferred income taxes | 5,518 |
| | 276 |
| | e | | 5,794 |
|
Deferred costs | 7,868 |
| | — |
| | | | 7,868 |
|
Other non-current assets | 2,672 |
| | — |
| | | | 2,672 |
|
Non-current assets of discontinued operations | 4,606 |
| | — |
| | | | 4,606 |
|
Total assets | $ | 330,427 |
| | $ | (9,009 | ) | | | | $ | 321,418 |
|
Liabilities and stockholders' equity |
| |
| | | |
|
Current liabilities |
| |
| | | |
|
Accounts payable | $ | 119,264 |
| | $ | 7 |
| | f | | $ | 119,271 |
|
Accounts payable to NACCO Industries, Inc. | 2,416 |
| | — |
| | | | 2,416 |
|
Revolving credit agreements | 11,624 |
| | — |
| | | | 11,624 |
|
Accrued compensation | 15,525 |
| | 353 |
| | f | | 15,878 |
|
Accrued product returns | 10,698 |
| | — |
| | | | 10,698 |
|
Other current liabilities | 24,554 |
| | (1,632 | ) | | a,d,e,f | | 22,922 |
|
Current liabilities of discontinued operations | 22,820 |
| | — |
| | | | 22,820 |
|
Total current liabilities | 206,901 |
| | (1,272 | ) | | | | 205,629 |
|
Revolving credit agreements | 35,000 |
| | — |
| | | | 35,000 |
|
Other long-term liabilities | 21,128 |
| | 883 |
| | e | | 22,011 |
|
Non-current liabilities of discontinued operations | 1,960 |
| | — |
| | | | 1,960 |
|
Total liabilities | 264,989 |
| | (389 | ) | | | | 264,600 |
|
Stockholders’ equity |
| |
| | | |
|
Preferred stock, par value $0.01 per share | — |
| | — |
| | | | — |
|
Class A Common stock, par value $0.01 per share; 9,291 shares issued as of December 31, 2018 | 93 |
| | — |
| | | | 93 |
|
Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis; 4,422 shares issued as of December 31, 2018 | 44 |
| | — |
| | | | 44 |
|
Capital in excess of par value | 51,714 |
| | — |
| | | | 51,714 |
|
Treasury stock | — |
| | — |
| | | | — |
|
Retained earnings | 30,897 |
| | (8,829 | ) | | a,d,e,f | | 22,068 |
|
Accumulated other comprehensive loss | (17,310 | ) | | 209 |
| | a,d,e,f | | (17,101 | ) |
Total stockholders’ equity | 65,438 |
| | (8,620 | ) | | | | 56,818 |
|
Total liabilities and stockholders' equity | $ | 330,427 |
| | $ | (9,009 | ) | | | | $ | 321,418 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
(a) Write-off of Assets: The correction of these misstatements resulted in a decrease to trade receivables of $0.6 million, a reduction to prepaid expenses and other current assets of $6.9 million, and an increase to other current liabilities of $0.6 million
(d) Correction for the timing of recognition of customer price concessions: The correction of these misstatements resulted in an increase to other current liabilities of $0.2 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to deferred income taxes of $0.3 million, a decrease to other current liabilities of $0.4 million, and an increase to other long-term liabilities of $0.9 million
(f) Correction of other immaterial errors: The correction of these misstatements resulted in a decrease to trade receivables of $1.9 million, an increase to inventory of $0.1 million, an increase to accrued compensation of $0.4 million, and a decrease to other current liabilities of $2.0 million
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| Year Ended December 31, 2019 |
| As Previously Reported |
| Restatement Impacts |
| As Restated |
| (In thousands) |
Operating activities | |
| |
|
|
Net income from continuing operations | $ | 25,078 |
|
| $ | (9,985 | ) |
| $ | 15,093 |
|
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization | 4,002 |
|
| — |
|
| 4,002 |
|
Deferred income taxes | 3,248 |
|
| (1,761 | ) |
| 1,487 |
|
Stock compensation expense | 2,632 |
|
| 165 |
|
| 2,797 |
|
Other | 471 |
|
| 145 |
|
| 616 |
|
Net changes in operating assets and liabilities: |
|
|
|
|
|
Affiliate payable | (1,920 | ) |
| — |
|
| (1,920 | ) |
Trade receivables | (25,586 | ) |
| 2,817 |
|
| (22,769 | ) |
Inventory | 13,756 |
|
| (82 | ) |
| 13,674 |
|
Other assets | (3,121 | ) |
| 4,248 |
|
| 1,127 |
|
Accounts payable | (7,257 | ) |
| 214 |
|
| (7,043 | ) |
Other liabilities | (11,101 | ) |
| 4,259 |
|
| (6,842 | ) |
Net cash provided by operating activities from continuing operations | 202 |
|
| 20 |
|
| 222 |
|
Investing activities |
|
|
|
|
|
Expenditures for property, plant and equipment | (4,122 | ) |
| — |
|
| (4,122 | ) |
Other | — |
|
| — |
|
| — |
|
Net cash used for investing activities from continuing operations | (4,122 | ) |
| — |
|
| (4,122 | ) |
Financing activities |
|
|
|
|
|
Net additions (reductions) to revolving credit agreements | 11,873 |
|
| — |
|
| 11,873 |
|
Purchase of treasury stock | (5,960 | ) |
| — |
|
| (5,960 | ) |
Cash dividends paid | (4,851 | ) |
| — |
|
| (4,851 | ) |
Cash dividends to NACCO Industries, Inc. | — |
|
| — |
|
| — |
|
Net cash provided by (used for) financing activities from continuing operations | 1,062 |
|
| — |
|
| 1,062 |
|
Cash flows from discontinued operations |
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities from discontinued operations | 3,953 |
|
| — |
|
| 3,953 |
|
Net cash provided by (used for) investing activities from discontinued operations | 585 |
|
| — |
|
| 585 |
|
Net cash used for financing activities from discontinued operations | (103 | ) |
| — |
|
| (103 | ) |
Cash provided by (used for) discontinued operations | 4,435 |
|
| — |
|
| 4,435 |
|
Effect of exchange rate changes on cash | (765 | ) |
| (20 | ) |
| (785 | ) |
Cash and Cash Equivalents |
|
|
|
|
|
(Decrease) increase for the year from continuing operations | (3,623 | ) |
| — |
|
| (3,623 | ) |
Increase (decrease) for the year from discontinued operations | 4,435 |
|
| — |
|
| 4,435 |
|
Balance at the beginning of the year | 6,352 |
|
| — |
|
| 6,352 |
|
Balance at the end of the year | $ | 7,164 |
|
| $ | — |
|
| $ | 7,164 |
|
See description of the net income impacts in the consolidated statement of operations for the year ended December 31, 2019 section above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The only impact of the corrections for misstatements on net cash provided by operating activities from continuing operations was due to the effect of exchange rate changes on cash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| Year Ended December 31, 2018 |
| As Previously Reported | | Restatement Impacts | | As Restated |
Operating activities | | | | | |
Net income from continuing operations | $ | 27,145 |
| | $ | (4,086 | ) | | $ | 23,059 |
|
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: |
| |
| |
|
Depreciation and amortization | 4,277 |
| | — |
| | 4,277 |
|
Deferred income taxes | 5,185 |
| | 289 |
| | 5,474 |
|
Stock compensation expense | 3,618 |
| | — |
| | 3,618 |
|
Other | 868 |
| | (31 | ) | | 837 |
|
Net changes in operating assets and liabilities: |
| |
| |
|
Affiliate payable | (5,300 | ) | | — |
| | (5,300 | ) |
Trade receivables | 16,298 |
| | 2,231 |
| | 18,529 |
|
Inventory | (12,308 | ) | | 53 |
| | (12,255 | ) |
Other assets | (10,509 | ) | | 5,923 |
| | (4,586 | ) |
Accounts payable | (7,756 | ) | | 37 |
| | (7,719 | ) |
Other liabilities | (4,195 | ) | | (3,784 | ) | | (7,979 | ) |
Net cash provided by operating activities from continuing operations | 17,323 |
| | 632 |
| | 17,955 |
|
Investing activities |
| |
| |
|
Expenditures for property, plant and equipment | (7,759 | ) | | — |
| | (7,759 | ) |
Other | — |
| | — |
| | — |
|
Net cash used for investing activities from continuing operations | (7,759 | ) | | — |
| | (7,759 | ) |
Financing activities |
| |
| |
|
Net additions (reductions) to revolving credit agreements | (4,597 | ) | | — |
| | (4,597 | ) |
Purchase of treasury stock | — |
| | — |
| | — |
|
Cash dividends paid | (4,658 | ) | | — |
| | (4,658 | ) |
Cash dividends to NACCO Industries, Inc. | — |
| | — |
| | — |
|
Net cash provided by (used for) financing activities from continuing operations | (9,255 | ) | | — |
| | (9,255 | ) |
Cash flows from discontinued operations |
|
| | — |
| |
|
|
Net cash provided by (used for) operating activities from discontinued operations | (5,499 | ) | | — |
| | (5,499 | ) |
Net cash provided by (used for) investing activities from discontinued operations | (305 | ) | | — |
| | (305 | ) |
Net cash used for financing activities from discontinued operations | — |
| | — |
| | — |
|
Cash provided by (used for) discontinued operations | (5,804 | ) | | — |
| | (5,804 | ) |
Effect of exchange rate changes on cash | 941 |
| | (632 | ) | | 309 |
|
Cash and Cash Equivalents |
| |
| |
|
(Decrease) increase for the year from continuing operations | 1,250 |
| | — |
| | 1,250 |
|
Increase (decrease) for the year from discontinued operations | (5,804 | ) | | — |
| | (5,804 | ) |
Balance at the beginning of the year | 10,906 |
| | — |
| | 10,906 |
|
Balance at the end of the year | $ | 6,352 |
| | $ | — |
| | $ | 6,352 |
|
See description of the net income impacts in the consolidated statement of operations for the year ended December 31, 2018 section above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The only impact of the corrections for misstatements on net cash provided by operating activities from continuing operations was due to the effect of exchange rate changes on cash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| Year Ended December 31, 2017 |
| As Previously Reported | | Restatement Impacts | | As Restated |
Operating activities | | | | | |
Net income from continuing operations | $ | 20,130 |
| | $ | (2,021 | ) | | $ | 18,109 |
|
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: |
| |
| |
|
Depreciation and amortization | 4,072 |
| | — |
| | 4,072 |
|
Deferred income taxes | 4,107 |
| | (632 | ) | | 3,475 |
|
Stock compensation expense | 323 |
| | — |
| | 323 |
|
Other | (1,167 | ) | | — |
| | (1,167 | ) |
Net changes in operating assets and liabilities: |
| |
| |
|
Affiliate payable | 866 |
| | — |
| | 866 |
|
Trade receivables | (8,442 | ) | | 314 |
| | (8,128 | ) |
Inventory | (16,485 | ) | | (81 | ) | | (16,566 | ) |
Other assets | (1,960 | ) | | 665 |
| | (1,295 | ) |
Accounts payable | 25,009 |
| | — |
| | 25,009 |
|
Other liabilities | 1,850 |
| | 1,755 |
| | 3,605 |
|
Net cash provided by operating activities from continuing operations | 28,303 |
| | — |
| | 28,303 |
|
Investing activities |
| |
| |
|
Expenditures for property, plant and equipment | (6,198 | ) | | — |
| | (6,198 | ) |
Other | 21 |
| | — |
| | 21 |
|
Net cash used for investing activities from continuing operations | (6,177 | ) | | — |
| | (6,177 | ) |
Financing activities |
| |
| |
|
Net additions (reductions) to revolving credit agreements | 12,630 |
| | — |
| | 12,630 |
|
Purchase of treasury stock | — |
| | — |
| | — |
|
Cash dividends paid | (1,162 | ) | | — |
| | (1,162 | ) |
Cash dividends to NACCO Industries, Inc. | (38,000 | ) | | — |
| | (38,000 | ) |
Net cash provided by (used for) financing activities from continuing operations | (26,532 | ) | | — |
| | (26,532 | ) |
Cash flows from discontinued operations |
|
| |
|
| |
|
|
Net cash provided by (used for) operating activities from discontinued operations | 5,137 |
| | — |
| | 5,137 |
|
Net cash provided by (used for) investing activities from discontinued operations | (1,176 | ) | | — |
| | (1,176 | ) |
Net cash used for financing activities from discontinued operations | (70 | ) | | — |
| | (70 | ) |
Cash provided by (used for) discontinued operations | 3,891 |
| | — |
| | 3,891 |
|
Effect of exchange rate changes on cash | 81 |
| | — |
| | 81 |
|
Cash and Cash Equivalents |
| |
| |
|
(Decrease) increase for the year from continuing operations | (4,325 | ) | | — |
| | (4,325 | ) |
Increase (decrease) for the year from discontinued operations | 3,891 |
| | — |
| | 3,891 |
|
Balance at the beginning of the year | 11,340 |
| | — |
| | 11,340 |
|
Balance at the end of the year | $ | 10,906 |
| | $ | — |
| | $ | 10,906 |
|
See description of the net income impacts in the consolidated statement of operations for the year ended December 31, 2017 section above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The only impact of the corrections for misstatements on net cash provided by operating activities from continuing operations was due to the effect of exchange rate changes on cash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
| | | | | | | | | | | | | | | | | | | | | |
| 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) |
As Previously Reported | | | | | | | |
Balance, January 1, 2019 | $ | 93 |
| $ | 44 |
| $ | 51,714 |
| $ | — |
| $ | 30,897 |
| $ | (17,310 | ) | $ | 65,438 |
|
Net loss | — |
| — |
| — |
| — |
| (3,522 | ) | — |
| (3,522 | ) |
Issuance of common stock, net of conversions | 5 |
| (3 | ) | (2 | ) | — |
| — |
| — |
| — |
|
Purchase of treasury stock | — |
| — |
| — |
| (5,960 | ) | — |
| — |
| (5,960 | ) |
Share-based compensation expense | — |
| — |
| 2,632 |
| — |
| — |
| — |
| 2,632 |
|
Cash dividends, $0.355 per share | — |
| — |
| — |
| — |
| (4,851 | ) | — |
| (4,851 | ) |
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| 719 |
| 719 |
|
Reclassification adjustment to net loss | — |
| — |
| — |
| — |
| — |
| 603 |
| 603 |
|
Balance, December 31, 2019 | $ | 98 |
| $ | 41 |
| $ | 54,344 |
| $ | (5,960 | ) | $ | 22,524 |
| $ | (15,988 | ) | $ | 55,059 |
|
Restatement Impacts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (8,829 | ) | $ | 209 |
| $ | (8,620 | ) |
Net loss | — |
| — |
| — |
| — |
| (9,985 | ) | — |
| (9,985 | ) |
Issuance of common stock, net of conversions | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Share-based compensation expense | — |
| — |
| 165 |
| — |
| — |
| — |
| 165 |
|
Cash dividends, $0.355 per share | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| (447 | ) | (447 | ) |
Reclassification adjustment to net loss | — |
| — |
| — |
| — |
| — |
| 94 |
| 94 |
|
Balance, December 31, 2019 | $ | — |
| $ | — |
| $ | 165 |
| $ | — |
| $ | (18,814 | ) | $ | (144 | ) | $ | (18,793 | ) |
As Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019 | $ | 93 |
| $ | 44 |
| $ | 51,714 |
| $ | — |
| $ | 22,068 |
| $ | (17,101 | ) | $ | 56,818 |
|
Net loss | — |
| — |
| — |
| — |
| (13,507 | ) | — |
| (13,507 | ) |
Issuance of common stock, net of conversions | 5 |
| (3 | ) | (2 | ) | — |
| — |
| — |
| — |
|
Purchase of treasury stock | — |
| — |
| — |
| (5,960 | ) | — |
| — |
| (5,960 | ) |
Share-based compensation expense | — |
| — |
| 2,797 |
| — |
| — |
| — |
| 2,797 |
|
Cash dividends, $0.355 per share | — |
| — |
| — |
| — |
| (4,851 | ) | — |
| (4,851 | ) |
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| 272 |
| 272 |
|
Reclassification adjustment to net loss | — |
| — |
| — |
| — |
| — |
| 697 |
| 697 |
|
Balance, December 31, 2019 | $ | 98 |
| $ | 41 |
| $ | 54,509 |
| $ | (5,960 | ) | $ | 3,710 |
| $ | (16,132 | ) | $ | 36,266 |
|
See description of the net income and other comprehensive income (loss) impacts in the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the year ended December 31, 2019 sections above.
The increase to share-based compensation expense and reclassification adjustment to net loss is the result of the correction of other immaterial errors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
| | | | | | | | | | | | | | | | | | | | | |
| 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 |
As Previously Reported | | | | | | | |
Balance, January 1, 2018 | $ | 88 |
| $ | 48 |
| $ | 47,773 |
| $ | — |
| $ | 12,603 |
| $ | (14,104 | ) | $ | 46,408 |
|
Net loss | — |
| — |
| — |
| — |
| 21,784 |
| — |
| 21,784 |
|
Issuance of common stock, net of conversions | 5 |
| (4 | ) | 323 |
| — |
| — |
| — |
| 324 |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Share-based compensation expense | — |
| — |
| 3,618 |
| — |
| — |
| — |
| 3,618 |
|
Cash dividends, $0.34 per share | — |
| — |
| — |
| — |
| (4,658 | ) | — |
| (4,658 | ) |
Reclassification due to adoption of ASU 2018-02 | — |
| — |
| — |
| — |
| 1,168 |
| (1,168 | ) | — |
|
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| (2,841 | ) | (2,841 | ) |
Reclassification adjustment to net loss | — |
| — |
| — |
| — |
| — |
| 803 |
| 803 |
|
Balance, December 31, 2018 | $ | 93 |
| $ | 44 |
| $ | 51,714 |
| $ | — |
| $ | 30,897 |
| $ | (17,310 | ) | $ | 65,438 |
|
Restatement Impacts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (4,743 | ) | $ | 361 |
| $ | (4,382 | ) |
Net loss | — |
| — |
| — |
| — |
| (4,086 | ) | — |
| (4,086 | ) |
Issuance of common stock, net of conversions | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Share-based compensation expense | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Cash dividends, $0.34 per share | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Reclassification due to adoption of ASU 2018-02 | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| (58 | ) | (58 | ) |
Reclassification adjustment to net loss | — |
| — |
| — |
| — |
| — |
| (94 | ) | (94 | ) |
Balance, December 31, 2018 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (8,829 | ) | $ | 209 |
| $ | (8,620 | ) |
As Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018 | $ | 88 |
| $ | 48 |
| $ | 47,773 |
| $ | — |
| $ | 7,860 |
| $ | (13,743 | ) | $ | 42,026 |
|
Net loss | — |
| — |
| — |
| — |
| 17,698 |
| — |
| 17,698 |
|
Issuance of common stock, net of conversions | 5 |
| (4 | ) | 323 |
| — |
| — |
| — |
| 324 |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Share-based compensation expense | — |
| — |
| 3,618 |
| — |
| — |
| — |
| 3,618 |
|
Cash dividends, $0.34 per share | — |
| — |
| — |
| — |
| (4,658 | ) | — |
| (4,658 | ) |
Reclassification due to adoption of ASU 2018-02 | — |
| — |
| — |
| — |
| 1,168 |
| (1,168 | ) | — |
|
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| (2,899 | ) | (2,899 | ) |
Reclassification adjustment to net income | — |
| — |
| — |
| — |
| — |
| 709 |
| 709 |
|
Balance, December 31, 2018 | $ | 93 |
| $ | 44 |
| $ | 51,714 |
| $ | — |
| $ | 22,068 |
| $ | (17,101 | ) | $ | 56,818 |
|
See description of the net income and other comprehensive income (loss) impacts in the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the year ended December 31, 2018 sections above.
The decrease to the reclassification adjustment to net loss is the result of the correction of other immaterial errors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
| | | | | | | | | | | | | | | | | | | | | |
| 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 |
As Previously Reported | | | | | | | |
Balance, January 1, 2017 | $ | — |
| $ | — |
| $ | 75,031 |
| $ | — |
| $ | 6,738 |
| $ | (16,501 | ) | $ | 65,268 |
|
Net loss | — |
| — |
| — |
| — |
| 17,905 |
| — |
| 17,905 |
|
Issuance of common stock, net of conversions | 88 |
| 48 |
| (136 | ) | — |
| — |
| — |
| — |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Share-based compensation expense | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Cash dividends to NACCO Industries, Inc. | — |
| — |
| (27,122 | ) | — |
| (10,878 | ) | — |
| (38,000 | ) |
Cash dividends, $0.085 per share | — |
| — |
| — |
| — |
| (1,162 | ) | — |
| (1,162 | ) |
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| 1,450 |
| 1,450 |
|
Reclassification adjustment to net loss | — |
| — |
| — |
| — |
| — |
| 947 |
| 947 |
|
Balance, December 31, 2017 | $ | 88 |
| $ | 48 |
| $ | 47,773 |
| $ | — |
| $ | 12,603 |
| $ | (14,104 | ) | $ | 46,408 |
|
Restatement Impacts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (2,722 | ) | $ | 402 |
| $ | (2,320 | ) |
Net loss | — |
| — |
| — |
| — |
| (2,021 | ) | — |
| (2,021 | ) |
Issuance of common stock, net of conversions | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Share-based compensation expense | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Cash dividends to NACCO Industries, Inc. | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Cash dividends, $0.085 per share | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| (41 | ) | (41 | ) |
Reclassification adjustment to net loss | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Balance, December 31, 2017 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (4,743 | ) | $ | 361 |
| $ | (4,382 | ) |
As Restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2017 | $ | — |
| $ | — |
| $ | 75,031 |
| $ | — |
| $ | 4,016 |
| $ | (16,099 | ) | $ | 62,948 |
|
Net loss | — |
| — |
| — |
| — |
| 15,884 |
| — |
| 15,884 |
|
Issuance of common stock, net of conversions | 88 |
| 48 |
| (136 | ) | — |
| — |
| — |
| — |
|
Purchase of treasury stock | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Share-based compensation expense | — |
| — |
| — |
| — |
| — |
| — |
| — |
|
Cash dividends to NACCO Industries, Inc. | — |
| — |
| (27,122 | ) | — |
| (10,878 | ) | — |
| (38,000 | ) |
Cash dividends, $0.085 per share | — |
| — |
| — |
| — |
| (1,162 | ) | — |
| (1,162 | ) |
Other comprehensive loss | — |
| — |
| — |
| — |
| — |
| 1,409 |
| 1,409 |
|
Reclassification adjustment to net income | — |
| — |
| — |
| — |
| — |
| 947 |
| 947 |
|
Balance, December 31, 2017 | $ | 88 |
| $ | 48 |
| $ | 47,773 |
| $ | — |
| $ | 7,860 |
| $ | (13,743 | ) | $ | 42,026 |
|
See description of the net income and other comprehensive income (loss) impacts in the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the year ended December 31, 2017 sections above.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 3 - Discontinued Operations
On October 10, 2019, the Board approved the wind down of KC's retail operation due to further deterioration in foot traffic which lowered the Company's outlook for the prospect of a future return to profitability. By December 31, 2019 all retail stores were closed and operations ceased. Accordingly, KC meets the requirements to be reported as discontinued operations.
The Company expects the wind down to continue through the first half of 2020 to facilitate the settlement of remaining liabilities.
KC’s operating results are reflected as discontinued operations in the Consolidated Statements of Operation for all periods presented. The major line items constituting the loss from discontinued operations, net of tax are as follows: |
| | | | | | | | | | | |
| Year Ended December 31 |
| 2019 | | 2018 | | 2017 |
| (In thousands) |
Revenue | $ | 100,860 |
| | $ | 113,469 |
| | $ | 128,520 |
|
Cost of sales | 62,927 |
| | 61,972 |
| | 69,708 |
|
Gross profit | 37,933 |
| | 51,497 |
| | 58,812 |
|
Selling, general and administrative expenses (1) | 54,047 |
| | 58,035 |
| | 61,033 |
|
Lease termination expense (2) | 15,186 |
| | — |
| | 435 |
|
Operating loss | (31,300 | ) | | (6,538 | ) | | (2,656 | ) |
Interest expense | 583 |
| | 361 |
| | 258 |
|
Other expense, net | 26 |
| | 33 |
| | 57 |
|
Loss from discontinued operations before income taxes | (31,909 | ) | | (6,932 | ) | | (2,971 | ) |
Income tax benefit | (3,309 | ) | | (1,571 | ) | | (746 | ) |
Loss from discontinued operations, net of tax | $ | (28,600 | ) | | $ | (5,361 | ) | | $ | (2,225 | ) |
| |
(1) | Selling, general and administrative expenses includes $1.8 million of severance termination benefits of which $0.4 remains unpaid as of December 31, 2019 and included within accrued compensation (current liabilities of discontinued operations). |
| |
(2) | KC recognized lease termination expense of $15.2 million for the estimated costs to terminate lease agreements in 2019 as a result of the decision to wind down the business. The lease termination obligation is measured at fair value using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. The fair value of the lease termination obligation is based on the remaining lease rentals, including common area maintenance costs, real estate taxes, and penalties, adjusted for the effects of deferred rent, and reduced by estimated sublease rentals that could be reasonably obtained. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
KC’s assets and liabilities are reflected as assets and liabilities of discontinued operations in the Company’s Consolidated Balance Sheets for all periods presented. The major classes of assets and liabilities included as part of discontinued operations are as follows:
|
| | | | | | | |
| December 31 |
| 2019 | | 2018 |
| (In thousands) |
Assets | | | |
Cash and cash equivalents | $ | 5,022 |
| | $ | 1,932 |
|
Credit card receivables | 51 |
| | 1,771 |
|
Inventory | — |
| | 21,994 |
|
Prepaid expenses and other current assets | 310 |
| | 2,182 |
|
Current assets of discontinued operations | $ | 5,383 |
| | $ | 27,879 |
|
| | | |
Property, plant and equipment, net | $ | — |
| | $ | 1,788 |
|
Deferred income taxes | 614 |
| | 2,645 |
|
Other non-current assets | — |
| | 173 |
|
Non-current assets of discontinued operations | $ | 614 |
| | $ | 4,606 |
|
| | | |
Liabilities | | | |
Accounts payable | $ | 4,594 |
| | $ | 13,704 |
|
Accrued compensation | 1,058 |
| | 1,498 |
|
Accrued product returns | — |
| | 243 |
|
Lease termination liability | 17,248 |
| | — |
|
Other current liabilities | 6,823 |
| | 7,375 |
|
Current liabilities of discontinued operations | $ | 29,723 |
| | $ | 22,820 |
|
| | | |
Other long-term liabilities | — |
| | $ | 1,960 |
|
Non-current liabilities of discontinued operations | $ | — |
| | $ | 1,960 |
|
KC has operating leases for retail stores, a distribution warehouse and corporate office that contractually expire at various dates through 2026. Future minimum operating lease payments at December 31, 2019 are: |
| | | |
| Operating Leases |
2020 | $ | 10,942 |
|
2021 | 5,863 |
|
2022 | 4,027 |
|
2023 | 2,458 |
|
2024 | 1,534 |
|
Subsequent to 2024 | 1,669 |
|
Total minimum lease payments (1) | $ | 26,493 |
|
| |
(1) | Minimum lease payments have not been reduced by minimum sublease rentals of $6.2 million due in the future under contractual sublease agreements. |
Rental expense from discontinued operations net of sublease rental income and excluding termination costs for all operating leases, is reported in selling, general and administrative expenses of discontinued operations and was $14.3 million, $18.0 million and $19.7 million in 2019, 2018 and 2017, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
KC maintained a separate revolving line of credit facility (the "KC Facility") that was secured by substantially all of the assets of KC. The Company's decision to wind down KC and its retail operations constituted an event of default under the KC Facility. As a result, on October 23, 2019, KC and its lender entered into a Forbearance Agreement (the “Forbearance Agreement”). Under the terms of the Forbearance Agreement, the lender agreed to forebear from exercising its rights and remedies as a result of the events of default pending accelerated payment in full of the obligations under the KC facility on or before December 15, 2019. All obligations under the KC Facility were paid in full in accordance with the Forbearance Agreement and the KC Facility was terminated on December 3, 2019.
Neither Hamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC.
NOTE 4 - Property, Plant and Equipment, Net
Property, plant and equipment, net includes the following:
|
| | | | | | | |
| December 31 |
| 2019 | | 2018 |
Land | $ | 226 |
| | $ | 226 |
|
Furniture and fixtures | 13,071 |
| | 12,583 |
|
Building and improvements | 10,116 |
| | 10,084 |
|
Machinery and equipment | 32,761 |
| | 30,728 |
|
Construction in progress, including internal-use capitalized software | 11,685 |
| | 10,626 |
|
Property, plant and equipment, at cost | 67,859 |
| | 64,247 |
|
Less allowances for depreciation and amortization | 45,535 |
| | 43,405 |
|
| $ | 22,324 |
| | $ | 20,842 |
|
NOTE 5 - Intangible Assets
Intangible assets other than goodwill, which are subject to amortization, consist of the following:
|
| | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Balance |
Balance at December 31, 2019 | | | | | |
Customer relationships | $ | 5,760 |
| | $ | (4,840 | ) | | $ | 920 |
|
Trademarks | 3,100 |
| | (1,008 | ) | | 2,092 |
|
Other intangibles | 1,240 |
| | (1,111 | ) | | 129 |
|
| $ | 10,100 |
| | $ | (6,959 | ) | | $ | 3,141 |
|
| | | | | |
Balance at December 31, 2018 | | | | | |
Customer relationships | $ | 5,760 |
| | $ | (3,880 | ) | | $ | 1,880 |
|
Trademarks | 3,100 |
| | (808 | ) | | 2,292 |
|
Other intangibles | 1,240 |
| | (893 | ) | | 347 |
|
| $ | 10,100 |
| | $ | (5,581 | ) | | $ | 4,519 |
|
Amortization expense for intangible assets included in continuing operations was $1.4 million in 2017, 20162019, 2018 and 2015.2017.
Expected annual amortization expense of HBB's intangible assets for the next five years is $1.4 million in years 2018 through 2019, $1.2 million in 2020 $0.2 million in 2021, and $0.2 million in 2022.the remaining years. The weighted average amortization period for HBB's intangible assets is approximately 8.9 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 6—6 - Current and Long-Term Financing
Financing arrangements are obtained and maintainedexist at the subsidiary level. Hamilton Beach HoldingsBrands Holding Company has not guaranteed any borrowings of its subsidiaries.
The following table summarizes the Company'sHBB's available and outstanding borrowings: |
| | | | | | | |
| December 31 |
| 2017 | | 2016 |
Total outstanding borrowings: | | | |
Revolving credit agreements — HBB | $ | 51,346 |
| | $ | 37,917 |
|
Other debt — HBB | — |
| | 797 |
|
Total debt outstanding | $ | 51,346 |
| | $ | 38,714 |
|
Current portion of borrowings outstanding - HBB
| 31,346 |
| | 12,714 |
|
| | | |
Long-term portion of borrowings outstanding - HBB
| 20,000 |
| | 26,000 |
|
Total available borrowings, net of limitations, under revolving credit agreements: | | | |
HBB | 111,078 |
| | 112,975 |
|
KC | 13,589 |
| | 20,525 |
|
| $ | 124,667 |
| | $ | 133,500 |
|
Unused revolving credit agreements: | | | |
HBB | 59,732 |
| | 75,058 |
|
KC | 13,589 |
| | 20,525 |
|
| $ | 73,321 |
| | $ | 95,583 |
|
| | | |
Weighted average stated interest rate on total borrowings - HBB
| 3.82 | % | | 2.26 | % |
Weighted average effective interest rate on total borrowings (including interest rate swap - HBB agreements) | 3.83 | % | | 2.67 | % |
|
| | | | | | | |
| December 31 |
| 2019 | | 2018 |
Total outstanding borrowings for continuing operations: | | | |
Revolving credit agreements | $ | 58,305 |
| | $ | 45,733 |
|
Book overdrafts | 192 |
| | 891 |
|
Total outstanding borrowings | $ | 58,497 |
| | $ | 46,624 |
|
| | | |
Current portion of borrowings outstanding | $ | 23,497 |
| | $ | 11,624 |
|
Long-term portion of borrowings outstanding | 35,000 |
| | 35,000 |
|
| $ | 58,497 |
| | $ | 46,624 |
|
| |
| | |
Total available borrowings, net of limitations, under revolving credit agreements | $ | 114,366 |
| | $ | 114,669 |
|
| |
| | |
Unused revolving credit agreements | $ | 56,061 |
| | $ | 68,936 |
|
| | | |
Weighted average stated interest rate on total borrowings | 4.16 | % | | 4.12 | % |
Weighted average effective interest rate on total borrowings (including interest rate swap agreements) | 3.82 | % | | 3.45 | % |
Including swap settlements, interest paid on total debt was $3.1 million, $3.1 million, and $1.6 million $1.4 million,during 2019, 2018, and $1.8 million during 2017, 2016, and 2015, respectively. Interest capitalized was $0.4 million in 2019, $0.3 million in 2018 and $0.2 million in 2017 and less than $0.1 million in 2016 and 2015.2017.
HBB:HBB hasmaintains a $115.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires in June 2021. The current portion of borrowings outstanding represents expected voluntary repayments to be made in the next twelve months. The obligations under the HBB Facility are secured by substantially all of HBB's assets. The approximate book value of HBB's assets held as collateral under the HBB Facility was $281.0$297.2 million as of December 31, 2017.2019.
The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible accounts receivable,trade receivables, inventory and trademarks of the borrowers, as defined in the HBB Facility. Adjustments to reserves booked against these assets, including inventory reserves, will change the eligible borrowing base and thereby impact the liquidity provided by the HBB Facility. A portion of the availability is denominated in Canadian dollars to provide funding to HBB's Canadian subsidiary. 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 December 31, 2017,2019, for base rate loans and LIBOR loans denominated in U.S. dollars were 0.00%0.0% and 1.50%1.75%, respectively. The applicable margins, effective December 31, 2017,2019, for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.00%0.0% and 1.50%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.
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 $35.0 million at December 31, 2019 at an average fixed interest rate of 1.5%. HBB also has delayed-start interest rate swaps with notional values totaling $10.0 million as of December 31, 2019, with fixed rates of 1.7%.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
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. 6 to the HBB declared and paid a $35 million dividendFacility, dividends to Hamilton Beach Holding which was subsequently paidare not to NACCOexceed $5.0 million during any calendar year to the extent that for the thirty days prior to the spin-off in September 2017, which under Amendment No. 5dividend payment date, and after giving effect to the dividend payment, HBB Facility, has been excluded from the covenants. Othermaintains excess availability of not less than the $35 million dividend in September 2017, dividends$15.0 million. Dividends to Hamilton Beach Holding are discretionary to the extent that for the thirty30 days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $25.0 million. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. At December 31, 2017,2019, HBB was in compliance with all financial covenants in the HBB Facility.
KC: KC has a $20.0 million secured revolving line of credit that expires in October 2022 (the “KC Facility”). The obligations under the KC Facility are secured by substantially all assets of KC. The approximate book value of KC's assets held as collateral under the KC Facility was $43.4 million as of December 31, 2017.
The maximum availability under the KC Facility is derived from a borrowing base formula using KC's eligible inventory and eligible credit card accounts receivable, as defined in the KC Facility. Borrowings bear interest at a floating rate plus a margin based on the excess availability under the agreement, as defined in the KC Facility, which can be either a base rate plus a margin of 0.75% or LIBOR plus a margin of 1.75% as of December 31, 2017. The KC Facility also requires a fee of 0.25% per annum on the unused commitment.
The KC Facility allows for the payment of dividends to Hamilton Beach Holding, subject to certain restrictions based on availability and meeting a fixed charge coverage ratio as described in the KC Facility. Dividends are limited to (i) $6.0 million in any twelve-month period, so long as KC has excess availability, as defined in the KC Facility, of at least $5.0 million after giving effect to such payment and maintaining a minimum fixed charge coverage ratio of 1.1 to 1.0, as defined in the KC Facility; (ii) $2.0 million in any twelve-month period, so long as KC has excess availability, as defined in the KC Facility, of at least $5.0 million after giving effect to such payment and (iii) in such amounts as determined by KC, so long as KC has excess availability under the KC Facility of $10.0 million after giving effect to such payment. At December 31, 2017, KC was in compliance with all financial covenants in the KC Facility.
NOTE 7—Derivative Financial Instruments7 - Fair Value Disclosure
Recurring Fair Value Measurements
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 values of revolving credit agreements, including book overdrafts, which approximate book value, were 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 years ended December 31, 2019 and 2018.
NOTE 8 - Derivative Financial Instruments
Foreign Currency Derivatives
: HBB held forward foreign currency exchange contracts with total notional amounts of $11.7$13.2 million and $9.0$13.0 million at December 31, 2017,2019, and 2016,2018, respectively, denominated primarily in Canadian dollars and Mexican pesos. The fair value of these contracts approximated a payable of $0.3 million at December 31, 2019 and a net receivable of $0.2 million and $0.1 million at December 31, 2017 and 20182016, respectively..
Forward foreign currency exchange contracts that qualify for hedge accounting are used to hedge transactions expected to occur within the next twelve months. The mark-to-market effect of forward foreign currency exchange contracts that are considered effective as hedges has been included in AOCI.
Interest Rate Derivatives:
HBB has interest rate swaps that hedge interest payments on its one-month LIBOR borrowings. All swaps have been designated as cash flow hedges.
The following table summarizes the notional amounts, related rates and remaining terms of active and delayed interest rate swap agreements for HBB at December 31 in millions: |
| | | | | | | | | | | | | | | |
| Notional Amount | | Average Fixed Rate | | Remaining Term at |
| 2019 | | 2018 | | 2019 | | 2018 | | December 31, 2019 |
Interest rate swaps | $ | 20.0 |
| | $ | 20.0 |
| | 1.4 | % | | 1.4 | % | | Extending to January 2020 |
Interest rate swaps | $ | 15.0 |
| | $ | 15.0 |
| | 1.6 | % | | 1.6 | % | | Extending to January 2024 |
Delayed start interest rate swaps | $ | 10.0 |
| | $ | 10.0 |
| | 1.7 | % | | 1.7 | % | | Extending to January 2024 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The following table summarizes the notional amounts, related rates and remaining terms of interest rate swap agreements active and delayed at December 31 in millions:
|
| | | | | | | | | | | | | | | |
| Notional Amount | | Average Fixed Rate | | Remaining Term at |
| 2017 | | 2016 | | 2017 | | 2016 | | December 31, 2017 |
HBB - Interest rate swaps | $ | 20.0 |
| | $ | 20.0 |
| | 1.4 | % | | 1.4 | % | | Extending to January 2020 |
HBB - Delayed start interest rate swaps | $ | 15.0 |
| | $ | 15.0 |
| | 1.6 | % | | 1.6 | % | | Extending to January 2024 |
HBB - Delayed start interest rate swaps | $ | 10.0 |
| | $ | 10.0 |
| | 1.7 | % | | 1.7 | % | | Extending to January 2024 |
The fair value of HBB's interest rate swap agreements was a net receivablepayable of $0.9$0.1 million at December 31, 20172019 and a net receivable of $0.8$1.1 million at December 31, 2016.2018. The mark-to-market effect of interest rate swap agreements that are considered effective as hedges has been included in AOCI. The interest rate swap agreements held by HBB on December 31, 20172019 are expected to continue to be effective as hedges.
The following table summarizes the fair value of derivative instruments at December 31 as recorded in the Consolidated Balance Sheets: | | | Asset Derivatives | | Liability Derivatives | Asset Derivatives | | Liability Derivatives |
| Balance sheet location | | 2017 | | 2016 | | Balance sheet location | | 2017 | | 2016 | Balance sheet location | | 2019 | | 2018 | | Balance sheet location | | 2019 | | 2018 |
Derivatives designated as hedging instruments | | | | | | | | | | | | |
Interest rate swap agreements | | | | | | | | | | | | | | | | | | | | | | |
Current | Prepaid expenses and other | | $ | 109 |
| | $ | 14 |
| | Other current liabilities | | $ | — |
| | $ | — |
| Prepaid expenses and other current assets | | $ | — |
| | $ | 349 |
| | Other current liabilities | | $ | 21 |
| | $ | — |
|
Long-term | Other non-current assets | | 785 |
| | 760 |
| | Other long-term liabilities | | — |
| | — |
| Other non-current assets | | — |
| | 710 |
| | Other long-term liabilities | | 61 |
| | — |
|
Foreign currency exchange contracts | | | | | | | | | | | | | | | | | | | | | | |
Current | Prepaid expenses and other | | 245 |
| | 147 |
| | Other current liabilities | | 93 |
| | — |
| Prepaid expenses and other current assets | | — |
| | 231 |
| | Other current liabilities | | 308 |
| | 87 |
|
Total derivatives | | | $ | 1,139 |
| | $ | 921 |
| | | | $ | 93 |
| | $ | — |
| | | $ | — |
| | $ | 1,290 |
| | | | $ | 390 |
| | $ | 87 |
|
| | | | | | | | | |
NOTE 9 - Leasing Arrangements
HBB leases certain office and warehouse facilities as well as machinery and equipment under noncancellable operating leases that expire at various dates through 2034. Many leases include renewal and/or fair value purchase options.
Future minimum operating lease payments at December 31, 2019 are: |
| | | |
| Operating Leases |
2020 | $ | 6,114 |
|
2021 | 4,089 |
|
2022 | 1,816 |
|
2023 | 1,574 |
|
2024 | 1,590 |
|
Subsequent to 2024 | 16,527 |
|
Total minimum lease payments | $ | 31,710 |
|
Rental expense from continuing operations net of sublease rental income for all operating leases, is reported in selling, general and administrative expenses and was $5.6 million in 2019 and 2018 and $5.3 million in 2017.
NOTE 8—Fair Value Disclosure10 - Stockholders' Equity and Earnings Per Share
Recurring Fair Value Measurements: Capital Stock
The Company uses significant other observable inputs to value derivative instruments used to hedge foreign currency and interest rate risk; therefore, they are classified within Level 2authorized capital stock of the valuation hierarchy. The fair value for these contracts is determined based on exchange ratesCompany consists of Class A Common, Class B Common and interest rates, respectively. See Note 7 for further discussionone series of Preferred stock. Voting, dividend, conversion and liquidation rights of the Company’s derivative financial instruments.Preferred stock is established by the Board upon issuance of such preferred stock.
There wereHamilton Beach Brands Holding Company Class A Common is traded on the New York Stock Exchange under the ticker symbol “HBB.” Because of transfer restrictions on Class B Common, no transfers intotrading market has developed, or out of Levels 1, 2 or 3 duringis expected to develop, for the years ended December 31, 2017 and 2016.Class B Common.
Other Fair Value Measurement Disclosures: The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. The fair values of revolving credit agreements were 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.
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable and derivatives. HBB maintains significant accounts receivable balances with several large retail customers. At December 31, 2017 and 2016, receivables from HBB’s five largest customers represented 61.5% and 63.0%, respectively, of the Company’s consolidated net accounts receivable. HBB’s significant credit concentration is uncollateralized; however, historically minimal credit losses have been incurred. To further reduce credit risk associated with accounts receivable, the Company performs periodic credit evaluations of its customers, but does not generally require advance payments or collateral. The Company enters into derivative contracts with high-quality financial institutions and limits the amount of credit exposure to any one institution. See Note 7 for further discussion of the Company’s derivative financial instruments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 9—Leasing Arrangements
Subject to the rights of the holders of any series of preferred stock, each share of Class A Common will entitle the holder of the share to one vote on all matters submitted to stockholders, and each share of the Company's Class B Common will entitle the holder of the share to ten votes on all such matters. Subject to the rights of the preferred stockholders, each share of Class A Common and Class B Common will be equal in respect of rights to dividends, except that in the case of dividends payable in stock, only Class A Common will be distributed with respect to Class A Common and only Class B Common will be distributed with respect to Class B Common. As the liquidation and dividend rights are identical, any distribution of earnings would be allocated to Class A and Class B stockholders on a proportionate basis, and accordingly the net income per share for each class of common stock is identical.
The following table sets forth the Company's authorized capital stock information:
|
| | | | | |
| December 31 |
| 2019 | | 2018 |
| (In thousands) |
Preferred stock, par value $0.01 per share | | | |
Preferred stock authorized | 5,000 |
| | 5,000 |
|
| | | |
Class A Common stock(1)(2) | | | |
Class A Common stock authorized | 70,000 |
| | 70,000 |
|
Treasury Stock | 365 |
| | — |
|
| | | |
Class B Common stock(1) | | | |
Class B Common stock authorized | 30,000 |
| | 30,000 |
|
(1) Class B Common converted to Class A Common were 345 shares during 2019 and 387 shares 2018.
(2) The Company leases certain officeissued Class A Common shares of 169 during 2019 and warehouse facilities, retail stores and machinery and equipment under noncancellable operating leases that expire at various dates32 during 2018.
Stock Repurchase Program
In May 2018, the Company approved a stock repurchase program for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through 2031. Many leases include renewal and/or fair value purchase options.
Future minimum operating lease payments at December 31, 2019. As of December 31, 2019, the Company repurchased 364,893 shares for an aggregate purchase price of $6.0 million. There were no share repurchases during the years ended December 31, 2018 and 2017, are:respectively.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in accumulated other comprehensive income (loss) by component and related tax effects for periods shown:
|
| | | |
| Operating Leases |
2018 | $ | 23,633 |
|
2019 | 17,781 |
|
2020 | 14,267 |
|
2021 | 9,287 |
|
2022 | 5,709 |
|
Subsequent to 2022 | 20,273 |
|
Total minimum lease payments | $ | 90,950 |
|
|
| | | | | | | | | | | | |
| Foreign Currency | Deferred Gain (Loss) on Cash Flow Hedging | Pension Plan Adjustment | Total |
Balance, January 1, 2017 (As Restated) | $ | (8,221 | ) | $ | 616 |
| $ | (8,494 | ) | $ | (16,099 | ) |
Other comprehensive income (loss) | 648 |
| (456 | ) | 2,446 |
| 2,638 |
|
Reclassification adjustment to net income | — |
| 916 |
| 511 |
| 1,427 |
|
Tax effects | — |
| (568 | ) | (1,141 | ) | (1,709 | ) |
Balance, December 31, 2017 (As Restated) | $ | (7,573 | ) | $ | 508 |
| $ | (6,678 | ) | $ | (13,743 | ) |
Reclassification due to adoption of ASU 2018-02 | — |
| 118 |
| (1,286 | ) | (1,168 | ) |
Other comprehensive income (loss) | (1,162 | ) | 174 |
| (2,583 | ) | (3,571 | ) |
Reclassification adjustment to net income | — |
| 213 |
| 729 |
| 942 |
|
Tax effects | 83 |
| (134 | ) | 490 |
| 439 |
|
Balance, December 31, 2018 (As Restated) | $ | (8,652 | ) | $ | 879 |
| $ | (9,328 | ) | $ | (17,101 | ) |
Other comprehensive income (loss) | 481 |
| (2,199 | ) | 1,882 |
| 164 |
|
Reclassification adjustment to net loss | — |
| 490 |
| 727 |
| 1,217 |
|
Tax effects | (50 | ) | 489 |
| (851 | ) | (412 | ) |
Balance, December 31, 2019 (As Restated) | $ | (8,221 | ) | $ | (341 | ) | $ | (7,570 | ) | $ | (16,132 | ) |
Rental expense for all operating leases was $25.0 million, $25.9 million,
Earnings per share
The weighted average number of shares of Class A Common and $26.0 million in 2017, 2016,Class B Common outstanding used to calculate basic and 2015, respectively. The Company also recognized $0.4 million in 2017, 2016, and 2015, respectively for rental income on subleases of equipment and buildings under operating leases in which it was the lessee.diluted earnings (loss) per share were as follows:
|
| | | | | | | | | | | |
| As Restated |
| 2019 | | 2018 | | 2017 |
Basic weighted average shares outstanding | 13,690 |
| | 13,699 |
| | 13,673 |
|
Dilutive effect of share-based compensation awards | 36 |
| | 32 |
| | 12 |
|
Diluted weighted average shares outstanding | 13,726 |
| | 13,731 |
| | 13,685 |
|
| | | | | |
Basic and diluted earnings (loss) per share: | | | | |
|
|
Continuing operations | $ | 1.10 |
|
| $ | 1.68 |
|
| $ | 1.32 |
|
Discontinued operations | (2.09 | ) |
| (0.39 | ) |
| (0.16 | ) |
Basic and diluted earnings (loss) per share | $ | (0.99 | ) |
| $ | 1.29 |
|
| $ | 1.16 |
|
NOTE 11 - Revenue
A description of the performance obligations for HBB is as follows:
Product revenue - Product revenue consist 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 as well as sales of commercial products for restaurants, bars and hotels. Transactions with these 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
the Company's facility, or delivered to customers, depending on the shipping terms. The amount of consideration received and revenue recognized varies primarily with changes in returns and price concessions.
License revenues - From time to time, HBB 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, tradenames, 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).
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. 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.
The following table presents the HBB's revenue on a disaggregated basis for the year ending:
|
| | | | | | | |
| As Restated |
| Year Ended |
| December 31 |
| 2019 | | 2018 |
Type of good or service: | | | |
Products | $ | 607,307 |
| | $ | 626,423 |
|
Licensing | 4,479 |
| | 3,659 |
|
Total revenues | $ | 611,786 |
| | $ | 630,082 |
|
| | | |
Wal-Mart Inc. and its global subsidiaries accounted for approximately 33%, 33% and 32% of the HBB’s revenue in 2019, 2018, and 2017, respectively. Amazon.com, Inc. and its subsidiaries accounted for approximately 14%, 10%, and 12% of the HBB's revenue in 2019, 2018, and 2017 respectively. HBB’s five largest customers accounted for approximately 58%, 53%, and 54% of the HBB’s revenue for the years ended December 31, 2019, 2018, and 2017, respectively.
NOTE 10—12 - Contingencies
Various legal and regulatory proceedings and claims have been or may be asserted against Hamilton Beach Holding and certain subsidiariesthe Company relating to the conduct of theirits 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
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 of 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. Accordingly, the Company recorded $3.2 million expense in selling, general and administrative expenses during the second quarter of 2019 for the contingent loss included within other current liabilities on the Consolidated Balance Sheet as of December 31, 2019. On September 23, 2019 the Company filed post-trial motions challenging the jury verdict of infringement and the award of damages and the plaintiffs filed motions seeking interest, post-trial accounting, injunctive relief, and attorneys’ fees. A hearing date on the post-trial motions has not been set. The Company maintains that its products do not infringe on the plaintiff’s patents and will vigorously defend against the plaintiff's post-trial motions.
KC is a defendant in a legal proceeding in which the plaintiff alleges that KC is in breach of forty-nine store leases for failing to continue to operate the stores during the entire term of the leases and for the use of certain store sale signs. In November 2019, KC agreed to the entry of an order preventing the use of certain store sale signs in the specified stores. All KC stores ceased operations as of December 31, 2019. An estimate of the fair value of the future minimum lease liability obligation related to the subject store leases has been included in the results of discontinued operations.
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 December 31, 2019 and December 31, 2018, HBB had accrued undiscounted obligations of $4.4 million and $8.2 million respectively, for environmental investigation and remediation activities. The reduction in the amount accrued at December 31, 2019 compared to December 31, 2018 is the result of a reduction to the accrual recorded in the second quarter of 2019 due to a change in the expected type and extent of investigation and remediation activities associated with one of the sites based upon additional testing and assessment performed with respect to that site in the second quarter of 2019. HBB estimates that it is reasonably possible that it may incur additional expenses in the range of zero to $4.0 million related to the environmental investigation and remediation at these sites. Additionally, the Company recorded a $1.5 million receivable as of December 31, 2019 related to a probable recovery for environmental investigation and remediation costs associated with one of the sites from a responsible party in exchange for release from all future obligations by that party.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 13 - Income Taxes
The components of income before income taxes and the income tax provision for the years ended December 31 are as follows:
|
| | | | | | | | | | | |
| As Restated |
| 2019 | | 2018 | | 2017 |
Income (loss) before income taxes | | | | | |
Domestic | $ | 24,835 |
| | $ | 30,835 |
| | $ | 34,136 |
|
Foreign | (658 | ) | | (350 | ) | | 2,940 |
|
| $ | 24,177 |
| | $ | 30,485 |
| | $ | 37,076 |
|
Income tax provision (benefit) | | | | | |
Current income tax provision (benefit): | | | | | |
Federal | $ | 2,966 |
| | $ | (323 | ) | | $ | 12,647 |
|
State | 1,106 |
| | 356 |
| | 1,396 |
|
Foreign | 3,525 |
| | 1,919 |
| | 1,449 |
|
Total current | 7,597 |
| | 1,952 |
| | 15,492 |
|
Deferred income tax provision (benefit): | | | | | |
Federal | 856 |
| | 5,592 |
| | 3,417 |
|
State | 1,676 |
| | 447 |
| | (96 | ) |
Foreign | (1,045 | ) | | (565 | ) | | 154 |
|
Total deferred | 1,487 |
| | 5,474 |
| | 3,475 |
|
| $ | 9,084 |
| | $ | 7,426 |
| | $ | 18,967 |
|
The Company made federal income tax payments of $1.9 million, $8.3 million, and $9.9 million during 2019, 2018, and 2017, respectively, to the IRS and to NACCO as a member of the consolidated income tax return for periods prior to spin off. The Company made foreign and state income tax payments of $3.6 million, $2.6 million, and $1.9 million during 2019, 2018, and 2017, respectively. During the same periods, income tax refunds totaled $0.1 million in 2019 and $0.1 million in 2018. There were no tax refunds in 2017.
A reconciliation of the federal statutory and effective income tax rate for the years ended December 31 is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| As Restated |
| 2019 | | 2018 | | 2017 |
| $ | | % | | $ | | % | | $ | | % |
Income before income taxes | $ | 24,177 |
| |
|
| | $ | 30,485 |
| |
|
| | $ | 37,076 |
| |
|
|
Statutory taxes at 21.0% (35.0% in 2017) | $ | 5,077 |
| | 21.0 | % | | $ | 6,402 |
| | 21.0 | % | | $ | 12,976 |
| | 35.0 | % |
State and local income taxes | 1,031 |
| | 4.3 | % | | 729 |
| | 2.4 | % | | 824 |
| | 2.2 | % |
Valuation allowances | 2,190 |
| | 9.1 | % | | 42 |
| | 0.1 | % | | 344 |
| | 0.9 | % |
Other non-deductible expenses | 253 |
| | 1.0 | % | | 429 |
| | 1.4 | % | | — |
| | — | % |
Credits | (1,195 | ) | | (4.9 | )% | | (348 | ) | | (1.1 | )% | | (458 | ) | | (1.2 | )% |
Provisional effect of the Tax Cuts and Jobs Act (the "Tax Act") | — |
| | — | % | | — |
| | — | % | | 4,654 |
| | 12.6 | % |
Non-deductible spin-related costs | — |
| | — | % | | — |
| | — | % | | 540 |
| | 1.5 | % |
Unrecognized tax benefits | 2,719 |
| | 11.2 | % | | 1,427 |
| | 4.7 | % | | (12 | ) | | — | % |
Other, net | (991 | ) | | (4.1 | )% | | (1,255 | ) | | (4.1 | )% | | 99 |
| | 0.3 | % |
Income tax provision | $ | 9,084 |
| | 37.6 | % | | $ | 7,426 |
| | 24.4 | % | | $ | 18,967 |
| | 51.2 | % |
The valuation allowances in 2019 includes $2.0 million of deferred tax expense related to a change in judgment regarding the valuation allowances recorded against certain deferred tax assets of KC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
At December 31, 2017 and 2016, HBB had accrued undiscounted obligations of $8.9 million and $8.7 million, respectively, for environmental investigation and remediation activities at these sites. In addition, HBB estimates that it is reasonably possible that it may incur additional expenses in the range of zero to $5.3 million related to the environmental investigation and remediation at these sites.
During 2015, HBB recorded $1.5 million in “Selling, general and administrative expenses” in the Consolidated Statement of Operations for environmental investigation and remediation at HBB’s Picton, Ontario facility as a result of environmental studies.
NOTE 11—Stockholders' Equity and Earnings Per Share
Capital Stock: The authorized capital stock of the Company consists of Class A Common, Class B Common and one series of Preferred stock. Voting, dividend, conversion and liquidation rights of the Preferred stock would be established by the Board upon issuance of such preferred stock.
Hamilton Beach Holding Class A common stock is traded on the New York Stock Exchange under the ticker symbol “HBB.” Because of transfer restrictions on Class B Common, no trading market has developed, or is expected to develop, for the Company's Class B Common. Subject to the rights of the holders of any series of preferred stock, each share of the Company's Class A Common will entitle the holder of the share to one vote on all matters submitted to stockholders, and each share of the Company's Class B Common will entitle the holder of the share to ten votes on all such matters.
Subject to the rights of the preferred stockholders, each share of Class A Common and Class B Common will be equal in respect of rights to dividends, except that in the case of dividends payable in stock, only Class A Common will be distributed with respect to Class A Common and only Class B Common will be distributed with respect to Class B Common. As the liquidation and dividend rights are identical, any distribution of earnings would be allocated to Class A and Class B stockholders on a proportionate basis, and accordingly the net income per share for each class of common stock is identical.
Amounts Reclassified out of Accumulated Other Comprehensive Income: The following table summarizes the amounts reclassified out of AOCI and recognized in the Consolidated Statements of Operations: |
| | | | | | | | | | | | | | |
| | Amount reclassified from AOCI | | |
Details about AOCI components | | 2017 | | 2016 | | 2015 | | Location of loss (gain) reclassified from AOCI into income |
| | (In thousands) | | |
Loss (gain) on cash flow hedging | | | | | | | | |
Foreign exchange contracts | | $ | 853 |
| | $ | (11 | ) | | $ | (860 | ) | | Cost of sales |
Interest rate contracts | | 63 |
| | 183 |
| | 243 |
| | Interest expense |
| | 916 |
| | 172 |
| | (617 | ) | | Total before income tax expense (benefit) |
Tax effect | | (275 | ) | | (67 | ) | | 235 |
| | Income tax (benefit) expense |
| | $ | 641 |
| | $ | 105 |
| | $ | (382 | ) | | Net of tax |
| | | | | | | | |
Pension plan | | | | | | | | |
Actuarial loss | | $ | 511 |
| | $ | 508 |
| | $ | 748 |
| | (a) |
Tax effect | | (205 | ) | | (195 | ) | | (236 | ) | | Income tax benefit |
| | $ | 306 |
| | $ | 313 |
| | $ | 512 |
| | Net of tax |
Total reclassifications for the period | | $ | 947 |
| | $ | 418 |
| | $ | 130 |
| | Net of tax |
(a) These AOCI components are included in the computation of pension expense. See Note 13 for a discussion of the Company's pension expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Earnings per share: Basic income per common share has been computed by dividing net income by the weighted-average number of shares of the Company’s common stock outstanding. Diluted income per common share adjusts common stock outstanding for the effect of all potentially dilutive shares of the Company’s common stock. The weighted average number of shares of Class A common stock and Class B common stock outstanding used to calculate basic and diluted earnings per share were as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Basic weighted average shares outstanding (1) | 13,673 |
| | 13,673 |
| | 13,673 |
|
Dilutive effect of outstanding restricted stock awards | 12 |
| | — |
| | — |
|
Diluted weighted average shares outstanding (1) | 13,685 |
| | 13,673 |
| | 13,673 |
|
| | | | | |
Basic earnings per share (1) | $ | 1.31 |
| | $ | 1.91 |
| | $ | 1.44 |
|
| | | | | |
Diluted earnings per share (1) | $ | 1.31 |
| | $ | 1.91 |
| | $ | 1.44 |
|
| |
(1) | On September 29, 2017, NACCO, Hamilton Beach Holding's former parent company, spun-off the Company to NACCO stockholders. In the spin-off, NACCO stockholders, in addition to retaining their shares of NACCO common stock, received one share of Hamilton Beach Holding Class A common stock and one share of Hamilton Beach Holding Class B common stock for each share of NACCO Class A or Class B common stock. The basic and diluted earnings per share amounts for the Company have been calculated based upon the number of shares distributed in the spin-off for all periods prior to the spin-off. |
NOTE 12—Income Taxes
The components of income before income tax provision and the income tax provision for the years ended December 31 are as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Income before income tax provision | | | | | |
Domestic | $ | 31,328 |
| | $ | 39,136 |
| | $ | 31,277 |
|
Foreign | 4,749 |
| | 2,027 |
| | 759 |
|
| $ | 36,077 |
| | $ | 41,163 |
| | $ | 32,036 |
|
Income tax provision | | | | | |
Current income tax provision: | | | | | |
Federal | $ | 11,484 |
| | $ | 12,140 |
| | $ | 10,953 |
|
State | 1,381 |
| | 501 |
| | 1,908 |
|
Foreign | 1,365 |
| | 556 |
| | 1,143 |
|
Total current | 14,230 |
| | 13,197 |
| | 14,004 |
|
Deferred income tax provision (benefit): | | | | | |
Federal | 4,122 |
| | 1,458 |
| | (1,242 | ) |
State | (437 | ) | | 239 |
| | (43 | ) |
Foreign | 257 |
| | 90 |
| | (394 | ) |
Total deferred | 3,942 |
| | 1,787 |
| | (1,679 | ) |
| $ | 18,172 |
| | $ | 14,984 |
| | $ | 12,325 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
A portion of Hamilton Beach Holding's U.S. operating results will be included in the consolidated federal income tax return filed by NACCO. The Company's allocation of taxes through the spin-off date will be in accordance with the Tax Allocation Agreement. In general, the Tax Allocation Agreement between the Company and NACCO provides that federal income taxes are computed by the Company as if it had filed a tax return on a standalone basis calculated using the separate return method. Subsequent to the spin-off, the Company will file a separate federal tax return in the U.S. for the period subsequent to the spin-off date. The Company made net federal income tax payments of $9.9 million, $11.0 million, and $7.9 million during 2017, 2016, and 2015, respectively, to NACCO as a member of the consolidated income tax return. The Company made foreign and state income tax payments of $1.9 million, $2.8 million, and $1.9 million during 2017, 2016, and 2015, respectively. During the same periods, income tax refunds totaled $0.0 million, $0.6 million, and $0.1 million, respectively.
The following is a reconciliation of the Company's total gross unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the financial statements for the years ended December 31, 2017, 2016,2019, 2018, and 2015.2017. Approximately $0.6$3.0 million, $0.4$1.4 million, and $0.8$0.6 million of these gross amounts as of December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively, relate to permanent items that, if recognized, would impact the effective income tax rate. This amount differs from the gross unrecognized tax benefits presented in the table below due to the decrease in U.S. federal income taxes which would occur upon the recognition of the state tax benefits included herein.
The Company records interest and penalties on uncertain tax positions as a component of the income tax provision. The Company recorded immaterial amounts of interest and penalties as of December 31, 20172019 and 2016,2018, respectively. The Company expects the amount of unrecognized tax benefits will change within the next 12 months; however, the change in unrecognized tax benefits, which is reasonably possible within the next 12 months, is not expected to have a significant effect on the Company's financial position, results of operations or cash flows.
In general, the Company operates in taxing jurisdictions that provide a statute of limitations period ranging from three to five years for the taxing authorities to review the applicable tax filings. The examination of NACCO's 2013-20152013-2016 U.S. federal tax returns is ongoing. In addition, the Company does not have any material taxing jurisdictions in which the statute of limitations has been extended beyond the applicable time frame allowed by law.
The Company maintains two defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. All eligible employees of the Company, including employees whose pension benefits are frozen, receive retirement benefits under defined contribution retirement plans.
The Company recognizes as a component of benefit cost (income), as of the measurement date, any unrecognized actuarial net gains or losses that exceed 10% of the larger of the projected benefit obligations or the plan assets, defined as the "corridor." Amounts outside the corridor are amortized over the average expected remaining lifetime of inactive participants for the pension plans. The (gain) lossgain (loss) amounts recognized in AOCI are not expected to be fully recognized until the plan is terminated or as settlements occur, which would trigger accelerated recognition.
Pension benefit payments are made from assets of the pension plans.
The expected long-term rate of return on defined benefit plan assets reflects management's expectations of long-term rates of return on funds invested to provide for benefits included in the projected benefit obligations. In establishing the expected long-term rate of return assumption for plan assets, the Company considers the historical rates of return over a period of time that is consistent with the long-term nature of the underlying obligations of these plans as well as a forward-looking rate of return. The historical and forward-looking rates of return for each of the asset classes used to determine the Company's estimated rate of return assumption were based upon the rates of return earned or expected to be earned by investments in the equivalent benchmark market indices for each of the asset classes.
Expected returns for U.S. pension plans are based on a calculated market-related value for U.S. pension plan assets. Under this methodology, asset gains and losses resulting from actual returns that differ from the Company's expected returns are recognized in the market-related value of assets ratably over three years. Expected returns for Non-U.S.non-U.S. pension plans are based on fair market value for Non-U.S.non-U.S. pension plan assets.
The pension plans maintain investment policies that, among other things, establish a portfolio asset allocation methodology with percentage allocation bands for individual asset classes. The investment policies provide that investments are reallocated between asset classes as balances exceed or fall below the appropriate allocation bands.
No single country outside of the U.S. comprised 10% or more of the Company's revenuesHBB's revenue from unaffiliated customers.