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.
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.
Aggregate market value of Class A Common Stock and Class B Common Stock held by non-affiliates as of June 30, 20172021 (the last business day of the registrant's most recently completed second fiscal quarter): Not applicable$152,963,013
HAMILTON BEACH BRANDS HOLDING COMPANY
TABLE OF CONTENTS
PART I
Item 1. BUSINESS
General
Hamilton Beach Brands Holding Company (“Hamilton Beach Holding” or the “Company”) is an operatinga holding company for two separate businesses: consumer, commercial and specialty small appliances and specialty retail.operates through its wholly-owned subsidiary Hamilton Beach Brands, Inc. (“HBB”). HBB is the Company's single reportable segment.
The only material assets held by Hamilton Beach Holding is the investment in its consolidated subsidiary. Substantially all of its cash flows are provided by dividends paid or distributions made by its subsidiary. Hamilton Beach Brands Holding Company has not guaranteed any obligations of its subsidiary.
The Company also previously operated through its former wholly-owned subsidiary, The Kitchen Collection, LLC ("KC"), which is reported as discontinued operations in all periods presented herein. KC completed its dissolution on April 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist.
HBB is a leading designer, marketer, and distributor of a wide range of branded, small electric household and specialty housewares appliances, as well as commercial products for restaurants, fast food chains, bars, and hotels. The Kitchen Collection, LLC (“KC”) is a nationalHBB operates in the consumer, commercial and 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.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 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.
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 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,air fryers, blenders, can openers, coffeemakers,coffee makers, food processors, indoor electric grills, irons, juicers, mixers, slow cookers, toasters and toaster ovens. In addition, HBB also designs, markets and distributes commercial products for restaurants, fast food chains, bars and hotels. HBB generally markets its “good” and “better” and “best”consumer products under the Hamilton Beach® brand and uses the Proctor Silex® brand for the “good” and opening price point products.brands. HBB participates in the “only-the-best”premium market with its owned brands Hamilton Beach® Professional and Weston® farm-to-table and field-to-table food processing equipment. Additionally, the Hamilton Beach Professional brand, under aCompany participates in the premium market through multiyear licensing agreementagreements to sellmarket and distribute a line of counter topcountertop appliances and kitchen tools under the Wolf Gourmet® brand, a line of premium garment care products under the CHI® brand, the Bartesian® premium cocktail delivery system, and withair purifiers under the new CHI®-branded, garment-care line under a multi-year licensing deal that began initial shipments in 2017.Clorox® brand. The Company also sells TrueAir® air purifiers and BrightlineTM brand personal care products. HBB markets a range of game and garden food processing equipment including, but not limited to, meat grinders, bag sealers, dehydrators and meat slicersits commercial products under the Weston®Hamilton Beach Commercial® and the Proctor Silex Commercial® brands. Through an agreement with HealthBeacon Limited, HBB is the exclusive marketer and distributor of a smart Injection Care Management System in the U.S. and Canada under the brand as well as several private-label brands.name Hamilton Beach® Health. HBB supplies additional private-labelprivate 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.basis. HBB also licenses certain of its trademarks to various licensees primarily for use within categories such as microwave ovens, compact refrigerators, water dispensers, among others.
its innovative products primarily through the use of digital and print advertising.
Customers
Consumer salesSales in North America are generated predominantly by a network of inside sales employees to mass merchandisers, e-commerceecommerce retailers, national department stores, variety store chains, drug store chains, specialty home retailers, distributors, restaurants, bars, hotels and other retail outlets. Wal-MartWalmart Inc. and its global subsidiaries accounted for approximately 32%28%, 35% and 33% of HBB’s revenuesrevenue in each of 2017, 20162021, 2020 and 2015. Amazon2019, respectively. Amazon.com, Inc. and its subsidiaries accounted for approximately 12%22%, 10%,16% and 8%14% of HBB's revenuesrevenue in 2017, 20162021, 2020 and 2015,2019, respectively. HBB’s five largest customers accounted for approximately 55%61%, 54%64%, and 52%58% of HBB’s revenuesrevenue for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively. The loss
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 WarrantiesWarranty
HBB’sHBB's warranty program to the consumer consists generally of aan 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 year. Under its warranty program,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. RevenuesThe majority of HBB's revenue and operating profit for HBB are traditionally greatertypically occurs in the second half of the year as sales of small electric appliancesdue to retailers and consumers increase significantly with the fall holiday-selling season. Because ofDue to the seasonality of purchases of its products, HBB generally uses a substantial amount of cash or short-term debt to finance inventories and accounts receivableinventory in anticipation of the fall holiday-selling season.
Patents, Trademarks, Copyrights and Licenses
HBB holds patents and trademarks registered in the United States ("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®, Professional, and Weston® trademarks are material to its business.
Product Design and Development
HBB spent $10.4incurred $8.6 million, $9.7$10.0 million and $9.6$12.1 million in 2017, 20162021, 2020 and 2015,2019, respectively, on product design and development activities.
Key Suppliers and Raw Material
HBB’s products are suppliedproduced to its specifications by third-party suppliers located primarily in China.suppliers. 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 2017,2021, HBB purchased 98%substantially all of its finished products from suppliers in China. HBB purchases its inventory from approximately 4978 suppliers, twoone of which represented more than 10% of purchases during the year ended December 31, 2017.2021. 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 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. HBB competes with many small manufacturers and distributors of housewares products. 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 ecommerce channel, HBB must compete with a broad list of competitors for brand reputation through strong ratings and reviews from consumers.
To meet these competitive challenges, the Company has focused on continued innovation in its leading brands as well as expanding into new categories using existing core competencies. HBB’s presence in a significant number of product categories across various price points allows the Company to meet the needs of a wide range of retailers and consumers. 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, including the U.S., Canada, Mexico and Latin America, based on key product categories. Hamilton Beach® is the #1 small kitchen appliance brand in the US, in brick-and-mortar and ecommerce channels, based on units sold.
HBB also competes toTo a lesser degree, in Europe through its commercialHBB retail product lines and in South America and China.compete outside of North America. HBB's commercial products compete globally. The competition in these geographic markets is more fragmented than in North America, and HBB is not yet a significant participant although our commercial business has generated a stronger position 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 managementHBB 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 nationnational and industry specific standards. HBB endeavors to havedesign 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, theHBB conducts supply-chain due diligence investigationinvestigations required by the conflict minerals rules requires expenditures of resources and management attention, regardlessmakes disclosures required by the Dodd Frank Act. Our compliance with these investigation and disclosure requirements could adversely affect our ability to sell 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 resultsCompany and current non-executive chairman of the investigation.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 consulting services rendered by Mr. Rankin were $0.5 million for each of the years ended December 31, 2021, 2020, and 2019.
EmployeesHuman Capital Resources
Our business is dependent upon, and focused on, people—our employees, our customers and the consumers who enjoy our appliances, and the communities in which we live. Our culture is built on and centered around Good Thinking ®, which incorporates teamwork, service and inspired thinking into all areas of our business. We believe that this values-based culture is a core strength that provides the foundation for our working environment and our employees. Good Thinking ® is more than developing new products; it inspires everything we do.
Within this culture, our people are our most valuable resource, and we expect them to remain the key to our success for decades to come. We strive to create an environment that attracts, engages and develops the talent necessary to enable our performance and growth, including by offering competitive compensation and benefits, providing attractive professional growth opportunities, and insisting that everyone be treated with dignity and respect and be afforded equal opportunity. We also recognize the basic human need to feel a sense of inclusion, belonging, and meaning. So, we strive to foster an environment in which our people are passionate about our business and our Good Thinking ® culture, have a seat at the table, and genuinely believe that they are doing meaningful work. We believe that employees with diverse backgrounds, experiences and viewpoints bring value to our Company, especially when coupled with a strong culture of trust in which competing ideas are not only allowed but encouraged to emerge. We strongly believe that this type of environment drives discretionary effort, morale, creativity, initiative and retention—and, in turn, long-term competitive advantage and value creation. Within the framework of our Good Thinking ® culture, we operate as One Team and strive to enrich the lives of our customers and consumers by delivering innovative solutions that improve everyday living, all while having a positive, lasting impact on our people and the communities in which we operate.
We are committed to achieving the highest standards of legal and ethical conduct, including by protecting the human rights and fair treatment of our employees. Our policies and programs—including our Code of Corporate Conduct and other compliance policies, our employment-related policies, and our Human Rights Policy—are designed to support this effort.
As of December 31, 2017, HBB’s work force consisted2021, the Company employed approximately 700 employees in four countries—Canada, China, Mexico, and the United States, of which approximately 650 employees, none685 were full time and 15 were part time. Approximately 8% of our workforce is covered by collective bargaining agreements, all of whom are represented by unions except for 16 hourlybased in Canada or Mexico. There are approximately 500 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.
SalesStates with about half of those based at the Company’s headquarters in Richmond, Virginia, which is home to the Company’s product design, development and Marketing
KC operated 210 retail storesmarketing teams as well as its state-of-the-art test kitchen and UL-certified test laboratory. Most of December 31, 2017the remaining employees in outlet and traditional malls throughout the United States. States support the operation of our Byhalia, Mississippi distribution centers. We consider employee relations to be good.
Occupational Health and Safety
One of our top priorities is protecting the health and safety of our workforce. We are committed to maintaining a safe work environment and operating in a safe, secure and responsible manner. We require all Company personnel to perform their work in a manner that complies with legal requirements protecting the safety and health of all persons from unreasonable risks. In addition to maintaining property and equipment in safe operating conditions, our occupational health and safety framework includes certain safety training programs and safety-related processes and procedures as we strive to ensure the health and safety of our workforce. Employees are encouraged to initiate safety improvements, participate in safety committees, and always reinforce safe behaviors.
Talent Acquisition, Development and Retention
The stores sell kitchenware fromlong-term success and growth of our business depend in large part on our ability to execute an effective talent strategy that attracts, engages and grows a numberhighly talented and committed workforce capable of highly recognizable name-brands, including Hamilton Beach®enabling and Proctor Silex®. KC sales accounted for 17.4%, 19.4%leading our performance. To meet our talent objectives, we utilize key strategies and 19.7%processes related to recruitment while we remain focused on continuing to strengthen our onboarding and ongoing learning development in the wake of the HamiltonCOVID-19 pandemic. We monitor market compensation and benefits to be able to attract, retain and promote employees and reduce turnover and its associated costs. Through our total rewards programs, we strive to offer competitive compensation, benefits and services to our full-time employees including, incentive plans, recognition plans, defined contribution plans, healthcare benefits, tax-advantaged spending accounts, employee assistance programs and other programs such as sick leave and paid vacation and holidays.
We are a learning organization committed to the goal of continuous improvement and the development of our workforce. To empower our employees to reach their full potential, we offer certain training, learning experiences and resources, such as “Hamilton Beach Holding’s annual revenuesUniversity”—an ongoing, cross-functional learning program designed not only to help employees learn about our Company, our products and our industry but also to stay abreast of emerging trends and to develop job-specific skills.
Diversity and Inclusion
As an equal opportunity employer, we make decisions without regard to race, color, religion, creed, gender, sexual orientation, gender identity, marital status, national origin, age, veteran status, disability, or any other protected class. We strive to cultivate diversity of perspective in 2017, 2016our workforce and 2015, respectively.
Seasonality
Revenuesbelieve teammates with diverse backgrounds, experiences and operating profitviewpoints bring value to our organization and improve our Good Thinking ® and, in turn, our decision-making. We strive to create a workplace in which employee differences are embraced and competing perspectives are encouraged to emerge, allowing robust collaboration and teamwork to drive better decision making and more favorable results for KC are traditionally greaterall stakeholders. All employees participate in the second halftraining intended to enhance our awareness of the yearbenefits of a diverse and inclusive workforce, to encourage more meaningful collaboration, and to strengthen team effectiveness.
COVID-19 Response
In March 2020, we established a cross-functional task force to monitor and respond to the growing health crisis. We established specific strategies for each location that were designed to protect our employees and to comply with applicable legal requirements and local guidelines. In addition, we followed guidelines from the World Health Organization, Occupational Safety and Health Administration and the Centers for Disease Control and Prevention in developing prevention and workplace protocols, including mandating mask wearing, social distancing and remote working where possible.
Throughout the pandemic we have monitored the changing landscape of local requirements and guidelines for all locations and have made changes to our workplace protocols as salesnecessary. We continue to consumers increase significantlymonitor diligently the developments related to COVID-19 and to adjust as needed to perform our business requirements while providing a safe environment for our workforce. We continue to comply with the fall holiday-selling season. Because of the seasonality of purchases of its products, KC incurs substantial short-term debt to finance inventoriesapplicable legal requirements and, in anticipation of our return to office in 2022, we have updated and communicated company-wide safety protocols and will continue to offer flexibility for our employees.
We have been impressed by the fall holiday-selling season.
Patents, Trademarks, Copyrightsresiliency and Licenses
KC holdsadaptability demonstrated by our employees throughout the pandemic. We believe that their ability to remain flexible and to work productively and collaboratively and, in many cases, remotely during such stressful and unpredictable times is a trademark registered intestament to the U.S. for the KC store name and believesstrength of our Good Thinking ® culture. We also believe that the trademark is materialpandemic-related challenges experienced during the last two years have strengthened us and that we now are better positioned to its business.adjust work locations and patterns if other disruptive events were to occur.
Information about our Executive Officers
Product DesignThere exists no arrangement or understanding between any executive officer and Developmentany other person pursuant to which such executive officer was selected.
KC, a retailer, has limited expenditures for product designThe following tables set forth, as of March 9, 2022, the name, age, current position and development activities.
Product Sourcingprincipal occupation and Distribution
KC purchases all inventory centrally, which allows it to take advantage of volume purchase discounts and monitor controls over inventory and product mix. KC purchases its inventory from approximately 199 suppliers, one of which represented approximately 21% of purchasesemployment during the year ended December 31, 2017. No other supplier represents more than 10%past five years of purchases. KC 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’s requirements. However, the loss of a supplier could, in the short term, adversely affect KC’s business until alternative supply arrangements are secured.Company’s executive officers.
KC currently maintains its inventory for distribution to its stores at a distribution center located near its corporate headquarters in Chillicothe, Ohio.EXECUTIVE OFFICERS OF THE COMPANY
Competition | | | | | | | | | | | | | | | | | | | | |
| Name | | Age | | Current Position | | Other Positions |
| | | | | | |
| Gregory H. Trepp | | 60 | | President and Chief Executive Officer of Hamilton Beach Holding (from September 2017); President and Chief Executive Officer of HBB (from prior to 2016) | | Chief Executive Officer of KC (from prior to 2016 to April 2020) |
| R. Scott Tidey | | 57 | | Senior Vice President, Consumer Sales & Marketing of HBB (from March 2021) | | Senior Vice President, North America Sales and Marketing of HBB (from prior to 2016 to March 2021) |
| Michelle O. Mosier | | 56 | | Senior Vice President, Chief Financial Officer and Treasurer of Hamilton Beach Holding (from January 2020) | | Successor Vice President and Chief Financial Officer of HBB (from October 2018 to December 2019); Chief Financial Officer of United Sporting Companies (from prior to 2016 to June 2018) a subsidiary of SportsCo Holding, Inc. which filed for Chapter 11 bankruptcy in June 2019. |
| Lawrence K. Workman, Jr. | | 52 | | Senior Vice President, General Counsel and Secretary of Hamilton Beach Holding (from July 2021) | | Vice President, Business Development and Corporate Counsel of Coca-Cola Consolidated, Inc. (from prior to 2016 to July 2021) |
KC competes against a diverse group of retailers, including specialty stores, department stores, discount stores, e-commerce competitors and catalog retailers. The retail environment continues to be extremely competitive. Widespread Chinese sourcing of products allows many retailers to offer value-priced kitchen products. While a number of very low-end and very high-end kitchenware retailers participate in the marketplace, KC believes there continues to be an opportunity for stores offering mid-priced, high-quality kitchenware.
Employees
As of December 31, 2017, KC’s work force consisted of approximately 950 employees. None of KC’s employees are unionized. KC believes its current labor relations with employees are satisfactory.
Item 1A. RISK FACTORS
Hamilton Beach Brands, Inc.Industry Risks
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.
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 our control, such as movements in 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, they 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 from which to choose from. As a result, HBB competes for retail shelf space with its competitors.choose. 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.
HBB may become subject to claims under foreign lawsChanges in consumer shopping trends and regulations, which may be expensive, time-consuming and distracting.
Because HBB has employees, property and business operations outside of the United States, HBB is subject to the laws and the court systems of many jurisdictions. HBB may become subject to claims outside the United States 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 enactedchanges 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 liabilities 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. In addition, the discovery of additional contamination at these or other sitesdistribution 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 cleanup costsgrowth. 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 could have a material adverse effect on HBB’s financial conditionsearn strong ratings and results of operations.
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 businessesreviews and meaningful engagement with online shoppers. 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 increaseinvested in industry leading selling and marketing capabilities, while maintaining its presence in traditional brick-and-mortar retail channels. However, if the unrelated third party doeswe are 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 liabilitiessuccessful in utilizing ecommerce channels that consumers may not arise, if at all, until years after HBB sold these operationsprefer, we may experience a loss in market share and could require us to incur significant additional expenses, which could materially adversely affect HBB’s results of operationsdecreased revenue and financial condition.profitability.
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.
The markets for HBB's products are highly seasonal and dependent on consumer spending, which could result in significant variations in revenue and profitability.
Sales of HBB products are 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, the retail market for small electric household and specialty housewares appliances is highly seasonal in nature. Accordingly, HBB generally recognizes a substantial portion of our revenue in the second half of the year as sales 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 revenue and profitability.
Business Risks
Our results of operations have been adversely affected and, in the future, may be materially adversely impacted by the coronavirus (COVID-19) pandemic.
The ongoing global COVID-19 pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including business shutdowns and limitations, travel restrictions, border closings, restrictions on public gatherings and shelter-in-place restrictions. This has negatively impacted the global economy, disrupted financial markets and resulted in increased unemployment levels, all of which have negatively impacted various industries. Despite our efforts to manage through the current circumstances, the continued spread of COVID-19 and efforts to contain the virus could:
•result in continued disruptions to our supply chain, especially with respect to freight availability and cost;
•continue to impact demand for our products;
•cause the Company to experience an increase in costs as a result of the Company’s emergency measures, delayed payments from customers and increased risk of uncollectible accounts;
•limit the Company’s access to further capital resources, if needed, and increase associated costs; and
•adversely impact economies and financial markets of our international operations resulting in an economic downturn that could affect the value of foreign currencies.
More recently, we have experienced the effects of the COVID-19 pandemic through increasing product and transportation costs.
Over the preceding two years, the fluctuation in levels of the virus’s effects on different portions of the global economy have continued to affect our business as well as other businesses. Management is actively monitoring the impact of the global situation on our financial condition, liquidity, operations, suppliers, industry and workforce. The situation remains fluid and the potential for a material impact on the Company’s results of operations, financial condition, liquidity, and stock price increases the longer the virus impacts activity levels in the United States and globally. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact the COVID-19 pandemic may have on the Company’s results of operations, financial position, liquidity and stock price. The extent of any impact will depend on the scope of any new virus mutations and outbreaks, the nature of government public health guidelines and the public’s adherence to those guidelines, the rate of individuals becoming fully vaccinated, the public's adherence to guidelines to receive booster shots, the success of business and economic recovery as the pandemic recedes, unemployment levels, the extent to which new shutdowns may be needed, the impact of any further government economic relief on the U.S. economy, consumer confidence and demand for the Company's products. Any of these factors could cause or contribute to the risks and uncertainties included within this Annual Report on Form 10-K and could materially adversely affect our business, financial condition, results of operations and/or stock price.
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.
As a result of our 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.
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 HBB's control, such as inflation 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, supplier price increases may materially reduce our profitability.
Further, our operations and performance depend on global, regional and U.S. economic and geopolitical conditions. Russia’s invasion and military attacks on Ukraine have triggered significant sanctions from U.S. and European leaders. These events are currently escalating and creating increasingly volatile global economic conditions. Resulting changes in U.S. trade policy could trigger retaliatory actions by Russia, its allies and other affected countries, including China, resulting in a “trade war.” A trade war could result in increased costs for raw materials used in the manufacture of our products and could result in Russia and other foreign governments imposing tariffs on products that we import or export, or otherwise limiting our ability to source materials or sell our products abroad. These increased costs would have a negative effect on our financial condition and profitability.
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 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's 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 certain suppliers are primarily based in China, international operations are subject to additional risks including, among others:
•currency fluctuations;
•labor unrest;
•potential political, economic and social instability, including the repercussions of the conflict in Ukraine;
•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 have a material adverse effect on our ability to maintain or increase the supply of products, which may result in material increases in expenses and decreases in revenue and profitability.
Our financial results may be negatively impacted by transportation constraints on shipping capabilities.
Our ability to meet customers’ demands depends, in part, on our ability to obtain the timely and adequate shipment of our products. Certain transportation industry vendors may experience capacity constraints due to increases in volume. For example, 2021 saw continued congestion in several areas of the supply chain, including the supply chain from China to our distribution facility as well as certain customers' ability to send in equipment to pick up or receive goods due to congestion at their facilities, impacted our ability to receive and ship inventory in a timely manner and resulted in increased freight charges. If our transportation industry vendors become capacity constrained, then we may have to identify new vendors or explore alternative order fulfillment methods to ensure we have sufficient shipping capabilities. We have experienced and may continue to experience significant delays in shipping our products to customers and incur additional costs to establish alternative shipping sources if existing vendors are unable to sufficiently handle our shipping volume. We cannot predict if we will be able to obtain alternative shipping sources within the time frames that we require and at a comparable cost.
Further, Russia’s invasion and military attacks on Ukraine, including indirect impacts as a result of sanctions and economic disruption, may cause further constraints on our supply chain. These limitations could impact our ability to supply our products to our customers. If we encounter delays or difficulties that disrupt our ability to supply our products, we may not be able to satisfy customer demand or we may experience a reduction in product stock, which could have a material adverse effect on our financial condition and results of operations.
The Company is dependent on key personnel and the loss of these key personnel could significantly reduce its consolidated profitability.
The 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 our business. Therefore, the Company's success also depends upon its ability to recruit, hire, train and retain current and additional skilled and experienced management personnel. The 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.
The Company’s business could suffer if information technology systems are disrupted, cease to operate effectively or become subject to a security breach.
The 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 cybersecurity. In addition, we collect, store, have access to and otherwise process certain confidential or sensitive data.
Cyber-attacks are becoming more sophisticated and include computer viruses or other malicious codes, attacks to gain unauthorized access to data, and other security breaches that could lead to the loss of valuable business data, misappropriation of our consumers’ or employees’ personal information, or a disruption of our critical systems. The Audit Review Committee of the Company is regularly briefed on cybersecurity matters, however despite our security efforts, if unauthorized access does occur, we could become the subject of regulatory action or litigation from our customers, employees, suppliers, and shareholders, which could damage our reputation, require significant expenditures of capital, and cause us to lose business and revenue. Additionally, unauthorized access could also cause interruptions in our operations and might require us to spend significant management time and other resources investigating the event and dealing with local and federal law enforcement. While we have not experienced any material impacts from a cyber-attack, any one or more future cyber-attacks could have a material adverse effect on our financial condition and results of operations.
Our information technology systems may be vulnerable from time to time to damage 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. Any material disruption or slowdown of our systems, including our failure to successfully upgrade 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.
Failure to maintain data privacy could have a material adverse effect on our business, financial condition and results of operations.
The Company 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 Privacy Laws could have a material adverse impact on our financial condition and results of operations.
Financial Risks
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 financing arrangement of HBB contains various restrictions that could limit operating flexibility.
HBB’s credit facility contains covenants and other restrictions that, among other things, require HBB to satisfy certain financial tests, maintain certain financial ratios and restrict HBB’s ability to incur additional indebtedness. The restrictions and covenants in HBB’s credit facility, and other future financing arrangements may limit HBB’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 may incur.
Regulatory Risks
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 U.S., HBB is subject to the laws and the court systems of many jurisdictions. HBB may become subject to claims outside the U.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 obligations 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. 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.
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
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, LLC
As consumer shopping habits change, foot traffic to brick and mortar stores could continue to decline and result in a loss of
market share, revenues and profitability, and store closures at a more rapid pace than 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 revenues and profitability.
The market for KC’s products is highly seasonal and dependent on consumer spending, which could result in significant variations in our revenues and profitability.
Sales of 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, KC generally recognizes a substantial portion of its revenues and operating profit in the last half of the year as sales to consumers increase significantly with the fall holiday-selling season. Accordingly, any economic downturn, decrease in consumer spending or a shift in consumer spending away from KC’s products could significantly reduce, or cause significant variations in, KC’s revenues 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 supplyU.S. government trade actions could have a material adverse effect on KC’s profitability.Hamilton Beach Brands Holding Company’s subsidiaries, financial position, and results of operation.
KC may be forced to closeThe U.S. government has taken a significant number of stores,trade actions that impact or could impact our operations, including imposing tariffs on certain goods imported into the United States. In addition, several governments, including the European Union, China and India, 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 U.S. trade law that have been applied to separate lists of Chinese goods imported into the United States. The Section 301 tariffs on goods covered by lists 1, 2, 3 and 4a affect approximately 25% of total 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 which the U.S. government agreed 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. A number of lawsuits and other legal challenges with respect to the Section 301 tariff actions have been filed and remain pending, which could adversely impact its profitability.
Although we have slowedresult in changes to the opening of new KC retail storestariffs. To date, the Biden Administration has effectively maintained and havehas continued to close underperforming stores,defend and to enforce these particular trade actions. We are continually evaluating the continuingimpact of the current and accelerating shift in consumer shopping patterns from traditional brickany possible new tariffs on our supply chain, costs, sales 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 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 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 Holding is dependent on key personnel and the loss of these key personnel could significantly reduce its profitability.
Hamilton Beach Holding 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 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’s success also depends upon its ability to recruit, hire, train and retain current and additional skilled and experienced management personnel. Hamilton Beach Holding’s inability to hire and retain personnel with the requisite skills could impair its ability to manage and operate its business effectively and could significantly reduce its 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, results 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 to various restrictions that could limit operating flexibility.
HBB’s and KC’s respective credit facilities contain 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, 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’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 rely 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 security 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 replacing and modifying these systems, including inaccurate system information, system disruptions and user acceptance and understanding. We believe we are taking appropriate action to mitigate the risks but there can be no assurance that ourimpact of such tariffs or other trade actions will be successful or sufficient.
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 demandsuccessful. Given the uncertainty regarding the scope 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 designed 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 with 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 an adverse effect on our business, financial condition and results of operations.
The transition services agreement Hamilton Beach Holding entered into with NACCO contains early termination provisions that, if exercised by NACCO, could prevent Hamilton Beach Holding from operating Hamilton Beach Holding’s business in a cost-efficient manner and could disrupt Hamilton Beach Holding’s operations.
Hamilton Beach Holding entered into a transition services agreement with NACCO on September 29, 2017. Under the terms 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:
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.
In addition, both NACCO and Hamilton Beach Holding may terminate any transition service that is being provided at any time by giving such party 30 days’ prior written notice of its intention to do so. NACCO and Hamilton Beach Holding may also terminate 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.
Hamilton Beach Holding may experience increased costs 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 audit 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,
for varying periods aftertrade actions by 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 management 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 businessesgovernment or other transactions that could maximize the value of our business.
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") 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 extended founding family of NACCO own a substantial amount of Hamilton Beach Holding’s Class A and Class B common stock, 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") and Class B common stock ("Class B Common"). Holders of Class A Common will be entitled to cast one vote per share and, as of December 31, 2017, accounted for approximately 15.57% 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, accounted for the remaining voting power of Hamilton Beach Holding. As of December 31, 2017, certain members of NACCO’s extended founding family held approximately 37.96% of Hamilton Beach Holding’s Class A Common and 69.99% of Hamilton Beach Holding’s Class B Common. On the basis of this common stock ownership, certain members of NACCO’s extended founding family could exercise 65.01% of Hamilton Beach Holding’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’s amended and restated certificate of incorporation and sales of Hamilton Beach Holding or substantially all of its assets. Because such family members could prevent other stockholders from exercising significant influence over significant corporate actions, Hamilton Beach Holding 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,countries, as well as provisions of Delaware law, could impair a takeover attempt that stockholders may consider favorable.the potential for additional trade actions, the impact on our operations and results remains uncertain.
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 shareholder approval of any golden parachute payments not previously approved.
exemption from any rules
In addition, 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 rulesJOBS Act also provides that may be adopted by the PCAOB.
We could be 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 predict if investors will findlose our status as an emerging growth company as of December 31, 2022, the last day of the fiscal year following the fifth anniversary of our spin-off from NACCO Industries, Inc.
Registered Securities Risk
The amount and frequency of dividend payments made on Hamilton Beach Holding’s common stock less attractivecould change.
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 own a substantial amount of Class A Common and Class B Common, and if we relythey were to act in concert, could control the outcome of director elections and other stockholder votes on these exemptions. If some investors find oursignificant actions.
Hamilton Beach Holding has two classes of common stock: Class A Common and Class B Common. Holders of Class A Common will be entitled to cast one vote per share and, as of December 31, 2021, accounted for approximately 19.84% 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, 2021, accounted for the remaining voting power of Hamilton Beach Holding. As of December 31, 2021, certain members of the Company's extended founding family held approximately 33.75% of Class A Common and 81.65% of Class B Common. On the basis of this common stock less attractiveownership, certain members of the Company's extended founding family could exercise 72.14% of the 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 a result, therecertain amendments to the Company's amended and restated certificate of incorporation and sale of the Company or substantially all of its assets. Because such family members could prevent other stockholders from exercising significant influence over significant corporate actions, the Company may be a less active tradingattractive takeover target, which could adversely affect the market for our common stock and the price of ourits common stock may be more volatile.stock.
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:
|
| | | | | | | | | | | | | |
| | Owned/ | | |
| Facility Location | | Leased | | Function(s) (2) (3) |
| 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, MississippiBelleville, Ontario, Canada | | Leased | | Distribution center |
Picton, 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,Joinville, Santa Catarina, Brazil | | Leased(1) | | Brazil sales and administrative headquartersDistribution center |
Jundiai, Sao Paulo, Brazil | | (1) | | Distribution center |
| Shanghai, People's Republic of China | | Leased | | Sales office |
Shanghai,Suzhou, People's Republic of China | | (1) | | Distribution center |
Independence, OhioTultitlan, Mexico | | Leased(1) | | Weston Brands sales officeDistribution center |
Tultitlan, MexicoByhalia, Mississippi | | (1)Leased | | Distribution centercenters (2) |
| |
(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, Canada, China and Mexico. |
B. (1)This facility is not owned or leased by HBB. This facility is managed by a third-party distribution provider.
(2)The Kitchen CollectionCompany leases two distribution facilities in Byhalia, Mississippi
(3)Sales offices are also leased in several cities in the U.S., Canada, China and Mexico.
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
The information required by this Item 3 is set forth in Note 11 "Contingencies" included in our Financial Statements and Supplementary Data contained in Part IV of this Form 10-K and is hereby incorporated herein by reference to such information.
Neither the Company nor any of its subsidiaries is a party to any material legal proceeding other than ordinary routine litigation incidental to its respective business.
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, 2017,2021 and 2020, there were 789749 and 773, respectively, Class A Common stockholders of record and 864855 and 890, respectively, Class B commonCommon stockholders of record.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers Item 6. SELECTED FINANCIAL DATA
The following table sets forthIn May 2018, the Company approved a stock repurchase program for the purchase of up to $25.0 million of the Company's selected historical financial data asClass A Common outstanding through December 31, 2019. On November 5, 2019, the Company's Board adopted a new stock repurchase program for the purchase of and for eachup to $25.0 million of the periods indicated. TheCompany's Class A Common outstanding starting January 1, 2020 and ending December 31, 2021. During the year ended December 31, 2019, the Company derivedrepurchased 364,893 shares for an aggregate purchase price of $6.0 million. There were no share repurchases during the summary historical financial data as of and for each of the three years ended December 31, 2017 from2021 and 2020. On February 22, 2022, the Company's audited consolidated financial statements. This information is onlyBoard approved a summarystock repurchase program for the purchase of up to $25 million of the Company's Class A Common outstanding starting February 22, 2022 and should be read in conjunction with the historical consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ending December 31, 2023.
|
| | | | | | | | | | | |
| | 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 |
|
|
| | | | | | | | | | | |
| | 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 |
|
| |
(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 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. |
| |
(2)
| This information is only included for periods subsequent to the spin-off from NACCO. |
OVERVIEW
Hamilton Beach Brands Holding Company (“Hamilton Beach Holding” or the “Company”)This item is an operating holding company for two separate businesses: consumer, commercial and specialty small appliances and specialty retail. Hamilton Beach Brands, Inc. (“HBB”) is a leading designer, marketer and distributor of branded small electric household and specialty housewares appliancesreserved 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.
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 distributionCompany's adoption of one shareItem 301 of Hamilton Beach Holding Class A common stockRegulation S-K, pursuant to rules adopted by the Securities and one share of Hamilton Beach Holding Class B common stock for each share of NACCO Class A or NACCO Class B common stock,Exchange Commission on November 19, 2020, which included removing the earnings per share amounts for the Company for periods priorrequirement 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.
include selected financial data.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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)
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report on Form 10-K. The following discussion and analysis focuses on our financial results for the years ended December 31, 2021 and 2020 and year-to-year comparisons between these years. A discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019 is included in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
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: Section 102(b)(1)Revenue Recognition: 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 not to opt out of such extended transition period which means that whenaccount for shipping and handling activities performed after a standard is issued or revised and it has different application dates for public or private companies, 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 passes 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 and customers take possessionobtains control of the merchandisegoods 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 price concessions and changes in stores. Reserves for discounts and returns are maintained for anticipated future claims at HBB and KC.
Product discounts: returns. The Company records estimated reductionsoffers price concessions to revenuesour customers 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 cooperativearrangements. We determine whether price concessions offered to our customers are a reduction of the transaction price and revenue or are advertising other volume-based incentives, estimatedexpense, 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.
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 allowances for defective products. At KC, retail markdowns are incorporated into KC’s retail method of accounting for cost of sales. If market conditionsprice concessions, and periodically makes adjustments to the carrying amounts as appropriate. During 2021, there were no material adjustments to decline or if competition were to increase, the Company may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenues ataforesaid estimates and the time the incentive is offered. If the Company's accrued cooperative advertising balance as of December 31, 2017 were to increase by one percent, the reserve for product discounts 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 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.
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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)
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.
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 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 20172021 assumptions are used to calculate 20182022 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 20182022 of approximately $0.3$0.4 million for the plans. A one percentage-point change in the discount rate would result in a change in pension expense for 20182022 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 20172021 by approximately $2.0$1.5 million; while a one percentage-point decrease in the discount rate would have raised the plans’ projected benefit obligation as of the end of 20172021 by approximately $2.3$1.7 million.
See Note 13 toRESULTS OF OPERATIONS
The results of operations for Hamilton Beach Holding were as follows for the Consolidated Financial Statements in this Form 10-K for further discussion of the Company's retirement benefit plans.years ended December 31:
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 estimates for these self-insurance obligations causing a related increase or decrease in reported net operating results in the period of change in the estimate.
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.2021 Compared with 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2021 | | % of Revenue | | 2020 | | % of Revenue | | $ Change | | % Change |
| Revenue | $ | 658,394 | | | 100.0 | % | | $ | 603,713 | | | 100.0 | % | | $ | 54,681 | | | 9.1 | % |
| Cost of sales | 521,892 | | | 79.3 | % | | 465,059 | | | 77.0 | % | | 56,833 | | | 12.2 | % |
| Gross profit | 136,502 | | | 20.7 | % | | 138,654 | | | 23.0 | % | | (2,152) | | | (1.6) | % |
| Selling, general and administrative expenses | 104,763 | | | 15.9 | % | | 99,990 | | | 16.6 | % | | 4,773 | | | 4.8 | % |
| Amortization of intangible assets | 200 | | | — | % | | 1,249 | | | 0.2 | % | | (1,049) | | | (84.0) | % |
| Operating profit (loss) | 31,539 | | | 4.8 | % | | 37,415 | | | 6.2 | % | | (5,876) | | | (15.7) | % |
| Interest expense, net | 2,854 | | | 0.4 | % | | 1,998 | | | 0.3 | % | | 856 | | | 42.8 | % |
| Other expense (income), net | (272) | | | — | % | | 1,685 | | | 0.3 | % | | (1,957) | | | (116.1) | % |
| Income (loss) from continuing operations before income taxes | 28,957 | | | 4.4 | % | | 33,732 | | | 5.6 | % | | (4,775) | | | (14.2) | % |
| Income tax expense | 7,651 | | | 1.2 | % | | 9,665 | | | 1.6 | % | | (2,014) | | | (20.8) | % |
| Net income from continuing operations | 21,306 | | | 3.2 | % | | 24,067 | | | 4.0 | % | | (2,761) | | | (11.5) | % |
| Income (loss) from discontinued operations, net of tax | — | | | n/m | | 22,191 | | | n/m | | (22,191) | | | n/m |
| Net income (loss) | $ | 21,306 | | | | | $ | 46,258 | | | | | $ | (24,952) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Effective income tax rate on continuing operations | 26.4 | % | | | | 28.7 | % | | | | | | |
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 the change in revenue for 2021compared with 2020:
Allowances for doubtful accounts: | | | | | | |
| | Revenue | |
| 2020 | $ | 603,713 | | |
| (Decrease) increase from: | | |
| Unit volume and product mix | 37,069 | | |
| Foreign currency | 4,814 | | |
| Average sales price | 12,798 | | |
| 2021 | $ | 658,394 | | |
Revenue- Revenue increased $54.7 million, or 9.1%. The Company maintains allowances for doubtful accounts for estimated losses resulting fromhad higher sales in 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 ofNorth American consumer market, driven by continued strong demand in 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 requireUS and Latin American markets and an increase in the allowance for doubtful accounts and would result in additional expense of approximately $1.1 million.
Income taxes: The U.S. operating results of the Company will be included in the consolidated federal income tax return filed by NACCO through the spin-off date. 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.
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 required to assess the future tax consequences of events that have been recognized 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 rate due to the reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.
In addition to the reduction in the U.S. federal corporate tax rate mentioned above, other significant changes to existing tax law include (1) a deduction received on dividends of foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings; (2) limitations on the deductibility of certain executive compensation for publicly traded companies; (3) accelerated expensing of capital investment, subject to phase out beginning in 2023; (4) a new limitation on deductible interest expense; and (5) a new U.S. minimum tax on earnings of foreign subsidiaries.
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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)
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. Asaverage sales price, a result of the Tax Actpreviously announced price increases that were implemented during the back half of 2021. Revenue in the Global Commercial market increased $10.9 million compared to prior year as the market rebounded from the pandemic-related demand softness in the prior year. Ecommerce revenue represents 37.5% of total sales for the year ended December 31, 2021 and pursuantincreased 22.4% compared to SAB 118,2020.
Gross profit - Gross profit margin decreased to 20.7% from 23.0% due to significantly higher transportation costs, as a result of the disruption and congestion in the supply chain. These costs were not fully offset by the price increases implemented by the Company recordedduring the second half of 2021. Additionally, gross profit in 2020 includes a provisionalbenefit of approximately $2.1 million for tariff relief.
Selling, general and administrative expenses - Selling, general and administrative expenses increased $4.8 million, driven primarily by $2.9 million of incremental expenses incurred during the relocation of the Company's distribution center, an increase in employee-related costs, and a full year of depreciation expense for ERP-related capitalized software compared to six months of expense in the prior year. Included in selling, general and administrative expenses for the year ended December 31, 2020 is $1.9 million of charges to write-off unrealizable assets created as a result of the unauthorized transactions at our Mexico subsidiary identified during the quarter ended March 31, 2020 which resulted in a restatement filed on Form 10-K/A for the year ended December 31, 2019, offset by a net tax charge$1.0 million reduction to the accruals for litigation and environmental reserves.
Other expense (income), net - Other expense (income), net in 2021 includes currency losses of $4.7$0.6 million in the period endingcurrent year compared to currency losses of $1.7 million in 2020.
Income tax expense - The effective tax rate on income from continuing operations was 26.4% and 28.7% for the twelve months ended December 31, 2017.2021 and 2020, respectively. The provisionaleffective tax rate was lower for the twelve months ended December 31, 2021 due to an expense is primarily attributablerelated to the corporate rate reductionloss on existing deferred tax assets and liabilities. IncludedKitchen Collections dissolution in the provisional income tax charge is $0.4 million for excess executive renumeration expense expected to be underprior year that did not recur, 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 impactreversal of deferred taxes related to repatriation of unremittedcertain foreign earnings. The ultimate impact ofitems and a reduction in 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 ofcurrent year valuation allowance, partially offset by state income taxes as there is uncertainty on conformity to the U.S. federal tax system following the Tax Act.and non-deductible expenses.
CONSOLIDATED FINANCIAL SUMMARYLIQUIDITY AND CAPITAL RESOURCES
Hamilton Beach Brands 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 itsCompany cash flows are provided by dividends paid or distributions made by its subsidiaries.subsidiary. The cash to pay dividends to Hamilton Beach Holding’s stockholders is derived from these cash flows.only material assets held by it are the investment in its consolidated subsidiary. 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 ofsubsidiary. Hamilton Beach Brands Holding wereCompany has not guaranteed any of the obligations of its subsidiary.
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
follows:defined below. HBB's primary use of funds consists of working capital requirements, operating expenses, capital expenditures, and payments of principal and interest on debt. At December 31, 2021, the Company had cash and cash equivalents for continuing operations of $1.1 million, compared to $2.4 million at December 31, 2020. |
| | | | | | | | | | | |
| | 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 |
|
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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)
We believe we are well positioned to effectively navigate the ongoing COVID-19 pandemic for a number of reasons. Demand for certain retail small kitchen appliances in the U.S. remains strong as consumers prepare more food and beverages at home. We have implemented a number of mitigation strategies, including previously announced price increases, are managing discretionary expenses, and have sufficient availability under the revolving credit facility to meet our future anticipated obligations. We will continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19 and closely monitor our liquidity.
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:
| | | | | | | | | | | | | | | |
| Year Ended December 31 |
| (In thousands) |
| | 2021 | | 2020 | | |
| Net cash provided by (used for) operating activities from continuing operations | $ | 17,857 | | | $ | (27,934) | | | |
| Net cash provided by (used for) investing activities from continuing operations | $ | (11,844) | | | $ | (3,812) | | | |
| Net cash provided by (used for) financing activities from continuing operations | $ | (7,266) | | | $ | 34,180 | | | |
|
| | | | | | | | | | | |
| | 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 |
|
The components of change are discussed below in “Segment Results”.
Liquidity and Capital Resources of Hamilton Beach Holding
Although Hamilton Beach Holding’s subsidiaries have entered into borrowing agreements, Hamilton Beach Holding 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, 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 record at the close of business on December 1, 2017. The declared cash dividend was equal to an annual rate of $0.34 per share.
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 to the payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that the board deems relevant.
Contractual Obligations, Contingent Liabilities and Commitments
As a holding company, Hamilton Beach Holding has no contractual obligations, contingent liabilities and commitments.
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 compared2021 Compared with December 31, 20162020
Operating activities - Net cash provided by operating activities was $17.9 million compared to cash used for operating activities of $27.9 million in 2020 primarily due to net working capital which was a use of cash of $1.5 million in 2021 compared to a use of cash of $66.9 million in 2020. In 2021, Trade receivables provided net cash of $27.6 million compared to a use of cash of $41.3 million in the prior year due to the timing of collections and increased fourth quarter sales in 2020 compared to 2021. This was partially offset by changes in other assets and other liabilities, primarily federal income taxes paid, payment of a previously accrued legal settlement and an increase in the net pension plan assets.
Investing activities - Net cash used for investing activities increased in 2021 compared to 2020 due to capital spending for the Company's new distribution center leased facility, which is presented below:partially offset by $4.0 million in lease incentives and tenant improvement allowances classified as cash provided by operating activities.
Financing activities - Net cash used for financing activities was $7.3 million in 2021 compared to cash provided by financing activities of $34.2 million primarily due to a decrease in HBB's net borrowing activity on the revolving credit facility. Borrowings on the revolving credit facility are used to fund net working capital.
Capital Resources
On September 17, 2021, HBB entered into Amendment No. 10 to its Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties thereto as the Lenders, Hamilton Beach Brands, Inc., as Parent and U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower (the “Amendment”). Among other changes, the Amendment increased the credit facility from $125 million to $150 million, amended the pricing grid and increased the eligible inventory included in the borrowing base. Under the Amendment, dividends to Hamilton Beach Brands Holding Company are not to exceed $7.0 million during any calendar year to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $18.0 million. Dividends to Hamilton Beach Brands Holding Company are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $30 million. In addition, the Amendment provides mechanics relating to the transition away from LIBOR as a benchmark interest rate and the replacement of LIBOR with a replacement or alternative benchmark interest rate.
The Company expects to continue to borrow against the facility and make voluntary repayments within the next twelve months. Repayment of the credit facility is due on June 30, 2025, therefore all borrowings are classified as long term debt as of December 31, 2021. The obligations under the HBB Facility are secured by substantially all of HBB's assets.
| |
Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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.
| |
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.
| |
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, 2017,2021, the borrowing base under the HBB Facility was $111.1was $149.0 million andand borrowings outstanding were $51.3$96.8 million. AtAt December 31, 2017,2021, the excess availability under the HBB Facility was $59.7$52.2 million.
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. TheThe applicable margins, effective December 31, 2017,2021, for base rate loans and LIBOR loans denominated in U.S. dollars were 0.00% and 1.50%1.75%, respectively. The applicable margins, effective December 31, 2017,2021, for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.00% 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 commitmentcommitment 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 atfor the year ended December 31, 20172021 was 3.83% including3.38%, including the floating rate margin and the effect of the interest rate swap agreements.agreements described below.
To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of the HBB Facility. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate. HBB has interest rate swaps with notional values totaling $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, with2021 at an average 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.of 1.7%. HBB also entered into delayed-start interest rate swaps during the second and third quarter of 2021. These swaps have notional values totaling $75.0 million as of December 31, 2021, with an average fixed interest rate of 1.2%.
The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends to Hamilton Beach Holding, subject to achieving availability thresholds. Under Amendment No. 10 to the HBB declared and paid a $35 million dividendFacility, dividends to Hamilton Beach Holding which was subsequently paidare not to NACCOexceed $7.0 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$18.0 million. Dividends to Hamilton Beach Holding are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $25.0$30.0 million. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. At December 31, 2017,2021, HBB was in compliance with all financial covenants in the HBB Facility.
The Company maintains 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.
Contractual Obligations, Contingent Liabilities and Commitments
Following is a table which summarizes the contractual obligations of Hamilton Beach Holding as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
| Contractual Obligations | Total | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
| | | | | | | | | | | | | |
| Revolving credit agreements | $ | 96,837 | | | $ | — | | | $ | — | | | $ | — | | | $ | 96,837 | | | $ | — | | | $ | — | |
| Variable interest payments on HBB Facility | 9,936 | | | 3,228 | | | 2,731 | | | 2,698 | | | 1,279 | | | — | | | — | |
| Purchase and other obligations | 288,384 | | | 288,217 | | | 69 | | | 64 | | | 34 | | | — | | | — | |
| Operating lease obligations | 73,196 | | | 7,619 | | | 7,929 | | | 7,765 | | | 5,887 | | | 5,404 | | | 38,592 | |
| Total contractual cash obligations | $ | 468,353 | | | $ | 299,064 | | | $ | 10,729 | | | $ | 10,527 | | | $ | 104,037 | | | $ | 5,404 | | | $ | 38,592 | |
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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, 20172021 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$0.1 million.
The
HBB's purchase and other obligations are primarily for accounts payable, open purchase orders and accrued payroll and incentive compensation.
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.
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 2018.2022. Pension benefit payments are made from assets of the pension plans.
Off Balance Sheet Arrangements
HBB
The Company 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 actualRecently Issued and planned capital expenditures (in millions):Adopted Accounting Standards |
| | | | | | | | | | | |
| | Planned | | Actual | | Actual |
| | 2018 | | 2017 | | 2016 |
| HBB | $ | 9.9 |
| | $ | 6.2 |
| | $ | 4.8 |
|
Planned expendituresRefer to Note 1 to the consolidated financial statements 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, 2016recently issued and December 31, 2016 compared with December 31, 2015.adopted accounting standards.
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Item 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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.
In 2018, cash flow before financing activities is expected to be higher than 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 placements 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.
| |
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 subject 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 half of the year when sales of kitchenware to consumers increase significantly for 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 results of operations for KC were as follows for the years ended 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, 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 |
|
| |
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: 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, the Company can adopt the new or revised standard at the time private companies 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, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is planning to adopt ASU 2016-02 for its fiscal year ending December 31, 2020 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.
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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)
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-K 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-lookingforward 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) the Company’s ability to source and ship products to meet anticipated demand, (2) the Company’s ability to successfully manage ongoing constraints throughout the global transportation supply chain, (3) the unpredictable nature of the COVID-19 pandemic and its potential impact on the Company's business; (4) the direct and indirect impacts of the increasingly volatile global economic conditions as a result of the conflict in Ukraine; (5) changes in the sales prices, product mix or levels of consumer purchases of small electric and specialty housewares appliances, (2)(6) changes in consumer retail and credit markets, including the increasing volume of transactions made through third-party internet sellers, (3)(7) bankruptcy of or loss of major retail customers or suppliers, (4)(8) changes in costs, including transportation costs, of sourced products, (5)(9) delays in delivery of sourced products, (6)(10) changes in or unavailability of quality or cost effective suppliers, (7)(11) exchange rate fluctuations, changes in the import tariffs and monetary policies and other changes in the regulatory climate in the countries in which HBBthe Company buys, operates and/or sells products, (8)(12) the impact of tariffs on customer purchasing patterns, (13) product liability, regulatory actions or other litigation, warranty claims or returns of products, (9)(14) customer acceptance of, changes in costs of, or delays in the development of new products, (10)(15) increased competition, including consolidation within the industry, (11)(16) 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)(17) changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation, and (13)(18) other risk factors, including those described in the actualCompany's filings with the Securities and Exchange Commission, including, but not limited to, the Annual Report on Form 10-K for the year ended December 31, 2021. Furthermore, the situation surrounding COVID-19, including the mutation of variants, remains fluid and the potential for a material impact on the Company’s results of operations, financial condition, liquidity, and stock price increases the longer the virus impacts activity levels in the U.S. and globally. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on its results of operations, financial position, liquidity and stock price. The extent of any impact will depend on the scope of any new virus mutations and outbreaks, the nature of government public health guidelines and the public’s adherence to those guidelines, the rate of individuals becoming fully vaccinated, the public's adherence to guidelines to receive booster shots, the success of business and economic recovery as the pandemic recedes, unemployment levels, the extent to which new shutdowns may be needed, the impact of any further government economic relief on the 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.
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 ofU.S. economy, consumer confidence and disposable income as a result of economic conditions, unemployment rates or other events or conditions that may adversely affectdemand for 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.Company's products.
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 million at December 31, 2017.2021. A hypothetical 10% decrease in interest rates would cause a decrease of $0.2$0.3 million in the fair value of interest rate swap agreements and the resulting fair value would be a receivablepayable of $0.7$1.2 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$2.9 million at December 31, 2017.2021.
FOREIGN CURRENCY EXCHANGE RATE RISK
HBB operates internationally and enters into transactions denominated in foreign currencies, principally the Canadian dollar, the Mexican peso and, to a lesser extent, the Chinese yuan and Brazilian real. As such, HBB's financial results are subject to the variability that arises from exchange rate movements. The fluctuation in the value of the 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 receivable of $0.2less than $0.1 million at December 31, 2017.2021. Assuming a hypothetical 10% weakening of the U.S. dollar compared with the Canadian dollar at December 31, 2017,2021, the fair value of foreign currency-sensitive financial instruments, which represents forward foreign currency exchange contracts, would be decreased by $1.3$1.6 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.2021.
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-K 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, 2017.2021 that would require disclosure pursuant to this Item 9.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controlsDisclosure Controls and procedures: An evaluation was carried out under the supervision and with the participation of the Company'sProcedures: As required by Exchange Act Rule 13a-15(b), our management, including the principal executive officerour Chief Executive Officer and the principal financial officer,Chief Financial Officer, conducted an evaluation of the effectiveness of the Company'sour disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, these officers haveour Chief Executive Officer and Chief Financial Officer concluded that the Company'sour disclosure controls and procedures are effective.were effective as of December 31, 2021.
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 maintained effective internal control over financial reporting was effective as of December 31, 2017. 2021.
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.
Remediation of Material Weakness related to Income taxes
During the fourth quarter of 2020, Management identified and disclosed a material weakness in our internal control over financial reporting related to controls over our income tax accounting process to identify and accurately measure deferred tax assets, deferred tax liabilities and income taxes payable and the related income tax expense.
In order to remediate the material weakness, we implemented a plan of remediation to strengthen our internal controls over financial reporting. The steps taken to remediate the Company’s material weakness included the following:
a.Reviewed the organization structure and resources to ensure the appropriate level of tax experience to support the income taxes accounting process;
b.Enhanced the design of the processes and controls related to deferred income taxes, income taxes payable and the related income tax expense;
c.Enhanced the monitoring activities related to income taxes; and
d.Enhanced the level of precision in the management review controls related to income taxes.
The actions described above to address the material weakness are fully implemented and the operational effectiveness of related internal controls has been validated through testing. Based on the actions taken, and the testing and evaluation of the effectiveness of the controls, management concluded that these controls are operating effectively and the material weakness described above has been remediated as of December 31, 2021.
The Company's effectiveness of internal control over financial reporting as of December 31, 20172021 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-K and incorporated herein by reference.
Changes in internal control: There have beenInternal Control over Financial Reporting: Other than with respect to the material weakness related to income taxes discussed above that was identified as of December 31, 2020 and subsequently remediated as of December 31, 2021, there were no changes in the Company'sCompany’s internal control over financial reporting that occurredidentified during the fourth quarter of 2017,2021, in connection with the evaluation by the Company’s management required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’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 20182022 Proxy Statement under the subheadings “Part II — Proposals To Be Voted On At The 20182022 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 20182022 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 20182022 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-K 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 20182022 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 20182022 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 20182022 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 20182022 Proxy Statement under the heading “Part II — Proposals To Be Voted On At The 20182022 Annual Meeting — Proposal 24 — Ratification of the Appointment of Ernst & Young LLP as the Company's Independent Registered Public Accounting Firm for 2018,2022,” 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. (a)(2) Financial Statement Schedules
The response to Item 15(a)(2) is set forth beginning at page F-2F-37 of this Form 10-K. (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.
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| 10.3 | | Amendment to Stockholders’ Agreement, dated as of December 21, 2020, by and amongbetween the Depository, the Issuer, NACCOthe new Participating Stockholders and the signatories thereto,Participating Stockholders is incorporated by reference to Exhibit 2 of19 to the Participating Stockholders’ Schedule 13D,13D/A, filed by the Participating Stockholders on October 6, 2017.February 12, 2021, Commission File Number 005-90132 |
10.5*10.4 | | The Retirement Benefit Plan for Alfred M. Rankin, Jr. (Amended and Restated EffectiveAmendment to Stockholders' Agreement, dated as of January 1, 2014) (incorporated hereinFebruary 11, 2022, by and among the Depository, Hamilton Beach Brands Holding Company, the new Participating Stockholder signatories thereto and the Participating Stockholders is incorporated by reference to Exhibit 10.218 to the NACCO Industries, Inc. Current Report on Form 8-K,Participating Stockholders’ Schedule 13D/A, filed by NACCO Industries, Inc.the Participating Stockholders on February 14, 2014,11, 2022, Commission File Number 1-9172).005-90132 |
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10.19 | | 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. |
10.20 | | 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. |
10.21 | | 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. |
10.22 | | 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. |
10.2310.6 | | 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. |
10.2410.7 | | 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. |
10.2510.8 | | 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. |
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10.2610.9 | | 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. |
10.2710.10 | | 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. |
10.2810.11 | | 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. |
10.2910.12 | | 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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| 10.13 | | 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. |
10.30*10.14 | | Amendment No.1No. 7 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 May 15, 2020, is incorporated by reference to Exhibit 10.2 of Hamilton Beach Brands Holding Company's Current Report on Form 10-Q, filed on July 24, 2020. |
| 10.15 | | Amendment No. 8 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 U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower, dated November 23, 2020, incorporated by reference to Exhibit 10.23 of Hamilton Beach Brands Holding Company's Annual Report on Form 10-K, filed on March 22, 2021. |
| 10.16 | | Amendment No. 9 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties Hereto as the Lenders, Hamilton Beach Brands, Inc., as Parent and U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower, dated April 9, 2021, incorporated by reference to Exhibit 10.1 of Hamilton Beach Brands Holding Company's Current Report on Form 10-Q, filed on May 5, 2021. |
| 10.17 | | Amendment No. 10 to Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties thereto as the Lenders, Hamilton Beach Brands, Inc., as U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower, dated September 17, 2021 is incorporated by reference to Exhibit 10.1 of Hamilton Beach Brands Holding Company's Current Report on Form 10-Q, filed on November 3, 2021. |
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10.40 | | 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. |
(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 |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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| * | | Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item15(b)Item 15(b) of this Annual Report on Form 10-K. |
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) | | | | |
| | | | | |
| Hamilton Beach Brands Holding CompanySignature | | Title | | Date |
| By: | (Registrant) | | | | |
| | | | | |
| 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, 20189, 2022 |
| 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-K for the fiscal year ended December 31, 2017 and to sign any and all amendments to suchthis Annual Report on Form 10-K, 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 |
| | | | |
Signature | | Title | | Date |
| | | | |
| /s/ Gregory H. Trepp | | | | |
| Gregory H. Trepp | | President and Chief Executive Officer (Principal Executive Officer), Director | | March 7, 2018 |
| | | | |
/s/ James H. Taylor | | | | |
James H. Taylor | | Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)/(Principal Accounting Officer)
| | March 7, 2018 |
| | | | |
/s/ Mark R. Belgya | | | | |
Mark R. Belgya | | Director | | March 7, 2018 |
| | | | |
/s/ J.C. Butler, Jr. | | | | |
J.C. Butler, Jr. | | Director | | March 7, 2018 |
| | | | |
/s/ John P. Jumper | | | | |
John P. Jumper | | Director | | March 7, 2018 |
| 9, 2022 |
| | | | |
Signature/s/ Michelle O. Mosier | | Title | | Date |
| Michelle O. Mosier | | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)/(Principal Accounting Officer) | | March 9, 2022 |
| | | | |
| /s/ Mark R. Belgya | | | | |
| Mark R. Belgya | | Director | | March 9, 2022 |
| | | | |
| /s/ J.C. Butler, Jr. | | | | |
| J.C. Butler, Jr. | | Director | | March 9, 2022 |
| | | | |
| /s/ Paul D. Furlow | | | | |
| Paul D. Furlow | | Director | | March 9, 2022 |
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ John P. Jumper | | | | |
| John P. Jumper | | Director | | March 9, 2022 |
| | | | |
| /s/ Dennis W. LaBarre | | | | |
| Dennis W. LaBarre | | Director | | March 7, 20189, 2022 |
| | | | |
| /s/ Michael S. Miller | | | | |
| Michael S. Miller | | Director | | March 7, 20189, 2022 |
| | | | |
/s/ Roger F. Rankin | | | | |
Roger F. Rankin | | Director | | March 7, 2018 |
| | | | |
| /s/ Alfred M. Rankin, Jr. | | | | |
| Alfred M. Rankin, Jr. | | Director | | March 7, 20189, 2022 |
| | | | |
| /s/ Thomas T. Rankin | | | | |
| Thomas T. Rankin | | Director | | March 7, 20189, 2022 |
| | | | |
| /s/ James A. Ratner | | | | |
| James A. Ratner | | Director | | March 7, 20189, 2022 |
| | | | |
/s/ David F. TaplinClara R. Williams | | | | |
David F. TaplinClara R. Williams | | Director | | March 7, 20189, 2022 |
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, 20172021
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, 20172021 and 2016,2020, 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, 2017,2021, and the related notes and the financial statement scheduleFinancial 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, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2021, 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, 2017,2021, 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, 20189, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany'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. |
| | | |
| | | /s/ Ernst & Young LLP |
| | | |
We have served as the Company’s auditor since 2017. | |
| | | |
Cleveland, Ohio | | | |
March 7, 2018 | | | |
Cleveland, Ohio
March 9, 2022
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, 2017,2021, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hamilton Beach Brands Holding Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 20172021 consolidated financial statements of the Company and our report dated March 7, 20189, 2022 expressed an unqualified opinion thereon.
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 reportReport on internal controlInternal Control over financial reporting in Item 9A.Financial Reporting. Our responsibility is to express an opinion on the Company’sCompany'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
March 9, 2022
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 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
| | 2021 | | 2020 | | 2019 |
| | (In thousands, except per share data) |
| Revenue | $ | 658,394 | | | $ | 603,713 | | | $ | 611,786 | |
| Cost of sales | 521,892 | | | 465,059 | | | 483,234 | |
| Gross profit | 136,502 | | | 138,654 | | | 128,552 | |
| Selling, general and administrative expenses | 104,763 | | | 99,990 | | | 100,381 | |
| Amortization of intangible assets | 200 | | | 1,249 | | | 1,377 | |
| Operating profit (loss) | 31,539 | | | 37,415 | | | 26,794 | |
| Interest expense, net | 2,854 | | | 1,998 | | | 2,975 | |
| Other expense (income), net | (272) | | | 1,685 | | | (358) | |
| Income (loss) from continuing operations before income taxes | 28,957 | | | 33,732 | | | 24,177 | |
| Income tax expense (benefit) | 7,651 | | | 9,665 | | | 9,084 | |
| Net income (loss) from continuing operations | 21,306 | | | 24,067 | | | 15,093 | |
| Income (loss) from discontinued operations, net of tax | — | | | 22,191 | | | (28,600) | |
| Net income (loss) | $ | 21,306 | | | $ | 46,258 | | | $ | (13,507) | |
| | | | | |
| Basic earnings (loss) per share: | | | | | |
| Continuing operations | $ | 1.54 | | | $ | 1.76 | | | $ | 1.10 | |
| Discontinued operations | — | | | 1.62 | | | (2.09) | |
| Basic earnings (loss) per share | $ | 1.54 | | | $ | 3.39 | | | $ | (0.99) | |
| | | | | |
| Diluted earnings (loss) per share: | | | | | |
| Continuing operations | $ | 1.53 | | | $ | 1.76 | | | $ | 1.10 | |
| Discontinued operations | — | | | 1.62 | | | (2.09) | |
| Diluted earnings (loss) per share | $ | 1.53 | | | $ | 3.37 | | | $ | (0.99) | |
| | | | | |
| Basic weighted average shares outstanding | 13,880 | | | 13,657 | | | 13,690 | |
| Diluted weighted average shares outstanding | 13,930 | | | 13,712 | | | 13,726 | |
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
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 one1 share of Hamilton Beach Brands Holding Company Class A common stock ("Class A Common") and one1 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 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.
Cash and cash equivalents include cash in banks and highly liquid investments with original maturities of three months or less.
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
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 $10.4$8.6 million, $9.7$10.0 million, and $9.6$12.1 million in 2017, 2016,2021, 2020, and 2015,2019, respectively.
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.
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
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). For cash flow hedges, the Company formally assesses, both at inception and on a quarterly basis thereafter, whether the designated derivative instrument is highly effective in offsetting changes in cash flows of the hedged item. 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. The ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings and included on the line “Other, net, including interest income” in the “Other expense” section of the Consolidated Statements of Operations.
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.
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.
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 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, 2019,2021, and interim periods within fiscal years beginning after December 15, 2020.2022. Early adoption is permitted. The Company is planning to adopt ASU 2016-02 for its fiscal year ending December 31, 2020when required and is currently evaluating to what extent ASU 2016-02 will affect the Company's financial position, results of operations, cash flows and related disclosures. The Company expects to record additional material assets and corresponding liabilities related to operating leases in the statement of financial position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 3—Inventories
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 |
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31 |
| | | | 2020 | | 2019 |
| | |
| Revenue | | | $ | 631 | | | $ | 100,860 | |
| Cost of sales | | | — | | | 62,927 | |
| Gross profit | | | 631 | | | 37,933 | |
| Selling, general and administrative expenses | | | 1,346 | | | 54,047 | |
Adjustment of lease termination liability (1) | | | (16,457) | | | 15,186 | |
Adjustment of other current liabilities(2) | | | (6,608) | | | — | |
| Operating profit (loss) | | | 22,350 | | | (31,300) | |
| Interest expense | | | — | | | 583 | |
| Other expense, net | | | 88 | | | 26 | |
| Income (loss) from discontinued operations before income taxes | | | 22,262 | | | (31,909) | |
| Income tax expense (benefit) | | | 71 | | | (3,309) | |
| Income (loss) from discontinued operations, net of tax | | | $ | 22,191 | | | $ | (28,600) | |
(1) For the year ended December 31, 2020, represents an adjustment to the lease termination obligation based on the final distribution of KC's remaining assets on April 3, 2020.
(2) Represents an adjustment to the carrying value of substantially all of the other current liabilities based on the final distribution of KC's remaining assets on April 3, 2020.
Due to the dissolution of KC, there were no assets or liabilities associated with KC as of December 31, 2021 and 2020. Neither Hamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC.
NOTE 4—3 - Property, Plant and Equipment, Net
Property, plant and equipment, net includes the following:
| | | | | | | | | | | |
| | December 31 |
| | 2021 | | 2020 |
| Land | $ | 226 | | | $ | 226 | |
| Furniture and fixtures | 11,485 | | | 10,957 | |
| Building and improvements | 9,737 | | | 10,145 | |
| Machinery and equipment | 32,392 | | | 33,601 | |
| Internal-use capitalized software | 14,615 | | | 15,582 | |
| Construction in progress, including internal-use capitalized software not yet in service | 1,240 | | | 1,214 | |
| Property, plant and equipment, at cost | 69,695 | | | 71,725 | |
| Less allowances for depreciation and amortization | 39,210 | | | 48,235 | |
| | $ | 30,485 | | | $ | 23,490 | |
|
| | | | | | | |
| | 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)
NOTE 4 - 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, 2021 | | | | | |
| | | | | |
| Trademarks | $ | 3,100 | | | $ | (1,408) | | | $ | 1,692 | |
| | | | | |
| $ | 3,100 | | | $ | (1,408) | | | $ | 1,692 | |
| | | | | |
| Balance at December 31, 2020 | | | | | |
| Customer relationships | $ | 5,760 | | | $ | (5,760) | | | $ | — | |
| Trademarks | 3,100 | | | (1,208) | | | 1,892 | |
| Other intangibles | 1,240 | | | (1,240) | | | — | |
| $ | 10,100 | | | $ | (8,208) | | | $ | 1,892 | |
Amortization expense for intangible assets was $1.4$0.2 million in 2021 and $1.2 million in 2017, 2016 and 2015.2020.
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.million. The weighted average amortization period for HBB'sremaining useful life of the trademark intangible assetsasset is approximately 8.98.5 years.
NOTE 6—5 - 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.subsidiary.
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 |
| | 2021 | | 2020 |
| Total outstanding borrowings for continuing operations: | | | |
| Revolving credit agreements | $ | 96,837 | | | $ | 98,360 | |
| | | |
| Total outstanding borrowings | $ | 96,837 | | | $ | 98,360 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Total available borrowings, net of limitations, under revolving credit agreements | $ | 149,015 | | | $ | 123,277 | |
| | | |
| Unused available borrowings | $ | 52,178 | | | $ | 24,917 | |
| | | |
| Weighted average stated interest rate on total borrowings | 2.18 | % | | 2.51 | % |
| Weighted average effective interest rate on total borrowings (including interest rate swap agreements) | 3.38 | % | | 2.88 | % |
Including swap settlements, interest paid on total debt was $1.6$2.8 million, $1.4$2.1 million, and $1.8$3.1 million during 2017, 2016,2021, 2020, and 2015,2019, respectively. Interest capitalized was $0.2 million in 2017 and less than $0.1 million in 20162021, $0.3 million in 2020 and 2015.$0.4 million in 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
On September 17, 2021, HBB has a $115.0 million senior secured floating-rate revolvingentered into Amendment No. 10 to its Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties thereto as the Lenders, Hamilton Beach Brands, Inc., as Parent and U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower (the “Amendment”). Among other changes, the Amendment increased the credit facility (the “HBB Facility”)from $125 million to $150 million, amended the pricing grid and increased the eligible inventory included in the borrowing base. Under the Amendment, dividends to Hamilton Beach Brands Holding Company are not to exceed $7.0 million during any calendar year to the extent that expires infor the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $18.0 million. Dividends to Hamilton Beach Brands Holding Company are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $30 million. In addition, the Amendment provides mechanics relating to the transition away from LIBOR as a benchmark interest rate and the replacement of LIBOR with a replacement or alternative benchmark interest rate. The Company expects to continue to borrow against the facility and make voluntary repayments within the next twelve months. Repayment of the credit facility is due on June 30, 2025, therefore all borrowings are classified as long-term debt as of December 31, 2021. The obligations under the HBB Facility are secured by substantially all of HBB's assets. The approximate book value of HBB's assets heldHBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as collateral underdefined in the HBB Facility was $281.0 million as ofFacility. At December 31, 2017.2021, HBB was in compliance with all financial covenants in the HBB Facility.
The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible accounts receivable, inventorytrade 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, 2017,2021, for base rate loans and LIBOR loans denominated in U.S. dollars were 0.00% and 1.50%1.75%, respectively. The applicable margins, effective December 31, 2017,2021, for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.00% 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Theinterest, HBB Facility includes restrictive covenants, which, among other things, limit the paymenthas entered into interest rate swap agreements for a portion 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. AtTerms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate. HBB has interest rate swaps with notional values totaling $25.0 million at December 31, 2017,2021 at an average fixed interest rate of 1.7%. HBB was in compliance with all financial covenants inalso entered into delayed-start interest rate swaps during the HBB Facility.
KC: KC has a $20.0 million secured revolving linesecond and third quarter 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 $43.42021. These swaps have notional values totaling $75.0 million as of December 31, 2017.2021, with an average fixed interest rate of 1.2%.
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 6 - Fair Value Disclosure
NOTE 7—Derivative Financial InstrumentsRecurring 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. The fair value of assets held for sale at December 31, 2020, classified as Level 3, were determined using a market approach based on market participant inputs.
There were no transfers into or out of Levels 1 or 2 during the years ended December 31, 2021 and 2020. There was one transfer into Level 3 related to the $3.4 million of assets held for sale during the year ended December 31, 2020. These assets were transferred out of Level 3 during the year ended December 31, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 7 - Derivative Financial Instruments
Foreign Currency Derivatives:
HBB held forward foreign currency exchange contracts with total notional amounts of $11.7$15.1 million and $9.0$12.3 million at December 31, 2017,2021, and 2016,2020, respectively, denominated primarily in Canadian dollars and Mexican pesos. The fair value of these contracts approximated a net receivable of $0.2less than $0.1 million and $0.1 millionat December 31, 20172021 and 2016, respectively.a payable of $0.5 million at December 31, 2020.
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.
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 delayedfor HBB 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 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional Amount | | Average Fixed Rate | | Remaining Term at |
| | 2021 | | 2020 | | 2021 | | 2020 | | December 31, 2021 |
| | | | | | | | | |
| Interest rate swaps | $ | 25.0 | | | $ | 25.0 | | | 1.7 | % | | 1.7 | % | | Extending to January 2024 |
| Delayed start interest rate swaps | $ | 75.0 | | | $ | — | | | 1.2 | % | | — | % | | Extending to January 2029 |
The fair value of HBB's interest rate swap agreements was a net receivablepayable of $0.9 million at December 31, 20172021 and a net receivablepayable of $0.8$1.2 million at December 31, 2016.2020. 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, 20172021 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 |
| | Balance sheet location | | 2021 | | 2020 | | Balance sheet location | | 2021 | | 2020 |
| Interest rate swap agreements | | | | | | | | | | | |
| Current | Prepaid expenses and other current assets | | $ | — | | | $ | — | | | Other current liabilities | | $ | 216 | | | $ | 380 | |
| Long-term | Other non-current assets | | — | | | — | | | Other long-term liabilities | | 655 | | | 779 | |
| Foreign currency exchange contracts | | | | | | | | | | | |
| Current | Prepaid expenses and other current assets | | 73 | | | — | | | Other current liabilities | | 41 | | | 518 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total derivatives | | | $ | 73 | | | $ | — | | | | | $ | 912 | | | $ | 1,677 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | Balance sheet location | | 2017 | | 2016 | | Balance sheet location | | 2017 | | 2016 |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Interest rate swap agreements | | | | | | | | | | | |
| Current | Prepaid expenses and other | | $ | 109 |
| | $ | 14 |
| | Other current liabilities | | $ | — |
| | $ | — |
|
| Long-term | Other non-current assets | | 785 |
| | 760 |
| | Other long-term liabilities | | — |
| | — |
|
| Foreign currency exchange contracts | | | | | | | | | | | |
| Current | Prepaid expenses and other | | 245 |
| | 147 |
| | Other current liabilities | | 93 |
| | — |
|
| Total derivatives | | | $ | 1,139 |
| | $ | 921 |
| | | | $ | 93 |
| | $ | — |
|
| | | | | | | | | | | | |
NOTE 8—Fair Value Disclosure
Recurring Fair Value Measurements: 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 2 of the valuation hierarchy. The fair value for these contracts is determined based on exchange rates and interest rates, respectively. See Note 7 for further discussion of the Company’s derivative financial instruments.
There were no transfers into or out of Levels 1, 2 or 3 during the years ended December 31, 2017 and 2016.
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—8 - Leasing Arrangements
The CompanyHBB leases certain office and warehouse facilities retail stores andas well as machinery and equipment under noncancellable operating leases that expire at various dates through 2031. Many leases include renewal and/or fair value purchase options.2034.
Future minimum operating lease payments at December 31,
20172021 are:
|
| | | |
| | 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 |
|
| | | | | |
| | Operating
Leases |
| 2022 | $ | 7,619 | |
| 2023 | 7,929 | |
| 2024 | 7,765 | |
| 2025 | 5,887 | |
| 2026 | 5,404 | |
| Subsequent to 2026 | 38,592 | |
| Total minimum lease payments | $ | 73,196 | |
Rental expense from continuing operations net of sublease rental income for all operating leases was $9.0 million in 2021, $6.2 million in 2020 and $5.6 million 2019.
NOTE 9 - Stockholders' Equity and Earnings Per Share
Capital Stock
The authorized capital stock of Hamilton Beach Brands Holding 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 are established by the Board upon issuance of such Preferred stock.
Hamilton 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 trading market has developed, or is expected to develop, for the Class B Common.
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 1 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 10 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The following table sets forth the Company's authorized capital stock information:
| | | | | | | | | | | |
| December 31 |
| 2021 | | 2020 |
| |
| Preferred stock, par value $0.01 per share | | | |
| Preferred stock authorized | 5,000 | | | 5,000 | |
| Preferred stock outstanding | — | | | — | |
| Class A Common stock, par value $0.01 per share | | | |
| Class A Common authorized | 70,000 | | | 70,000 | |
Class A Common issued(1)(2) | 10,267 | | | 10,006 | |
| Treasury Stock | 365 | | | 365 | |
| Class B Common stock, par value $0.01 per share, convertible into Class A on a 1-for-1 basis | | | |
| Class B Common authorized | 30,000 | | | 30,000 | |
Class B Common issued(1) | 4,000 | | | 4,045 | |
(1) Class B Common converted to Class A Common were 45 shares during 2021 and 31 shares 2020.
(2) The Company issued Class A Common of 216 during 2021 and 170 during 2020 related to the Company's stock compensation plan.
Stock Repurchase Program
In May 2018, the Company approved a stock repurchase program for the purchase of up to $25.0 million $25.9of the Company's Class A Common outstanding through December 31, 2019. 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 $26.0ending December 31, 2021. During the year ended December 31, 2019, the Company repurchased 364,893 shares for an aggregate purchase price of $6.0 million. There were 0 share repurchases during the years ended December 31, 2021 and 2020. On February 22, 2022, the Company's Board approved a stock repurchase program for the purchase of up to $25 million of the Company's Class A Common outstanding starting February 22, 2022 and ending December 31, 2023.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes in 2017, 2016,accumulated other comprehensive income (loss) by component and 2015, respectively.related tax effects for periods shown:
| | | | | | | | | | | | | | |
| Foreign Currency | Deferred Gain (Loss) on Cash Flow Hedging | Pension Plan Adjustment | Total |
| Balance, January 1, 2019 | $ | (8,652) | | $ | 879 | | $ | (9,328) | | $ | (17,101) | |
| | | | |
| Other comprehensive income (loss) | 481 | | (2,199) | | 1,882 | | 164 | |
| Reclassification adjustment to net income (loss) | — | | 490 | | 727 | | 1,217 | |
| Tax effects | (50) | | 489 | | (851) | | (412) | |
| Balance, December 31, 2019 | $ | (8,221) | | $ | (341) | | $ | (7,570) | | $ | (16,132) | |
| Other comprehensive income (loss) | (896) | | (718) | | 844 | | (770) | |
| Reclassification adjustment to net income (loss) | — | | (642) | | 701 | | 59 | |
| Tax effects | (658) | | 357 | | (332) | | (633) | |
| Balance, December 31, 2020 | $ | (9,775) | | $ | (1,344) | | $ | (6,357) | | $ | (17,476) | |
| Other comprehensive income (loss) | (181) | | 418 | | 2,970 | | 3,207 | |
| Reclassification adjustment to net income (loss) | — | | 557 | | 654 | | 1,211 | |
| Tax effects | 79 | | (269) | | (995) | | (1,185) | |
| Balance, December 31, 2021 | $ | (9,877) | | $ | (638) | | $ | (3,728) | | $ | (14,243) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Earnings per share
The weighted average number of shares of Class A Common and Class B Common outstanding used to calculate basic and diluted earnings (loss) per share were as follows:
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Basic weighted average shares outstanding | 13,880 | | | 13,657 | | | 13,690 | |
| Dilutive effect of share-based compensation awards | 50 | | | 55 | | | 36 | |
| Diluted weighted average shares outstanding | 13,930 | | | 13,712 | | | 13,726 | |
| | | | | |
| Basic earnings (loss) per share: | | | | | |
| Continuing operations | $ | 1.54 | | | $ | 1.76 | | | $ | 1.10 | |
| Discontinued operations | — | | | 1.62 | | | (2.09) | |
| Basic and diluted earnings (loss) per share | $ | 1.54 | | | $ | 3.39 | | | $ | (0.99) | |
| | | | | |
| Diluted earnings (loss) per share: | | | | | |
| Continuing operations | $ | 1.53 | | | $ | 1.76 | | | $ | 1.10 | |
| Discontinued operations | — | | | 1.62 | | | (2.09) | |
| Diluted earnings (loss) per share | $ | 1.53 | | | $ | 3.37 | | | $ | (0.99) | |
| | | | | |
NOTE 10 - Revenue
Revenue is recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services, which includes an estimate for variable consideration.
HBB’s warranty program to the consumer consists generally of an assurance-type limited warranty lasting for varying periods of up to ten years for electric appliances, with the majority of products having a warranty of one to three years. There is no guarantee to the customer as HBB may repair or replace, at its option, those products returned under warranty. Accordingly, the Company determined that no separate performance obligation exists.
HBB products are not sold with a general right of return. However, based on historical experience, a portion of products sold are estimated to be returned due to reasons such as product failure and excess inventory stocked by the customer, which, subject to certain terms and conditions, HBB will agree to accept. Product returns, customer programs and incentive offerings, including special pricing agreements, price competition, promotions, and other volume-based incentives are accounted for as variable consideration.
A description of revenue sources and performance obligations for HBB are as follows:
Consumer and Commercial product revenue
Transactions with both consumer and commercial customers generally originate upon the receipt of a purchase order from the customer, which in some cases are governed by master sales agreements, specifying product(s) that the customer desires. Contracts for product revenue have an original duration of one year or less, and payment terms are generally standard and based on customer creditworthiness. Revenue from product sales is recognized at the point in time when control transfers to the customer, which is either when product is shipped from the Company's facility, or delivered to customers, depending on the shipping terms. The amount of revenue recognized varies primarily with price concessions and changes in returns. The Company also recognized $0.4 millionoffers price concessions to our customers for incentive offerings, special pricing agreements, price competition, promotions or other volume-based arrangements. The Company evaluated such agreements with our customers and determined returns and price concessions should be accounted for as variable consideration.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in 2017, 2016,Thousands, Except Per Share and 2015, respectivelyPercentage Data)
Consumer product revenue consists of sales of small electric household and specialty housewares appliances to traditional brick and mortar and ecommerce retailers, distributors and directly to the end consumer. A majority of this revenue is in North America.
Commercial product revenue consists of sales of products for rental incomerestaurants, fast-food chains, bars and hotels. Approximately one-half of our commercial sales is in the U.S. and the other half is in markets across the globe.
License revenue
From time to time, the Company enters into exclusive and non-exclusive licensing agreements which grant the right to use certain of HBB’s intellectual property ("IP") in connection with designing, manufacturing, distributing, advertising, promoting and selling the licensees’ products during the term of the agreement. The IP that is licensed generally consists of trademarks, trade names, patents, trade dress, and/or logos (the “Licensed IP”). In exchange for granting the right to use the Licensed IP, HBB receives a royalty payment, which is a function of (1) the total net sales of products that use the Licensed IP and (2) the royalty percentage that is stated in the licensing agreement. HBB recognizes revenue at the later of when the subsequent sales occur or satisfying the performance obligation (over time).
The following table presents the HBB's revenue on subleasesa disaggregated basis for the year ending:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31 |
| | 2021 | | 2020 | | 2019 |
| | | | | |
| Consumer products | $ | 612,795 | | | $ | 568,685 | | | $ | 559,279 | |
| Commercial products | 40,978 | | | 30,066 | | | 48,028 | |
| Licensing | 4,621 | | | 4,962 | | | 4,479 | |
| Total revenues | $ | 658,394 | | | $ | 603,713 | | | $ | 611,786 | |
| | | | | |
Walmart Inc. and its global subsidiaries accounted for approximately 28%, 35%, and 33% of equipmentHBB’s revenue in 2021, 2020, and buildings under operating leases2019, respectively. Amazon.com, Inc. and its subsidiaries accounted for approximately 22%, 16%, and 14% of the HBB's revenue in which it was2021, 2020, and 2019 respectively. HBB’s five largest customers accounted for approximately 61%, 64%, and 58% of the lessee.HBB’s revenue in 2021, 2020, and 2019, respectively.
NOTE 10—11 - Contingencies
VariousHamilton Beach Holding and its subsidiary are involved in various legal and regulatory proceedings and claims that have been or may be asserted against Hamilton Beach Holding and certain subsidiaries relating toarisen in the conductordinary course of their businesses,business, including product liability, patent infringement, asbestos related claims, environmental and other claims. TheseAlthough it is difficult to predict the ultimate outcome of these proceedings and claims, are incidental to the ordinary courseCompany believes the ultimate disposition of businessthese matters will not have a material adverse effect on the financial condition, results of operation or cash flows of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that managementthe Company estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.
These mattersProceedings and claims asserted against the Company or its subsidiary 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’sCompany's financial position, results of operations and cash flows offor the period in which the ruling occurs, or in future periods.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Hamilton Beach Brands Holding Company is a defendant in a legal proceeding instituted in February 2020 in which the plaintiff seeks to hold the Company liable for the unsatisfied portion of an agreed final judgment that plaintiff obtained against KC related to KC’s failure to continue to operate NaN stores during the term of the store leases. All KC stores were closed by December 31, 2019 and on January 23, 2020 a Certificate of Dissolution of Ohio Limited Liability Company was filed with the Ohio Secretary of State, effective as of January 21, 2020. In February 2020, KC agreed to the entry of a final judgment in favor of the plaintiff in the amount of $8.1 million and in April 2020 the plaintiff received $0.3 million in the final distribution of KC assets to KC creditors. The Company believes that the plaintiff’s claims are without merit and will vigorously defend against plaintiff’s claims.
Environmental matters
HBB is investigating or remediating historical environmental contamination at some current and former sites operated by HBB or by businesses it acquired. Based on the current stage of the investigation or remediation at each known site, HBB estimates the total investigation and remediation costs and the period of assessment and remediation activity required for each site. The estimate of future investigation and remediation costs is primarily based on variables associated with site clean-up, including, but not limited to, physical characteristics of the site, the nature and extent of the contamination and applicable regulatory programs and remediation standards. No assessment can fully characterize all subsurface conditions at a site. There is no assurance that additional assessment and remediation efforts will not result in adjustments to estimated remediation costs or the time frame for remediation at these sites.
HBB's estimates of investigation and remediation costs may change if it discovers contamination at additional sites or additional contamination at known sites, if the effectiveness of its current remediation efforts change, if applicable federal or state regulations change or if HBB's estimate of the time required to remediate the sites changes. HBB's revised estimates may differ materially from original estimates.
At December 31, 2021 and December 31, 2020, HBB had accrued undiscounted obligations of $3.4 million and $3.1 million respectively, for environmental investigation and remediation activities. The increase in the amount accrued at December 31, 2021 compared to December 31, 2020 is due to a change in the expected type and extent of investigation and remediation activities associated with one of the sites. HBB estimates that it is reasonably possible that it may incur additional expenses in the range of zero to $1.6 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 of 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. As of December 31, 2021, the receivable has been collected and $1.0 million is restricted cash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
At
NOTE 12 - Income Taxes
The components of income (loss) from continuing operations before income taxes and the income tax expense (benefit) for the years ended December 31, 2017 and 2016, HBB had accrued undiscounted obligations of $8.9are as follows:
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Income (loss) from continuing operations before income taxes | | | | | |
| Domestic | $ | 27,187 | | | $ | 31,140 | | | $ | 24,835 | |
| Foreign | 1,770 | | | 2,592 | | | (658) | |
| | $ | 28,957 | | | $ | 33,732 | | | $ | 24,177 | |
| Income tax expense (benefit) within continuing operations | | | | | |
| Current income tax expense (benefit): | | | | | |
| Federal | $ | 2,520 | | | $ | 7,006 | | | $ | 2,966 | |
| State | 1,015 | | | 1,877 | | | 1,106 | |
| Foreign | 2,006 | | | 2,213 | | | 3,525 | |
| Total current | 5,541 | | | 11,096 | | | 7,597 | |
| Deferred income tax expense (benefit): | | | | | |
| Federal | 1,815 | | | (924) | | | 856 | |
| State | 556 | | | (325) | | | 1,676 | |
| Foreign | (261) | | | (182) | | | (1,045) | |
| Total deferred | 2,110 | | | (1,431) | | | 1,487 | |
| | $ | 7,651 | | | $ | 9,665 | | | $ | 9,084 | |
The Company made $6.4 million and $8.7$1.9 million respectively, for environmental investigationfederal income tax payments during 2021 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 related2019, respectively, to the environmental investigationIRS and remediation at these sites.
During 2015, HBB recorded $1.5to NACCO as a member of the consolidated income tax return for periods prior to spin off. No federal income tax payments were made during 2020. The Company made foreign and state income tax payments of $2.6 million, $2.9 million, and $3.6 million during 2021, 2020, and 2019, respectively. No income tax refunds were received in 2021. Income tax refunds totaled $1.0 million in “Selling, general2020 and administrative expenses”$0.1 million in the Consolidated Statement of Operations for environmental investigation and remediation at HBB’s Picton, Ontario facility as a result of environmental studies.2019.
NOTE 11—Stockholders' Equity and Earnings Per Share
Capital Stock: The authorized capital stockA reconciliation of the Company consists of Class A Common, Class B Commonfederal statutory 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,effective income tax rate 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.years ended December 31, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| 2021 | | 2020 | | 2019 |
| | $ | | % | | $ | | % | | $ | | % |
| Income (loss) from continuing operations before income taxes | $ | 28,957 | | | | | $ | 33,732 | | | | | $ | 24,177 | | | |
| Statutory taxes at 21% | $ | 6,081 | | | 21.0 | % | | $ | 7,092 | | | 21.0 | % | | $ | 5,077 | | | 21.0 | % |
| State and local income taxes | 1,357 | | | 4.7 | % | | 1,136 | | | 3.4 | % | | 1,031 | | | 4.3 | % |
| Valuation allowances | 297 | | | 1.0 | % | | 614 | | | 1.8 | % | | 2,190 | | | 9.1 | % |
| Other non-deductible expenses | 579 | | | 2.0 | % | | 415 | | | 1.2 | % | | 253 | | | 1.0 | % |
| Credits | (681) | | | (2.4) | % | | (700) | | | (2.1) | % | | (1,195) | | | (4.9) | % |
| Effect of foreign operations | (399) | | | (1.4) | % | | 120 | | | 0.4 | % | | (606) | | | (2.5) | % |
| Loss on Kitchen Collection dissolution | — | | | — | % | | 616 | | | 1.8 | % | | — | | | — | % |
| Unrecognized tax benefits | 687 | | | 2.4 | % | | 708 | | | 2.1 | % | | 2,719 | | | 11.2 | % |
| Other, net | (270) | | | (0.9) | % | | (336) | | | (1.0) | % | | (385) | | | (1.6) | % |
| Income tax provision | $ | 7,651 | | | 26.4 | % | | $ | 9,665 | | | 28.7 | % | | $ | 9,084 | | | 37.6 | % |
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.
A reconciliation of the federal statutory and effective income tax rate for the years ended December 31 is as follows:
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Income before income tax provision | $ | 36,077 |
| | $ | 41,163 |
| | $ | 32,036 |
|
| Statutory taxes at 35.0% | $ | 12,627 |
| | $ | 14,407 |
| | $ | 11,212 |
|
| State and local income taxes | 901 |
| | 1,019 |
| | 540 |
|
| Provisional effect of the Tax Act | 4,654 |
| | — |
| | — |
|
| Non-deductible spin-related costs | 540 |
| | — |
| | — |
|
| Other non-deductible expenses | 411 |
| | 414 |
| | 364 |
|
| Valuation allowances | 369 |
| | 170 |
| | 606 |
|
| Other, net | (1,330 | ) | | (1,026 | ) | | (397 | ) |
| Income tax provision | $ | 18,172 |
| | $ | 14,984 |
| | $ | 12,325 |
|
| Effective income tax rate | 50.4 | % | | 36.4 | % | | 38.5 | % |
A detailed summary of the total deferred tax assets and liabilities in the Company's Consolidated Balance Sheets resulting from differences in the book and tax basis of assets and liabilities follows: | | | | December 31 | | December 31 | |
| | 2017 | | 2016 | | 2021 | | 2020 | |
| Deferred tax assets | | | | Deferred tax assets | | | | |
| Tax carryforwards | $ | 5,034 |
| | $ | 2,610 |
| Tax carryforwards | $ | 2,841 | | | $ | 3,002 | | |
| Inventories | 207 |
| | 421 |
| |
| Depreciation and amortization | 716 |
| | 1,841 |
| |
| Inventory | | Inventory | 2,084 | | | 2,114 | | |
| Accrued expenses and reserves | 6,929 |
| | 9,423 |
| Accrued expenses and reserves | 7,338 | | | 4,436 | | |
| Other employee benefits | 3,238 |
| | 5,321 |
| Other employee benefits | 2,852 | | | 4,700 | | |
| Other | 696 |
| | 1,454 |
| Other | 1,046 | | | 2,374 | | |
| Total deferred tax assets | 16,820 |
| | 21,070 |
| Total deferred tax assets | 16,161 | | | 16,626 | | |
| Less: Valuation allowance | 1,916 |
| | 1,614 |
| |
| Less: Valuation allowances | | Less: Valuation allowances | (2,095) | | | (2,102) | | |
| | 14,904 |
| | 19,456 |
| | 14,066 | | | 14,524 | | |
| Deferred tax liabilities | | | | Deferred tax liabilities | | | | |
| Inventory | | Inventory | 550 | | | 1,099 | | |
| Accrued pension benefits | 2,079 |
| | 1,609 |
| Accrued pension benefits | 4,119 | | | 3,262 | | |
| Unremitted foreign earnings | — |
| | 343 |
| |
| Depreciation and amortization | | Depreciation and amortization | 5,355 | | | 3,198 | | |
| Total deferred tax liabilities | 2,079 |
| | 1,952 |
| Total deferred tax liabilities | 10,024 | | | 7,559 | | |
| Net deferred asset | $ | 12,825 |
| | $ | 17,504 |
| |
| Net deferred tax asset | | Net deferred tax asset | $ | 4,042 | | | $ | 6,965 | | |
TableAs of ContentsDecember 31, 2021 and 2020, respectively, HBB maintained valuation allowances with respect to certain deferred tax assets relating primarily to operating losses in certain non-U.S. jurisdictions that HBB believes are not likely to be realized.
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 tax carryforwards and associated carryforward periods and related valuation allowances where the Company has determined that realization is uncertain:
| | | | | | | | | | | | | | | | | |
| |
| | December 31, 2021 |
| | Net deferred tax
asset | | Valuation
allowance | | Carryforwards
expire during: |
| | | | | |
| Non-U.S. net operating loss | $ | 2,841 | | | $ | 1,399 | | | 2022 - Indefinite |
| | | | | |
| | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Net deferred tax
asset | | Valuation
allowance | | Carryforwards
expire during: |
| Non-U.S. net operating loss | $ | 3,002 | | | $ | 1,363 | | | 2021 - Indefinite |
| | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
|
| | | | | | | | | |
| | December 31, 2017 |
| | Net deferred tax asset | | Valuation allowance | | Carryforwards expire during: |
| Alternative minimum tax credit | $ | 2,429 |
| | $ | — |
| | (1) |
| Non-U.S. net operating loss | 1,658 |
| | 1,658 |
| | 2018 - Indefinite |
| State losses | 1,198 |
| | — |
| | 2020 - 2035 |
| Total | $ | 5,285 |
| | $ | 1,658 |
| | |
|
| | | | | | | | | |
| | December 31, 2016 |
| | Net deferred tax asset | | Valuation allowance | | Carryforwards expire during: |
| Non-U.S. net operating loss | $ | 1,376 |
| | $ | 1,376 |
| | 2018 - Indefinite |
| State losses | 1,053 |
| | — |
| | 2020 - 2035 |
| Research credit | 547 |
| | — |
| | 2028 - 2030 |
| Total | $ | 2,976 |
| | $ | 1,376 |
| | |
(1) The Tax Act repealed the corporate alternative minimum tax for tax years beginning after December 31, 2017. This credit is refundable in 2021, if not fully utilized prior to 2021.
The Company evaluates its deferred tax assets to determine if a valuation allowance is required based on the consideration of all available evidence, both positive and negative, using a “more likely than not” standard. A valuation allowance is required where realization is determined to no longer meet the “more likely than not” standard. The establishment of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the Company from using its loss carryforwards or other deferred tax assets in future periods.
The Company has a valuation allowance for certain foreign deferred tax assets. Based upon the review of historical earnings and the relevant expiration of carryforwards, the Company believes the valuation allowances are appropriate and does not expect to release valuation allowances within the next twelve months that would have a significant effect on the Company’s financial position or results of operations. Furthermore, the Company considers the necessity of valuation allowance application to state loss carryforwards and believes sufficient positive evidence exists for future profitability of the Company, including available tax strategies as necessary, to realize the benefit of losses in the future.
On December 22, 2017, the U.S. federal government enacted the Tax Act, which significantly revises U.S. tax law. The Tax Act will positively impact the Company’s future effective income tax rate due to the reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.
In addition to the reduction in the U.S. federal corporate tax rate mentioned above, other significant changes to existing tax law include (1) a deduction received on dividends of foreign earnings with a related tax for the deemed repatriation of unremitted foreign earnings; (2) limitations on the deductibility of certain executive compensation for publicly traded companies; (3) accelerated expensing of capital investment, subject to phase out beginning in 2023; (4) a new limitation on deductible interest expense; and (5) a new U.S. minimum tax on earnings of foreign subsidiaries.
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. Included in the provisional income tax charge is $4.1 million for the remeasurement of U.S. deferred tax assets and liabilities resulting from the reduction in the U.S. federal corporate tax rate from 35% to 21%, $0.4 million related to executive compensation that may not be deductible when paid in future periods, and $0.2 million related to the net estimated income tax on deemed repatriation of foreign earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
The Company has computed the provisional income tax charge based on information available; however, there is still uncertainty as to the application of the Tax Act, in particular as it relates to state income taxes. Further, management has not yet completed the analysis of the components of the computation, including the amount of foreign earnings subject to U.S. income tax, and the portion of foreign earnings held in cash or other specified assets. As the Company completes the analysis of the Tax Act in 2018, it may make adjustments to the provisional amounts, which may impact the provision for income taxes in the period in which the adjustments are made. 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.
As of December 31, 2017,2021, the cumulative unremitted earnings of the Company's foreign subsidiaries are approximately $19.6$12.5 million. In consideration of the Tax Act, the Company has no longer provided a deferred tax liability with respect to the cumulative unremitted earnings. The Company has recorded a provisional estimate of the tax impact for the unremitted earnings as allowed under the Tax Cuts and Jobs Act (the "Tax Act"), a portion of which is classified in Otherother long-term liabilities in the Consolidated Balance Sheets as the Company intends to electhas elected to make payments over eight years. The Company continues to conclude all material entities’ foreign earnings will be indefinitely reinvested in its foreign operations and will remain offshore in order to meet the capital and business needs outside of the U.S.
The tax returns of NACCO, As a result, the Company and certaindoes not provide a deferred tax liability with respect to the cumulative unremitted earnings. It is not practicable to determine the deferred tax liability associated with these undistributed earnings due to the availability of its subsidiaries are under routine examination by various taxing authorities.foreign tax credits. The Company hasmade an accounting policy election to account for the global intangible low-tax income as a current period expense when incurred. The Company recognizes any tax impacts of global intangible low-taxed income (GILTI) as period costs similar to other special deductions, and not been informed of any material assessmentas deferred taxes for which an accrual has not been previously provided and the Company would vigorously contest any material assessment. Management believes any potential assessment would not materially affect the Company’s financial condition or results of operations.basis differences.
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, 2016,2021, 2020, and 2015.2019. Approximately $0.6$3.8 million, $0.4$4.0 million, and $0.8$3.0 million of these gross amounts as of December 31, 2017, 2016,2021, 2020, and 2015,2019, 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.
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| Balance at January 1 | $ | 4,114 | | | $ | 4,266 | | | $ | 1,576 | |
| Additions (reductions) based on tax positions related to prior years | (110) | | | (116) | | | 97 | |
| Additions based on tax positions related to the current year | 40 | | | 130 | | | 2,593 | |
| Reductions for lapse of statute of limitations | — | | | (166) | | | — | |
| Reductions due to settlements with taxing authorities | (189) | | | — | | | — | |
| Balance at December 31 | $ | 3,855 | | | $ | 4,114 | | | $ | 4,266 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance at January 1 | $ | 671 |
| | $ | 1,199 |
| | $ | 180 |
|
| Additions based on tax positions related to prior years | — |
| | 167 |
| | 1,119 |
|
| Additions based on tax positions related to the current year | 210 |
| | 165 |
| | — |
|
| Reductions due to settlements with taxing authorities | — |
| | (860 | ) | | — |
|
| Reductions due to lapse of the applicable statute of limitations | — |
| | — |
| | (100 | ) |
| Balance at December 31 | $ | 881 |
| | $ | 671 |
| | $ | 1,199 |
|
The Company records interest and penalties on uncertain tax positions as a component of the income tax provision. The Company recorded immaterial amountsrecognized expense of $1.1 million, $0.7 million, and $0.1 million related to interest and penalties as of December 31, 20172021, 2020 and 2016,2019, respectively. The Company expects thetotal 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, resultsinterest and penalties accrued was $1.9 million, $0.7 million, and $0.1 million as of operations or cash flows.December 31, 2021, 2020 and 2019, respectively.
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.ongoing, and exam years from 2017 onwards remain open for federal tax returns. The Company is generally open for examination of state and foreign jurisdictions for the tax year 2016 and beyond. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
NOTE 13—13 - Retirement Benefit Plans
Defined Benefit Plans:Plans
The Company maintains two2 defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. All eligible employees ofThe Company's U.S. plan was frozen, effective December 31, 1996, for participation and benefit accrual purposes (except cash balance interest credits required by law). Similarly, the Company, including employees whose pension benefits areCompany’s non-U.S. plan was frozen, receive retirement benefits under defined contribution retirement plans.effective December 31, 2008.
The assumptions used in accounting for the defined benefit plans were as follows for the years ended December 31: |
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| U.S. Plans | | | | | |
| Discount rate for pension benefit obligation | 3.30 | % | | 3.60 | % | | 3.70 | % |
| Discount rate for net periodic benefit cost | 3.60 | % | | 3.70 | % | | 3.45 | % |
| Expected long-term rate of return on assets for net periodic benefit (income) expense | 7.50 | % | | 7.50 | % | | 7.75 | % |
| Non-U.S. Plan | | | | | |
| Discount rate for pension benefit obligation | 3.25 | % | | 3.75 | % | | 4.00 | % |
| Discount rate for net periodic benefit cost | 3.75 | % | | 4.00 | % | | 3.75 | % |
| Expected long-term rate of return on assets for net periodic benefit (income) expense | 5.50 | % | | 5.50 | % | | 5.75 | % |
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| U.S. Plan | | | | | |
| Discount rate for pension benefit obligation | 2.46 | % | | 1.87 | % | | 2.88 | % |
| Discount rate for net periodic benefit (income) expense | 1.87 | % | | 2.88 | % | | 4.00 | % |
| Expected long-term rate of return on assets for net periodic pension (income) expense | 7.25 | % | | 7.50 | % | | 7.50 | % |
| Non-U.S. Plan | | | | | |
| Discount rate for pension benefit obligation | 2.90 | % | | 2.38 | % | | 2.96 | % |
| Discount rate for net periodic benefit (income) expense | 2.38 | % | | 2.96 | % | | 3.50 | % |
| Expected long-term rate of return on assets for net periodic pension (income) expense | 4.75 | % | | 5.00 | % | | 5.50 | % |
Set forth below is a detail of the net periodic pension (income) expense, included in other expense (income), net for the defined benefit plans for the years ended December 31: |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| U.S. Plans | | | | | |
| Interest cost | $ | 811 |
| | $ | 875 |
| | $ | 914 |
|
| Expected return on plan assets | (2,074 | ) | | (2,071 | ) | | (2,159 | ) |
| Amortization of actuarial loss | 501 |
| | 495 |
| | 564 |
|
| Net periodic pension income | $ | (762 | ) | | $ | (701 | ) | | $ | (681 | ) |
| | | | | | |
| Non-U.S. Plan | | | | | |
| Interest cost | $ | 153 |
| | $ | 144 |
| | $ | 152 |
|
| Expected return on plan assets | (264 | ) | | (248 | ) | | (272 | ) |
| Amortization of actuarial loss | 10 |
| | 13 |
| | 146 |
|
| Settlements | — |
| | — |
| | 37 |
|
| Net periodic pension (income) expense | $ | (101 | ) | | $ | (91 | ) | | $ | 63 |
|
Set forth below is the detail of other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended December 31: |
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| U.S. Plans | | | | | |
| Current year actuarial loss (gain) | $ | (2,506 | ) | | $ | 243 |
| | $ | 1,373 |
|
| Amortization of actuarial loss | (501 | ) | | (495 | ) | | (564 | ) |
| Total recognized in other comprehensive (income) loss | $ | (3,007 | ) | | $ | (252 | ) | | $ | 809 |
|
| Non-U.S. Plan | | | | | |
| Current year actuarial loss (gain) | $ | 60 |
| | $ | 318 |
| | $ | (128 | ) |
| Amortization of actuarial loss | (10 | ) | | (13 | ) | | (146 | ) |
| Settlements | — |
| | — |
| | (37 | ) |
| Total recognized in other comprehensive loss (income) | $ | 50 |
| | $ | 305 |
| | $ | (311 | ) |
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| U.S. Plan | | | | | |
| Interest cost | $ | 338 | | | $ | 527 | | | $ | 727 | |
| Expected return on plan assets | (2,033) | | | (2,011) | | | (1,987) | |
| Amortization of actuarial loss | 591 | | | 631 | | | 561 | |
| Net periodic pension (income) expense | $ | (1,104) | | | $ | (853) | | | $ | (699) | |
| | | | | |
| Non-U.S. Plan | | | | | |
| Interest cost | $ | 118 | | | $ | 128 | | | $ | 144 | |
| Expected return on plan assets | (260) | | | (253) | | | (263) | |
| Amortization of actuarial loss | 63 | | | 70 | | | 72 | |
| Net periodic pension (income) expense | $ | (79) | | | $ | (55) | | | $ | (47) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Set forth below is the detail of other changes in plan assets and benefit obligations recognized in other comprehensive loss (income) for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| U.S. Plan | | | | | |
| Current year actuarial loss (gain) | $ | (2,228) | | | $ | (1,080) | | | $ | (1,727) | |
| Amortization of actuarial loss | (591) | | | (631) | | | (561) | |
| Total recognized in other comprehensive loss (income) | $ | (2,819) | | | $ | (1,711) | | | $ | (2,288) | |
| Non-U.S. Plan | | | | | |
| Current year actuarial loss (gain) | $ | (742) | | | $ | 236 | | | $ | (155) | |
| Amortization of actuarial loss | (63) | | | (70) | | | (72) | |
| Total recognized in other comprehensive loss (income) | $ | (805) | | | $ | 166 | | | $ | (227) | |
The following table sets forth the changes in the benefit obligation and the plan assets during the year and the funded status of the defined benefit plans at
December 31:31: | | | | 2017 | | 2016 | | 2021 | | 2020 |
| | U.S. Plan | | Non-U.S. Plan | | U.S. Plan | | Non-U.S. Plan | | U.S.
Plan | | Non-U.S.
Plan | | U.S. Plan | | Non-U.S.
Plan |
| Change in benefit obligation | | | | | | | | Change in benefit obligation | | | | | | | |
| Projected benefit obligation at beginning of year | $ | 23,651 |
| | $ | 4,021 |
| | $ | 24,932 |
| | $ | 3,519 |
| Projected benefit obligation at beginning of year | $ | 18,978 | | | $ | 5,000 | | | $ | 19,374 | | | $ | 4,570 | |
| Interest cost | 811 |
| | 153 |
| | 875 |
| | 144 |
| Interest cost | 338 | | | 118 | | | 527 | | | 128 | |
| Actuarial loss (gain) | (521 | ) | | 291 |
| | 11 |
| | 430 |
| |
| Actuarial (gain) loss | | Actuarial (gain) loss | (649) | | | (309) | | | 972 | | | 399 | |
| Benefits paid | (2,225 | ) | | (153 | ) | | (2,167 | ) | | (176 | ) | Benefits paid | (1,663) | | | (228) | | | (1,895) | | | (205) | |
| Foreign currency exchange rate changes | — |
| | 292 |
| | — |
| | 104 |
| Foreign currency exchange rate changes | — | | | 26 | | | — | | | 108 | |
| Projected benefit obligation at end of year | $ | 21,716 |
| | $ | 4,604 |
| | $ | 23,651 |
| | $ | 4,021 |
| Projected benefit obligation at end of year | $ | 17,004 | | | $ | 4,607 | | | $ | 18,978 | | | $ | 5,000 | |
| Accumulated benefit obligation at end of year | $ | 21,716 |
| | $ | 4,604 |
| | $ | 23,651 |
| | $ | 4,021 |
| Accumulated benefit obligation at end of year | $ | 17,004 | | | $ | 4,607 | | | $ | 18,978 | | | $ | 5,000 | |
| Change in plan assets | | | | | | | | Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 27,402 |
| | $ | 4,712 |
| | $ | 27,730 |
| | $ | 4,383 |
| Fair value of plan assets at beginning of year | $ | 31,070 | | | $ | 5,497 | | | $ | 28,900 | | | $ | 5,350 | |
| Actual return on plan assets | 4,060 |
| | 497 |
| | 1,839 |
| | 356 |
| Actual return on plan assets | 3,612 | | | 676 | | | 4,065 | | | 428 | |
| Employer contributions | — |
| | 55 |
| | — |
| | 17 |
| |
| Benefits paid | (2,225 | ) | | (153 | ) | | (2,167 | ) | | (176 | ) | Benefits paid | (1,663) | | | (228) | | | (1,895) | | | (205) | |
| Foreign currency exchange rate changes | — |
| | 345 |
| | — |
| | 132 |
| Foreign currency exchange rate changes | — | | | (173) | | | — | | | (76) | |
| Fair value of plan assets at end of year | $ | 29,237 |
| | $ | 5,456 |
| | $ | 27,402 |
| | $ | 4,712 |
| Fair value of plan assets at end of year | $ | 33,019 | | | $ | 5,772 | | | $ | 31,070 | | | $ | 5,497 | |
| Funded status at end of year | $ | 7,521 |
| | $ | 852 |
| | $ | 3,751 |
| | $ | 691 |
| Funded status at end of year | $ | 16,015 | | | $ | 1,165 | | | $ | 12,092 | | | $ | 497 | |
| Amounts recognized in the balance sheets consist of: | | | | | | | | Amounts recognized in the balance sheets consist of: | | | | | | | |
| Noncurrent assets | $ | 7,521 |
| | $ | 852 |
| | $ | 3,751 |
| | $ | 691 |
| |
| Components of accumulated other comprehensive loss (income) consist of: | | | | | | | | |
| Actuarial (gain) loss | $ | (9,703 | ) | | $ | (1,033 | ) | | $ | 12,712 |
| | $ | 1,029 |
| |
| Non-current assets | | Non-current assets | $ | 16,015 | | | $ | 1,165 | | | $ | 12,092 | | | $ | 497 | |
| Components of accumulated other comprehensive loss consist of: | | Components of accumulated other comprehensive loss consist of: | | | | | | | |
| Actuarial loss | | Actuarial loss | $ | (4,610) | | | $ | (419) | | | $ | (7,429) | | | $ | (1,224) | |
| Deferred taxes | 3,687 |
| | 327 |
| | (4,830 | ) | | (327 | ) | Deferred taxes | 1,179 | | | 122 | | | 1,901 | | | 395 | |
| Currency differences | — |
| | 44 |
| | — |
| | (89 | ) | |
| | $ | (6,016 | ) | | $ | (662 | ) | | $ | 7,882 |
| | $ | 613 |
| | $ | (3,431) | | | $ | (297) | | | $ | (5,528) | | | $ | (829) | |
The actuarial loss included in accumulated other comprehensive income (loss)loss expected to be recognized in net periodic pension (income) expense in 20182022 is $0.7 million ($0.5 million net$0.4 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
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.
The Company's policy is to make contributions to fund its pension plans within the range allowed by applicable regulations. The Company does not expect to contribute to its U.S. and non-U.S. pension plans in 2018.2022.
Pension benefit payments are made from assets of the pension plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HAMILTON BEACH BRANDS HOLDING COMPANY
(Tabular Amounts in Thousands, Except Per Share and Percentage Data)
Future pension benefit payments expected to be paid from assets of the pension plans are: |
| | | | | | | |
| | U.S. Plan | | Non-U.S. Plan |
| 2018 | $ | 2,152 |
| | $ | 181 |
|
| 2019 | 1,961 |
| | 189 |
|
| 2020 | 2,184 |
| | 200 |
|
| 2021 | 1,923 |
| | 213 |
|
| 2022 | 1,810 |
| | 254 |
|
| 2023 - 2027 | 7,509 |
| | 1,292 |
|
| | $ | 17,539 |
| | $ | 2,329 |
|
| | | | | | | | | | | |
| | U.S. Plan | | Non-U.S. Plan |
| 2022 | $ | 1,753 | | | $ | 239 | |
| 2023 | 1,672 | | | 247 | |
| 2024 | 1,550 | | | 255 | |
| 2025 | 1,453 | | | 261 | |
| 2026 | 1,339 | | | 273 | |
| 2027-2031 | 5,228 | | | 1,312 | |
| | $ | 12,995 | | | $ | 2,587 | |
The expected long-term rate of return on defined benefit plan assets reflects management'sthe Company'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.
The following is the actual allocation percentage and target allocation percentage for the U.S. pension plan assets at December 31: | | | | 2017
Actual
Allocation | | 2016
Actual
Allocation | | Target Allocation Range | | 2021 Actual Allocation | | 2020 Actual Allocation | | Target Allocation
Range |
| U.S. equity securities | 45.8 | % | | 45.2 | % | | 36.0% - 54.0% | U.S. equity securities | 48.3 | % | | 45.5 | % | | 36.0% - 54.0% |
| Non-U.S. equity securities | 20.5 | % | | 19.7 | % | | 16.0% - 24.0% | Non-U.S. equity securities | 19.8 | % | | 20.3 | % | | 16.0% - 24.0% |
| Fixed income securities | 32.9 | % | | 33.8 | % | | 30.0% - 40.0% | Fixed income securities | 31.3 | % | | 33.8 | % | | 30.0% - 40.0% |
| Money market | 0.8 | % | | 1.3 | % | | 0.0% - 10.0% | Money market | 0.6 | % | | 0.4 | % | | 0.0% - 10.0% |
No single country outside of the U.S. comprised 10% or more of the Company's revenuesHBB's revenue from unaffiliated customers.