UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
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(Mark One) | | | |
☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended | September 30, 2020March 31, 2021 |
or
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☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
Commission File Number: 001-38214
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| HAMILTON BEACH BRANDS HOLDING COMPANY | |
| | (Exact name of registrant as specified in its charter) | | |
| | | | | |
| Delaware | | | 31-1236686 | |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) | |
| | | | | |
| 4421 WATERFRONT DR. | GLEN ALLEN | VA | 23060 | |
| (Address of principal executive offices) | (Zip code) | |
| | | | | |
| | (804) | 273-9777 | | |
| | (Registrant's telephone number, including area code) | | |
| | | | | |
| | N/A | | |
| | (Former name, former address and former fiscal year, if changed since last report) | | |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Class A Common Stock, Par Value $0.01 Per Share | | HBB | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | o | Accelerated filer | þ | Non-accelerated filer | o | Smaller reporting company | ☑ | Emerging growth company | ☑ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO þ
Number of shares of Class A Common Stock outstanding at November 6, 2020: 9,637,807April 30, 2021: 9,845,038
Number of shares of Class B Common Stock outstanding at November 6, 2020: 4,048,226April 30, 2021: 4,029,355
HAMILTON BEACH BRANDS HOLDING COMPANY
TABLE OF CONTENTS
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| | | | | Page Number |
Part I. | | FINANCIAL INFORMATION | |
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| | Item 1 | | Financial Statements | |
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| | Item 2 | | | |
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| | Item 3 | | | |
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| | Item 4 | | | |
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Part II. | | OTHER INFORMATION | |
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| | Item 1 | | | |
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| | Item 1A | | | |
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| | Item 2 | | | |
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| | Item 3 | | | |
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| | Item 4 | | | |
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| | Item 5 | | | |
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| | Item 6 | | Exhibits | |
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Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | As Restated | | As Restated and Recast | | | | | | | | | | | | | | | |
| | SEPTEMBER 30 2020 | | DECEMBER 31 2019 | | SEPTEMBER 30 2019 | | MARCH 31 2021 | | DECEMBER 31 2020 | | MARCH 31 2020 |
| | (In thousands) | | (In thousands) |
Assets | Assets | | | | | Assets | | | | |
Current assets | Current assets | | Current assets | |
Cash and cash equivalents | Cash and cash equivalents | $ | 858 | | | $ | 2,142 | | | $ | 1,559 | | Cash and cash equivalents | $ | 1,375 | | | $ | 2,415 | | | $ | 2,078 | |
Trade receivables, net | Trade receivables, net | 98,062 | | | 108,381 | | | 103,091 | | Trade receivables, net | 107,934 | | | 144,797 | | | 69,569 | |
Inventory | Inventory | 203,369 | | | 109,806 | | | 161,043 | | Inventory | 163,831 | | | 173,962 | | | 89,986 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 14,483 | | | 11,345 | | | 14,086 | | Prepaid expenses and other current assets | 13,770 | | | 15,118 | | | 16,427 | |
Current assets of discontinued operations | Current assets of discontinued operations | 0 | | | 5,383 | | | 22,830 | | Current assets of discontinued operations | 0 | | | 0 | | | 324 | |
Total current assets | Total current assets | 316,772 | | | 237,057 | | | 302,609 | | Total current assets | 286,910 | | | 336,292 | | | 178,384 | |
Property, plant and equipment, net | Property, plant and equipment, net | 23,412 | | | 22,324 | | | 22,193 | | Property, plant and equipment, net | 24,252 | | | 23,490 | | | 22,465 | |
Goodwill | Goodwill | 6,253 | | | 6,253 | | | 6,253 | | Goodwill | 6,253 | | | 6,253 | | | 6,253 | |
Other intangible assets, net | Other intangible assets, net | 2,170 | | | 3,141 | | | 3,483 | | Other intangible assets, net | 1,842 | | | 1,892 | | | 2,818 | |
Deferred income taxes | Deferred income taxes | 6,078 | | | 6,248 | | | 5,640 | | Deferred income taxes | 3,416 | | | 6,965 | | | 5,128 | |
Deferred costs | Deferred costs | 11,852 | | | 10,941 | | | 8,804 | | Deferred costs | 13,960 | | | 13,449 | | | 11,172 | |
| Other non-current assets | Other non-current assets | 2,842 | | | 2,085 | | | 1,553 | | Other non-current assets | 2,708 | | | 2,827 | | | 2,150 | |
Non-current assets of discontinued operations | 0 | | | 614 | | | 1,744 | | |
| Total assets | Total assets | $ | 369,379 | | | $ | 288,663 | | | $ | 352,279 | | Total assets | $ | 339,341 | | | $ | 391,168 | | | $ | 228,370 | |
Liabilities and stockholders' equity | Liabilities and stockholders' equity | | | | | | Liabilities and stockholders' equity | | | | | |
Current liabilities | Current liabilities | | Current liabilities | |
Accounts payable | Accounts payable | $ | 187,296 | | | $ | 111,348 | | | $ | 140,011 | | Accounts payable | $ | 102,725 | | | $ | 152,054 | | | $ | 61,578 | |
Accounts payable to NACCO Industries, Inc. | Accounts payable to NACCO Industries, Inc. | 496 | | | 496 | | | 220 | | Accounts payable to NACCO Industries, Inc. | 10 | | | 505 | | | 496 | |
Revolving credit agreements | Revolving credit agreements | 70,413 | | | 23,497 | | | 50,152 | | Revolving credit agreements | 0 | | | 0 | | | 34,547 | |
Accrued compensation | Accrued compensation | 14,294 | | | 15,027 | | | 14,650 | | Accrued compensation | 10,894 | | | 15,981 | | | 8,126 | |
Accrued product returns | Accrued product returns | 6,575 | | | 8,697 | | | 8,266 | | Accrued product returns | 5,860 | | | 6,853 | | | 7,536 | |
Other current liabilities | Other current liabilities | 17,338 | | | 12,534 | | | 25,880 | | Other current liabilities | 18,465 | | | 23,677 | | | 14,098 | |
Current liabilities of discontinued operations | Current liabilities of discontinued operations | 0 | | | 29,723 | | | 24,713 | | Current liabilities of discontinued operations | 0 | | | 0 | | | 1,099 | |
Total current liabilities | Total current liabilities | 296,412 | | | 201,322 | | | 263,892 | | Total current liabilities | 137,954 | | | 199,070 | | | 127,480 | |
Revolving credit agreements | Revolving credit agreements | 0 | | | 35,000 | | | 30,000 | | Revolving credit agreements | 102,555 | | | 98,360 | | | 35,000 | |
Other long-term liabilities | Other long-term liabilities | 12,567 | | | 16,075 | | | 14,258 | | Other long-term liabilities | 16,133 | | | 13,633 | | | 12,494 | |
Non-current liabilities of discontinued operations | 0 | | | 0 | | | 1,585 | | |
| Total liabilities | Total liabilities | 308,979 | | | 252,397 | | | 309,735 | | Total liabilities | 256,642 | | | 311,063 | | | 174,974 | |
Stockholders' equity | Stockholders' equity | | | | | Stockholders' equity | | | | |
| Class A Common stock | Class A Common stock | 100 | | | 98 | | | 95 | | Class A Common stock | 102 | | | 100 | | | 99 | |
Class B Common stock | Class B Common stock | 41 | | | 41 | | | 44 | | Class B Common stock | 41 | | | 41 | | | 41 | |
Capital in excess of par value | Capital in excess of par value | 58,225 | | | 54,509 | | | 54,143 | | Capital in excess of par value | 59,456 | | | 58,485 | | | 55,062 | |
Treasury stock | Treasury stock | (5,960) | | | (5,960) | | | (5,960) | | Treasury stock | (5,960) | | | (5,960) | | | (5,960) | |
Retained earnings | Retained earnings | 27,219 | | | 3,710 | | | 12,231 | | Retained earnings | 46,489 | | | 44,915 | | | 23,996 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (19,225) | | | (16,132) | | | (18,009) | | Accumulated other comprehensive loss | (17,429) | | | (17,476) | | | (19,842) | |
Total stockholders' equity | Total stockholders' equity | 60,400 | | | 36,266 | | | 42,544 | | Total stockholders' equity | 82,699 | | | 80,105 | | | 53,396 | |
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 369,379 | | | $ | 288,663 | | | $ | 352,279 | | Total liabilities and stockholders' equity | $ | 339,341 | | | $ | 391,168 | | | $ | 228,370 | |
See notes to unaudited condensed consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | THREE MONTHS ENDED SEPTEMBER 30 | | NINE MONTHS ENDED SEPTEMBER 30 | | | | | | | | | | | |
| | | As Restated and Recast | | | As Restated and Recast | | THREE MONTHS ENDED MARCH 31 | |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | |
| | (In thousands, except per share data) | | (In thousands, except per share data) | | (In thousands, except per share data) | |
Revenue | Revenue | $ | 110,549 | | | $ | 149,508 | | | $ | 369,692 | | | $ | 407,216 | | Revenue | $ | 149,249 | | | $ | 120,846 | | |
Cost of sales | Cost of sales | 86,801 | | | 118,562 | | | 285,650 | | | 321,061 | | Cost of sales | 117,556 | | | 95,806 | | |
Gross profit | Gross profit | 23,748 | | | 30,946 | | | 84,042 | | | 86,155 | | Gross profit | 31,693 | | | 25,040 | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 25,830 | | | 26,162 | | | 74,078 | | | 77,385 | | Selling, general and administrative expenses | 26,379 | | | 24,213 | | |
Amortization of intangible assets | Amortization of intangible assets | 323 | | | 345 | | | 971 | | | 1,036 | | Amortization of intangible assets | 50 | | | 324 | | |
Operating (loss) profit | (2,405) | | | 4,439 | | | 8,993 | | | 7,734 | | |
Operating profit | | Operating profit | 5,264 | | | 503 | | |
Interest expense, net | Interest expense, net | 339 | | | 756 | | | 1,308 | | | 2,208 | | Interest expense, net | 720 | | | 603 | | |
Other expense (income), net | 92 | | | 681 | | | 1,601 | | | 352 | | |
Other expense, net | | Other expense, net | 171 | | | 1,702 | | |
Income (loss) from continuing operations before income taxes | Income (loss) from continuing operations before income taxes | (2,836) | | | 3,002 | | | 6,084 | | | 5,174 | | Income (loss) from continuing operations before income taxes | 4,373 | | | (1,802) | | |
Income tax expense (benefit) | Income tax expense (benefit) | (826) | | | 2,449 | | | 1,383 | | | 3,385 | | Income tax expense (benefit) | 1,497 | | | (448) | | |
Net income (loss) from continuing operations | Net income (loss) from continuing operations | (2,010) | | | 553 | | | 4,701 | | | 1,789 | | Net income (loss) from continuing operations | 2,876 | | | (1,354) | | |
Income (loss) from discontinued operations, net of tax | 0 | | | (2,753) | | | 22,561 | | | (7,992) | | |
Net income (loss) | $ | (2,010) | | | $ | (2,200) | | | $ | 27,262 | | | $ | (6,203) | | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | 0 | | | 22,866 | | |
Net income | | Net income | $ | 2,876 | | | $ | 21,512 | | |
| | | | | | | | | | | | | |
Basic and diluted earnings (loss) per share: | Basic and diluted earnings (loss) per share: | | Basic and diluted earnings (loss) per share: | | |
Continuing operations | Continuing operations | $ | (0.15) | | | $ | 0.04 | | | $ | 0.34 | | | $ | 0.13 | | Continuing operations | $ | 0.21 | | | $ | (0.10) | | |
Discontinued operations | Discontinued operations | 0 | | | (0.20) | | | 1.65 | | | (0.58) | | Discontinued operations | 0 | | | 1.68 | | |
Basic and diluted earnings (loss) per share | Basic and diluted earnings (loss) per share | $ | (0.15) | | | $ | (0.16) | | | $ | 1.99 | | | $ | (0.45) | | Basic and diluted earnings (loss) per share | $ | 0.21 | | | $ | 1.58 | | |
| | Basic weighted average shares outstanding | Basic weighted average shares outstanding | 13,670 | | | 13,579 | | | 13,646 | | | 13,726 | | Basic weighted average shares outstanding | 13,855 | | | 13,625 | | |
Diluted weighted average shares outstanding | Diluted weighted average shares outstanding | 13,686 | | | 13,595 | | | 13,667 | | | 13,731 | | Diluted weighted average shares outstanding | 13,874 | | | 13,625 | | |
See notes to unaudited condensed consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| | | THREE MONTHS ENDED SEPTEMBER 30 | | NINE MONTHS ENDED SEPTEMBER 30 | | THREE MONTHS ENDED MARCH 31 | |
| | | As Restated and Recast | | | As Restated and Recast | | 2021 | | 2020 | |
| | 2020 | | 2019 | | 2020 | | 2019 | | (In thousands) | |
| (In thousands) | | (In thousands) | |
Net income (loss) | $ | (2,010) | | | $ | (2,200) | | | $ | 27,262 | | | $ | (6,203) | | |
Net income | | Net income | $ | 2,876 | | | $ | 21,512 | | |
Other comprehensive income (loss), net of tax: | Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | | |
Foreign currency translation adjustment | Foreign currency translation adjustment | 300 | | | (18) | | | 1,845 | | | 309 | | Foreign currency translation adjustment | 678 | | | 1,057 | | |
(Loss) gain on long-term intra-entity foreign currency transactions | (Loss) gain on long-term intra-entity foreign currency transactions | 154 | | | (509) | | | (4,725) | | | (373) | | (Loss) gain on long-term intra-entity foreign currency transactions | (1,033) | | | (4,910) | | |
Cash flow hedging activity | Cash flow hedging activity | 120 | | | (127) | | | (162) | | | (1,426) | | Cash flow hedging activity | 164 | | | (162) | | |
Reclassification of hedging activities into earnings | Reclassification of hedging activities into earnings | (432) | | | 122 | | | (457) | | | 268 | | Reclassification of hedging activities into earnings | 125 | | | 110 | | |
| Reclassification of pension adjustments into earnings | Reclassification of pension adjustments into earnings | 114 | | | 127 | | | 406 | | | 313 | | Reclassification of pension adjustments into earnings | 113 | | | 195 | | |
Total other comprehensive income (loss), net of tax | Total other comprehensive income (loss), net of tax | 256 | | | (405) | | | (3,093) | | | (909) | | Total other comprehensive income (loss), net of tax | 47 | | | (3,710) | | |
Comprehensive income (loss) | $ | (1,754) | | | $ | (2,605) | | | $ | 24,169 | | | $ | (7,112) | | |
Comprehensive income | | Comprehensive income | $ | 2,923 | | | $ | 17,802 | | |
See notes to unaudited condensed consolidated financial statements.
CONDENSED HAMILTON BEACH BRANDS HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | NINE MONTHS ENDED SEPTEMBER 30 | | | | | | | | | | |
| | | As Restated and Recast | | THREE MONTHS ENDED MARCH 31 |
| | 2020 | | 2019 | | 2021 | | 2020 |
| | (In thousands) | | (In thousands) |
Operating activities | Operating activities | | | Operating activities | | |
Net income (loss) from continuing operations | Net income (loss) from continuing operations | $ | 4,701 | | | $ | 1,789 | | Net income (loss) from continuing operations | $ | 2,876 | | | $ | (1,354) | |
Adjustments to reconcile net income (loss) from continuing operations to net cash used for operating activities: | Adjustments to reconcile net income (loss) from continuing operations to net cash used for operating activities: | | | Adjustments to reconcile net income (loss) from continuing operations to net cash used for operating activities: | | |
Depreciation and amortization | Depreciation and amortization | 2,469 | | | 2,813 | | Depreciation and amortization | 896 | | | 792 | |
Deferred income taxes | Deferred income taxes | 342 | | | 3,018 | | Deferred income taxes | 3,702 | | | 1,182 | |
Stock compensation expense | Stock compensation expense | 3,722 | | | 2,430 | | Stock compensation expense | 1,107 | | | 555 | |
Other | Other | (113) | | | 98 | | Other | 405 | | | 343 | |
Net changes in operating assets and liabilities: | Net changes in operating assets and liabilities: | | | Net changes in operating assets and liabilities: | | |
Affiliate payable | Affiliate payable | 0 | | | (2,196) | | Affiliate payable | (495) | | | 0 | |
Trade receivables | Trade receivables | 7,567 | | | (6,097) | | Trade receivables | 36,853 | | | 34,811 | |
Inventory | Inventory | (95,684) | | | (38,662) | | Inventory | 9,774 | | | 17,047 | |
Other assets | Other assets | (2,749) | | | (1,150) | | Other assets | 926 | | | (5,637) | |
Accounts payable | Accounts payable | 76,035 | | | 21,430 | | Accounts payable | (49,152) | | | (49,550) | |
Other liabilities | Other liabilities | (2,021) | | | (7,613) | | Other liabilities | (8,781) | | | (8,231) | |
Net cash provided by (used for) operating activities from continuing operations | Net cash provided by (used for) operating activities from continuing operations | (5,731) | | | (24,140) | | Net cash provided by (used for) operating activities from continuing operations | (1,889) | | | (10,042) | |
Investing activities | Investing activities | | | | Investing activities | | | |
Expenditures for property, plant and equipment | Expenditures for property, plant and equipment | (2,596) | | | (3,156) | | Expenditures for property, plant and equipment | (1,746) | | | (625) | |
| Other | (500) | | | 0 | | |
| Net cash provided by (used for) investing activities from continuing operations | Net cash provided by (used for) investing activities from continuing operations | (3,096) | | | (3,156) | | Net cash provided by (used for) investing activities from continuing operations | (1,746) | | | (625) | |
Financing activities | Financing activities | | | | Financing activities | | | |
Net additions to revolving credit agreements | Net additions to revolving credit agreements | 11,946 | | | 33,524 | | Net additions to revolving credit agreements | 4,129 | | | 11,102 | |
Purchase of treasury stock | 0 | | | (5,960) | | |
| Cash dividends paid | Cash dividends paid | (3,753) | | | (3,634) | | Cash dividends paid | (1,302) | | | (1,226) | |
| Other financing | | Other financing | (134) | | | 0 | |
Net cash provided by (used for) financing activities from continuing operations | Net cash provided by (used for) financing activities from continuing operations | 8,193 | | | 23,930 | | Net cash provided by (used for) financing activities from continuing operations | 2,693 | | | 9,876 | |
Cash flows from discontinued operations | Cash flows from discontinued operations | | | | Cash flows from discontinued operations | |
Net cash provided by (used for) operating activities from discontinued operations | Net cash provided by (used for) operating activities from discontinued operations | (6,193) | | | (10,959) | | Net cash provided by (used for) operating activities from discontinued operations | 0 | | | (4,968) | |
Net cash provided by (used for) investing activities from discontinued operations | Net cash provided by (used for) investing activities from discontinued operations | 6 | | | (112) | | Net cash provided by (used for) investing activities from discontinued operations | 0 | | | 6 | |
Net cash provided by (used for) financing activities from discontinued operations | Net cash provided by (used for) financing activities from discontinued operations | 0 | | | 9,550 | | Net cash provided by (used for) financing activities from discontinued operations | 0 | | | 0 | |
Cash provided by (used for) discontinued operations | Cash provided by (used for) discontinued operations | (6,187) | | | (1,521) | | Cash provided by (used for) discontinued operations | 0 | | | (4,962) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 1,490 | | | 401 | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (85) | | | 1,376 | |
Cash, cash equivalents and restricted cash | Cash, cash equivalents and restricted cash | | | Cash, cash equivalents and restricted cash | | |
Increase (decrease) for the period from continuing operations | Increase (decrease) for the period from continuing operations | 856 | | | (2,965) | | Increase (decrease) for the period from continuing operations | (1,027) | | | 585 | |
Decrease for the period from discontinued operations | Decrease for the period from discontinued operations | (6,187) | | | (1,521) | | Decrease for the period from discontinued operations | 0 | | | (4,962) | |
Balance at the beginning of the period | Balance at the beginning of the period | 7,164 | | | 6,352 | | Balance at the beginning of the period | 3,436 | | | 7,164 | |
Balance at the end of the period | Balance at the end of the period | $ | 1,833 | | | $ | 1,866 | | Balance at the end of the period | $ | 2,409 | | | $ | 2,787 | |
| Reconciliation of cash, cash equivalents and restricted cash | Reconciliation of cash, cash equivalents and restricted cash | | Reconciliation of cash, cash equivalents and restricted cash | |
Continuing operations: | Continuing operations: | | Continuing operations: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 858 | | | $ | 1,559 | | Cash and cash equivalents | $ | 1,375 | | | $ | 2,078 | |
Restricted cash included in prepaid expenses and other current assets | Restricted cash included in prepaid expenses and other current assets | 198 | | | 0 | | Restricted cash included in prepaid expenses and other current assets | 210 | | | 186 | |
Restricted cash included in other non-current assets | Restricted cash included in other non-current assets | 777 | | | 0 | | Restricted cash included in other non-current assets | 824 | | | 378 | |
Cash and cash equivalents of discontinued operations | Cash and cash equivalents of discontinued operations | 0 | | | 307 | | Cash and cash equivalents of discontinued operations | 0 | | | 145 | |
Total cash, cash equivalents, and restricted cash | Total cash, cash equivalents, and restricted cash | $ | 1,833 | | | $ | 1,866 | | Total cash, cash equivalents, and restricted cash | $ | 2,409 | | | $ | 2,787 | |
See notes to unaudited condensed consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| | | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity |
| | (In thousands, except per share data) | | (In thousands, except per share data) |
As Restated Balance, January 1, 2020 | $ | 98 | | $ | 41 | | $ | 54,509 | | $ | (5,960) | | $ | 3,710 | | $ | (16,132) | | $ | 36,266 | | |
Net income (loss) | — | | — | | — | | — | | 21,512 | | — | | 21,512 | | |
| Issuance of common stock, net of conversions | 1 | | — | | (1) | | — | | — | | — | | 0 | | |
Share-based compensation expense | — | | — | | 554 | | — | | — | | — | | 554 | | |
Cash dividends, $0.09 per share | — | | — | | — | | — | | (1,226) | | — | | (1,226) | | |
Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | (4,015) | | (4,015) | | |
Reclassification adjustment to net income | — | | — | | — | | — | | — | | 305 | | 305 | | |
Balance, March 31, 2020 | $ | 99 | | $ | 41 | | $ | 55,062 | | $ | (5,960) | | $ | 23,996 | | $ | (19,842) | | $ | 53,396 | | |
Net income (loss) | — | | — | | — | | — | | 7,760 | | — | | 7,760 | | |
| Issuance of common stock, net of conversions | — | | — | | — | | — | | — | | — | | 0 | | |
Share-based compensation expense | — | | — | | 1,263 | | — | | — | | — | | 1,263 | | |
Cash dividends, $0.09 per share | — | | — | | — | | — | | (1,228) | | — | | (1,228) | | |
Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | 656 | | 656 | | |
Reclassification adjustment to net income | — | | — | | — | | — | | — | | (295) | | (295) | | |
Balance, June 30, 2020 | $ | 99 | | $ | 41 | | $ | 56,325 | | $ | (5,960) | | $ | 30,528 | | $ | (19,481) | | $ | 61,552 | | |
Balance, January 1, 2021 | | Balance, January 1, 2021 | $ | 100 | | $ | 41 | | $ | 58,485 | | $ | (5,960) | | $ | 44,915 | | $ | (17,476) | | $ | 80,105 | |
Net income (loss) | Net income (loss) | — | | — | | — | | — | | (2,010) | | — | | (2,010) | | Net income (loss) | — | | — | | — | | — | | 2,876 | | — | | 2,876 | |
| Issuance of common stock, net of conversions | Issuance of common stock, net of conversions | 1 | | — | | (1) | | — | | — | | — | | 0 | | Issuance of common stock, net of conversions | 2 | | — | | (2) | | — | | — | | — | | 0 | |
Share-based compensation expense | Share-based compensation expense | — | | — | | 1,901 | | — | | — | | — | | 1,901 | | Share-based compensation expense | — | | — | | 973 | | — | | — | | — | | 973 | |
Cash dividends, $0.095 per share | Cash dividends, $0.095 per share | — | | — | | — | | — | | (1,299) | | — | | (1,299) | | Cash dividends, $0.095 per share | — | | — | | — | | — | | (1,302) | | — | | (1,302) | |
Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | 574 | | 574 | | Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | (191) | | (191) | |
Reclassification adjustment to net income | Reclassification adjustment to net income | — | | — | | — | | — | | — | | (318) | | (318) | | Reclassification adjustment to net income | — | | — | | — | | — | | — | | 238 | | 238 | |
Balance, September 30, 2020 | $ | 100 | | $ | 41 | | $ | 58,225 | | $ | (5,960) | | $ | 27,219 | | $ | (19,225) | | $ | 60,400 | | |
Balance, March 31, 2021 | | Balance, March 31, 2021 | $ | 102 | | $ | 41 | | $ | 59,456 | | $ | (5,960) | | $ | 46,489 | | $ | (17,429) | | $ | 82,699 | |
|
See notes to unaudited condensed consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
| | | Class A Common Stock | Class B Common Stock | Capital in Excess of Par Value | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |
Balance as Restated, January 1, 2019 | $ | 93 | | $ | 44 | | $ | 51,714 | | $ | 0 | | $ | 22,068 | | $ | (17,101) | | $ | 56,818 | | |
Balance, January 1, 2020 | | Balance, January 1, 2020 | $ | 98 | | $ | 41 | | $ | 54,509 | | $ | (5,960) | | $ | 3,710 | | $ | (16,132) | | $ | 36,266 | |
Net income (loss) | Net income (loss) | — | | — | | — | | — | | (3,385) | | — | | (3,385) | | Net income (loss) | — | | — | | — | | — | | 21,512 | | — | | 21,512 | |
Issuance of common stock, net of conversions | Issuance of common stock, net of conversions | 2 | | — | | (1) | | — | | — | | — | | 1 | | Issuance of common stock, net of conversions | 1 | | — | | (1) | | — | | — | | — | | 0 | |
Purchase of treasury stock | — | | — | | — | | — | | — | | — | | 0 | | |
Share-based compensation expense | — | | — | | 807 | | — | | — | | — | | 807 | | |
Cash dividends, $0.085 per share | — | | — | | — | | — | | (1,177) | | — | | (1,177) | | |
Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | (192) | | (192) | | |
Reclassification adjustment to net loss | — | | — | | — | | — | | — | | 86 | | 86 | | |
Balance as Restated, March 31, 2019 | $ | 95 | | $ | 44 | | $ | 52,520 | | $ | 0 | | $ | 17,506 | | $ | (17,207) | | $ | 52,958 | | |
Net income (loss) | — | | — | | — | | — | | (618) | | — | | (618) | | |
Issuance of common stock, net of conversions | — | | — | | — | | — | | — | | — | | 0 | | |
Purchase of treasury stock | — | | — | | — | | (2,334) | | — | | — | | (2,334) | | |
| Share-based compensation expense | Share-based compensation expense | — | | — | | 822 | | — | | — | | — | | 822 | | Share-based compensation expense | — | | — | | 554 | | — | | — | | — | | 554 | |
Cash dividends, $0.09 per share | Cash dividends, $0.09 per share | — | | — | | — | | — | | (1,242) | | — | | (1,242) | | Cash dividends, $0.09 per share | — | | — | | — | | — | | (1,226) | | — | | (1,226) | |
Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | (643) | | (643) | | Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | (4,015) | | (4,015) | |
Reclassification adjustment to net loss | Reclassification adjustment to net loss | — | | — | | — | | — | | — | | 246 | | 246 | | Reclassification adjustment to net loss | — | | — | | — | | — | | — | | 305 | | 305 | |
Balance as Restated, June 30, 2019 | $ | 95 | | $ | 44 | | $ | 53,342 | | $ | (2,334) | | $ | 15,646 | | $ | (17,604) | | $ | 49,189 | | |
Net income (loss) | — | | — | | — | | — | | (2,200) | | — | | (2,200) | | |
Issuance of common stock, net of conversions | 0 | | — | | 0 | | — | | — | | — | | 0 | | |
Purchase of treasury stock | — | | — | | — | | (3,626) | | — | | — | | (3,626) | | |
Share-based compensation expense | — | | — | | 801 | | — | | — | | — | | 801 | | |
Cash dividends, $0.09 per share | — | | — | | — | | — | | (1,215) | | — | | (1,215) | | |
Other comprehensive income (loss), net of tax | — | | — | | — | | — | | — | | (654) | | (654) | | |
Reclassification adjustment to net loss | — | | — | | — | | — | | — | | 249 | | 249 | | |
Balance as Restated, September 30, 2019 | $ | 95 | | $ | 44 | | $ | 54,143 | | $ | (5,960) | | $ | 12,231 | | $ | (18,009) | | $ | 42,544 | | |
Balance, March 31, 2020 | | Balance, March 31, 2020 | $ | 99 | | $ | 41 | | $ | 55,062 | | $ | (5,960) | | $ | 23,996 | | $ | (19,842) | | $ | 53,396 | |
|
See notes to unaudited condensed consolidated financial statements.
HAMILTON BEACH BRANDS HOLDING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020MARCH 31, 2021
(Tabular amounts in thousands, except as noted and per share amounts)
NOTE 1—Basis of Presentation and Recently Issued Accounting Standards
Basis of Presentation
Hamilton Beach Brands Holding Company is a holding company and operates through its wholly-owned subsidiary, Hamilton Beach Brands, Inc. (“HBB”) (collectively “Hamilton Beach Holding” or the “Company”). HBB is a leading designer, marketer, and distributor of a wide range of branded, small electric household and specialty housewares appliances, as well as commercial products for restaurants, fast food chains, bars, and hotels. HBB participatesoperates in the consumer, commercial and specialty small kitchen appliance markets.
The Company previously operated through its other wholly-owned subsidiary, The Kitchen Collection, LLC ("KC"), which is reported as discontinued operations in all periods presented herein. KC completed its dissolution on April 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist. See Note 32 for further information on discontinued operations.
The financial statements have been prepared in accordance with US generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K/A10-K for the year ended December 31, 2019.2020.
Operating results for the ninethree months ended September 30, 2020March 31, 2021 are not necessarily indicative of the results that may be expected for the remainder of the year due to the highly seasonal nature of our primary markets. A majority of revenue and operating profit typically occurs in the second half of the calendar year when sales of our products to retailers and consumers historically increase significantly for the fall holiday-selling season.
HBB maintains a $115.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires on June 30, 2021, within one year after the issuance of these financial statements. Given the market conditions including unfavorable pricing terms, HBB has not yet completed its refinancing of the HBB Facility and accordingly, all amounts outstanding have been classified as current liabilities. HBB has approved and is in the process of refinancing, which is considered customary. Based on the current status of the refinancing and HBB’s history of successfully refinancing its debt, HBB believes that it is probable that the HBB Facility will be refinanced by December 31, 2020. 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.
During the three-months ended September 30, 2020, management identified certain errors primarily related to the timing of recognition of price concessions during the year ended December 31, 2019. The errors are considered immaterial to prior periods and have been corrected during the current period. The impact of correcting the errors resulted in a reduction to income from continuing operations before income taxes of $0.7 million and a reduction to net income of $0.5 million for the nine months ended September 30, 2020.
Accounting Standards Not Yet Adopted
The Company is an emerging growth company and has elected not to opt out of the extended transition period for complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application dates for public or nonpublic entities, the Company can adopt the new or revised standard at the time nonpublic entities adopt the new or revised standard.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires an entity to recognize assets and liabilities for the rights and obligations created by leased assets. For nonpublic entities, the amendments are currently effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.
Early adoption is permitted. The Company is planning to adopt ASU 2016-02 when required and is currently evaluating to what extent ASU 2016-02 will affect the Company's financial position, results of operations, cash flows and related disclosures.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)," which requires an entity to recognize credit losses as an allowance rather than as a write-down. For nonpublic entities, the amendments are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is planning to adopt ASU 2016-03 for its year ending December 31, 2022 and is currently evaluating to what extent ASU 2016-13 will affect the Company's financial position, results of operations, cash flows and related disclosures.
NOTE 2—Restatement of Previously Issued Financial Statements
During the quarter ended March 31, 2020, the Company discovered certain accounting irregularities at its Mexican subsidiaries. The Company’s Audit Review Committee commenced an internal investigation, with the assistance of outside counsel and other third party experts. As a result of this investigation, the Company, along with the Audit Review Committee and its third party experts, concluded that certain former employees of one of the Company’s Mexican subsidiaries engaged in unauthorized transactions with the Company’s Mexican subsidiaries that resulted in expenditures being deferred on the balance sheet beyond the period for which the costs pertained. As a result, the Company recorded a non-cash write-off for certain amounts included in the Company’s historical consolidated financial statements in trade receivables and prepaid expenses and other current assets, among other corrections, related to these transactions, and restated its consolidated financial statements as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017 and each of the quarters during the years ended December 31, 2019 and 2018 on Form 10-K/A for the year ended December 31, 2019. During the course of the investigation, certain expenses at the Company's Mexican subsidiaries were found to be incorrectly classified within the consolidated statement of operations and have also been corrected in the restatement. These misstatements are described in restatement reference (a) through (d) below.
The restatement also includes corrections for other errors previously identified as immaterial, individually and in the aggregate, to our consolidated financial statements.
Description of Misstatements
(a) Write-off of Assets: Certain former employees of one of the Company's Mexican subsidiaries engaged in unauthorized transactions with the Company’s Mexican subsidiaries and vendors in which the employees had an interest. In doing so, expenditures were deferred on the balance sheet beyond the period for which the costs pertained. The amounts were recorded as trade receivables, prepaid expenses and other current assets, and reductions in accrued liabilities. The amounts have been written off to selling, general and administrative expenses. Where these write-offs caused prepaid assets and other current assets balance to become a liability, the balance has been reclassed from prepaid expenses and other assets to other current liabilities.
(b) Reversal of Revenue: Certain former employees of one of our Mexican subsidiaries engaged in sales activities to customers in which the employees had an interest. The Company concluded that these unauthorized transactions did not meet the criteria for revenue recognition at the time of sale and the revenue has been reversed.
(c) Correction of misclassification of Selling and Marketing Expenses: Certain former employees of one of the Mexican subsidiaries engaged a third-party, in which the employees had an interest, to perform selling and marketing activities on behalf of the Mexican subsidiaries. Amounts paid for the selling and marketing activities had previously been treated as variable consideration and reflected as a reduction to revenue; however, the amounts should be reflected as selling, general and administrative expenses.
(d) Correction for the timing of recognition of customer price concessions: Customer price concessions at our Mexican subsidiaries were not accrued timely in order to obscure the increased expenses due to unauthorized transactions as described above.
(e) Tax adjustments for corrections: The tax impacts of the corrections have been recorded.
(f) Correction of other immaterial errors.
Restatement TablesIn December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new accounting rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new accounting rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new accounting rules will be effective for the Company for its year ending December 31, 2022. The Company is currently in the process of evaluating the impact of adoption of the new accounting rules on the Company’s financial condition, results of operations, cash flows and disclosures.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The restatement tables below present a reconciliation fromnew accounting rules provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this standard can be applied anytime between the previously reported to the restated values asfirst quarter of 2020 and for the three and nine months ended September 30, 2019 and as of December 31, 2019. The values as previously reported were derived from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 filed on November 7, 2019 and from our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed on February 26, 2020.
Additionally, in the fourth quarter of 2019, KC met2022. The Company is currently in the requirements to be reported as a discontinued operation. The following consolidatedprocess of evaluating the impact of adoption of the new rules on the Company’s financial tables present a reconciliation to reflect KC as a discontinued operation for all periods presentedcondition, results of operations, cash flows and are labeled "Recast". See Note 3, Discontinued Operations for more information.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| As Previously Reported | | Restatement Impacts | | Restatement Reference | | As Restated |
| (In thousands) |
Assets | | | | | | | |
Current assets | | | | | | | |
Cash and cash equivalents | $ | 2,142 | | | $ | 0 | | | | | $ | 2,142 | |
Trade receivables, net | 113,781 | | | (5,400) | | | a,b,d | | 108,381 | |
Inventory | 109,621 | | | 185 | | | f | | 109,806 | |
Prepaid expenses and other current assets | 23,102 | | | (11,757) | | | a,b,f | | 11,345 | |
Current assets of discontinued operations | 5,383 | | | 0 | | | | | 5,383 | |
Total current assets | 254,029 | | | (16,972) | | | | | 237,057 | |
Property, plant and equipment, net | 22,324 | | | 0 | | | | | 22,324 | |
Goodwill | 6,253 | | | 0 | | | | | 6,253 | |
Other intangible assets, net | 3,141 | | | 0 | | | | | 3,141 | |
Deferred income taxes | 3,853 | | | 2,395 | | | e | | 6,248 | |
Deferred costs | 10,941 | | | 0 | | | | | 10,941 | |
Other non-current assets | 2,085 | | | 0 | | | | | 2,085 | |
Non-current assets of discontinued operations | 614 | | | 0 | | | | | 614 | |
Total assets | $ | 303,240 | | | $ | (14,577) | | | | | $ | 288,663 | |
Liabilities and stockholders' equity | | | | | | | |
Current liabilities | | | | | | | |
Accounts payable | $ | 111,117 | | | $ | 231 | | | f | | $ | 111,348 | |
Accounts payable to NACCO Industries, Inc. | 496 | | | 0 | | | | | 496 | |
Revolving credit agreements | 23,497 | | | 0 | | | | | 23,497 | |
Accrued compensation | 14,277 | | | 750 | | | f | | 15,027 | |
Accrued product returns | 8,697 | | | 0 | | | | | 8,697 | |
Other current liabilities | 12,873 | | | (339) | | | a,e | | 12,534 | |
Current liabilities of discontinued operations | 29,723 | | | 0 | | | | | 29,723 | |
Total current liabilities | 200,680 | | | 642 | | | | | 201,322 | |
Revolving credit agreements | 35,000 | | | 0 | | | | | 35,000 | |
Other long-term liabilities | 12,501 | | | 3,574 | | | e | | 16,075 | |
Total liabilities | 248,181 | | | 4,216 | | | | | 252,397 | |
Stockholders’ equity | | | | | | | |
Preferred stock, par value $0.01 per share | 0 | | | 0 | | | | | 0 | |
Class A Common stock, par value $0.01 per share; 9,805 shares issued as of December 31, 2019 | 98 | | | 0 | | | | | 98 | |
Class B Common stock, par value $0.01 per share, convertible into Class A on a 1-for-one basis; 4,076 shares issued as of December 31, 2019 | 41 | | | 0 | | | | | 41 | |
Capital in excess of par value | 54,344 | | | 165 | | | f | | 54,509 | |
Treasury stock | (5,960) | | | 0 | | | | | (5,960) | |
Retained earnings | 22,524 | | | (18,814) | | | a,b,d,e,f | | 3,710 | |
Accumulated other comprehensive loss | (15,988) | | | (144) | | | a,b,d,e | | (16,132) | |
Total stockholders’ equity | 55,059 | | | (18,793) | | | | | 36,266 | |
Total liabilities and stockholders' equity | $ | 303,240 | | | $ | (14,577) | | | | | $ | 288,663 | |
Table of Contents
disclosures.
(a) Write-offAssets Held for Sale
During the fourth quarter of Assets:2020, the Company committed to a plan to sell our Brazilian subsidiary and determined that we met all of the criteria to classify the assets and liabilities of this business as held for sale. The correctioncarrying amounts of the major classes of assets that are classified as held for sale as of March 31, 2021 are as follows: $1.6 million of trade receivables, net, and $0.5 million of inventory. As of March 31, 2021, the total of these misstatements resultedamounts are included in a decrease to trade receivables of $2.5 million, a reduction tothe prepaid expenses and other current assets line item on the Consolidated Balance Sheet. The carrying value of $12.4 million, and an increase to other current liabilities of $0.9 million
(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to trade receivables of $1.3 million and an increase to prepaid expenses and other current assets of $0.2 millionthe disposal group approximates the fair value, which we determined based on the expected sales price.
(d) Correction forIn April 2021, the timing of recognition of customer price concessions: The correction of these misstatements resulted inCompany made the decision to wind down the Brazilian subsidiary and enter into a decreaselicensing agreement with a third party to trade receivables of $1.6 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to deferred income taxes of $2.4 million,service the Brazilian market. As a decrease to other current liabilities of $1.2 million, and an increase to other long-term liabilities of $3.6 million
(f) Correction of other immaterial errors: The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $0.5 million, an increase to inventory of $0.2 million, an increase to accounts payable of $0.2 million, an increase to accrued compensation of $0.7 million, and an increase to capital in excess of par of $0.2 million
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
` | September 30, 2019 |
| As Previously Reported | | Restatement Impacts | | Restatement Reference | | As Restated | | Recasting Impacts | | As Restated and Recast |
| (In thousands) |
Assets | | | | | | | | | | | |
Current assets | | | | | | | | | | | |
Cash and cash equivalents | $ | 1,866 | | | $ | 0 | | | | | $ | 1,866 | | | $ | (307) | | | $ | 1,559 | |
Trade receivables, net | 106,135 | | | (2,179) | | | a,b | | 103,956 | | | (865) | | | 103,091 | |
Inventory | 181,847 | | | 0 | | | | | 181,847 | | | (20,804) | | | 161,043 | |
Prepaid expenses and other current assets | 22,445 | | | (7,505) | | | a,b | | 14,940 | | | (854) | | | 14,086 | |
Current assets of discontinued operations | 0 | | | 0 | | | | | 0 | | | 22,830 | | | 22,830 | |
Total current assets | 312,293 | | | (9,684) | | | | | 302,609 | | | 0 | | | 302,609 | |
Property, plant and equipment, net | 22,653 | | | 0 | | | | | 22,653 | | | (460) | | | 22,193 | |
Goodwill | 6,253 | | | 0 | | | | | 6,253 | | | 0 | | | 6,253 | |
Other intangible assets, net | 3,483 | | | 0 | | | | | 3,483 | | | 0 | | | 3,483 | |
Deferred income taxes | 6,161 | | | 634 | | | e | | 6,795 | | | (1,155) | | | 5,640 | |
Deferred costs | 8,925 | | | 0 | | | | | 8,925 | | | (121) | | | 8,804 | |
Other non-current assets | 1,561 | | | 0 | | | | | 1,561 | | | (8) | | | 1,553 | |
Non-current assets of discontinued operations | 0 | | | 0 | | | | | 0 | | | 1,744 | | | 1,744 | |
Total assets | $ | 361,329 | | | $ | (9,050) | | | | | $ | 352,279 | | | $ | 0 | | | $ | 352,279 | |
Liabilities and stockholders' equity | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | |
Accounts payable | $ | 147,206 | | | $ | 16 | | | | | $ | 147,222 | | | $ | (7,211) | | | $ | 140,011 | |
Accounts payable to NACCO Industries, Inc. | 220 | | | 0 | | | | | 220 | | | 0 | | | 220 | |
Revolving credit agreements | 59,702 | | | 0 | | | | | 59,702 | | | (9,550) | | | 50,152 | |
Accrued compensation | 15,568 | | | 389 | | | f | | 15,957 | | | (1,307) | | | 14,650 | |
Accrued product returns | 8,266 | | | 0 | | | | | 8,266 | | | 0 | | | 8,266 | |
Other current liabilities | 30,651 | | | 1,874 | | | a,d,e | | 32,525 | | | (6,645) | | | 25,880 | |
Current liabilities of discontinued operations | 0 | | | 0 | | | | | 0 | | | 24,713 | | | 24,713 | |
Total current liabilities | 261,613 | | | 2,279 | | | | | 263,892 | | | 0 | | | 263,892 | |
Revolving credit agreements | 30,000 | | | 0 | | | | | 30,000 | | | 0 | | | 30,000 | |
Other long-term liabilities | 14,961 | | | 882 | | | e | | 15,843 | | | (1,585) | | | 14,258 | |
Non-current liabilities of discontinued operations | 0 | | | 0 | | | | | 0 | | | 1,585 | | | 1,585 | |
Total liabilities | 306,574 | | | 3,161 | | | | | 309,735 | | | 0 | | | 309,735 | |
Stockholders’ equity | | | | | | | | | | | |
Class A Common stock | 95 | | | 0 | | | | | 95 | | | 0 | | | 95 | |
Class B Common stock | 44 | | | 0 | | | | | 44 | | | 0 | | | 44 | |
Capital in excess of par value | 54,143 | | | 0 | | | | | 54,143 | | | 0 | | | 54,143 | |
Treasury stock | (5,960) | | | 0 | | | | | (5,960) | | | 0 | | | (5,960) | |
Retained earnings | 24,955 | | | (12,724) | | | a,b,c,d,e,f | | 12,231 | | | 0 | | | 12,231 | |
Accumulated other comprehensive loss | (18,522) | | | 513 | | | a,b,d | | (18,009) | | | 0 | | | (18,009) | |
Total stockholders’ equity | 54,755 | | | (12,211) | | | | | 42,544 | | | 0 | | | 42,544 | |
Total liabilities and stockholders' equity | $ | 361,329 | | | $ | (9,050) | | | | | $ | 352,279 | | | $ | 0 | | | $ | 352,279 | |
(a) Write-off of Assets: The correction of these misstatements resulted in a decrease to trade receivables of $1.6 million, a reduction to prepaid expenses and other current assets of $7.6 million, and an increase to other current liabilities of $2.1 million
(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to trade receivables of $0.6 million and an increase to prepaid expenses and other current assets of $0.1 million
(d) Correction for the timing of recognition of customer price concessions: The correction of these misstatements resulted in an increase to other current liabilities of $0.2 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to deferred income taxes of $0.6 million, a decrease to other current liabilities of $0.4 million, and an increase to other long-term liabilities of $0.9 million
(f) Correction of other immaterial errors: The correction of these misstatements resulted in an increase to accrued compensation of $0.4 million
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2019 |
| As Previously Reported | | Restatement Impacts | | Restatement References | | As Restated | | Recasting Impacts | | As Restated and Recast |
| (In thousands) |
Revenue | $ | 169,778 | | | $ | 18 | | | b,c | | $ | 169,796 | | | $ | (20,288) | | | $ | 149,508 | |
Cost of sales | 129,194 | | | 0 | | | | | 129,194 | | | (10,632) | | | 118,562 | |
Gross profit | 40,584 | | | 18 | | | | | 40,602 | | | (9,656) | | | 30,946 | |
Selling, general and administrative expenses | 36,182 | | | 2,570 | | | a,c,f | | 38,752 | | | (12,590) | | | 26,162 | |
Amortization of intangible assets | 345 | | | 0 | | | | | 345 | | | 0 | | | 345 | |
Operating profit (loss) | 4,057 | | | (2,552) | | | | | 1,505 | | | 2,934 | | | 4,439 | |
Interest expense, net | 864 | | | 0 | | | | | 864 | | | (108) | | | 756 | |
Other expense (income), net | 688 | | | 0 | | | | | 688 | | | (7) | | | 681 | |
Income (loss) from continuing operations before income taxes | 2,505 | | | (2,552) | | | | | (47) | | | 3,049 | | | 3,002 | |
Income tax expense (benefit) | 2,108 | | | 45 | | | e | | 2,153 | | | 296 | | | 2,449 | |
Net income (loss) from continuing operations | 397 | | | (2,597) | | | | | (2,200) | | | 2,753 | | | 553 | |
Loss from discontinued operations, net of tax | 0 | | | 0 | | | | | 0 | | | (2,753) | | | (2,753) | |
Net income (loss) | $ | 397 | | | $ | (2,597) | | | | | $ | (2,200) | | | $ | 0 | | | $ | (2,200) | |
| | | | | | | | | | | |
Basic and diluted earnings (loss) per share: | | | | | | | | | | | |
Continuing operations | $ | 0.03 | | | $ | (0.19) | | | | | $ | (0.16) | | | $ | 0.20 | | | $ | 0.04 | |
Discontinued operations | 0 | | | 0 | | | | | 0 | | | (0.20) | | | (0.20) | |
Basic and diluted earnings (loss) per share | $ | 0.03 | | | $ | (0.19) | | | | | $ | (0.16) | | | $ | 0 | | | $ | (0.16) | |
| | | | | | | | | | | |
Basic weighted average shares outstanding | 13,579 | | | 0 | | | | | 13,579 | | | 0 | | | 13,579 | |
Diluted weighted average shares outstanding | 13,595 | | | 0 | | | | | 13,595 | | | 0 | | | 13,595 | |
(a) Write-off of Assets: The correction of these misstatements resulted in an increaseresult, we are no longer committed to selling generalthe subsidiary. The carrying amounts of the assets will be reclassified to held and administrative ("SG&A") expenseused during the second quarter of $2.22021. The disposal group had $2.5 million
(b) Reversal of Revenue: The correctionaccumulated other comprehensive losses at March 31, 2021, which will be recognized in net income upon substantial liquidation of these misstatements resultedthe Brazilian subsidiary which we expect to occur in a decrease to revenuethe back half of $0.5 million
(c) Correction of misclassification of Selling and Marketing Expenses: The correction of these misstatements resulted in an increase to revenue and an increase to SG&A expense of $0.5 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to income tax expense
(f) Correction of other immaterial errors: The correction of these misstatements resulted in a decrease to SG&A expense of $0.1 million2021.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2019 |
| As Previously Reported | | Restatement Impacts | | Restatement References | | As Restated | | Recasting Impacts | | As Restated and Recast |
| (In thousands) |
Revenue | $ | 463,582 | | | $ | 1,458 | | | b,c,f | | $ | 465,040 | | | $ | (57,824) | | | $ | 407,216 | |
Cost of sales | 352,618 | | | (64) | | | f | | 352,554 | | | (31,493) | | | 321,061 | |
Gross profit | 110,964 | | | 1,522 | | | | | 112,486 | | | (26,331) | | | 86,155 | |
Selling, general and administrative expenses | 108,306 | | | 5,137 | | | a,c,f | | 113,443 | | | (36,058) | | | 77,385 | |
Amortization of intangible assets | 1,036 | | | 0 | | | | | 1,036 | | | 0 | | | 1,036 | |
Operating profit (loss) | 1,622 | | | (3,615) | | | | | (1,993) | | | 9,727 | | | 7,734 | |
Interest expense, net | 2,514 | | | 0 | | | | | 2,514 | | | (306) | | | 2,208 | |
Other expense (income), net | 230 | | | 144 | | | f | | 374 | | | (22) | | | 352 | |
Income (loss) from continuing operations before income taxes | (1,122) | | | (3,759) | | | | | (4,881) | | | 10,055 | | | 5,174 | |
Income tax expense (benefit) | 1,186 | | | 136 | | | e | | 1,322 | | | 2,063 | | | 3,385 | |
Net income (loss) from continuing operations | (2,308) | | | (3,895) | | | | | (6,203) | | | 7,992 | | | 1,789 | |
Loss from discontinued operations, net of tax | 0 | | | 0 | | | | | 0 | | | (7,992) | | | (7,992) | |
Net income (loss) | $ | (2,308) | | | $ | (3,895) | | | | | $ | (6,203) | | | $ | 0 | | | $ | (6,203) | |
| | | | | | | | | | | |
Basic and diluted earnings (loss) per share: | | | | | | | | | | | |
Continuing operations | $ | (0.17) | | | $ | (0.28) | | | | | $ | (0.45) | | | $ | 0.58 | | | $ | 0.13 | |
Discontinued operations | 0 | | | 0 | | | | | 0 | | | (0.58) | | | (0.58) | |
Basic and diluted earnings (loss) per share | $ | (0.17) | | | $ | (0.28) | | | | | $ | (0.45) | | | $ | 0 | | | $ | (0.45) | |
| | | | | | | | | | | |
Basic weighted average shares outstanding | 13,726 | | | 0 | | | | | 13,726 | | | 0 | | | 13,726 | |
Diluted weighted average shares outstanding | 13,726 | | | 0 | | | | | 13,726 | | | 5 | | | 13,731 | |
(a) Write-off of Assets: The correction of these misstatements resulted in an increase to selling, general and administrative ("SG&A") expense of $3.3 million
(b) Reversal of Revenue: The correction of these misstatements resulted in a decrease to revenue of $0.5 million
(c) Correction of misclassification of Selling and Marketing Expenses: The correction of these misstatements resulted in an increase to revenue and an increase to SG&A expense of $1.8 million
(e) Tax adjustments for corrections: The correction of these misstatements resulted in an increase to income tax expense of $0.1 million
(f) Correction of other immaterial errors: The correction of these misstatements resulted in an increase to revenue of $0.2 million, a decrease to cost of sales of $0.1 million, and an increase to other expense of $0.1 million.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, 2019 |
| As Previously Reported | | Restatement Impacts | | As Restated |
| (In thousands) |
Net income (loss) | $ | 397 | | | $ | (2,597) | | | $ | (2,200) | |
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency translation adjustment | (312) | | | 294 | | | (18) | |
(Loss) gain on long-term intra-entity foreign currency transactions | (509) | | | 0 | | | (509) | |
Cash flow hedging activity | (127) | | | 0 | | | (127) | |
Reclassification of hedging activities into earnings | 122 | | | 0 | | | 122 | |
Pension plan adjustment | 0 | | | 0 | | | 0 | |
Reclassification of pension adjustments into earnings | 127 | | | 0 | | | 127 | |
Total other comprehensive loss, net of tax | (699) | | | 294 | | | (405) | |
Comprehensive income (loss) | $ | (302) | | | $ | (2,303) | | | $ | (2,605) | |
See description of the net income (loss) impacts in the consolidated statement of operations for the three months ended September 30, 2019 section above.
The increase to foreign currency translation adjustments is the result of the translation impacts of restatements in the write-off of assets, reversal of revenue and timing of recognition of customer pricing concessions categories.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, 2019 |
| As Previously Reported | | Restatement Impacts | | As Restated |
| (In thousands) |
Net income (loss) | $ | (2,308) | | | $ | (3,895) | | | $ | (6,203) | |
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency translation adjustment | 244 | | | 65 | | | 309 | |
(Loss) gain on long-term intra-entity foreign currency transactions | (373) | | | 0 | | | (373) | |
Cash flow hedging activity | (1,570) | | | 144 | | | (1,426) | |
Reclassification of hedging activities into earnings | 268 | | | 0 | | | 268 | |
Pension plan adjustment | 0 | | | 0 | | | 0 | |
Reclassification of pension adjustments into earnings | 219 | | | 94 | | | 313 | |
Total other comprehensive loss, net of tax | (1,212) | | | 303 | | | (909) | |
Comprehensive income (loss) | $ | (3,520) | | | $ | (3,592) | | | $ | (7,112) | |
See description of the net income (loss) impacts in the consolidated statement of operations for the nine months ended September 30, 2019 section above.
The increase to foreign currency translation adjustments is the result of the translation impacts of restatements in the write-off of assets, reversal of revenue and timing of recognition of customer pricing concessions categories.
The increases to cash flow hedging and the reclassification of pension adjustments are from the correction of other immaterial errors.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
| As Previously Reported | | Restatement Impacts | | As Restated | | Recasting Impacts | | As Restated and Recast |
Operating activities | | | | | | | | | |
Net income (loss) from continuing operations | $ | (2,308) | | | $ | (3,895) | | | $ | (6,203) | | | $ | 7,992 | | | $ | 1,789 | |
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | 3,279 | | | 0 | | | 3,279 | | | (466) | | | 2,813 | |
Deferred income taxes | 2,969 | | | 32 | | | 3,001 | | | 17 | | | 3,018 | |
Stock compensation expense | 2,430 | | | 0 | | | 2,430 | | | 0 | | | 2,430 | |
Other | 1,117 | | | (24) | | | 1,093 | | | (995) | | | 98 | |
Net changes in operating assets and liabilities: | | | | | | | | | |
Affiliate payable | (2,199) | | | 0 | | | (2,199) | | | 3 | | | (2,196) | |
Trade receivables | (4,897) | | | (294) | | | (5,191) | | | (906) | | | (6,097) | |
Inventory | (37,641) | | | 169 | | | (37,472) | | | (1,190) | | | (38,662) | |
Other assets | (231) | | | 430 | | | 199 | | | (1,349) | | | (1,150) | |
Accounts payable | 14,927 | | | 10 | | | 14,937 | | | 6,493 | | | 21,430 | |
Other liabilities | (12,577) | | | 3,604 | | | (8,973) | | | 1,360 | | | (7,613) | |
Net cash provided by (used for) operating activities from continuing operations | (35,131) | | | 32 | | | (35,099) | | | 10,959 | | | (24,140) | |
Investing activities | | | | | | | | | |
Expenditures for property, plant and equipment | (3,305) | | | 0 | | | (3,305) | | | 149 | | | (3,156) | |
Other | 37 | | | 0 | | | 37 | | | (37) | | | 0 | |
Net cash used for investing activities from continuing operations | (3,268) | | | 0 | | | (3,268) | | | 112 | | | (3,156) | |
Financing activities | | | | | | | | | |
Net additions (reductions) to revolving credit agreements | 43,074 | | | 0 | | | 43,074 | | | (9,550) | | | 33,524 | |
Purchase of treasury stock | (5,960) | | | 0 | | | (5,960) | | | 0 | | | (5,960) | |
Cash dividends paid | (3,634) | | | 0 | | | (3,634) | | | 0 | | | (3,634) | |
Net cash provided by (used for) financing activities from continuing operations | 33,480 | | | 0 | | | 33,480 | | | (9,550) | | | 23,930 | |
Cash flows from discontinued operations | | | | | | | | | |
Net cash used for operating activities from discontinued operations | 0 | | | 0 | | | 0 | | | (10,959) | | | (10,959) | |
Net cash used for investing activities from discontinued operations | 0 | | | 0 | | | 0 | | | (112) | | | (112) | |
Net cash used for financing activities from discontinued operations | 0 | | | 0 | | | 0 | | | 9,550 | | | 9,550 | |
Cash provided by (used for) discontinued operations | 0 | | | 0 | | | 0 | | | (1,521) | | | (1,521) | |
Effect of exchange rate changes on cash | 433 | | | (32) | | | 401 | | | 0 | | | 401 | |
Cash and Cash Equivalents | | | | | | | | | |
(Decrease) increase for the year from continuing operations | (4,486) | | | 0 | | | (4,486) | | | 1,521 | | | (2,965) | |
Increase (decrease) for the year from discontinued operations | 0 | | | 0 | | | 0 | | | (1,521) | | | (1,521) | |
Balance at the beginning of the year | 6,352 | | | 0 | | | 6,352 | | | 0 | | | 6,352 | |
Balance at the end of the period | $ | 1,866 | | | $ | 0 | | | $ | 1,866 | | | $ | 0 | | | $ | 1,866 | |
See description of the net income (loss) impacts in the consolidated statement of operations for the nine months ended September 30, 2019 section above.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| | | | | | | | | | | | | | | | | | | | | | | |
| Class A common stock | Class B common stock | Capital in excess of par value | Treasury stock | Retained earnings | Accumulated other comprehensive income (loss) | Total stockholders' equity |
As Previously Reported | | | | | | | |
Balance, January 1, 2019 | $ | 93 | | $ | 44 | | $ | 51,714 | | $ | 0 | | $ | 30,897 | | $ | (17,310) | | $ | 65,438 | |
Net loss | | | — | | — | | (2,308) | | — | | (2,308) | |
Issuance of common stock, net of conversions | 2 | | — | | (1) | | — | | — | | — | | 1 | |
Purchase of treasury stock | | | — | | (5,960) | | — | | — | | (5,960) | |
Share-based compensation expense | | | 2,430 | | — | | — | | — | | 2,430 | |
Cash dividends, $0.085 per share | | | — | | — | | (3,634) | | — | | (3,634) | |
Other comprehensive loss | | | — | | — | | — | | (1,699) | | (1,699) | |
Reclassification adjustment to net loss | | | — | | — | | — | | 487 | | 487 | |
Balance, September 30, 2019 | $ | 95 | | $ | 44 | | $ | 54,143 | | $ | (5,960) | | $ | 24,955 | | $ | (18,522) | | $ | 54,755 | |
Restatement Impacts | | | | | | | |
Balance, January 1, 2019 | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | (8,829) | | $ | 209 | | $ | (8,620) | |
Net loss | | | — | | — | | (3,895) | | — | | (3,895) | |
Issuance of common stock, net of conversions | — | | — | | — | | — | | — | | — | | — | |
Purchase of treasury stock | | | — | | — | | — | | — | | — | |
Share-based compensation expense | | | — | | — | | — | | — | | — | |
Cash dividends, $0.085 per share | | | — | | — | | — | | — | | — | |
Other comprehensive loss | | | — | | — | | — | | 210 | | 210 | |
Reclassification adjustment to net loss | | | — | | — | | — | | 94 | | 94 | |
Balance, September 30, 2019 | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | (12,724) | | $ | 513 | | $ | (12,211) | |
As Restated | | | | | | | |
Balance, January 1, 2019 | $ | 93 | | $ | 44 | | $ | 51,714 | | $ | 0 | | $ | 22,068 | | $ | (17,101) | | $ | 56,818 | |
Net loss | — | | — | | — | | — | | (6,203) | | — | | (6,203) | |
Issuance of common stock, net of conversions | 2 | | — | | (1) | | — | | — | | — | | 1 | |
Purchase of treasury stock | — | | — | | — | | (5,960) | | — | | — | | (5,960) | |
Share-based compensation expense | — | | — | | 2,430 | | — | | — | | — | | 2,430 | |
Cash dividends, $0.085 per share | — | | — | | — | | — | | (3,634) | | — | | (3,634) | |
Other comprehensive loss | — | | — | | — | | — | | — | | (1,489) | | (1,489) | |
Reclassification adjustment to net loss | — | | — | | — | | — | | — | | 581 | | 581 | |
Balance, September 30, 2019 | $ | 95 | | $ | 44 | | $ | 54,143 | | $ | (5,960) | | $ | 12,231 | | $ | (18,009) | | $ | 42,544 | |
See description of the net income and other comprehensive income (loss) impacts in the consolidated statement of operations and consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2019 sections above.
NOTE 3—2—Discontinued Operations
On October 10, 2019, the Board approved the wind down of KC's retail operations due to further deterioration in foot traffic which lowered the Company's outlook for the prospect of a future return to profitability. By December 31, 2019, all retail stores were closed and operations ceased.operations. Accordingly, KC is reported as discontinued operations in all periods presented. KC completed its dissolution on April 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist and was no longer consolidated by the Company. Neither Hamilton Beach Brands Holding Company nor Hamilton Beach Brands, Inc. received a distribution.
KC’s operating results are reflected as discontinued operations for all periods presented. The major line items constituting the income (loss) from discontinued operations, net of tax are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30 | | NINE MONTHS ENDED SEPTEMBER 30 |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) |
Revenue | $ | 0 | | | $ | 20,288 | | | 631 | | | 57,824 | |
Cost of sales | 0 | | | 10,632 | | | 0 | | | 31,493 | |
Gross profit | 0 | | | 9,656 | | | 631 | | | 26,331 | |
Selling, general and administrative expenses | 0 | | | 12,590 | | | 1,346 | | | 36,058 | |
Adjustment of lease termination liability(1) | 0 | | | 0 | | | (16,457) | | | 0 | |
Adjustment of other current liabilities(2) | 0 | | | 0 | | | (6,608) | | | 0 | |
Operating income (loss) | 0 | | | (2,934) | | | 22,350 | | | (9,727) | |
Interest expense | 0 | | | 108 | | | 0 | | | 306 | |
Other expense, net | 0 | | | 7 | | | 88 | | | 22 | |
Income (loss) from discontinued operations before income taxes | 0 | | | (3,049) | | | 22,262 | | | (10,055) | |
Income tax benefit | 0 | | | (296) | | | (299) | | | (2,063) | |
Income (loss) from discontinued operations, net of tax | $ | 0 | | | $ | (2,753) | | | $ | 22,561 | | | $ | (7,992) | |
| | | | | | | | | | | | | |
| | THREE MONTHS ENDED MARCH 31 | | |
| | | 2020 | | | | |
| | |
Revenue | | | $ | 631 | | | | | |
Cost of sales | | | 0 | | | | | |
Gross profit | | | 631 | | | | | |
Selling, general and administrative expenses | | | 1,047 | | | | | |
Adjustment of lease termination liability(1) | | | (16,457) | | | | | |
Adjustment of other current liabilities(2) | | | (6,608) | | | | | |
Operating income | | | 22,649 | | | | | |
| | | | | | | |
| | | | | | | |
Income from discontinued operations before income taxes | | | 22,649 | | | | | |
Income tax benefit | | | (217) | | | | | |
Income from discontinued operations, net of tax | | | $ | 22,866 | | | | | |
(1) Represents an adjustment to the lease termination obligation based on the final distribution of KC's remaining assets on April 3, 2020. The lease termination obligation is measured at fair value using significant observable inputs, which is Level 2 as defined in the fair value hierarchy.
(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.
KC’s assets and liabilities are reflected as assets and liabilities of discontinued operations as of December 31, 2019 and September 30, 2019. Due to the deconsolidation of KC on April 3, 2020, there wereare no assets or liabilities associated with KC as of September 30,March 31, 2021 and December 31, 2020. The major classes of KC's assets and liabilities included as part of discontinued operations in prior periodsas of March 31, 2020 are as follows:
| | | | | | | | | | | | | | |
| | DECEMBER 31 2019 | | SEPTEMBER 30 2019 |
| |
Assets | | | | |
Cash and cash equivalents | | $ | 5,022 | | | $ | 307 | |
Inventory | | 0 | | | 20,804 | |
Prepaid expenses and other current assets | | 361 | | | 1,719 | |
Current assets of discontinued operations | | $ | 5,383 | | | $ | 22,830 | |
| | | | |
Property, plant and equipment, net | | 0 | | | 460 | |
Deferred income taxes | | $ | 614 | | | $ | 1,155 | |
Other non-current assets | | 0 | | | 129 | |
Non-current assets of discontinued operations | | $ | 614 | | | $ | 1,744 | |
| | | | |
Liabilities | | | | |
Accounts payable | | $ | 4,594 | | | $ | 7,211 | |
| | | | |
Revolving credit agreement | | 0 | | | 9,550 | |
Lease termination liability | | 17,248 | | | 0 | |
Other current liabilities | | 7,881 | | | 7,952 | |
Current liabilities of discontinued operations | | $ | 29,723 | | | $ | 24,713 | |
| | | | |
Other long-term liabilities | | 0 | | | 1,585 | |
Non-current liabilities of discontinued operations | | $ | 0 | | | $ | 1,585 | |
| | | | | | | | | |
| | | | | MARCH 31 2020 |
| | | | | |
Assets | | | | | |
Cash and cash equivalents | | | | | $ | 145 | |
| | | | | |
Prepaid expenses and other current assets | | | | | 179 | |
Current assets of discontinued operations | | | | | $ | 324 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Liabilities | | | | | |
Accounts payable | | | | | $ | 63 | |
| | | | | |
| | | | | |
Lease termination liability | | | | | 791 | |
Other current liabilities | | | | | 245 | |
Current liabilities of discontinued operations | | | | | $ | 1,099 | |
| | | | | |
| | | | | |
| | | | | |
Neither Hamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC.
NOTE 4—3—Transfer of Financial Assets
The Company has entered into an arrangement with a financial institution to sell certain US trade receivables on a non-recourse basis. The Company utilizes this arrangement as an integral part of financing working capital. Under the terms of the agreement, the Company receives cash proceeds and retains no rights or interest and has no obligations with respect to the sold receivables. These transactions are accounted for as sold receivables which result in a reduction in trade receivables because the agreement transfers effective control over and risk related to the receivables to the buyer. Under this arrangement, the Company derecognized $18.2$29.8 million and $93.4$36.5 million of trade receivables during the three and nine months ending September 30,March 31, 2021 and 2020, respectively, $36.9 million and $104.8 million of trade receivables during the three and nine months ending September 30, 2019, respectively, and $162.7$162.4 million during the year ending December 31, 2019.2020. The loss incurred on sold receivables in the consolidated results of operations for the ninethree months ended September 30,March 31, 2021 and 2020 and 2019 was not material. The Company does not carry any servicing assets or liabilities. Cash proceeds from this arrangement are reflected as operating activities in the Condensed Consolidated Statements of Cash Flows.
NOTE 5—4—Fair Value Disclosure
The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
| Description | Description | | Balance Sheet Location | | SEPTEMBER 30 2020 | | DECEMBER 31 2019 | | SEPTEMBER 30 2019 | Description | | Balance Sheet Location | | MARCH 31 2021 | | DECEMBER 31 2020 | | MARCH 31 2020 |
Assets: | Assets: | | | | | Assets: | | | | |
Interest rate swap agreements | Interest rate swap agreements | | Interest rate swap agreements | |
Current | Current | | Prepaid expenses and other current assets | | $ | 0 | | | $ | 0 | | | $ | 0 | | Current | | Prepaid expenses and other current assets | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Foreign currency exchange contracts | Foreign currency exchange contracts | | Foreign currency exchange contracts | |
Current | Current | | Prepaid expenses and other current assets | | 9 | | | 0 | | | 0 | | Current | | Prepaid expenses and other current assets | | 0 | | | 0 | | | 767 | |
| | $ | 9 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 767 | |
Liabilities: | Liabilities: | | | | | | | Liabilities: | | | | | | |
Interest rate swap agreements | Interest rate swap agreements | | Interest rate swap agreements | |
Current | Current | | Other current liabilities | | $ | 398 | | | $ | 21 | | | $ | 4 | | Current | | Other current liabilities | | $ | 333 | | | $ | 380 | | | $ | 362 | |
Long-term | Long-term | | Other long-term liabilities | | 828 | | | 61 | | | 244 | | Long-term | | Other long-term liabilities | | 591 | | | 779 | | | 818 | |
Foreign currency exchange contracts | Foreign currency exchange contracts | | Foreign currency exchange contracts | |
Current | Current | | Other current liabilities | | 31 | | | 308 | | | 78 | | Current | | Other current liabilities | | 249 | | | 518 | | | 0 | |
| | $ | 1,257 | | | $ | 390 | | | $ | 326 | | | $ | 1,173 | | | $ | 1,677 | | | $ | 1,180 | |
The Company measures its derivatives at fair value using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. The Company uses a present value technique that incorporates the LIBOR swap curve, foreign currency spot rates and foreign currency forward rates to value its derivatives, including its interest rate swap agreements and foreign currency exchange contracts, and also incorporates the effect of its subsidiary and counterparty credit risk into the valuation.
Other Fair Value Measurement Disclosures
The carrying amounts of cash and cash equivalents, trade receivables and accounts payable approximate fair value due to the short-term maturities of these instruments. The fair value of the revolving credit agreement, including book overdrafts, which approximate book value, was determined using current rates offered for similar obligations taking into account subsidiary credit risk, which is Level 2 as defined in the fair value hierarchy.
There were no transfers into or out of Levels 1, 2 or 3 during the three months ended March 31, 2021.
NOTE 6—5—Stockholders' Equity
Capital Stock
The following table sets forth the Company's authorized capital stock information:
| | | SEPTEMBER 30 2020 | | DECEMBER 31 2019 | | SEPTEMBER 30 2019 | | MARCH 31 2021 | | DECEMBER 31 2020 | | MARCH 31 2020 |
| | (In thousands) | |
Preferred stock, par value $0.01 per share | Preferred stock, par value $0.01 per share | | Preferred stock, par value $0.01 per share | |
Preferred stock authorized | Preferred stock authorized | 5,000 | | | 5,000 | | | 5,000 | | Preferred stock authorized | 5,000 | | | 5,000 | | | 5,000 | |
Preferred stock outstanding | Preferred stock outstanding | 0 | | | 0 | | | 0 | | Preferred stock outstanding | 0 | | | 0 | | | 0 | |
Class A Common stock, par value $0.01 per share | Class A Common stock, par value $0.01 per share | | Class A Common stock, par value $0.01 per share | |
Class A Common stock authorized | Class A Common stock authorized | 70,000 | | | 70,000 | | | 70,000 | | Class A Common stock authorized | 70,000 | | | 70,000 | | | 70,000 | |
Class A Common issued(1)(2) | Class A Common issued(1)(2) | 9,980 | | | 9,805 | | | 9,488 | | Class A Common issued(1)(2) | 10,186 | | | 10,006 | | | 9,917 | |
Treasury Stock | Treasury Stock | 365 | | | 365 | | | 365 | | Treasury Stock | 365 | | | 365 | | | 365 | |
Class B Common stock, par value $0.01 per share, convertible into Class A on a 1-for-one basis | Class B Common stock, par value $0.01 per share, convertible into Class A on a 1-for-one basis | | Class B Common stock, par value $0.01 per share, convertible into Class A on a 1-for-one basis | |
Class B Common stock authorized | Class B Common stock authorized | 30,000 | | | 30,000 | | | 30,000 | | Class B Common stock authorized | 30,000 | | | 30,000 | | | 30,000 | |
Class B Common issued(1) | Class B Common issued(1) | 4,055 | | | 4,076 | | | 4,377 | | Class B Common issued(1) | 4,037 | | | 4,045 | | | 4,074 | |
(1) Class B Common converted to Class A Common were 8 and 213 shares during the three and nine months ending September 30,March 31, 2021 and 2020, respectively, and 6 and 44 during the three and nine months ending September 30, 2019, respectively.
(2) The Company issued Class A Common shares of 26172 and 154108 during the three and nine months ending September 30,March 31, 2021 and 2020, respectively, and 13 and 153 during the three and nine months ending September 30, 2019, respectively.
Accumulated Other Comprehensive Loss: The following table summarizes changes in accumulated other comprehensive loss by component and related tax effects for periods shown:
| | | Foreign Currency | | Deferred Gain (Loss) on Cash Flow Hedging | | Pension Plan Adjustment | | Total | | Foreign Currency | | Deferred Gain (Loss) on Cash Flow Hedging | | Pension Plan Adjustment | | Total |
| As Restated Balance, January 1, 2020 | $ | (8,221) | | | $ | (341) | | | $ | (7,570) | | | $ | (16,132) | | |
Balance, January 1, 2021 | | Balance, January 1, 2021 | $ | (9,775) | | | $ | (1,344) | | | $ | (6,357) | | | $ | (17,476) | |
Other comprehensive income (loss) | | Other comprehensive income (loss) | (276) | | | 222 | | | 0 | | | (54) | |
Reclassification adjustment to net income (loss) | | Reclassification adjustment to net income (loss) | 0 | | | 182 | | | 156 | | | 338 | |
Tax effects | | Tax effects | (79) | | | (115) | | | (43) | | | (237) | |
Balance, March 31, 2021 | | Balance, March 31, 2021 | $ | (10,130) | | | $ | (1,055) | | | $ | (6,244) | | | $ | (17,429) | |
| | Balance, January 1, 2020 | | Balance, January 1, 2020 | $ | (8,221) | | | $ | (341) | | | $ | (7,570) | | | $ | (16,132) | |
Other comprehensive income (loss) | Other comprehensive income (loss) | (4,985) | | | (171) | | | 0 | | | (5,156) | | Other comprehensive income (loss) | (4,985) | | | (171) | | | 0 | | | (5,156) | |
Reclassification adjustment to net income (loss) | Reclassification adjustment to net income (loss) | 0 | | | 154 | | | 239 | | | 393 | | Reclassification adjustment to net income (loss) | 0 | | | 154 | | | 239 | | | 393 | |
Tax effects | Tax effects | 1,132 | | | (35) | | | (44) | | | 1,053 | | Tax effects | 1,132 | | | (35) | | | (44) | | | 1,053 | |
Balance, March 31, 2020 | Balance, March 31, 2020 | $ | (12,074) | | | $ | (393) | | | $ | (7,375) | | | $ | (19,842) | | Balance, March 31, 2020 | $ | (12,074) | | | $ | (393) | | | $ | (7,375) | | | $ | (19,842) | |
Other comprehensive income (loss) | 742 | | | (164) | | | 0 | | | 578 | | |
Reclassification adjustment to net income (loss) | 0 | | | (188) | | | 140 | | | (48) | | |
Tax effects | (223) | | | 97 | | | (43) | | | (169) | | |
Balance, June 30, 2020 | $ | (11,555) | | | $ | (648) | | | $ | (7,278) | | | $ | (19,481) | | |
Other comprehensive income (loss) | 622 | | | 157 | | | 0 | | | 779 | | |
Reclassification adjustment to net income (loss) | 0 | | | (605) | | | 158 | | | (447) | | |
Tax effects | (168) | | | 136 | | | (44) | | | (76) | | |
Balance, September 30, 2020 | $ | (11,101) | | | $ | (960) | | | $ | (7,164) | | | $ | (19,225) | | |
| As Restated Balance, January 1, 2019 | $ | (8,652) | | | $ | 879 | | | $ | (9,328) | | | $ | (17,101) | | |
Other comprehensive income (loss) | 246 | | | (631) | | | 0 | | | (385) | | |
Reclassification adjustment to net income (loss) | 0 | | | 4 | | | 45 | | | 49 | | |
Tax effects | (17) | | | 207 | | | 39 | | | 229 | | |
As Restated Balance, March 31, 2019 | $ | (8,423) | | | $ | 459 | | | $ | (9,244) | | | $ | (17,208) | | |
Other comprehensive income (loss) | 248 | | | (1,198) | | | 0 | | | (950) | | |
Reclassification adjustment to net income (loss) | 0 | | | 202 | | | 142 | | | 344 | | |
Tax effects | (13) | | | 263 | | | (40) | | | 210 | | |
As Restated Balance, June 30, 2019 | $ | (8,188) | | | $ | (274) | | | $ | (9,142) | | | $ | (17,604) | | |
Other comprehensive income (loss) | (558) | | | (166) | | | 0 | | | (724) | | |
Reclassification adjustment to net income (loss) | 0 | | | 171 | | | 166 | | | 337 | | |
Tax effects | 31 | | | (10) | | | (39) | | | (18) | | |
As Restated Balance, September 30, 2019 | $ | (8,715) | | | $ | (279) | | | $ | (9,015) | | | $ | (18,009) | | |
|
NOTE 7—6—Revenue
Revenue is recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. 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 therevenue sources and performance obligations for HBB isare as follows:
•ProductConsumer and Commercial product revenue - 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 as well as sales of commercial products for restaurants, bars and hotels.
Transactions with theseboth consumer and commercial customers generally originate upon the receipt of a purchase order from the customer, which in some cases are governed by master sales agreements, specifying product(s) that the customer desires. Contracts for product revenue have an original duration of one year or less, and payment terms are generally standard and based on customer creditworthiness. Revenue from product sales is recognized at the point in time when control transfers to the customer, which is either when product is shipped from the Company's facility, or delivered to customers, depending on the shipping terms. The amount of revenue recognized varies primarily with changes in returns. In addition, the Company offers price concessions to our customers for incentive offerings, special pricing agreements, price competition, promotions or other volume-based arrangements. We evaluated such agreements with our customers and determined returns and price concessions should be accounted for as variable consideration. As of December 31, 2019, we have determined that customer price concessions recorded as a reduction of revenue, certain of which were previously recorded in other current liabilities, meet all of the criteria specified in ASC 210-20, "Balance Sheet Offsetting". Accordingly, amounts related to such arrangements have now been classified as a reduction of trade receivables (prior periods have not been adjusted as all the criteria in ASC 210-20 had not previously been met).
Consumer product revenue consists of sales of small electric household and specialty housewares appliances to traditional brick and mortar and ecommerce retailers, distributors and directly to the end consumer. A majority of this revenue is in North America.
•
Commercial product revenue consists of sales of products for restaurants, fast-food chains, bars and hotels. Approximately one-half of our commercial sales are in the U.S. and the other half is in markets across the globe.
License revenue -
From time to time, the Company enters into exclusive and non-exclusive licensing agreements which grant the right to use certain of HBB’s intellectual property ("IP") in connection with designing, manufacturing, distributing, advertising, promoting and selling the licensees’ products during the term of the agreement. The IP that is licensed generally consists of trademarks, tradenames,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).
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.
The following table sets forth Company's revenue on a disaggregated basis for the three and nine months ended September 30:March 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30 | | NINE MONTHS ENDED SEPTEMBER 30 |
| | | As Restated and Recast | | | | As Restated and Recast |
| 2020 | | 2019 | | 2020 | | 2019 |
Type of good or service: | | | | | | | |
Products | $ | 109,374 | | | $ | 148,483 | | | $ | 365,825 | | | $ | 403,865 | |
Licensing | 1,175 | | | 1,025 | | | 3,867 | | | 3,351 | |
Total revenues | $ | 110,549 | | | $ | 149,508 | | | $ | 369,692 | | | $ | 407,216 | |
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED MARCH 31 | | |
| 2021 | | 2020 | | | | |
Type of good or service: | | | | | | | |
Consumer products | $ | 139,513 | | | $ | 109,717 | | | | | |
Commercial products | 8,593 | | | 9,918 | | | | | |
Licensing | 1,143 | | | 1,211 | | | | | |
Total revenues | $ | 149,249 | | | $ | 120,846 | | | | | |
NOTE 8—7—Contingencies
Various legal and regulatory proceedings and claims have been or may be asserted against Hamilton Beach Brands Holdings Company and certain subsidiaries relating to the conduct of its businesses, including product liability, patent infringement, asbestos related claims, environmental and other claims. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.
These matters are subject to inherent uncertainties and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company's financial position, results of operations and cash flows for the period in which the ruling occurs, or in future periods.
HBB is a defendant in a legal proceeding in which the plaintiff alleges that certain HBB products infringe the plaintiff’s patents. On May 3, 2019, the jury returned its verdict finding that the Company had infringed certain patents of the plaintiff and, as a result, awarded the plaintiff damages in the amount of $3.2 million. Accordingly, the Company recorded $3.2 million expense in selling, general and administrative expenses for the contingent loss. The Company filed post-trial motions challenging the jury verdict of infringement and the award of damages and the plaintiff filed motions seeking interest, post-trial accounting, injunctive relief, and attorneys’ fees. On May 2, 2020, the Company’s motion for judgment as a matter of law for non-infringement of certain claims of one of the patents in the case was granted. Since May 2, 2020, the court has also issued orders denying plaintiff’s motion for attorney’s fees and reducing plaintiff’s award. HBB has filed a Notice of Appeal with the US Court of Appeals for the Federal Circuit, as HBB maintains it does not infringe any valid patent claim and the damages award is not supported by the evidence. OnIn August 14, 2020, the court entered an order awarding the plaintiff additional sales posttrial and interest on the damages award through July 31, 2020 and continuing interest in a de minimis amount until the judgment is satisfied. As of September 30, 2020,March 31, 2021, the accrual for the contingent loss is $3.1 million. HBB continues to vigorously pursue the appeal of the judgment and adverse lower court rulings.rulings with the US Court of Appeals for the Federal Circuit, as HBB maintains it does not infringe any valid patent claim and the damages award is not supported by the evidence.
Hamilton Beach Brands Holding Company (HBBHC) is a defendant in a legal proceeding instituted in February 2020 in which the plaintiff seeks to hold the Company liable for the unsatisfied portion of an agreed final judgment that plaintiff obtained against KC related to KC’s failure to continue to operate forty-nineNaN 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.
On September 25, 2020, an owner of HBBHC class A common stock who had filed a class action complaint against HBBHC and the Company’s Chief Executive and Chief Financial officers in the US District Court for the Eastern District of New York in May 2020 asserting claims under Section 10(b) and 20 of the Securities Exchange Act, voluntarily dismissed the complaint without prejudice.
These matters are subject to inherent uncertainties and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company's financial position, results of operations and cash flows for the period in which the ruling occurs, or in future periods.
Environmental matters
HBB is investigating or remediating historical environmental contamination at some current and former sites operated by HBB or by businesses it acquired. Based on the current stage of the investigation or remediation at each known site, HBB estimates the total investigation and remediation costs and the period of assessment and remediation activity required for each site. The estimate of future investigation and remediation costs is primarily based on variables associated with site clean-up, including, but not limited to, physical characteristics of the site, the nature and extent of the contamination and applicable regulatory programs and remediation standards. No assessment can fully characterize all subsurface conditions at a site. There is no assurance that additional assessment and remediation efforts will not result in adjustments to estimated remediation costs or the time frame for remediation at these sites.
HBB's estimates of investigation and remediation costs may change if it discovers contamination at additional sites or additional contamination at known sites, if the effectiveness of its current remediation efforts change, if applicable federal or state regulations change or if HBB's estimate of the time required to remediate the sites changes. HBB's revised estimates may differ materially from original estimates.
At September 30, 2020,March 31, 2021, December 31, 2019,2020, and September 30, 2019,March 31, 2020, HBB had accrued undiscounted obligations of $3.6$3.1 million, $4.4$3.1 million and $4.5$4.2 million respectively, for environmental investigation and remediation activities. The reduction in the amount accrued at September 30, 2020 compared to December 31, 2019 is the result of a reduction in the third quarter of 2020 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 0 to $1.1$1.7 million related to the environmental investigation and remediation at these sites. Additionally, the Company recorded a $1.5 million receivable as
Table 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 September 30, 2020, the receivable has been collected and $1.0 million is restricted cash.Contents
NOTE 9—8—Income Taxes
The effective tax rate on income from continuing operations was 29.1%34.2% and 22.7%24.9% for the three and nine months ended September 30,March 31, 2021 and 2020, and 81.6% and 65.4%respectively. The effective tax rate was higher for the three and nine months ended September 30, 2019, respectively. The high effective tax rate in both periodsMarch 31, 2021 due to the inclusion of 2019 is attributable$0.4 million related to non-cash charges to write-off unrealizable assets at our Mexican subsidiaries for which the corresponding tax benefit has been substantially offset by an increase ininterest and penalties on unrecognized tax benefits and $1.6 million of deferred taxas a discrete expense related to a change in judgment regarding the valuation allowance recorded against the deferred tax assets of KC.item.
NOTE 9—Subsequent Events
On April 9, 2021, the Company entered into Amendment No. 9 to the Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are Parties thereto as the Lenders, Hamilton Beach Brands, Inc., as Parent and U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower (the “Amendment”). Due to the highly seasonal nature of the Company’s primary markets, Amendment No. 8 dated November 23, 2020 provided for increases in advance rates used to determine the borrowing base during periods of the second half of the calendar year. Amendment No. 9 increases the credit facility from $125 million to $140 million for a period of sixty days from its effective date to provide similar flexibility as demand for small kitchen appliances is expected to remain strong in the first half of 2021. The Amendment did not result in any other changes to the terms or due date of the credit facility.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except as noted and per share data)
Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in these forward-looking statements are set forth below under the heading “Forward-Looking Statements."
Hamilton Beach Brands Holding Company is a holding company and operates through its wholly-owned subsidiary Hamilton Beach Brands, Inc. (“HBB”) (collectively “Hamilton Beach Holding” or the “Company”). The Company previously operated through its other wholly-owned subsidiary, The Kitchen Collection, LLC ("KC"), which is reported as discontinued operations in all periods presented herein. KC completed its dissolution on April 3, 2020 with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist. Neither Hamilton Beach Brands Holding Company nor Hamilton Beach Brands, Inc. received a distribution.
HBB is the Company's single reportable segment and intercompany balances and transactions have been eliminated.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of the Company's critical accounting policies, refer to “Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in the Company's Annual Report on Form 10-K/A10-K for the year ended December 31, 20192020 as there have been no material changes from those disclosed in our Annual Report.
RESULTS OF OPERATIONS
The Company’s business is seasonal and a majority of revenue and operating profit typically occurs in the second half of the year when sales of small electric appliances and kitchenware historically increase significantly for the fall holiday-selling season. As described in Note 2 -Restatement of Previously Issued Financial Statements, amounts presented in prior periods have been restated. Additionally, in the fourth quarter of 2019, KC met the requirements to be reported as a discontinued operation. The following consolidated financial tables present KC as a discontinued operation for prior year periods and are labeled "Recast". See Note 3,2, Discontinued Operations for more information.
ThirdFirst Quarter of 20202021 Compared with ThirdFirst Quarter of 20192020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | THREE MONTHS ENDED MARCH 31 |
| | THREE MONTHS ENDED SEPTEMBER 30 | | | Increase / (Decrease) |
| | 2020 | | % of Revenue | | 2019 As Restated and Recast | | % of Revenue | | $ Change | | % Change | | 2021 | | % of Revenue | | 2020 | | % of Revenue | | $ Change | | % Change |
Revenue | Revenue | $ | 110,549 | | | 100.0 | % | | $ | 149,508 | | | 100.0 | % | | $ | (38,959) | | | (26.1) | % | Revenue | $ | 149,249 | | | 100.0 | % | | $ | 120,846 | | | 100.0 | % | | $ | 28,403 | | | 23.5 | % |
Cost of sales | Cost of sales | 86,801 | | | 78.5 | % | | 118,562 | | | 79.3 | % | | (31,761) | | | (26.8) | % | Cost of sales | 117,556 | | | 78.8 | % | | 95,806 | | | 79.3 | % | | 21,750 | | | 22.7 | % |
Gross profit | Gross profit | 23,748 | | | 21.5 | % | | 30,946 | | | 20.7 | % | | (7,198) | | | (23.3) | % | Gross profit | 31,693 | | | 21.2 | % | | 25,040 | | | 20.7 | % | | 6,653 | | | 26.6 | % |
Selling, general and administrative expenses | Selling, general and administrative expenses | 25,830 | | | 23.4 | % | | 26,162 | | | 17.5 | % | | (332) | | | (1.3) | % | Selling, general and administrative expenses | 26,379 | | | 17.7 | % | | 24,213 | | | 20.0 | % | | 2,166 | | | 8.9 | % |
Amortization of intangible assets | Amortization of intangible assets | 323 | | | 0.3 | % | | 345 | | | 0.2 | % | | (22) | | | (6.4) | % | Amortization of intangible assets | 50 | | | — | % | | 324 | | | 0.3 | % | | (274) | | | (84.6) | % |
Operating (loss) profit | (2,405) | | | (2.2) | % | | 4,439 | | | 3.0 | % | | (6,844) | | | (154.2) | % | |
Operating profit | | Operating profit | 5,264 | | | 3.5 | % | | 503 | | | 0.4 | % | | 4,761 | | | n/m |
Interest expense, net | Interest expense, net | 339 | | | 0.3 | % | | 756 | | | 0.5 | % | | (417) | | | (55.2) | % | Interest expense, net | 720 | | | 0.5 | % | | 603 | | | 0.5 | % | | 117 | | | 19.4 | % |
Other expense (income), net | 92 | | | 0.1 | % | | 681 | | | 0.5 | % | | (589) | | | (86.5) | % | |
Other expense, net | | Other expense, net | 171 | | | 0.1 | % | | 1,702 | | | 1.4 | % | | (1,531) | | | (90.0) | % |
Income (loss) from continuing operations before income taxes | Income (loss) from continuing operations before income taxes | (2,836) | | | (2.6) | % | | 3,002 | | | 2.0 | % | | (5,838) | | | (194.5) | % | Income (loss) from continuing operations before income taxes | 4,373 | | | 2.9 | % | | (1,802) | | | (1.5) | % | | 6,175 | | | n/m |
Income tax expense (benefit) | Income tax expense (benefit) | (826) | | | (0.7) | % | | 2,449 | | | 1.6 | % | | (3,275) | | | (133.7) | % | Income tax expense (benefit) | 1,497 | | | 1.0 | % | | (448) | | | (0.4) | % | | 1,945 | | | n/m |
Net income (loss) from continuing operations | Net income (loss) from continuing operations | (2,010) | | | (1.8) | % | | 553 | | | 0.4 | % | | (2,563) | | | (463.5) | % | Net income (loss) from continuing operations | 2,876 | | | 1.9 | % | | (1,354) | | | (1.1) | % | | 4,230 | | | n/m |
Income (loss) from discontinued operations, net of tax | — | | | n/m | | (2,753) | | | n/m | | 2,753 | | | n/m | |
Net income (loss) | $ | (2,010) | | | $ | (2,200) | | | $ | 190 | | | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | — | | | n/m | | 22,866 | | | n/m | | (22,866) | | | n/m |
Net income | | Net income | $ | 2,876 | | | $ | 21,512 | | | $ | (18,636) | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Effective income tax rate on continuing operations | 29.1 | % | | | | 81.6 | % | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Effective income tax rate on continuing operations | 34.2 | % | | | | 24.9 | % | | | | | | |
The following table identifies the components of the change in revenue:
| | | Revenue | | Revenue |
2019 As Restated | $ | 149,508 | | |
Increase (decrease) from: | | |
2020 | | 2020 | $ | 120,846 | |
Increase from: | | Increase from: | |
Unit volume and product mix | Unit volume and product mix | (39,851) | | Unit volume and product mix | 26,925 | |
Foreign currency | | Foreign currency | 652 | |
Average sales price | Average sales price | (1,267) | | Average sales price | 826 | |
Foreign currency | 2,159 | | |
2020 | $ | 110,549 | | |
2021 | | 2021 | $ | 149,249 | |
Revenue - Revenue decreased $39.0increased $28.4 million, or 26.1%23.5%, due primarily to lowerhigher sales volume in the USNorth American consumer market, as a result of greater than expected challenges arisingwe continue to see strong demand for small kitchen appliances in the US, Canadian and Latin American markets. Revenue in the Global Commercial market decreased as compared to prior year as recovery from the implementationpandemic-related demand softness continues. The Company remains focused on ecommerce, as revenue from this channel increased 59% and accounted for 35% of a new enterprise resource planning ("ERP") system. While unprecedented demand continued, the cutover to our new ERP system temporarily reduced shipping capabilities at the Company’s US distribution center and a significant amount of thetotal revenue shortfall is expected to shift to the fourth quarter. Additionally, constraints in the transportation industry also adversely affected shipping capabilities. Infirst quarter of 2021 compared to 27% of total revenue in the international consumer and global commercial markets, lower sales volumes were driven by pandemic-related demand softness.first quarter of 2020.
Gross profit - Gross profit declinedincreased due to the lowerhigher sales volume; however,volume. As a percentage of revenue, gross profit margin increased from 20.7% in the prior year to 21.5%21.2% primarily due to customer and product mix.
Selling, general and administrative expenses - Selling, general and administrative expenses decreased $0.3 million. During the quarter, the Company reported increasesincreased $2.2 million, driven primarily by an increase in third-party and consulting services fees as well as increased employee-related costs. Included in selling, general and administrative expenses attributable to: increased employee related costs due to increased incentive compensationfor the first quarter of $1.52020 is $1.9 million mostly driven by the increase of the market price of the Company's stock; an increase of $1.3 million in legal and other third party fees primarily related to the irregularities in our Mexican subsidiaries; and an increase of $0.7 million in the contingent loss related to patent litigation to account for interest accrued on the judgment. These increases were offset by a reduction to the environmental reserve at one site and lower overall spending. Additionally, 2019 includes charges of $2.6 million to write-off unrealizable assets of our Mexican subsidiaries created as a result of the Mexico unauthorized transactions, offset by certain former employees of our Mexican subsidiaries. See Note 2, Restatement of Previously Issued Financial Statementsa $1.6 million reduction to the accrual for additional information.litigation and environmental reserves.
Interest expense - Interest expense net decreased $0.4increased $0.1 million due to lower average interest rates and decreasedincreased average borrowings outstanding under HBB's revolving credit facility.
Other expense, (income), net - OtherFor the first quarter of 2021, other expense for the three months ended September 30, 2020, was $0.1 million and includes currency losses of $0.2 million. Other expense for the three months ended September 30, 2019, was $0.7$0.4 million and includes $0.8compared with currency losses of $1.9 million of currency losses.in 2020. The currency losses arise from the remeasurement of liabilities related to inventory purchases by foreign subsidiaries denominated in US dollars.
Income tax expense (benefit) - The Company recognized an income tax benefit of $0.8 million on a loss from continuing operations before income taxes of $2.8 million, an effective tax rate of 29.1% compared to income tax expense of $2.4$1.5 million on income from continuing operations before income taxes of $3.0$4.4 million, an effective tax rate of 34.2% compared to income tax benefit of $0.5 million on loss from continuing operations before income taxes of $1.8 million in the prior year, an effective tax rate of 81.6%24.9%. The higher effective tax rate in 2019 is attributable to non-cash charges to write-off unrealizable assets at our Mexican subsidiaries for which the corresponding tax benefit has been substantially offset by an increase in unrecognized tax benefits and $1.6 million of deferred tax expense related to a change in judgment regarding the valuation allowance recorded against the deferred tax assets of KC.
First Nine Months of 2020 Compared with First Nine Months of 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30 |
| 2020 | | % of Revenue | | 2019 As Restated and Recast | | % of Revenue | | $ Change | | % Change |
Revenue | $ | 369,692 | | | 100.0 | % | | $ | 407,216 | | | 100.0 | % | | $ | (37,524) | | | (9.2) | % |
Cost of sales | 285,650 | | | 77.3 | % | | 321,061 | | | 78.8 | % | | (35,411) | | | (11.0) | % |
Gross profit | 84,042 | | | 22.7 | % | | 86,155 | | | 21.2 | % | | (2,113) | | | (2.5) | % |
Selling, general and administrative expenses | 74,078 | | | 20.0 | % | | 77,385 | | | 19.0 | % | | (3,307) | | | (4.3) | % |
Amortization of intangible assets | 971 | | | 0.3 | % | | 1,036 | | | 0.3 | % | | (65) | | | (6.3) | % |
Operating profit | 8,993 | | | 2.4 | % | | 7,734 | | | 1.9 | % | | 1,259 | | | 16.3 | % |
Interest expense, net | 1,308 | | | 0.4 | % | | 2,208 | | | 0.5 | % | | (900) | | | (40.8) | % |
Other expense (income), net | 1,601 | | | 0.4 | % | | 352 | | | 0.1 | % | | 1,249 | | | 354.8 | % |
Income (loss) from continuing operations before income taxes | 6,084 | | | 1.6 | % | | 5,174 | | | 1.3 | % | | 910 | | | 17.6 | % |
Income tax expense (benefit) | 1,383 | | | 0.4 | % | | 3,385 | | | 0.8 | % | | (2,002) | | | (59.1) | % |
Net income (loss) from continuing operations | 4,701 | | | 1.3 | % | | 1,789 | | | 0.4 | % | | 2,912 | | | 162.8 | % |
Income (loss) from discontinued operations, net of tax | 22,561 | | | n/m | | (7,992) | | | n/m | | 30,553 | | | n/m |
Net income (loss) | $ | 27,262 | | | | | $ | (6,203) | | | | | $ | 33,465 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Effective income tax rate on continuing operations | 22.7 | % | | | | 65.4 | % | | | | | | |
The following table identifies the components of the change in revenue:
| | | | | |
| Revenue |
2019 As Restated | $ | 407,216 | |
Increase (decrease) from: | |
Unit volume and product mix | (37,739) | |
Average sales price | (3,543) | |
Foreign currency | 3,758 | |
2020 | $ | 369,692 | |
Revenue - Revenue was $37.5 million or 9.2% lower than the prior year. The year started off strong compared to the prior year, due in part to US customers increasing inventory positions in advance of expected disruptions from the supply chain in China, which stabilized. Momentum slowed across all markets towards the end of the first quarter as government measures to control the spread of COVID-19 were implemented in March. The reduced revenue in the first quarter was more than offset by increased revenue in the second quarter due primarily to strong demand in the US and Canada consumer markets as consumers continued to stay home and cook more during the pandemic. While unprecedented demand continued throughout the third quarter, sales volumes during the third quarter were lower than expected primarily due to challenges arising from the implementation of a new ERP system. As a result, year-to-date revenue is lower than prior year and a significant portion of the revenue shortfall is expected to shift to the fourth quarter.
Gross profit - Gross profit decreased $2.1 million due to the lower sales volume. Gross profit margin increased to 22.7% from 21.2% due to customer and product mix. Additionally, gross profit in 2020 includes a benefit of approximately $1.6 million for tariff relief.
Selling, general and administrative expenses - Selling, general and administrative expenses decreased $3.3 million. Included in selling, general and administrative expenses are charges of $1.9 million in 2020 and $5.1 million in the prior year to write-off unrealizable assets created as a result of the unauthorized transactions at our Mexican subsidiaries. See Note 2, Restatement of Previously Issued Financial Statements for additional information.
Interest expense - Interest expense, net decreased $0.9 million due to decreased average borrowings outstanding under HBB's revolving credit facility and lower average interest rates.
Other expense (income), net - Other expense for the nine months ended September 30, 2020 was $1.6 million and includes currency loss of $2.0 million due to the re-measurement of liabilities related to inventory purchases denominated in US dollars by HBB’s foreign subsidiaries. For the nine months ended September 30, 2019, other expense was $0.4 million.
Income tax expense (benefit) - For the nine months ended September 30, 2020, income tax expense was $1.4 million, and the effective tax rate was 22.7%. Income tax expensehigher for the nine monthsquarter ended September 30, 2019 was $3.4March 31, 2021 due to the inclusion of $0.4 million an effective rate of 65.4%. The higher effective tax rate in 2019 is attributablerelated to non-cash charges to write-off unrealizable assets at our Mexican subsidiaries for which the corresponding tax benefit has been substantially offset by an increase ininterest and penalties on unrecognized tax benefits and $1.6 million of deferred taxas a discrete expense related to a change in judgment regarding the valuation allowance recorded against the deferred tax assets of KC.item.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Hamilton Beach Brands Holding Company cash flows are provided by dividends paid or distributions made by its subsidiaries. The only material assets held by it are the investments in consolidated subsidiaries. As a result, certain statutory limitations or regulatory or financing agreements could affect the levels of distributions allowed to be made by its subsidiaries. Hamilton Beach Brands Holding Company has not guaranteed any of the obligations of its subsidiaries.
HBB's principal sources of cash to fund liquidity needs are: (i) cash generated from operations and (ii) borrowings available under the revolving credit facility, as defined below. HBB's primary use of funds consists of working capital requirements, operating expenses, capital expenditures, and payments of principal and interest on debt.
HBB maintains a $115.0$125.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires inon June 30, 2021, within one year after the issuance of the financial statements included in this Quarterly Report on Form 10-Q. Given
the market conditions including unfavorable pricing terms, HBB has not yet completed its refinancing of the HBB Facility and accordingly,2025, therefore all amounts outstanding have beenborrowings are classified as current liabilities. HBB has approved and begun the refinancing process, which is considered customary. Based on the current statuslong term debt as of the refinancing and HBB’s history of successfully refinancing its debt, HBB believes that it is probable that the HBB Facility will be refinanced by DecemberMarch 31, 2020.2021. HBB believes funds available from cash on hand, the HBB Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months.
The ongoing global Coronavirus Disease 2019 (COVID-19) pandemic has resulted in governments aroundOn April 9, 2021, the world implementing stringent measuresCompany entered into Amendment No. 9 to help controlAmended and Restated Credit Agreement by and among Wells Fargo Bank, National Association, as Administrative Agent, the spreadLenders that are Parties thereto as the Lenders, Hamilton Beach Brands, Inc., as Parent and U.S. Borrower, and Hamilton Beach Brands Canada, Inc., as Canadian Borrower (the “Amendment”). Due to the highly seasonal nature of the virus, including business shutdowns and limitations, travel restrictions, border closings, restrictions on public gatherings and shelter-in-place restrictions. This has negatively impactedCompany’s primary markets, Amendment No. 8 dated November 23, 2020 provided for increases in advance rates used to determine the global economy, disrupted financial markets and resulted in increased unemployment levels, allborrowing base during periods of which have negatively impacted various industries. We believe we are well positionedthe second half of the calendar year. Amendment No. 9 increases the credit facility from $125 million to effectively navigate the COVID-19 pandemic$140 million for a numberperiod of reasons. Demandsixty days from its effective date to provide similar flexibility as demand for certain small kitchen appliances is expected to remain strong in the US remains strong as consumers prepare more food and beverages at home. We are managing discretionary expenses, and have sufficient availability under the revolving credit facility to meet our future obligations. We have demonstrated effective managementfirst half of net working capital which was a major contributor to improved borrowing activity during the first nine months of the year, with net borrowings of $69.6 million as compared to $78.6 million in the prior year. Additionally, the Company is no longer impacted by KC’s losses and negative cash flow. We will continue to work with our customers, employees, suppliers and communities to address the impacts of COVID-19 and closely monitor our liquidity.2021.
On April 3, 2020, KC completed its dissolution with a pro-rata distribution of its remaining assets to creditors, at which time the KC legal entity ceased to exist and it was deconsolidated. Neither Hamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC.
The following table presents selected cash flow information from continuing operations:
| | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30 |
| | | As Restated |
| 2020 | | 2019 |
Net cash used for operating activities | $ | (5,731) | | | $ | (24,140) | |
Net cash used for investing activities | $ | (3,096) | | | $ | (3,156) | |
Net cash provided by financing activities | $ | 8,193 | | | $ | 23,930 | |
| | | | | | | | | | | |
| THREE MONTHS ENDED MARCH 31 |
| 2021 | | 2020 |
Net cash provided by (used for) operating activities | $ | (1,889) | | | $ | (10,042) | |
Net cash provided by (used for) investing activities | $ | (1,746) | | | $ | (625) | |
Net cash provided by (used for) financing activities | $ | 2,693 | | | $ | 9,876 | |
Operating activities - Net cash used for operating activities was $5.7$1.9 million compared to $24.1$10.0 million in the prior year. The improvement is dueAs compared to changes inthe prior year, the lower net working capital,cash used by operating activities was primarily due to higher net income and changes in trade receivables,other assets, which provided a source of cash of $7.6$0.9 million in 2021 compared to a use of cash of $6.1$5.6 million in 2019. Because of the seasonal nature of our business, the Company typically builds inventory and accounts payable during the third quarter. The net impact to cash flows from the change in inventory and accounts payable is relatively consistent year over year.2020.
Investing activities - Net cash used for investing activities was relatively flatincreased in 20202021 compared to 2019. Capital2020 due to capital spending for internal-use software development costs was lowerthe Company's new distribution center lease, which will begin in 2020 as the Company implemented its new ERP system in July 2020. The decline in spending on internal-use software was offset by other investments.
third quarter of 2021.
Financing activities - Net cash provided by financing activities was $8.2$2.7 million compared to $23.9$9.9 million in 2019.2020. The change is due to thea decrease in outstanding borrowingsHBB's net borrowing activity on the revolving credit facility during the first quarter of 2021 as a resultcompared to the first quarter of 2020. Borrowings on the improvement inrevolving credit facility are used to fund net working capital.
Capital Resources
HBB maintains a $115.0$125.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires inon June 2021. The entire outstanding balance has been30, 2025. Therefore, all borrowings are classified as a current liability duelong term debt as of March 31, 2021.The Company expects to the factcontinue to borrow against the facility expires within one year and has not yet been refinanced. Following the refinancing which is anticipated to occur by the end of 2020, expectedmake voluntary repayments to be made inwithin the next twelve months are $25.4 million.months. The obligations under the HBB Facility are secured by substantially all of HBB's assets. The approximate book value of HBB's assets held as collateral under the HBB Facility was $369.4 million as of September 30, 2020. At September 30, 2020,March 31, 2021, the borrowing base under the HBB Facility was $115.0$123.3 million and borrowings outstanding were $70.4$102.6 million. At September 30, 2020,March 31, 2021, the excess availability under the HBB Facility was $43.0$20.7 million.
The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible trade receivables, inventory and trademarks of the borrowers, as defined in the HBB Facility. Borrowings bear interest at a floating rate, which can be a base rate, LIBOR or bankers' acceptance rate, as defined in the HBB Facility, plus an applicable margin. The applicable margins, effective September 30, 2020,March 31, 2021, for base rate loans and LIBOR loans denominated in US dollars were 0.0% and 1.50%2.00%, respectively. The applicable margins, effective September 30, 2020,March 31, 2021, for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.0% and 1.50%2.00%, respectively. The HBB Facility also requires a fee of 0.25% per annum on the unused commitment. The margins and unused commitment fee under the HBB Facility are subject to quarterly adjustment based on average excess availability. The weighted average interest rate applicable to the HBB Facility for the ninethree months ended September 30, 2020March 31, 2021 was 3.10%2.77% including the floating rate margin and the effect of the interest rate swap agreements described below.
To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of the HBB Facility. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate. HBB has interest rate swaps with notional values totaling $25.0 million at September 30, 2020March 31, 2021 at an average fixed interest rate of 1.6%1.66%.
The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends to Hamilton Beach Holding, subject to achieving availability thresholds. Under Amendment No. 68 to the HBB Facility, dividends to Hamilton Beach Holding are not to exceed $5.0$6.0 million during any calendar year to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less thanat least $15.0 million. Dividends to Hamilton Beach Holding are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less thanat least $25.0 million. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. At September 30, 2020,March 31, 2021, HBB was in compliance with all financial covenants in the HBB Facility.
In December 2015, the Company entered into an arrangement with a financial institution to sell certain US trade receivables on a non-recourse basis. The Company utilizes this arrangement as an integral part of financing working capital. See Note 43 of the unaudited condensed consolidated financial statements.
HBB believes funds available from cash on hand, the HBB Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months.
Contractual Obligations, Contingent Liabilities and Commitments
For a summary of the Company's contractual obligations, contingent liabilities and commitments, refer to “Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations, Contingent Liabilities and Commitments” in the Company's Annual Report on Form 10-K/A10-K for the year ended December 31, 2019. In addition,2020 as there have been no material changes from those disclosed in July 2020, the Company entered into a new 12-year lease for a distribution center which is expected to begin on July 1, 2021, for which aggregate minimum lease payments are approximately $44.4 million over the term of the lease. 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.our Annual Report.
Off Balance Sheet Arrangements
For a summary of the Company's off balance sheet arrangements, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Off Balance Sheet Arrangements” in the Company's Annual Report on Form 10-K/A10-K for the year ended December 31, 20192020 as there have been no material changes from those disclosed in our Annual Report.
FORWARD-LOOKING STATEMENTS
The statements contained in this Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Such risks and uncertainties include, without limitation: (1) the Company’s ability to ship products to meet the anticipated increase in demand, (2) the Company’s ability to successfully manage the anticipated transportation constraints, (3) the unpredictable nature of the COVID-19 pandemic and its potential impact on our
business; (4) changes in the sales prices, product mix or levels of consumer purchases of small electric and specialty housewares appliances, (4)(5) changes in consumer retail and credit markets, including the increasing volume of transactions made through third-party internet sellers, (6) bankruptcy of or loss of major retail customers or suppliers, (7) changes in costs, including transportation costs, of sourced products, (8) delays in delivery of sourced products, (9) changes in or unavailability of quality or cost effective suppliers, (10) exchange rate fluctuations, changes in the import tariffs and monetary policies and other changes in the regulatory climate in the countries in which HBB buys, operates and/or sells products, (11) the impact of tariffs on customer purchasing patterns, (12) product liability, regulatory actions or other litigation, warranty claims or returns of products, (13) customer acceptance of, changes in costs of, or delays in the development of new products, (14) increased competition, including consolidation within the industry, (15) shifts in consumer shopping patterns, gasoline prices, weather conditions, the level of consumer confidence and disposable income as a result of economic conditions, unemployment rates or other events or conditions that may adversely affect the level of customer purchases of HBB products, (16) changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation, (17) risks associated with the wind down of KC including unexpected costs, contingent liabilities and the potential disruptiondifficulties arising as a result of our other businesses,implementation, integration or operation of an enterprise resource planning system in the US, (18) the result of shareholder or governmental actions relating to the restatement of our financial statements and accounting and legal fees that we may incur in connection with the restatement, (19) our ability to successfully remediate the material weaknesses in our internal control over financial reporting disclosed in Item 9A of the
Annual Report on Form 10-K/A10-K within the time periods and in the manner currently anticipated, additional material weaknesses or other deficiencies that may arise in the future or our ability to maintain an effective system of internal controls, (20) difficulties arising as a result of(19) the Company's ability to effectively plan and manage the relocation to our implementation of an enterprise resource planning system in the US, new distribution center, and (21)(20) other risk factors, including those described in the Company's filings with the Securities and Exchange Commission, including, but not limited to, the Annual Report on Form 10-K/A10-K for the year ended December 31, 2019 and this Quarterly Report on Form 10-Q.2020. Furthermore, the situation surrounding COVID-19 remains fluid and the potential for a material impact on the Company’s results of operations, financial condition, liquidity, and stock price increases the longer the virus impacts activity levels in the United StatesUS and globally. For this reason, the Company cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on its results of operations, financial position, liquidity and stock price. The extent of any impact will depend on the extent of new outbreaks, the extent to which new shutdowns may be needed, the nature of government public health guidelines and the public’s adherence to those guidelines, the impact of government economic relief on the US economy, unemployment levels, the success of businesses reopening fully, the timing for proven treatments and the availability of vaccines for COVID-19, consumer confidence and demand for our products.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
HBB enters into certain financing arrangements that require interest payments based on floating interest rates. As such, the Company's financial results are subject to changes in the market rate of interest. There is an inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and business financing requirements. To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of its floating rate financing arrangements. The Company does not enter into interest rate swap agreements for trading purposes. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate.
For purposes of risk analysis, the Company uses sensitivity analysis to measure the potential loss in fair value of financial instruments sensitive to changes in interest rates. The Company assumes that a loss in fair value is an increase to its receivables. The fair value of the Company's interest rate swap agreements was a payable of $1.2$0.9 million at September 30, 2020.March 31, 2021. A hypothetical 10% decrease in interest rates would cause a decrease of less than $0.1 million in the fair value of interest rate swap agreements. Additionally, a hypothetical 10% increase in interest rates would not have a material impact to the Company's interest expense, net of $1.3$0.7 million for the ninethree months ended September 30, 2020.March 31, 2021.
FOREIGN CURRENCY EXCHANGE RATE RISK
HBB operates internationally and enters into transactions denominated in foreign currencies, principally the Canadian dollar, the Mexican peso and, to a lesser extent, the Chinese Yuan and Brazilian Real. As such, HBB's financial results are subject to the variability that arises from exchange rate movements. The fluctuation in the value of the US dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of currency fluctuation increases as international expansion increases.
HBB uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies and not for trading purposes. These contracts generally mature within twelve months and require HBB to buy or sell
the functional currency in which the applicable subsidiary operates and buy or sell US dollars at rates agreed to at the inception of the contracts.
For purposes of risk analysis, the Company uses sensitivity analysis to measure the potential loss in fair value of financial instruments sensitive to changes in foreign currency exchange spot rates. The Company assumes that a loss in fair value is either a decrease to its assets or an increase to its liabilities. The fair value of the Company's foreign currency exchange contracts was a payable of less than $0.1$0.2 million at September 30, 2020.March 31, 2021. Assuming a hypothetical 10% weakening of the US dollar at September 30, 2020,March 31, 2021, the fair value of foreign currency-sensitive financial instruments, which represents forward foreign currency exchange contracts, would be decreased by $1.2$2.5 million compared with its fair value at September 30, 2020.March 31, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures: Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020.March 31, 2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2020,March 31, 2021, due to the existence of the material weaknesses in our internal control over financial reporting at our Mexican subsidiaries and over income taxes as described below, our disclosure controls and procedures were not effective to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Material Weaknesses in Internal Control over Financial Reporting: A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As previously disclosed in our Annual Report on Form 10-K/A10-K for the year ended December 31, 2019,2020, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 20192020 due to the material weaknesses as described below.
Mexican subsidiaries
As of December 31, 2019, we identified two material weaknesses at our Mexican subsidiaries described below.
We identified deficiencies at our Mexican subsidiaries as follows:
•Reviewrelated to (1) the design and operating effectiveness of review controls performed at our Mexican subsidiaries did not operate effectively asfor account reconciliations and manual journal entries were not supported by accurate and complete information, which resulted in expenditures being deferred on(2) the balance sheet beyond the period for which the costs pertaineddesign and the failure to detect unauthorized transactions deferred on the balance sheet as a resultoperating effectiveness of wrongdoing by certain former employees of one of our Mexican subsidiaries; and
•Transactiontransaction level controls over authorization of spending with vendors, adjusting product costing and selling prices, new customer setup and accounting for price concessions with our customers atcustomers.
Income taxes
Management determined that we did not design and maintain effective controls over our Mexican subsidiaries wereincome tax accounting process to identify and accurately measure deferred tax assets, deferred tax liabilities and income taxes payable and the related income tax expense. While the control deficiency did not sufficiently designedresult in a misstatement of our previously issued consolidated financial statements, the control deficiency could result in a material misstatement of the aforementioned account balances or operating effectively to provide reasonable assurance regarding the prevention and timely detection of misappropriation of assets.disclosures that would result in a material misstatement in our annual or interim consolidated financial statements that would not be prevented or detected.
We have concluded that each of these deficiencies at our Mexican subsidiaries constitutes a material weakness in our internal control over financial reporting.
Remediation of Material Weaknesses: Our management, withWe are committed to remediating the control deficiencies that gave rise to the material weaknesses. Management is responsible for implementing changes and improvements to internal control over financial reporting and for remediating the control deficiencies that gave rise to the material weaknesses.
Mexican subsidiaries
With oversight from ourthe Audit Review Committee, has initiated a planwe have taken significant steps to remediate the material weaknesses previously identified in the Annual Report on Form 10-K/A for the year ended December 31, 2019. The remediation efforts are intended to address the deficiencies and enhance our overall internal control environment:
•Personnel Actions - We have terminated employees of one ofdeficiencies at our Mexican subsidiaries foundby redesigning our controls, many of which operated for the first time during the fourth quarter of 2020. Our efforts have consisted primarily of strengthening our organization and designing a suite of controls that address the material weaknesses. Until the remediation actions are fully implemented and the operational effectiveness of related internal controls is validated through testing, the material weaknesses described above will continue to have engaged in misconduct, which included collusion between these employees and vendors and customers of our Mexican subsidiaries in which such employees had an interest. Additional training on our code of conduct has been implemented for all employees of the Mexican subsidiaries.exist.
•
Organizational Enhancements - We have implemented and are in the process of implementing organizational enhancements as follows: (i) augmented our local accounting team for our Mexican subsidiaries with additional professionals with the relevant levels of accounting and controls knowledge, experience and training in the area of account reconciliations and manual journal entries to validate that account reconciliations and manual journal entries
are supported by accurate and complete information; (ii)
Income taxes
With oversight from the Audit Review Committee, we have developed a more comprehensiveplan to remediate the material weakness in internal control over financial reporting related to our income taxes accounting process, which consists of:
a.Reviewing the organization structure, resources, processes, and controls in place to measure and record income taxes to enhance the effectiveness of the design and operation of those controls;
b.Enhancing monitoring activities related to income taxes; and
c.Evaluating and enhancing the level of precision in the management review processcontrols related to income taxes.
Until the remediation actions are fully implemented and monitoringthe operational effectiveness of related internal controls overis validated through testing, the approval for vendor payments, changesmaterial weakness described above will continue to product cost and selling prices, approval for new customer setup including related terms and accounting for price concessions with our customers at our Mexican subsidiaries; and (iii) outsourced functions at our Mexican subsidiaries where third-party service providers provide expertise or technical skillset, as appropriate.exist.
We are committed to achieving and maintaining a strong internal control environment and believe the remediation measures described above along with other elements of our remediation plan will remediate the material weaknesses identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processesreporting and have begun to implementremediate the steps described above. We will also continue to review, optimize and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies or we may modify certain of the remediation measures described above. We will not consider our material weaknesses remediated until the applicable remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.weakness identified.
Changes in internal control over financial reporting: During the third quarter of 2020, the Company implemented a new enterprise resource planning (“ERP") system to replace operational and financial systems for the US operations. The Company completed significant pre-implementation testing and post-implementation monitoring to ensure the effectiveness of internal controls over financial reporting. As a result of this implementation, we modified certain existing internal controls over financial reporting and implemented new controls and procedures related to the new ERP system. Therethree months ended March 31, 2021, there have been no other changes in ourthe Company's internal control over financial reporting that occurred during the third quarter of 2020 thathave materially affected, or are reasonably likely to materially affect, ourthe Company's internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1 Legal Proceedings
The information required by this Item 1 is set forth in Note 87 "Contingencies" included in our Financial Statements contained in Part I of this Form 10-Q and is hereby incorporated herein by reference to such information.
Item 1A Risk Factors
No material changes to the risk factors for Hamilton Beach Holding HBB, or KCHBB, from the Company's Annual Report on Form 10-K/A10-K for the year ended December 31, 2019,2020, except for the following, which should be read in conjunction with the risk factors in such Annual Report on Form 10-K/A.10-K.
Our results of operations have been adversely affectedFailure to adequately plan and inmanage 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. The continued spread of COVID-19 and efforts to contain the virus could:
•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;
•result in disruptions to our supply chain; and
•adversely impact economies and financial marketsrelocation of our internationaldistribution center may interrupt our operations resulting in an economic downturn that could affect the value of foreign currencies.and lower our operating income.
The situation surrounding the COVID-19 pandemic remains fluid and the potential forHBB has signed 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 extent of new outbreaks, the extent to which new shutdowns may be needed, the nature of government public health guidelines and the public’s adherence to those guidelines, the impact of government economic relief on the US economy, unemployment levels, the success of businesses reopening fully, the timing for proven treatments and vaccines for COVID-19, consumer confidence and demand for our products. Any of these factors could cause or contribute to the risks and uncertainties enumerated in our 2019 Annual Report on Form 10-K/A and could materially adversely affect our business, financial condition, results of operations and/or stock price.
The Company’s business could suffer if the implementation of its enterprise resource planning (“ERP”) system is not successful or is more difficult, costly or time consuming than expected.
HBB recently implemented an enterprise resource planning (“ERP”) system in the U.Slease agreement and will be implementingrelocating to a new US distribution center during the ERP system at other subsidiaries oversecond and third quarter of 2021. The planned move entails risk that could cause delays and cost overruns, such as: reduced shipping capabilities; unforeseen construction or scheduling problems; disruptions in the next few years. Such an implementation is a major undertaking from a financial, management and personnel perspective. The implementation, integration and successful operation of the ERP system may provenew distribution center with our warehouse management system; and unanticipated cost increases. There is also the risk that we will not adequately adjust our business processes or appropriately manage our work force during the transition. Failure to be more difficult, costly, or time consuming than expected,adequately plan and there can be no assurance that this system will be beneficial tomanage the extent anticipated. Any disruptions, delays or deficiencies in the implementation, integration or operation of our new ERP systemrelocation efforts could cause information, including data related to customer orders, to be lost or delayed. Such a loss or delay could reduce demand and causedisruption in our sales and/or profitability to decline. In addition, any significant disruption, delay or deficiency in the design and implementation of the ERP system could adversely affect our ability to process orders, ship products, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. Any disruptions, delays or deficiencies in the implementation, integration or operation of our new ERP system could adversely affect our financial position, results of operations and cash flows in addition to the effectiveness oflower our internal controls over financial reporting.operating income.
For example, shipping challenges from the implementation, integration and operation of the ERP system resulted in a significant order backlog during the third quarter of 2020 that represents product orders from our customers that we have confirmed and for which we have not yet recognized revenue. If we delay fulfilling customer orders or are unable to do so, or if customers reconsider their orders, those customers may seek to cancel or modify their orders with us. Customers may otherwise seek to cancel or delay their orders even if we are prepared to fulfill them. As such, our operating results may suffer if our shipping challenges continue and we are unable to fulfill such orders or if our orders in backlog do not result in sales.
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, in the third quarter of 2020, 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 ship inventory on a timely manner. 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 may 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.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
In May 2018, the Company approved a stock repurchase program for the purchase of up to $25.0 million of the Company's Class A Common Stock outstanding through December 31, 2019. As of December 31, 2019, the Company repurchased 364,893 shares for an aggregate purchase price of $6.0 million.
On November 5, 2019, the Company's Board adopted a new stock repurchase program for the purchase of up to $25.0 million of the Company's Class A Common outstanding starting January 1, 2020 and ending December 31, 2021.
There were no share repurchases during the ninethree months ended September 30,March 31, 2021 and 2020.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Mine Safety Disclosures
None.
Item 5 Other Information
None.
Item 6 Exhibits
| | | | | | | | |
Exhibit | | |
Number* | | Description of Exhibits |
| | |
31(i)(1) | | |
31(i)(2) | | |
32 | | |
10.1 | | 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. |
10.2 | | |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
* Numbered in accordance with Item 601 of Regulation S-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | Hamilton Beach Brands Holding Company (Registrant) |
Date: | November 9, 2020May 5, 2021 | /s/ Michelle O. Mosier |
| | Michelle O. Mosier |
| | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)/(Principal Accounting Officer) |