Hamilton Beach(HBB) - 2020 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION This section presents the company's financial statements, management's analysis, market risk disclosures, and internal control effectiveness for the period ended June 30, 2020 Financial Statements The company's financial statements for Q2 2020 reflect a restatement due to Mexican subsidiary accounting irregularities, showing improved operating profit and cash flow from operations Condensed Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2020 ($ thousands) | Dec 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Total current assets | $190,755 | $237,057 | | Total assets | $242,601 | $288,663 | | Total current liabilities | $168,550 | $201,322 | | Total liabilities | $181,049 | $252,397 | | Total stockholders' equity | $61,552 | $36,266 | Condensed Consolidated Statement of Operations Highlights (Unaudited) | Metric | Q2 2020 ($ thousands) | Q2 2019 ($ thousands) | 6 Months 2020 ($ thousands) | 6 Months 2019 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $138,297 | $131,065 | $259,143 | $257,707 | | Gross Profit | $35,254 | $28,507 | $60,294 | $55,209 | | Operating Profit | $10,895 | $3,185 | $11,398 | $3,296 | | Net Income from Continuing Ops | $8,065 | $1,898 | $6,711 | $1,236 | | Basic EPS from Continuing Ops | $0.59 | $0.14 | $0.49 | $0.09 | Condensed Consolidated Statement of Cash Flows Highlights (Unaudited, 6 Months Ended June 30) | Cash Flow Activity | 2020 ($ thousands) | 2019 ($ thousands) | | :--- | :--- | :--- | | Net cash from operating activities | $21,752 | $(31,646) | | Net cash from investing activities | $(2,092) | $(1,972) | | Net cash from financing activities | $(19,146) | $30,099 | - The company discovered accounting irregularities at its Mexican subsidiaries, leading to a restatement of its financial statements for 2019, 2018, and 2017, involving unauthorized transactions and a non-cash write-off of certain assets[23] - The Kitchen Collection, LLC (KC) subsidiary ceased operations and was dissolved on April 3, 2020, with its results reported as discontinued operations in all periods presented[15][54] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2020 revenue growth driven by U.S. consumer demand, improved operating profit, and enhanced liquidity, alongside ongoing credit facility refinancing efforts Results of Operations Q2 2020 revenue increased 5.5% to $138.3 million, driven by U.S. consumer demand, with gross profit margin improving to 25.5% and operating profit surging 242.1% Q2 2020 vs Q2 2019 Performance | Metric | Q2 2020 ($ thousands) | Q2 2019 ($ thousands) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $138,297 | $131,065 | 5.5% | | Gross Profit | $35,254 | $28,507 | 23.7% | | Operating Profit | $10,895 | $3,185 | 242.1% | - Revenue growth was primarily driven by strong demand in U.S. consumer markets as consumers stayed home during the COVID-19 pandemic, with e-commerce sales increasing 77% in Q2 and accounting for 37% of total revenue[81] - Gross profit margin improved to 25.5% from 21.8% in the prior-year quarter, benefiting from customer/product mix and approximately $1.6 million in tariff relief[82] - For the first six months of 2020, e-commerce sales increased 52.6% and accounted for 32.8% of total revenue[87] Liquidity and Capital Resources Liquidity significantly improved with positive cash from operations, supported by a $115.0 million revolving credit facility currently undergoing refinancing - Net cash provided by operating activities was $21.8 million for the first six months of 2020, a significant improvement from the $31.6 million used in the same period of 2019, primarily due to better management of inventory and accounts receivable[100] - The company maintains a $115.0 million senior secured revolving credit facility (HBB Facility) that expires on June 30, 2021, and has begun the refinancing process, believing it will be refinanced before maturity[96][102] - As of June 30, 2020, borrowings outstanding under the HBB Facility were $41.8 million, with excess availability of $54.2 million[102] - The company utilizes a non-recourse arrangement to sell certain U.S. trade receivables, derecognizing $75.2 million of receivables in the first six months of 2020[58][107] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk with swaps and foreign currency risk with forward contracts, primarily for Canadian dollar, Mexican peso, Chinese yuan, and Brazilian real exposures - The company uses interest rate swap agreements to reduce exposure to floating interest rates on its credit facility, with swaps having notional values of $25.0 million in place at June 30, 2020[105][114] - The company is exposed to foreign currency risk from transactions denominated in Canadian dollars, Mexican pesos, Chinese yuan, and Brazilian real, and uses forward foreign currency exchange contracts to mitigate this risk[116][117] Controls and Procedures Disclosure controls were ineffective due to material weaknesses in Mexican subsidiary internal controls, prompting a remediation plan including personnel and organizational changes - Management concluded that disclosure controls and procedures were not effective as of June 30, 2020, due to material weaknesses in internal control over financial reporting at its Mexican subsidiaries[119] - The material weaknesses identified were: 1) Ineffective review controls over account reconciliations and manual journal entries, which failed to detect unauthorized transactions; and 2) Insufficiently designed transaction-level controls over spending, pricing, and customer setup[121][122] - A remediation plan has been initiated, which includes terminating employees engaged in misconduct, augmenting the local accounting team, implementing a more comprehensive review process, and outsourcing certain functions[123][128] Part II. OTHER INFORMATION This section details ongoing legal proceedings, key risk factors, and information regarding unregistered equity security sales and use of proceeds Legal Proceedings The company faces patent infringement, dissolved subsidiary debt, and class-action lawsuits related to accounting irregularities, all of which it is vigorously defending - The company is a defendant in a patent infringement lawsuit where a jury awarded the plaintiff $3.2 million, but the court later reduced the award by $0.9 million[69] - The company is being sued for the unsatisfied debts of its dissolved subsidiary, The Kitchen Collection (KC), but believes the claims are without merit[70] - A class action complaint was filed against the company and its officers related to the accounting irregularities in Mexico, which the company also believes are without merit[71] Risk Factors Key risks include the uncertain impact of the COVID-19 pandemic on operations and potential disruptions from the new ERP system implementation - The COVID-19 pandemic poses a significant risk, with potential impacts on product demand, costs, supply chain, and access to capital, and the full extent of the impact remains uncertain[132][133] - The implementation of a new enterprise resource planning (ERP) system presents a risk, as any disruptions, delays, or deficiencies could adversely affect the company's ability to process orders, ship products, and operate its business effectively[134] Unregistered Sales of Equity Securities and Use of Proceeds A $25.0 million stock repurchase program is active through December 2021, with no shares repurchased during the first six months of 2020 - A stock repurchase program for up to $25.0 million of Class A Common Stock is in effect through December 31, 2021[136] - No shares were repurchased during the six months ended June 30, 2020[137]