HAMILTON BEACH BRANDS HOLDING COMPANY 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."
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 and Estimates" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 as there have been no material changes from those disclosed in the 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.
First Quarter of 2023 Compared with First Quarter of 2022
THREE MONTHS ENDED
MARCH 31
Increase / (Decrease)
2023 % of Revenue 2022 % of Revenue $ Change % Change
Revenue $ 128,252 100.0 % $ 146,351 100.0 % $ (18,099) (12.4) %
Cost of sales 107,342 83.7 % 118,121 80.7 % (10,779) (9.1) %
Gross profit 20,910 16.3 % 28,230 19.3 % (7,320) (25.9) %
Selling, general and administrative
expenses 25,919 20.2 % 15,433 10.5 % 10,486 67.9 %
Amortization of intangible assets 50 - % 50 - % - - %
Operating profit (loss) (5,059) (3.9) % 12,747 8.7 % (17,806) (139.7) %
Interest expense, net 1,269 1.0 % 733 0.5 % 536 73.1 %
Other expense (income), net 16 - % 1,466 1.0 % (1,450) (98.9) %
Income (loss) before income taxes (6,344) (4.9) % 10,548 7.2 % (16,892) (160.1) %
Income tax expense (benefit) (1,567) (1.2) % 3,375 2.3 % (4,942) (146.4) %
Net income (loss) $ (4,777) (3.7) % $ 7,173 4.9 % $ (11,950) (166.6) %
Effective income tax rate 24.7 % 32.0 %
The following table identifies the components of the change in revenue:
Revenue
2022 $ 146,351
Increase (decrease) from:
Unit volume and product mix (22,295)
Average sales price 4,269
Foreign currency (73)
2023 $ 128,252
13-------------------------------------------------------------------------------- Table of Contents Revenue - Revenue decreased$18.1 million , or 12.4% compared to the prior year, due to lower unit volume and unfavorable customer and product mix, partially offset by price increases. The decrease in volume is related to softer consumer consumption trends and inventory rebalancing by many retailers which impacted orders in the first quarter of 2023. Gross profit - As a percentage of revenue, gross profit margin decreased from 19.3% in the prior year to 16.3% in the current year due to unfavorable customer and product mix and deleveraging of fixed charges. These were offset slightly by lower expenses for outside warehousing and labor compared to the prior year due to lower inventory levels.
Selling, general and administrative expenses - Selling, general and
administrative expenses increased
Interest expense - Interest expense, net increased
Other expense (income), net - Other expense (income), net includes currency
gains of
Income tax expense (benefit) - The effective tax rate on loss was 24.7% for the three months endedMarch 31, 2023 , and 32.0% on income for the three months endedMarch 31, 2022 . The effective tax rate for the three months endedMarch 31, 2022 was unfavorably impacted by interest and penalties on unrecognized tax benefits and a valuation allowance on certain foreign deferred tax assets related to theBrazil liquidation as discrete expense items that did not recur in 2023.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Hamilton Beach Brands Holding Company cash flows are provided by dividends paid or distributions made by its subsidiary. The only material assets held by it are the investments in its consolidated subsidiary. As a result, certain statutory limitations or regulatory or financing agreements could affect the levels of distributions allowed to be made by its subsidiary.Hamilton Beach Brands Holding Company has not guaranteed any of the obligations of its subsidiary. HBB's principal sources of cash to fund liquidity needs are: (i) cash generated from operations and (ii) borrowings available under the revolving credit facility, as 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 has a$150.0 million senior secured floating-rate revolving credit facility (the "HBB Facility") that expires onJune 30, 2025 . 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 following table presents selected cash flow information:
THREE MONTHS ENDED
MARCH 31
2023 2022
Net cash provided by (used for) operating activities
Net cash provided by (used for) investing activities
Net cash provided by (used for) financing activities
Operating activities - Net cash provided by operating activities was$34.9 million compared to cash used for operating activities of$20.8 million in the prior year primarily due to net working capital which provided cash of$39.9 million in 2023 compared to a use of cash of$24.9 million in 2022. Trade receivables provided net cash of$25.3 million during 2023 compared to$15.5 million provided in the prior year. Net cash provided by inventory and accounts payable combined was$14.6 million in 2023 compared to$40.4 million used in 2022. The Company effectively managed elevated inventory levels during 2022 and significantly reduced inventory and accounts payable as compared to the quarter-endedMarch 31, 2022 and the year-endedDecember 31, 2022 . 14
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Investing activities - Net cash used for investing activities in 2023 was flat compared to 2022.
Financing activities - Net cash used for financing activities was$33.0 million in 2023 compared to net cash provided by financing activities of$21.0 million in 2022. The change is due to a decrease in HBB's net borrowing activity on the revolving credit facility to fund net working capital.
Capital Resources
The Company expects to continue to borrow against the HBB Facility and make
voluntary repayments within the next twelve months. The obligations under the
HBB Facility are secured by substantially all of HBB's assets. At
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, SOFR or bankers' acceptance rate, as defined in the HBB Facility, plus an applicable margin. The applicable margins, effectiveMarch 31, 2023 , for base rate loans and SOFR loans denominated inU.S. dollars were 0.0% and 2.05%, respectively. The applicable margins, effectiveMarch 31, 2023 , for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.0% and 2.05%, respectively. The HBB Facility also requires a fee of 0.25% per annum on the unused commitment. The margins and unused commitment fee under the HBB Facility are subject to quarterly adjustment based on average excess availability. The weighted average interest rate applicable to the HBB Facility for the three months endedMarch 31, 2023 was 5.10% 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$50.0 million atMarch 31, 2023 at an average fixed interest rate of 1.47%. HBB also entered into delayed-start interest rate swaps. These swaps have notional values totaling$25.0 million as ofMarch 31, 2023 , with an average fixed interest rate of 1.78%. The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends toHamilton Beach Holding , subject to achieving availability thresholds. Dividends toHamilton Beach Holding are not to exceed$7.0 million during any calendar year to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of at least$18.0 million . Dividends toHamilton Beach Holding are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of at least$30.0 million . The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. AtMarch 31, 2023 , HBB was in compliance with all financial covenants in the HBB Facility.
In
HBB believes funds available from cash on hand, the HBB Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months.
Contractual Obligations, Contingent Liabilities and Commitments
For a summary of the Company's contractual obligations, contingent liabilities and commitments, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations, Contingent Liabilities and Commitments" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 as there have been no material changes from those disclosed in the Annual Report. 15 -------------------------------------------------------------------------------- Table of Contents Off Balance Sheet Arrangements For a summary of the Company's off balance sheet arrangements, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Off Balance Sheet Arrangements" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 as there have been no material changes from those disclosed in the 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 source and ship products to meet anticipated demand, (2) the Company's ability to successfully manage constraints throughout the global transportation supply chain, (3) uncertain or unfavorable global economic conditions; (4) changes in the sales prices, product mix or levels of consumer purchases of small electric and specialty housewares appliances, (5) changes in consumer retail and credit markets, including the increasing volume of transactions made through third-party internet sellers, (6) bankruptcy of or loss of major retail customers or suppliers, (7) changes in costs, including transportation costs, of sourced products, (8) delays in delivery of sourced products, (9) changes in or unavailability of quality or cost effective suppliers, (10) exchange rate fluctuations, changes in the import tariffs and monetary policies and other changes in the regulatory climate in the countries in which the Company operates or buys 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, and (17) other risk factors, including those described in the Company's filings with theSecurities and Exchange Commission , including, but not limited to, the Annual Report on Form 10-K for the year endedDecember 31, 2022 . Furthermore, the future impact of unfavorable economic conditions, including inflation, rising interest rates, availability of capital markets and consumer spending rates remains uncertain. In uncertain economic environments, the Company cannot predict whether or when such circumstances may improve or worsen, or what impact, if any, such circumstances could have on its business, results of operations, cash flows and financial position.
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