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As filed with the Securities and Exchange Commission on September 18, 2017

Registration No. 333-220066

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Hamilton Beach Brands Holding Company

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3634   31-1236686
(State of Incorporation)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Hamilton Beach Brands Holding Company

4421 Waterfront Dr.

Glen Allen, VA 23060

(804) 273-9777

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Dana B. Sykes

Vice President, General Counsel and Secretary

4421 Waterfront Dr.

Glen Allen, VA 23060

(804) 273-9777

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Thomas Murphy, Esq.

Eric Orsic, Esq.

McDermott Will & Emery LLP

444 West Lake Street, Suite 4000

Chicago, IL 60606-0029

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    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 to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not distribute these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell securities, and it is not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 18, 2017

PRELIMINARY PROSPECTUS

[                ] Shares of Class A Common Stock

[                ] Shares of Class B Common Stock

HAMILTON BEACH BRANDS HOLDING COMPANY

To the Stockholders of NACCO Industries, Inc.:

We are pleased to inform you that the board of directors of NACCO Industries, Inc. (“NACCO”) has approved the spin-off of Hamilton Beach Brands Holding Company (“Hamilton Beach Holding”) to NACCO stockholders. Hamilton Beach Holding is a holding company for two separate businesses: consumer, commercial and specialty small appliances (Hamilton Beach Brands, Inc.) and specialty retail (The Kitchen Collection, LLC). Hamilton Beach Brands, Inc. (“HBB”) is a leading designer, marketer, and distributor of branded small electric household and specialty housewares appliances as well as commercial products for restaurants, bars, and hotels. HBB markets such products under numerous brand names, including the Hamilton Beach ® , Proctor Silex ® and Weston ® brands, among others. The Kitchen Collection, LLC (“KC”) is a national specialty retailer of kitchenware in outlet and traditional malls throughout the United States. Immediately following the spin-off, Hamilton Beach Holding will be an independent public company.

To effect the spin-off, NACCO will make a distribution of all of the outstanding shares of Hamilton Beach Holding common stock to holders of NACCO common stock as of 5:00 p.m., Eastern Time, on September 26, 2017, the record date for the spin-off. NACCO will distribute one share of Hamilton Beach Holding Class A common stock, referred to as Hamilton Beach Holding Class A Common, or our Class A Common, and one share of Hamilton Beach Holding Class B common stock, referred to as Hamilton Beach Holding Class B Common or our Class B Common, for each share of NACCO common stock, whether NACCO Class A common stock, referred to as NACCO Class A Common, or NACCO Class B common stock, referred to as NACCO Class B Common. The spin-off is expected to occur after the close of trading on the New York Stock Exchange (the “NYSE”) on September 29, 2017. Hamilton Beach Holding Class A Common has been approved for listing on the NYSE under the symbol “HBB.” The Hamilton Beach Holding Class B Common will not be listed on the NYSE or any other stock exchange and is subject to substantial restrictions on transfer. Each share of Hamilton Beach Holding Class A Common is entitled to one vote per share on matters submitted to a vote of the Hamilton Beach Holding common stockholders. Each share of Hamilton Beach Holding Class B Common is entitled to ten votes per share on matters submitted to a vote of the Hamilton Beach Holding common stockholders, is subject to transfer restrictions and is convertible into one share of Hamilton Beach Holding Class A Common at any time without cost at the option of the holder.

After the spin-off, NACCO will continue to own and operate its other principal business, which is mining and value-added mining services (The North American Coal Corporation).

No vote of NACCO stockholders is required in connection with this spin-off. NACCO stockholders will not be required to pay any consideration for the shares of Hamilton Beach Holding common stock they receive in the spin-off, and they will not be required to surrender or exchange shares of their NACCO common stock or take any other action in connection with the spin-off. We expect that, for U.S. federal income tax purposes, the spin-off will be tax-free to you, except with respect to cash received in lieu of fractional shares of Hamilton Beach Holding common stock.

Because NACCO owns all of the outstanding shares of Hamilton Beach Holding’s common stock, there currently is no public trading market for Hamilton Beach Holding common stock. We anticipate that a limited market, commonly known as a “when-issued” trading market, for Hamilton Beach Holding’s Class A Common will develop on or shortly before the record date for the spin-off and will continue up to and including the spin-off date. We expect the “regular-way” trading of Hamilton Beach Holding’s Class A Common will begin on the first trading day following the spin-off date.

Hamilton Beach Holding qualifies as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act, and, therefore will be subject to reduced reporting requirements.

 

 

In reviewing this prospectus, you should carefully consider the matters described in “ Risk Factors ” beginning on page 18 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined whether this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities.

 

 

The date of this prospectus is [                ], 2017.


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Questions and Answers About the Spin-off

     1  

Summary

     8  

Financial Summary

     16  

Risk Factors

     18  

Special Note Regarding Forward-Looking Statements

     34  

The Spin-Off

     36  

Material U.S. Federal Income Tax Consequences

     45  

Use of Proceeds

     49  

Determination of Offering Price

     50  

Market Price Information and Dividend Policy

     51  

Selected Historical Financial Data of Hamilton Beach Brands Holding Company

     52  

Management’s Discussion And Analysis of Financial Condition and Results of Operations

     54  

Businesses of Hamilton Beach Holding

     86  

Legal Proceedings

     92  

Security Ownership of Certain Beneficial Owners and Management

     93  

Management

     102  

Executive Compensation

     117  

The Separation Agreement

     144  

Ancillary Agreements

     147  

Description of Capital Stock of Hamilton Beach Holding After the Spin-Off

     150  

Where You Can Find More Information

     155  

Experts

     155  

Legal Matters

     155  

Tax Matters

     155  

Index to Financial Statements

     F-1  

This prospectus is being furnished solely to provide information to NACCO stockholders who will receive shares of Hamilton Beach Holding common stock in the spin-off. It is not and is not to be construed as an inducement or encouragement to buy or sell any securities of NACCO or Hamilton Beach Holding. This prospectus describes Hamilton Beach Holding’s business, its relationship with NACCO and how the spin-off affects NACCO and its stockholders, and provides other information to assist you in evaluating the benefits and risks of holding or disposing of the common stock that you will receive in the spin-off.

You should not assume that the information contained in this prospectus is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this prospectus may occur after that date, and we undertake no obligation to update the information, except in the normal course of our public disclosure obligations.


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QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF

The following questions and answers briefly address some commonly asked questions about the spin-off. They may not include all the information that is important to you. We encourage you to read carefully this entire prospectus, including the annexes and the other documents to which we have referred you. We have included page references in certain parts of this section to direct you to a more detailed discussion of each topic presented in this section. Unless the context indicates otherwise, “Hamilton Beach Holding,” “we,” “us” and “our” refer to Hamilton Beach Brands Holding Company and its subsidiaries before the spin-off and after the spin-off, as applicable. “NACCO” refers to NACCO Industries, Inc., unless the context clearly indicates otherwise, not its subsidiaries.

What will NACCO stockholders receive in the spin-off?

To effect the spin-off, NACCO will make a distribution of all of the outstanding shares of Hamilton Beach Holding common stock to NACCO common stockholders as of the record date, which will be September 26, 2017. For each share of NACCO Class A Common held on the record date, NACCO will distribute one share of Hamilton Beach Holding Class A Common and one share of Hamilton Beach Holding Class B Common. Similarly, for each share of NACCO Class B Common held on the record date, NACCO will distribute one share of Hamilton Beach Holding Class A Common and one share of Hamilton Beach Holding Class B Common.

No fractional shares of our Class A Common or our Class B Common will be distributed in the spin-off. Instead, as soon as practicable after the spin-off, the transfer agent will convert the fractional shares of our Class B Common into an equal number of fractional shares of our Class A Common, aggregate all fractional shares of our Class A Common into whole shares of our Class A Common, sell these shares of our Class A Common in the open market at prevailing market prices and distribute the applicable portion of the aggregate net cash proceeds of these sales to each holder who otherwise would have been entitled to receive a fractional share in the spin-off. You will not be entitled to any interest on the amount of the cash payment made in lieu of fractional shares.

NACCO stockholders will not be required to pay for shares of our common stock received in the spin-off, or to surrender or exchange shares of NACCO common stock or take any other action to be entitled to receive our common stock in the distribution. The distribution of our common stock will not cancel or affect the number of outstanding shares of NACCO common stock. Accordingly, NACCO stockholders should retain any NACCO stock certificates they hold as of the spin-off.

Immediately after the spin-off, holders of NACCO common stock as of the record date will hold all of the outstanding shares of our Class A Common and our Class B Common. Based on the number of shares of NACCO common stock outstanding on September 1, 2017, NACCO expects to distribute approximately 6.8 million shares of our Class A Common and approximately 6.8 million shares of our Class B Common to NACCO stockholders in the spin-off (page 37).

Why is NACCO spinning off Hamilton Beach Holding?

NACCO is an operating holding company with the following principal businesses: mining and value-added mining services (The North American Coal Corporation or “NACoal”), consumer, commercial and specialty small appliances (Hamilton Beach Brands, Inc. or “HBB”) and specialty retail (The Kitchen Collection, LLC or “KC”). NACCO’s board of directors, which is referred to as the NACCO board, determined that separating its consumer, commercial and specialty small appliances and specialty retail businesses from NACCO’s mining and value-added mining services business through the spin-off of Hamilton Beach Holding is in the best interests of NACCO and its stockholders and has concluded that the separation will provide both NACCO and Hamilton Beach Holding with a number of significant opportunities and benefits, including:

 

 

   

Create Opportunities for Growth . Create greater flexibility for Hamilton Beach Holding (i) to pursue strategic growth opportunities, such as acquisitions and joint ventures, in the housewares industry because

 

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it will have the ability, subject to certain restrictions relating to the requirements for a tax-free distribution, to offer its stock as consideration in connection with potential future acquisitions or other growth opportunities and (ii) to use its stock to raise funds for acquisitions or other growth opportunities.

 

    Access to Capital and Capital Structure . Provide Hamilton Beach Holding with direct access to equity capital markets and greater access to debt capital markets to fund its growth strategies and to establish a capital structure and dividend policy reflecting our business needs and financial position.

 

    Implement CEO Succession. Provide Hamilton Beach Holding and NACCO with the ability to immediately implement CEO succession for their respective companies. After the spin-off, Hamilton Beach Holding will be a focused company led by a seasoned and highly qualified CEO and executive team. NACCO’s current Chairman, President and Chief Executive Officer, who is also the current Chairman of HBB, Alfred M. Rankin, Jr., will be able to dramatically reduce his role at Hamilton Beach Holding by becoming Executive Chairman. If HBB were to remain a part of NACCO, designating a successor to Mr. Rankin as CEO of the combined company would be difficult because of the vastly different industries with respect to which the successor would be responsible.

 

    Recruiting, Motivating and Retaining Employees . Strengthen the alignment of senior management incentives with the needs and performance of Hamilton Beach Holding through the use of equity compensation arrangements that will also improve our ability to motivate and retain current personnel and attract, retain and motivate additional qualified personnel.

 

    Management Focus . Reinforce NACCO management’s focus on operating the NACoal business since a majority of NACCO’s executive officers will remain with NACCO after the spin-off and no longer be required to oversee the HBB and KC businesses. Reinforce Hamilton Beach Holding management’s focus on serving each of Hamilton Beach Holding’s market segments and customer needs, and on responding flexibly to changing market conditions and growth markets.

The NACCO board considered the following factors, among others, in connection with its decision to spin-off Hamilton Beach Holding:

 

    Voting Power/Proportionate Interest . As of September 1, 2017, holders of NACCO Class A Common and NACCO Class B Common have 25.1% and 74.9% of the voting power of NACCO, respectively. NACCO’s Restated Certificate of Incorporation, which is referred to as the NACCO Charter, provides that each class of NACCO common stock has equal rights in connection with stock dividends. When the spin-off, structured as a stock dividend, occurs, the holders of Hamilton Beach Holding Class A Common will have 9.1% of the voting power of Hamilton Beach Holding, while holders of Hamilton Beach Holding Class B Common will have 90.9% of the voting power of Hamilton Beach Holding. The collective voting power in Hamilton Beach Holding of current holders of NACCO Class A Common after the spin-off will be approximately 77%, while the collective voting power in Hamilton Beach Holding of current holders of NACCO Class B Common after the spin-off will be approximately 23%.

 

    Certain Restrictions Relating to Tax-Free Distributions . The ability of Hamilton Beach Holding to engage in equity transactions could be limited or restricted for a period of time after the spin-off in order to preserve the tax-free nature of the spin-off. See “Risk Factors — We might not be able to engage in desirable strategic transactions and equity issuances for some period of time following the spin-off because of certain restrictions relating to requirements for tax-free distributions.”

 

    No Existing Public Market. There is no existing public market for our common stock and the combined market values of NACCO common stock and our common stock following the spin-off may be less than the value of NACCO common stock prior to the spin-off.

 

    Risks Factors . Certain other risks associated with the spin-off and our business after the spin-off, as described in this prospectus under the heading “Risk Factors” beginning on page 18.

 

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What businesses will NACCO engage in after the spin-off?

NACCO will be principally engaged in the mining and value-added mining services business after the spin-off.

Why does Hamilton Beach Holding have two classes of common stock?

NACCO has two classes of common stock. The spin-off of Hamilton Beach Holding from NACCO is structured to provide the Hamilton Beach Holding stockholders with substantially the same capital structure that currently exists for the NACCO stockholders, with certain changes intended to provide Hamilton Beach Holding, as an independent company, with additional flexibility, including the ability to issue blank check preferred shares and an increased number of authorized shares. In the event blank check preferred stock is issued in the future, the voting rights and other rights of holders of our common stock may be adversely affected. In addition, while the governance-related provisions of Hamilton Beach Holding’s amended and restated certificate of incorporation and amended and restated bylaws, as well as a stockholders’ agreement to which Hamilton Beach Holding will be a party, are substantially the same as NACCO’s governance-related provisions and stockholders’ agreement, there are certain changes from the corresponding NACCO provisions. For example, holders of Hamilton Beach Holding Class B Common are permitted to transfer their shares to certain limited liability companies in addition to certain trusts and corporations. In addition, holders of NACCO Class B Common currently have the ability to transfer their shares to certain relatives and holders of our Class B Common will not have that right. With respect to the distribution of the stock of any subsidiary of Hamilton Beach Holding, Hamilton Beach Holding’s amended and restated certificate of incorporation will permit the Company to elect to distribute to each holder of Hamilton Beach Holding Class A Common shares of the Class A common stock of such subsidiary and to each holder of Hamilton Beach Holding’s Class B Common shares of the Class B common stock of such subsidiary, which is not permitted under the NACCO restated certificate of incorporation. Our amended and restated bylaws, unlike NACCO’s, contain additional procedures for the nomination and election of directors of Hamilton Beach Holding. Unlike NACCO’s, the 80% vote requirement to amend certain provisions of our amended and restated bylaws also applies to amendments to provisions regarding the order of business at meetings of stockholders and nominations and election of directors. The NACCO restated certificate of incorporation requires the affirmative vote of 50% of the outstanding voting stock of NACCO for the removal of directors, but our amended and restated certificate of incorporation provides for the removal of directors with or without cause by an 80% vote of our outstanding stock. Finally, our amended and restated certificate of incorporation contains an 80% vote requirement to amend certain provisions of our amended and restated certificate of incorporation with respect to the election and removal of directors and amendment of bylaws, which is not in the NACCO restated certificate of incorporation. Hamilton Beach Holding’s amended and restated certificate of incorporation, amended and restated bylaws and stockholders’ agreement are as described in more detail in “Ancillary Agreements — Stockholders’ Agreement” and “Description of Capital Stock of Hamilton Beach Holding after the Spin-Off.”

Why will I receive Hamilton Beach Holding Class A Common and Hamilton Beach Holding Class B Common if I currently own only NACCO Class A Common or NACCO Class B Common?

The NACCO Charter provides that each share of NACCO Class A Common and NACCO Class B Common is equal in respect of rights to dividends and any other distribution in cash, stock or property. Therefore, pursuant to the terms of the NACCO Charter, NACCO is required to distribute one share of Hamilton Beach Holding Class A Common and one share of Hamilton Beach Holding Class B Common for each share of NACCO common stock, whether NACCO Class A Common or NACCO Class B Common. As a result of this requirement for equal distribution, the proportionate interest that NACCO stockholders will have in Hamilton Beach Holding following the spin-off will differ from the interest those stockholders currently have in NACCO. In particular, the collective voting power in Hamilton Beach Holding of current holders of NACCO Class A Common after the spin-off will be approximately 77% while the collective voting power in Hamilton Beach Holding of current holders of NACCO Class B Common after the spin-off will be approximately 23%. By contrast, the collective voting power in NACCO of the current holders of NACCO Class A Common is approximately 25% while the

 

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collective voting power in NACCO of the current holders of NACCO Class B Common is approximately 75%. By virtue of the spin-off, there will be a greater concentration of voting power in Hamilton Beach Holding among the holders of NACCO Class A Common than such holders have in NACCO and a corresponding reduction in the concentration of voting power in Hamilton Beach Holding among the holders of NACCO Class B Common. See “Risk Factors – The relative voting power of holders of our Class B Common who convert their shares of our Class B Common into shares of our Class A Common will diminish” and “Risk Factors — The relative voting power of the remaining holders of Class B Common will increase as holders of our Class B Common convert their shares of our Class B Common into shares of our Class A Common.”

Who is entitled to receive shares of our common stock in the spin-off?

Holders of NACCO common stock at the close of business on September 26, 2017, the record date for the spin-off, will be entitled to receive shares of our common stock in the spin-off.

When is the spin-off expected to be completed?

The spin-off is expected to be completed during the third quarter of 2017.

What do I need to do to receive my shares of Hamilton Beach Holding common stock?

You do not need to take any action to receive your shares of our common stock. The shares of our common stock will be distributed on the date of the spin-off to holders of NACCO common stock as of the record date for the spin-off in book-entry form for our Class A Common and in certificated form for our Class B Common in accordance with Section 170 of the General Corporation Law of the State of Delaware (the “DGCL”).

What if I want to receive certificates representing my shares of Class A Common?

While the shares of our Class A Common will be distributed in book-entry form, you may request to receive certificates representing your shares of our Class A Common from our transfer agent.

What will govern my rights as a Hamilton Beach Holding stockholder?

Your rights as a Hamilton Beach Holding stockholder will be governed by Delaware law, as well as our amended and restated certificate of incorporation and our amended and restated bylaws. A description of these rights is included in this prospectus under the heading “Description of Capital Stock of Hamilton Beach Holding after the Spin-Off” (page 150). Except as otherwise described in this prospectus, these documents are substantially comparable to NACCO’s constituent documents.

What if I want to convert or sell the shares of Hamilton Beach Holding Class B Common I receive in the spin-off?

Like the NACCO Class B Common, our Class B Common will not be listed on the NYSE or any other stock exchange, and we do not expect any trading market for our Class B Common to exist. In addition, our Class B Common generally will not be transferable except to or among a limited number of permitted transferees pursuant to our amended and restated certificate of incorporation. However, our Class B Common will be convertible at any time, without cost to you, into our Class A Common on a share-for-share basis. If you want to sell the equity interest represented by your shares of our Class B Common, you may convert those shares into an equal number of shares of our Class A Common at any time, without cost, and then sell your shares of our Class A Common.

You will receive a conversion form when you receive the shares of our Class B Common that you are entitled to receive in the spin-off. The conversion form will include instructions for converting shares of our

 

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Class B Common into an equal number of shares of our Class A Common. If you elect to convert your shares of our Class B Common into shares of our Class A Common, you should follow the instructions included with the form, complete, sign and date the form, and return the form, along with your certificate, if any, representing shares of our Class B Common, to our transfer agent. If you deliver a certificate, our transfer agent, as promptly as practicable after receipt of your completed, signed and dated form and certificate, will issue to you a certificate representing shares of our Class A Common equal to the number of shares of our Class B Common that you elected to convert. Any Class A Common issued upon conversion of Class B Common will be issued in the name or names you specified in the form. The conversion will be deemed to have been made immediately prior to the close of business on the date you surrendered your completed, signed and dated form and certificate, if any. After you receive shares of our Class A Common you may sell those shares. After you convert our Class B Common into our Class A Common, such shares may not be converted back into shares of our Class B Common.

Do I have to convert my shares of Class B Common before I sell them?

No. If you do not wish to complete the conversion process before you sell, you may effect a sale of our Class A Common into which your shares of our Class B Common are convertible. If you hold certificated Class B Common simply deliver the certificate or certificates representing such shares of our Class B Common to a broker, properly endorsed, in contemplation of the sale. The broker will then instruct the transfer agent to convert such Class B Common and, if necessary, present a certificate or certificates representing shares of our Class B Common to our transfer agent, who will issue to the purchaser a certificate, if necessary, representing the number of shares of our Class A Common sold in settlement of the transaction.

What are the potential risks, costs, and materially adverse consequences that could arise should NACCO decide not to proceed with the spin-off of Hamilton Beach Brands, Inc. and The Kitchen Collection, LLC?

If the spin-off is not completed for any reason, NACCO and Hamilton Beach Holding will have incurred significant costs related to the spin-off, including fees for attorneys and auditors and printer costs, that will not be recouped. In addition, members of our senior management will have devoted significant time to manage the spin-off process, which may have decreased the time they have had to manage the business of NACCO and Hamilton Beach Holding.

We note that NACCO previously attempted to spin-off the Hamilton Beach business on two separate occasions. In 2006, NACCO intended to execute a spin-off of the Hamilton Beach business as part of a transaction in which NACCO would spin off the Hamilton Beach business and merge it into a third party target company. This spin-off did not occur because the target company was acquired before the spin-off could be completed. In 2007, NACCO intended to execute a spin-off of the Hamilton Beach business as a stand-alone company. NACCO’s board of directors ultimately determined not to proceed due to weak and declining macroeconomic and stock market conditions at the time of the proposed spin-off.

Are there risks associated with the spin-off and our business after the spin-off?

Yes. You should carefully review the risks described in this prospectus under the heading “Risk Factors” beginning on page 18.

Who can answer my questions about the spin-off?

If you have any questions about the spin-off, please contact the following.

NACCO Industries, Inc. 5875 Landerbrook Drive, Suite 220 Cleveland, Ohio 44124-4017 Attn: Investor Relations Telephone: 440-229-5130 Email: ir@naccoind.com

 

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Is stockholder approval needed in connection with the spin-off?

No vote of NACCO stockholders is required or will be sought in connection with the spin-off.

Where will the shares of Hamilton Beach Holding common stock be listed?

Our shares of Class A Common have been approved for listing on the New York Stock Exchange under the symbol “HBB.” Our Class B Common will not be listed on the NYSE or any other stock exchange.

Where can I find more information about Hamilton Beach Holding and NACCO?

You can find more information about NACCO and us from various sources described under “Where You Can Find More Information” beginning on page 155.

What are the U.S. federal income tax consequences of the spin-off to NACCO stockholders?

The spin-off is conditioned upon receipt by NACCO of an opinion of tax counsel to the effect that, for U.S. federal income tax purposes, the spin-off will qualify as tax-free under Section 355 of the Internal Revenue Code (the “Code”), except for cash received in lieu of fractional shares. The opinion of tax counsel to NACCO will be based on, among other things, current law and will rely on certain facts and assumptions, and certain representations and undertakings, provided by NACCO and us regarding the past and future conduct of our respective businesses and other matters, which, if incorrect, could jeopardize the conclusions reached in this opinion.

We expect that the opinion of tax counsel will conclude that for U.S. federal income tax purposes, the spin-off will qualify as tax-free under Section 355 of the Code, such that (1) no gain or loss will be recognized by NACCO or us as a result of the spin-off, and (2) no gain or loss will be recognized by (and no amount will be included in the income of) a NACCO stockholder, upon the receipt of our common stock in the spin-off, except a NACCO stockholder may recognize a gain or loss with respect to any cash received in lieu of a fractional share. A form of the opinion we expect to receive from tax counsel is filed as an exhibit to the registration statement that contains this prospectus.

In connection with the spin-off, we will enter into a tax allocation agreement with NACCO (the “Tax Allocation Agreement”). Under the Tax Allocation Agreement, NACCO has agreed to make a protective election under Section 336(e) of the Code with respect to the spin-off. If, notwithstanding the receipt of an opinion of tax counsel, the spin-off fails to qualify as tax-free under Section 355 of the Code, the Section 336(e) election would generally cause a deemed sale of the assets of Hamilton Beach Holding and its subsidiaries, causing the NACCO group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Hamilton Beach Holding and its subsidiaries in such assets. In such case, to the extent that NACCO is responsible for the resulting transaction taxes, Hamilton Beach Holding generally would be required under the Tax Allocation Agreement to make periodic payments to NACCO equal to the tax savings arising from a “step up” in the tax basis of Hamilton Beach Holding’s assets.

In addition, if the spin-off fails to qualify as tax-free under Section 355 of the Code, NACCO stockholders could be taxed on the full value of the shares of Hamilton Beach Holding’s common stock that they receive, which generally would be treated first as a taxable dividend to the extent of NACCO’s earnings and profits, then as a non-taxable return of capital to the extent of each stockholder’s tax basis in shares of NACCO common stock, and thereafter as a capital gain with respect to any remaining value. The protective Section 336(e) election does not impact this treatment of NACCO stockholders.

Even if the spin-off qualifies as tax-free under Section 355 of the Code, the spin-off would become taxable to NACCO under Section 355(e) of the Code if a 50% or greater interest (by vote or value) in NACCO or

 

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Hamilton Beach Holding stock were treated as acquired, directly or indirectly, by certain persons as part of a plan or series of related transactions that included the spin-off. For this purpose, it is unclear whether any increase in voting power by holders of our Class B Common Stock by reason of the conversion by other holders of Hamilton Beach Holding Class B Common Stock to Hamilton Beach Holding Class A Common Stock should be considered an acquisition of voting power as part of a plan or series of related transactions. However, even if so treated, any such voting shift would not alone cause an acquisition of 50% or more of the voting power of our Common Stock and, as a result, would not, by itself, cause the spin-off to be taxable to NACCO under Section 355(e) of the Code. However, if the IRS were to determine that other acquisitions of NACCO shares before or after the spin-off, or Hamilton Beach Holding shares after the spin-off, were part of a plan or series of related transactions that included the spin-off for purposes of Section 355(e) of the Code, such determination could result in the recognition of a gain by NACCO under Section 355(e) of the Code. Because of the protective Section 336(e) election, Hamilton Beach Holding and its subsidiaries would be deemed to have sold all of their assets, thereby causing the NACCO group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Hamilton Beach Holding and its subsidiaries in such assets. As described, above, to the extent that NACCO is responsible for the resulting transaction taxes, Hamilton Beach Holding would generally be required under the Tax Allocation Agreement to make certain periodic payments to NACCO.

For further information concerning the U.S. federal income tax consequences of the spin-off, see “Material U.S. Federal Income Tax Consequences” beginning on page 45.

Each NACCO stockholder is urged to consult a tax advisor as to the specific tax consequences of the spin-off to that stockholder, including the effect of any state, local, or non-U.S. tax laws and any changes in applicable tax laws.

How will I determine the tax basis I will have in the shares of Hamilton Beach Holding Class A and Class B common stock I receive in the spin-off?

Generally, for U.S. federal income tax purposes, your aggregate basis in the stock you hold in NACCO and the Hamilton Beach Holding common stock received in the spin-off (including cash received in lieu of fractional shares) will equal the aggregate basis of NACCO common stock held by you immediately before the spin-off. This aggregate basis will be allocated among your NACCO common stock and the Hamilton Beach Holding common stock you receive in the spin-off (including any fractional share interests in Hamilton Beach Holding for which cash is received) in proportion to the relative fair market value of each immediately following the spin-off. See “Material U.S. Federal Income Tax Consequences” beginning on page 45.

You should consult with your tax advisor about how this allocation will work in your situation (including a situation where you have purchased or received NACCO shares at different times or for different amounts) and regarding any particular consequences of the spin-off to you, including the application of state, local and non-U.S. tax laws.

 

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SUMMARY

This summary of the information contained in this prospectus may not include all the information that is important to you. To understand fully and for a more complete description of the terms and conditions of the spin-off, you should read this prospectus, including the annexes, in its entirety and the documents to which you are referred. See “Where You Can Find More Information” (page 155). Page references have been included parenthetically to direct you to a more complete discussion of each topic presented in this summary.

Information About Hamilton Beach Holding (page 86)

Hamilton Beach Holding is a Delaware corporation and a wholly owned subsidiary of NACCO. Hamilton Beach Holding is a holding company for two separate businesses: consumer, commercial and specialty small appliances (HBB) and specialty retail (KC). HBB is a leading designer, marketer, and distributor of branded small electric household and specialty housewares appliances as well as commercial products for restaurants, bars and hotels. HBB markets such products under numerous brand names, including the Hamilton Beach ®, Proctor Silex ® , and Weston ® brands, among others. KC is a national specialty retailer of kitchenware in outlet and traditional malls throughout the United States. For more information about our businesses, including our competitive strengths, see “Businesses of Hamilton Beach Holding” beginning on page 86.

Hamilton Beach Brands Holding Company

4421 Waterfront Dr.

Glen Allen, VA 23060

(804) 273-9777

Information about NACCO

NACCO is a holding company that will have one principal business after the spin-off: mining and value-added mining services. NACoal mines coal primarily for use in power generation and provides value-added services for natural resource companies.

NACCO Industries, Inc.

5875 Landerbrook Drive, Suite 220

Cleveland, Ohio 44124

(440) 229-5151

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions that are not otherwise applicable to public companies from various reporting requirements. These include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and stockholder advisory votes on golden parachute compensation.

Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:

 

    the last day of the fiscal year during which we have total annual gross revenues that exceed $1,070,000,000;

 

    the last day of the fiscal year following the fifth anniversary of the completion of the spin-off;

 



 

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    the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and

 

    the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, (the “Exchange Act”) (we will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months; the value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter).

The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 (the “Securities Act”) for complying with new or revised accounting standards. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with those of another public company, which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.

The Spin-Off (page 36)

On September 18, 2017, the NACCO board of directors and the Hamilton Beach Holding board of directors, which is referred to as our Board, each approved the spin-off of Hamilton Beach Holding, upon the terms and subject to the conditions contained in the separation agreement between NACCO and us, which is referred to as the separation agreement. For a more detailed description of the terms of the separation agreement, see “The Separation Agreement” beginning on page 144.

We encourage you to read the separation agreement, which is filed as an exhibit to the registration statement that contains this prospectus, because it sets forth the terms of the spin-off.

Stock Ownership of Hamilton Beach Holding Directors and Executive Officers (page 94)

The stock ownership of our directors and executive officers immediately after the spin-off is described under the heading “Security Ownership of Certain Beneficial Owners and Management” beginning on page 93.

Ownership of Hamilton Beach Holding after the Spin-Off (page 39)

Immediately after the spin-off, NACCO stockholders as of the record date will hold all of the outstanding shares of our Class A Common and our Class B Common. Based on the number of shares of NACCO common stock outstanding on September 1, 2017, NACCO expects to distribute approximately 6.8 million shares of our Class A Common and approximately 6.8 million shares of our Class B Common in the spin-off.

Operations of Hamilton Beach Holding after the Spin-Off (page 39)

We will continue to conduct business after completion of the spin-off under multiple brands and trade names. Our headquarters will continue to be located in Glen Allen, Virginia.

Management of Hamilton Beach Holding after the Spin-Off (page 39)

After the spin-off, our executive officers will be substantially the same as our executive officers immediately before the spin-off and will remain in office until their respective successors are duly elected or appointed and qualified in accordance with our amended and restated certificate of incorporation and our amended and restated bylaws or as otherwise provided by law.

 



 

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After the spin-off, we will be led by:

 

    Alfred M. Rankin, Jr. as our Executive Chairman;

 

    Gregory H. Trepp as our and HBB’s President and Chief Executive Officer and KC’s Chief Executive Officer;

 

    Keith B. Burns as HBB’s Vice President, Engineering and Information Technology;

 

    Gregory E. Salyers as HBB’s Senior Vice President, Global Operations;

 

    Dana B. Sykes as our and HBB’s Vice President, General Counsel and Secretary;

 

    James H. Taylor as our Vice President, Chief Financial Officer and Treasurer and HBB’s Vice President and Chief Financial Officer;

 

    R. Scott Tidey as HBB’s Senior Vice President, North America Sales and Marketing; and

 

    Robert O. Strenski as KC’s President.

See “Management” beginning on page 102 for additional information regarding our management after the spin-off.

Hamilton Beach Holding Board after the Spin-Off (page 40)

After the spin-off, our Board will consist of Alfred M. Rankin, Jr., J.C. Butler, Jr., John P. Jumper, Dennis W. LaBarre, Michael S. Miller, Roger F. Rankin, Thomas T. Rankin, James A. Ratner, David F. Taplin, Gregory H. Trepp and Mark R. Belgya, who will remain in office until their respective successors are duly elected or appointed and qualified in accordance with our amended and restated certificate of incorporation and our amended and restated bylaws or as otherwise provided by law. Of these individuals, the following served as our directors prior to the spin-off: Alfred M. Rankin, Jr., John P. Jumper, Dennis W. LaBarre, Michael S. Miller, James A. Ratner and David F. Taplin. Our Board has determined that John P. Jumper, Dennis W. LaBarre, Michael S. Miller, James A. Ratner, David F. Taplin and Mark R. Belgya satisfy the criteria for director independence as set forth in the NYSE rules.

Committees of the Hamilton Beach Holding Board after the Spin-Off (page 40)

After the spin-off, our Board will have an audit review committee, a compensation committee, a nominating and corporate governance committee and an executive committee.

 



 

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Immediately after the spin-off, the members of our Board, audit review committee, compensation committee, nominating and corporate governance committee and executive committee will be as follows:

 

Board

Members

 

Audit Review Committee

 

Compensation Committee

Alfred M. Rankin, Jr.

  Mark R. Belgya   Mark R. Belgya

J.C. Butler, Jr.

  John P. Jumper   John P. Jumper

John P. Jumper

  Dennis W. LaBarre   Dennis W. LaBarre

Dennis W. LaBarre

  Michael S. Miller   Michael S. Miller

Michael S. Miller

  James A. Ratner   James A. Ratner

Roger F. Rankin

   

Thomas T. Rankin

   

James A. Ratner

   

David F. Taplin

   

Gregory H. Trepp

   

Mark R. Belgya

   
   

Executive

Committee

 

Nominating and Corporate
Governance Committee

   
 

J.C. Butler, Jr.

  John P. Jumper  
 

Dennis W. LaBarre

  Dennis W. LaBarre  
 

Michael S. Miller

  Michael S. Miller  
 

Alfred M. Rankin, Jr.

  James A. Ratner  

Interests of NACCO and Hamilton Beach Holding Directors and Executive Officers in the Spin-Off (page 41)

Some NACCO and Hamilton Beach Holding directors and executive officers have interests in the spin-off that are different from, or in addition to, the interests of NACCO stockholders who will receive shares of our common stock in the spin-off. The NACCO board and our Board were aware of these interests and considered them in making their respective decisions to approve the separation agreement and the spin-off. These interests include:

 

    the designation of certain of our directors and officers before the spin-off as our directors or executive officers after the spin-off, including some who will serve as directors or executive officers of both Hamilton Beach Holding and NACCO;

 

    the rights of Alfred M. Rankin, Jr., our Executive Chairman, and J.C. Butler, Jr., Roger F. Rankin, Thomas T. Rankin and David F. Taplin, our directors, as parties to the stockholders’ agreement among Hamilton Beach Holding and certain members of the Rankin and Taplin families with respect to ownership of our common stock, as described in more detail in “Security Ownership of Certain Beneficial Owners and Management” beginning on page 93 and “Ancillary Agreements — Stockholders’ Agreement” beginning on page 149;

 

    the participation of our executive officers in various incentive compensation plans for 2017 prior to the spin-off, as previously approved by the compensation committee of the NACCO Industries, Inc. board, which is referred to as the NACCO compensation committee;

 

    the provision of NACCO equity compensation to our directors who were directors of NACCO prior to the spin-off under the NACCO Industries, Inc. Non-Employee Directors’ Equity Compensation Plan, referred to as the NACCO Directors’ Plan, as described in more detail in “Management — Compensation of Directors” beginning on page 112;

 



 

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    the provision of Hamilton Beach Holding equity to our directors and the participation by our directors in a director equity compensation plan following the spin-off, as described in more detail in “Management — Compensation of Directors” beginning on page 112;

 

    the participation by our Executive Chairman in a NACCO equity incentive compensation plan before the spin-off, subject to the approval of grants of awards by the NACCO compensation committee, as described in more detail in “Executive Compensation — Long-Term Incentive Compensation — Historically” beginning on page 130; and

 

    the participation by our executive officers in a Hamilton Beach Holding equity incentive compensation plan after the spin-off, subject to the approval of grants of awards by the Hamilton Beach Holding compensation committee, which is referred to as our compensation committee or the Hamilton Beach Holding compensation committee, as described in more detail in “Executive Compensation — Long-Term Incentive Compensation — Going Forward” beginning on page 134.

Listing of Hamilton Beach Holding Common Stock (page 51)

Our Class A Common has been approved for listing on the NYSE under the symbol “HBB.” Our Class B Common will not be listed on the NYSE or any other stock exchange.

Market for Hamilton Beach Holding Common Stock (page 51)

Currently, there is no public market for our Class A Common. Our Class A Common has been approved for listing on the NYSE. We expect that a “when-issued” trading market for our Class A Common will develop before the record date for the spin-off. “When-issued” trading refers to a transaction made conditionally because the stock has been authorized but is not yet issued or available. Even though when-issued trading may develop, none of these trades will settle before the distribution date for the spin-off, and if the spin-off does not occur, all when-issued trading will be null and void. On the first trading day after the spin-off, when-issued trading will end and “regular-way” trading will begin. “Regular-way” trading refers to trading after a stock has been issued and typically involves a transaction that settles on the second full business day after the date of a transaction.

Our Class B Common will not be listed on the NYSE or any other stock exchange or otherwise traded and will be subject to substantial restrictions on transfer, as described in more detail in “Description of Capital Stock of Hamilton Beach Holding after the Spin-Off — Common Stock — Restrictions on Transfer of Class B Common; Convertibility of Class B Common into Class A Common” beginning on page 150. Our Class B Common will, however, be convertible at all times, and without cost to the stockholder, into our Class A Common on a share-for-share basis. Therefore, stockholders desiring to sell the equity interest in us represented by their shares of our Class B Common may convert those shares into an equal number of shares of our Class A Common at any time and then sell the shares of our Class A Common.

Material U.S. Federal Income Tax Consequences (page 45)

The spin-off is conditioned upon receipt by NACCO of an opinion of tax counsel to the effect that, for U.S. federal income tax purposes, the spin-off will qualify as tax-free under Section 355 of the Code, except for cash received in lieu of fractional shares. The opinion of tax counsel to NACCO will be based on, among other things, current law and will rely on certain facts and assumptions, and certain representations and undertakings, provided by NACCO and us regarding the past and future conduct of our respective businesses and other matters, which, if incorrect, could jeopardize the conclusions reached in this opinion.

We expect that the opinion of tax counsel will conclude that for U.S. federal income tax purposes, the spin-off will qualify as tax-free under Section 355 of the Code, such that (1) no gain or loss will be recognized by NACCO or us as a result of the spin-off, and (2) no gain or loss will be recognized by (and no amount will be

 



 

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included in the income of) a NACCO stockholder, upon the receipt of our common stock in the spin-off, except a NACCO stockholder may recognize a gain or loss with respect to any cash received in lieu of a fractional share. A form of the opinion we expect to receive from tax counsel is filed as an exhibit to the registration statement that contains this prospectus.

Under the Tax Allocation Agreement, NACCO has agreed to make a protective election under Section 336(e) of the Code with respect to the spin-off. If, notwithstanding the receipt of an opinion of tax counsel, the spin-off fails to qualify as tax-free under Section 355 of the Code, the Section 336(e) election would generally cause a deemed sale of the assets of Hamilton Beach Holding and its subsidiaries, causing the NACCO group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Hamilton Beach Holding and its subsidiaries in such assets. In such case, to the extent that NACCO is responsible for the resulting transaction taxes, Hamilton Beach Holding generally would be required under the Tax Allocation Agreement to make periodic payments to NACCO equal to the tax savings arising from a “step up” in the tax basis of Hamilton Beach Holding’s assets.

In addition, if the spin-off fails to qualify as tax-free under Section 355 of the Code, NACCO stockholders could be taxed on the full value of the shares of Hamilton Beach Holding’s common stock that they receive, which generally would be treated first as a taxable dividend to the extent of NACCO’s earnings and profits, then as a non-taxable return of capital to the extent of each stockholder’s tax basis in shares of NACCO common stock, and thereafter as a capital gain with respect to any remaining value. The protective Section 336(e) election does not impact this treatment of NACCO stockholders.

Even if the spin-off qualifies as tax-free under Section 355 of the Code, the spin-off would become taxable to NACCO under Section 355(e) of the Code if a 50% or greater interest (by vote or value) in NACCO or Hamilton Beach Holding stock were treated as acquired, directly or indirectly, by certain persons as part of a plan or series of related transactions that included the spin-off. For this purpose, it is unclear whether any increase in voting power by holders of our Class B Common Stock by reason of the conversion by other holders of Hamilton Beach Holding Class B Common Stock to Hamilton Beach Holding Class A Common Stock should be considered an acquisition of voting power as part of a plan or series of related transactions. However, even if so treated, any such voting shift would not alone cause an acquisition of 50% or more of the voting power of our Common Stock and, as a result, would not, by itself, cause the spin-off to be taxable to NACCO under Section 355(e) of the Code. However, if the IRS were to determine that other acquisitions of NACCO shares before or after the spin-off, or Hamilton Beach Holding shares after the spin-off, were part of a plan or series of related transactions that included the spin-off for purposes of Section 355(e) of the Code, such determination could result in the recognition of a gain by NACCO under Section 355(e) of the Code. Because of the protective Section 336(e) election, Hamilton Beach Holding and its subsidiaries would be deemed to have sold all of their assets, thereby causing the NACCO group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Hamilton Beach Holding and its subsidiaries in such assets. As described, above, to the extent that NACCO is responsible for the resulting transaction taxes, Hamilton Beach Holding would generally be required under the Tax Allocation Agreement to make certain periodic payments to NACCO.

NACCO has the right to waive, in its sole discretion, the receipt of a tax opinion on or prior to the date of the spin-off that the tax consequences relating to the spin-off are as described above. NACCO does not currently intend to waive this condition to its obligation to complete the spin-off. In the event this condition were to be waived by NACCO and any changes to the tax consequences relating to the spin-off were material, Hamilton Beach Holding would undertake to recirculate this prospectus prior to the commencement of the distribution.

For further information concerning the U.S. federal income tax consequences of the spin-off, see “Material U.S. Federal Income Tax Consequences” beginning on page 45.

 



 

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You are encouraged to consult with your own tax advisor for a full understanding of the tax consequences of the spin-off to you.

Accounting Treatment (page 44)

The spin-off will be accounted for by NACCO as a spin-off of Hamilton Beach Holding. After the spin-off, Hamilton Beach Holding is expected to be accounted for as a discontinued operation by NACCO. If accounted for as a discontinued operation, the measurement date would be the effective date of the spin-off, which is referred to as the spin-off date. After the spin-off, our assets and liabilities will be accounted for at the historical book values carried by NACCO prior to the spin-off. No gain or loss will be recognized as a result of the spin-off.

Ancillary Agreements (page 147)

In connection with the spin-off, we will also enter into a transition services agreement with NACCO, a transfer restriction agreement with NACCO and certain of our stockholders, the Tax Allocation Agreement and a stockholders’ agreement with certain of our stockholders. This stockholders’ agreement is substantially similar to the stockholders’ agreement that was entered into among certain stockholders of NACCO.

Transition Services Agreement

Under the terms of the transition services agreement, NACCO will provide services to us on a transitional basis, as needed, for varying periods after the spin-off date. The services NACCO will provide include:

 

    legal and consulting support relating to employee benefits and compensation matters;

 

    general accounting support, including public company support;

 

    general legal, public company, information technology, insurance and internal audit support (including responding to requests from regulatory and compliance agencies) as needed; and

 

    tax compliance and consulting support (including completion of federal audits and appeals through the 2015 tax year; 2017 tax sharing computations; 2017 state income tax return filings for certain operating subsidiaries of NACCO after the spin-off and miscellaneous provision and tax return oversight).

None of the transition services are expected to exceed one year. We may extend the initial transition period for a period of up to three months for any service upon 30 days written notice to NACCO prior to the initial termination date. We expect to pay NACCO net aggregate fees of approximately $1 million over the initial term of the transition services agreement.

Transfer Restriction Agreement

Hamilton Beach Holding, NACCO, and certain members of the Rankin and Taplin families will enter into a transfer restriction agreement. Absent a ruling from the IRS, an unqualified tax opinion from approved counsel, or approval by Hamilton Beach Holding as the Administrator of the transfer restriction agreement, the agreement prohibits members of NACCO’s extended founding family, for a 2-year period following the spin-off, from (1) acquiring any stock of either NACCO or Hamilton Beach Holding (other than acquisitions of stock pursuant to an equity compensation plan of either NACCO or Hamilton Beach Holding) or (2) transferring directly or indirectly any stock owned by such family members. For the Administrator to approve any proposed transaction, the following requirements must be met:

 

  1.

Any dispositions of stock by members of the extended founding family must be made in a manner that for every share of NACCO stock disposed of (whether by sale, gift, or otherwise), two shares of Hamilton Beach Holding stock also are disposed of by a similar transfer (whether by sale, gift, or otherwise)). However, this requirement does not apply to (1) the conversion of Class B Common Stock into Class A Common Stock of either NACCO or Hamilton Beach Holding or (2) swaps between members of the extended founding family of NACCO Class A Common Stock for NACCO Class B

 



 

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  Common Stock, or of Hamilton Beach Holding Class A Common Stock for Hamilton Beach Holding Class B Common Stock.

 

  2. Including the proposed transaction, members of the extended founding family in the aggregate shall not have transferred or acquired more than 35 percent (by value) of the stock of either NACCO or Hamilton Beach Holding.

 

  3. Including the proposed transaction, members of the extended founding family in the aggregate shall not have transferred or acquired stock representing more than 35 percent of the voting power of NACCO or 5 percent of the voting power of Hamilton Beach Holding. However, certain transfers to direct relatives and certain trusts and controlled entities are not taken into account.

The transfer restriction agreement further provides that the 5-percent voting limitation on transfers of Hamilton Beach Holding voting power will be converted to a 35-percent limitation if NACCO or Hamilton Beach Holding obtains a private letter ruling from the IRS or an unqualified tax opinion substantially to the effect that the increase in voting power by holders of our Class B Common Stock by reason of the conversion by other holders of Hamilton Beach Holding Class B Common Stock to Hamilton Beach Holding Class A Common Stock will not be taken into account for purposes of Section 355(e) of the Code.

Tax Allocation Agreement

Hamilton Beach Holding and NACCO will enter into the Tax Allocation Agreement prior to the spin-off that will generally govern NACCO’s and Hamilton Beach Holding’s respective rights, responsibilities and obligations after the spin-off with respect to taxes for any tax period ending on or before the date of the spin-off, as well as tax periods beginning before and ending after the date of the spin-off. Generally, Hamilton Beach Holding will be liable for all pre-spin-off U.S. federal income taxes, foreign income taxes and certain non-income taxes attributable to Hamilton Beach Holding’s business. In addition, the Tax Allocation Agreement will address the allocation of liability for taxes that are incurred as a result of restructuring activities undertaken to effectuate the spin-off, if any. The Tax Allocation Agreement will also provide that Hamilton Beach Holding is liable for taxes incurred by NACCO that arise as a result of Hamilton Beach Holding’s taking or failing to take, as the case may be, certain actions that result in the spin-off failing to meet the requirements of a tax-free distribution under Section 355 of the Code. The Tax Allocation Agreement will also provide that NACCO is liable for taxes incurred by Hamilton Beach Holding as a result of NACCO’s taking or failing to take certain actions that result in the spin-off failing to meet the requirements of a tax-free distribution under Section 355 of the Code.

Stockholders’ Agreement

Our Class B Common is subject to substantial restrictions on transfer as set forth in our amended and restated certificate of incorporation. In addition, we intend to enter into a stockholders’ agreement with certain of our stockholders who are members of the Rankin and Taplin families, the extended founding families of NACoal, predecessor to NACCO. Immediately following the spin-off, [    ]% of our Class B Common will be subject to the stockholders’ agreement. We anticipate that at least 95% of the founding family members’ Class B Common will be subject to the stockholders’ agreement. See “Security Ownership of Certain Beneficial Owners and Management.” The terms of the stockholders’ agreement require signatories to the agreement, prior to any conversion of our Class B Common into our Class A Common by such signatories, to offer such Class B Common to all of the other signatories on a pro rata basis. A signatory may sell or transfer all shares not purchased under the right of first refusal as long as they are converted into our Class A Common prior to such sale or transfer. Under the stockholders’ agreement, we may, but are not obligated to, buy any of the shares of our Class B Common not purchased by signatories following the triggering of the right of first refusal. A substantially similar stockholders’ agreement is in effect among certain stockholders of NACCO. For a description of transfer restrictions on our Class B Common, see “Description of Capital Stock of Hamilton Beach Holding after the Spin-Off — Common Stock — Restrictions on Transfer of Class B Common; Convertibility of Class B Common into Class A Common.”

 



 

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FINANCIAL SUMMARY

Market Price Data

There is no established trading market for shares of our Class A Common or our Class B Common. At September 1, 2017, there were 100 shares of our common stock outstanding, all of which immediately prior to the spin-off were owned by NACCO.

In connection with the spin-off, NACCO will distribute approximately 6.8 million shares of our Class A Common and approximately 6.8 million shares of our Class B Common to holders of NACCO Class A Common and NACCO Class B Common as of the record date for the spin-off. Our Class A Common has been approved for listing on the NYSE under the symbol “HBB.” Our Class B Common will not be listed on the NYSE or any other stock exchange or otherwise traded and will be subject to substantial restrictions on transfer.

Dividends

We paid dividends to NACCO in 2015 and 2016 in the aggregate amount of $57 million. We paid $3 million in dividends to NACCO from January 1, 2017 to June 30, 2017, and declared an additional $35 million dividend payable to NACCO prior to the spin-off.

Dividend Policy

We currently intend to pay regular quarterly dividends after the spin-off. The declaration of future dividends and the establishment of the per share amount, record dates and payout dates for such future dividends will be at the discretion of our Board and will depend on various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that our Board deems relevant. The HBB and KC credit facilities limit our ability to pay dividends or make distributions in respect of our capital stock in certain circumstances. For a discussion of these restrictions, see the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources of HBB — After the Spin-Off” beginning on page 67 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources of KC — After the Spin-Off” beginning on page 80.

 



 

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SUMMARY HISTORICAL FINANCIAL DATA OF HAMILTON BEACH HOLDING

The following table sets forth our selected historical financial data as of and for each of the periods indicated. We derived the summary historical financial data as of and for each of the two years ended December 31, 2016 from our audited consolidated financial statements. We derived the summary historical financial data as of and for the three and six months ended June 30, 2017 and 2016 from our unaudited condensed consolidated financial statements which, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of the interim period. This information is only a summary and you should read it in conjunction with the historical consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this prospectus.

 

     Three Months Ended
June 30
     Six Months Ended
June 30
    Year Ended
December 31
 
     2017      2016      2017     2016     2016      2015  
     (In thousands)  

Operating Statement Data:

               

Revenues

   $ 152,976      $ 154,918      $ 293,258     $ 298,052     $ 745,357      $ 767,862  

Operating profit (loss)

   $ 2,164      $ 1,684      $ (274   $ (1,205   $ 43,374      $ 35,554  

Net income (loss)

   $ 1,239      $ 964      $ (119   $ (1,184   $ 26,179      $ 19,711  

 

     June 30      December 31  
     2017      2016      2016      2015  
     (In thousands)  

Balance Sheet Data:

           

Total assets

   $ 277,182      $ 263,221      $ 310,833      $ 310,128  

Long-term debt

   $ 32,000      $ 34,156      $ 26,000      $ 50,000  

Stockholder equity

   $ 62,961      $ 69,766      $ 65,126      $ 82,824  

 

     Six Months Ended
June 30
    Year Ended
December 31
 
     2017     2016     2016     2015  
     (In thousands)  

Cash Flow Data:

        

Provided by (used for) operating activities

   $ (16,261   $ 18,834     $ 62,563     $ 26,488  

Used for investing activities

   $ (2,378   $ (2,989   $ (5,925   $ (6,543

Provided by (used for) financing activities

   $ 12,562     $ (28,251   $ (61,837   $ (10,088

Other Data:

        

Cash dividends paid

   $ 3,000     $ 10,000     $ 42,000     $ 15,000  

 



 

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RISK FACTORS

In addition to the other information included in this prospectus, including the matters addressed in “Special Note Regarding Forward-Looking Statements” on page 34, you should carefully consider the matters described below. The risk factors described below include risk factors that will be applicable to our business if the spin-off is consummated, as well as risks related to the spin-off.

Risks Relating to the Spin-Off

The relative voting power of holders of our Class B Common who convert their shares of our Class B Common into shares of our Class A Common will diminish.

Holders of our Class B Common will have ten votes per share of our Class B Common, while holders of our Class A Common will have one vote per share of our Class A Common. Holders of our Class A Common and holders of our Class B Common generally will vote together as a single class on most matters submitted to a vote of our stockholders. Holders of our Class B Common who convert their shares of our Class B Common into shares of our Class A common will reduce their voting power.

The relative voting power of the remaining holders of Class B Common will increase as holders of our Class B Common convert their shares of our Class B Common into shares of our Class A Common.

After the spin-off, holders of our Class A Common and holders of our Class B Common generally will vote together on most matters submitted to a vote of our stockholders. Consequently, as holders of our Class B Common convert their shares of our Class B Common into shares of our Class A Common, the relative voting power of the remaining holders of our Class B Common will increase. Immediately after the spin-off, the holders of our Class B Common will collectively control approximately 90.9% of the voting power of the outstanding shares of our common stock and the holders of our Class A Common will collectively control approximately 9.1% of the voting power of the outstanding shares of our common stock.

If the spin-off by NACCO of our common stock to NACCO’s stockholders does not qualify as a tax-free transaction, the spin-off will not be consummated or if it is, tax could be imposed on NACCO’s stockholders.

NACCO intends to obtain, immediately before the spin-off, an opinion from tax counsel to the effect that, for U.S. federal income tax purposes, the spin-off will qualify as tax-free under Section 355 of the Code, except for cash received in lieu of fractional shares. The opinion will be based on, among other things, current law and will rely on certain facts and assumptions, and certain representations and undertakings, provided by NACCO and us regarding the past and future conduct of our respective businesses and other matters, which, if incorrect, could jeopardize the conclusions reached in this opinion.

NACCO has the right to waive, in its sole discretion, the receipt of a tax opinion on or prior to the date of the spin-off that the tax consequences relating to the spin-off are as described above. NACCO does not currently intend to waive this condition to its obligation to complete the spin-off.

If a satisfactory opinion from tax counsel regarding the tax-free qualification of the spin-off cannot be obtained, the NACCO board would consider not completing the spin-off. In the event this condition were to be waived by NACCO and any changes to the tax consequences relating to the spin-off were material, Hamilton Beach Holding would undertake to recirculate this prospectus prior to the commencement of the distribution.

Notwithstanding an opinion of tax counsel, the Internal Revenue Service could determine on audit that the spin-off should be treated as a taxable transaction if it determines that any of the facts, assumptions, representations or undertakings relied upon in the opinion is not correct or has been violated, or that the spin-off should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the spin-off.

 

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Under the Tax Allocation Agreement, NACCO has agreed to make a protective election under Section 336(e) of the Code with respect to the spin-off. If, notwithstanding the receipt of an opinion of tax counsel, the spin-off fails to qualify as tax-free under Section 355 of the Code, the Section 336(e) election would generally cause a deemed sale of the assets of Hamilton Beach Holding and its subsidiaries, causing the NACCO group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Hamilton Beach Holding and its subsidiaries in such assets. In such case, to the extent that NACCO is responsible for the resulting transaction taxes, Hamilton Beach Holding generally would be required under the Tax Allocation Agreement to make periodic payments to NACCO equal to the tax savings arising from a “step up” in the tax basis of Hamilton Beach Holding’s assets.

In addition, if the spin-off fails to qualify as tax-free under Section 355 of the Code, NACCO stockholders could be taxed on the full value of the shares of Hamilton Beach Holding’s common stock that they receive, which generally would be treated first as a taxable dividend to the extent of NACCO’s earnings and profits, then as a non-taxable return of capital to the extent of each stockholder’s tax basis in shares of NACCO common stock, and thereafter as a capital gain with respect to any remaining value. The protective Section 336(e) election does not impact this treatment of NACCO stockholders.

Even if the spin-off qualifies as tax-free under Section 355 of the Code, the spin-off would become taxable to NACCO under Section 355(e) of the Code if a 50% or greater interest (by vote or value) in NACCO or Hamilton Beach Holding stock were treated as acquired, directly or indirectly, by certain persons as part of a plan or series of related transactions that included the spin-off. For this purpose, it is unclear whether any increase in voting power by holders of our Class B Common Stock by reason of the conversion by other holders of Hamilton Beach Holding Class B Common Stock to Hamilton Beach Holding Class A Common Stock should be considered an acquisition of voting power as part of a plan or series of related transactions. However, even if so treated, any such voting shift would not alone cause an acquisition of 50% or more of the voting power of our Common Stock and, as a result, would not, by itself, cause the spin-off to be taxable to NACCO under Section 355(e) of the Code. However, if the IRS were to determine that other acquisitions of NACCO shares before or after the spin-off, or Hamilton Beach Holding shares after the spin-off, were part of a plan or series of related transactions that included the spin-off for purposes of Section 355(e) of the Code, such determination could result in the recognition of a gain by NACCO under Section 355(e) of the Code. Because of the protective Section 336(e) election, Hamilton Beach Holding and its subsidiaries would be deemed to have sold all of their assets, thereby causing the NACCO group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Hamilton Beach Holding and its subsidiaries in such assets. As described, above, to the extent that NACCO is responsible for the resulting transaction taxes, Hamilton Beach Holding would generally be required under the Tax Allocation Agreement to make certain periodic payments to NACCO.

If the spin-off does not qualify as a tax-free transaction, tax could be imposed on NACCO and, in certain circumstances, we may be required to indemnify NACCO after the spin-off for that tax.

Please see the preceding risk factor for a discussion of the tax consequences to NACCO in the event that the spin-off is not tax-free.

Under the terms of the Tax Allocation Agreement that we intend to enter into in connection with the spin-off, in the event that the spin-off were determined to be taxable solely as the result of actions taken after the spin-off by or in respect of Hamilton Beach Holding, any of its affiliates or its stockholders, Hamilton Beach Holding would be responsible for all taxes imposed on NACCO as a result thereof. Such tax amounts could be significant.

We might not be able to engage in desirable strategic transactions and equity issuances for some period of time following the spin-off because of certain restrictions relating to requirements for tax-free distributions.

Our ability to engage in equity transactions could be limited or restricted after the spin-off in order to preserve, for U.S. federal income tax purposes, the tax-free nature of the spin-off. Even if the spin-off otherwise qualifies for tax-free treatment under the Code, it may result in corporate-level taxable gain to NACCO under the

 

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Code if there is a 50% or greater change in ownership, by vote or value, of shares of our stock or NACCO’s stock occurring as part of a plan or series of related transactions that includes the spin-off. Any acquisitions or issuances of our stock or NACCO’s stock within two years before or two years after the spin-off are generally presumed to be part of such a plan, although we or NACCO may be able to rebut that presumption. It is unclear whether any increase in voting power by holders of our Class B Common Stock by reason of the conversion by other holders of Hamilton Beach Holding Class B Common Stock to Hamilton Beach Holding Class A Common Stock should be considered an acquisition of voting power as part of a plan or series of related transactions. However, even if so treated, any such voting shift would not alone cause an acquisition of 50% or more of the voting power of our Common Stock and, as a result, would not, by itself, cause the spin-off to be taxable to NACCO under Section 355(e) of the Code.

Under the Tax Allocation Agreement that we will enter into with NACCO, we will be prohibited from taking or failing to take any action that prevents the spin-off from being tax-free. Further, during the two-year period following the spin-off, without obtaining the consent of NACCO, a private letter ruling from the Internal Revenue Service or an unqualified opinion of a nationally recognized law firm, we may be prohibited from:

 

    approving or allowing any transaction that results in a change in ownership of 35% or more of the value or 5% or more of the voting power of our common stock;

 

    redeeming equity securities;

 

    selling or otherwise disposing of more than 35% of the value of our assets;

 

    acquiring a business or assets with equity securities to the extent one or more persons would acquire 35% or more of the value or 5% or more of the voting power of our common stock; and

 

    engaging in certain internal transactions.

These restrictions may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that could maximize the value of our business. See “Ancillary Agreements — Tax Allocation Agreement” beginning on page 148.

The combined market values of NACCO common stock and our common stock that NACCO stockholders will hold after the spin-off may be less than the market value of NACCO common stock prior to the spin-off.

After the spin-off, holders of NACCO common stock prior to the spin-off will own a combination of NACCO common stock and our common stock. Any number of matters, including the risks described in this prospectus, may adversely impact the value of NACCO common stock and our common stock after the spin-off. Some of these matters may not have been identified by NACCO prior to the consummation of the spin-off and, in any event, may not be within NACCO’s or our control. In the event of any adverse circumstances, facts, changes or effects, the combined market values of NACCO common stock and our common stock held by NACCO stockholders after the spin-off may be less than the market value of NACCO common stock before the spin-off.

Risks Relating to Our Business after the Spin-Off

Hamilton Beach Brands, Inc.

HBB’s business is sensitive to the strength of the North American consumer markets and weakness in these markets could adversely affect its business.

The strength of the economy in the United States, and to a lesser degree in Canada and Mexico, has a significant impact on HBB’s performance. Weakness in consumer confidence and poor financial performance by mass merchandisers, e-commerce retailers, warehouse clubs, department stores or any of HBB’s other customers could result in reduced revenues and profitability. A general slowdown in the consumer sector could result in additional pricing and marketing support pressures on HBB.

 

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The market for HBB’s products is highly seasonal and dependent on consumer spending, which could result in significant variations in our revenues and profitability.

Sales of HBB’s products are related to consumer spending. A downturn in the general economy or a shift in consumer spending away from small electric household and specialty housewares appliances could adversely affect its business. In addition, the market for small electric household and specialty housewares appliances is highly seasonal in nature. HBB generally recognizes a substantial portion of its sales in the last half of the year as sales of small electric appliances and specialty housewares appliances increase significantly with the fall holiday-selling season. Accordingly, quarter-to-quarter comparisons of past operating results of HBB are meaningful only when comparing equivalent time periods, if at all. Any economic downturn, decrease in consumer spending or shift in consumer spending away from small electric household and specialty housewares appliances may significantly reduce revenues and profitability.

HBB is dependent on key customers and the loss of, or significant decline in business from, one or more of its key customers could materially reduce its revenues and profitability and its ability to sustain or grow its business.

HBB relies on several key customers. Although HBB has long-established relationships with many customers, it does not have any long-term supply contracts with these customers, and purchases are generally made using individual purchase orders. A loss of or significant reduction in sales to any key customer could result in significant decreases in HBB’s revenues and profitability and an inability to sustain or grow its business.

HBB must receive a continuous flow of new orders from its large, high-volume retail customers; however, it may be unable to continually meet the needs of those customers. In addition, failure to obtain anticipated orders or delays or cancellations of orders or significant pressure to reduce prices from key customers could impair its ability to sustain or grow its business.

As a result of dependence on its key customers, HBB could experience a material adverse effect on its revenues and profitability if any of the following were to occur:

 

    the insolvency or bankruptcy of any key customer;

 

    a declining market in which customers materially reduce orders or demand lower prices; or

 

    a strike or work stoppage at a key customer facility, which could affect both its suppliers and customers.

If HBB were to lose, or experience a significant decline in business from, any major customer or if any major customers were to go bankrupt, HBB might be unable to find alternate distribution outlets.

HBB depends on third-party suppliers for the manufacturing of all of its products, which subjects it to risks, including unanticipated increases in expenses, decreases in revenues and disruptions in the supply chain.

HBB is dependent on third-party suppliers for the manufacturing of all of its products. HBB’s ability to select reliable suppliers that provide timely deliveries of quality products will impact its success in meeting customer demand. Any inability of HBB’s suppliers to timely deliver products that meet HBB’s specifications or any unanticipated changes in suppliers could be disruptive and costly to us. Any significant failure by HBB to obtain quality products on a timely basis at an affordable cost or any significant delays or interruptions of supply would have a material adverse effect on our revenues and profitability.

Because HBB’s suppliers are primarily based in China, international operations subject HBB to additional risks including, among others:

 

    currency fluctuations;

 

    labor unrest;

 

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    potential political, economic and social instability;

 

    restrictions on transfers of funds;

 

    import and export duties and quotas;

 

    changes in domestic and international customs and tariffs, including embargoes and customs restrictions;

 

    uncertainties involving the costs to transport products;

 

    long distance shipping routes dependent upon a small group of shipping and rail carriers and import facilities;

 

    unexpected changes in regulatory environments;

 

    regulatory issues involved in dealing with foreign suppliers and in exporting and importing products;

 

    protection of intellectual property;

 

    difficulty in complying with a variety of foreign laws;

 

    difficulty in obtaining distribution and support; and

 

    potentially adverse tax consequences, including significant tax law changes that are currently being evaluated by the U.S. government, including the use of a border adjustment tax.

The foregoing factors could have a material adverse effect on HBB’s ability to maintain or increase the supply of products, which may result in material increases in expenses and decreases in revenues and profitability.

HBB is subject to foreign currency exchange risk.

A portion of HBB’s revenue is derived from international operations, and HBB anticipates that a portion of sales will continue to come from outside the U.S. in the future. HBB’s international revenues may be adversely affected by fluctuations in foreign currency exchange rates. Any hedging activities HBB engages in may only offset a portion of the adverse financial impact resulting from unfavorable changes in foreign currency exchange rates. HBB cannot predict with any certainty changes in foreign currency exchange rates or the degree to which HBB can mitigate these risks.

Increases in costs of products may materially reduce our profitability.

Factors that are largely beyond our control, such as movements in commodity prices for the raw materials needed by suppliers of HBB’s products, may affect the cost of products, and HBB may not be able to pass those costs on to its customers. As an example, HBB’s products require a substantial amount of plastic. Because the primary resource used in plastic is petroleum, the cost and availability of plastic varies to a great extent with the price of petroleum. When the prices of petroleum, as well as steel, aluminum and copper, increase significantly, they may materially reduce our profitability.

The increasing concentration of HBB’s branded small electric household and specialty housewares appliance sales among a few retailers and the trend toward private label brands could materially reduce revenues and profitability.

With the growing trend towards the concentration of HBB’s branded small electric household and specialty housewares appliance sales among a few retailers, HBB is increasingly dependent upon fewer customers whose bargaining strength is growing as a result of this concentration. HBB sells a substantial quantity of products to

 

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mass merchandisers, e-commerce retailers, national department stores, variety store chains, drug store chains, specialty home retailers and other retail outlets. These retailers generally have a large selection of small electric household and specialty housewares appliance suppliers to choose from. As a result, HBB competes for retail shelf space with its competitors. In addition, certain of HBB’s larger customers use their own private label brands on household appliances that compete directly with some of HBB’s products. As the retailers in the small electric household appliance industry become more concentrated, competition for sales to these retailers may increase, which could materially reduce our revenues and profitability.

The small electric household, specialty housewares appliances and commercial appliance industry is consolidating, which could reduce HBB’s ability to successfully secure product placements at key customers and limit our ability to sustain a cost competitive position in the industry.

Over the past several years, the small electric household, specialty housewares appliances and commercial appliance industry has undergone consolidation, and further consolidation is likely. As a result of this consolidation, the small electric household, specialty housewares appliances and commercial appliance industry primarily consists of a limited number of large distributors. HBB’s ability to gain or maintain share of sales in the small electric household, specialty housewares appliances and commercial appliance industry or maintain or enhance HBB’s relationships with key customers may be limited as a result of actions by competitors, including as a result of increased consolidation in the small electric household, specialty housewares appliances and commercial appliance industry.

If HBB is unable to continue to enhance existing products, as well as develop and market new products, that respond to customer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products, which could materially reduce revenues and profitability, which have historically benefited from sales of new products.

One of HBB’s strategic initiatives is to enhance placements through consumer-driven innovative products to generate revenue growth. HBB may not be able to compete as effectively with competitors, and ultimately satisfy the needs and preferences of customers, unless HBB can continue to enhance existing products and develop new innovative products for the markets in which HBB competes. Product development requires significant financial, technological, and other resources. Product improvements and new product introductions also require significant research, planning, design, development, engineering, and testing at the technological and product process levels and HBB may not be able to timely develop and introduce product improvements or new products. Competitors’ new products may beat HBB’s products to market, be higher quality or more reliable, be more effective with more features, obtain better market acceptance, or render HBB’s products obsolete. Any new products that HBB develops may not receive market acceptance or otherwise generate any meaningful revenues or profits for us relative to our expectations based on, among other things, commitments to fund advertising, marketing, promotional programs and development.

HBB’s inability to compete effectively with competitors in its industry, including large established companies with greater resources, could result in lost market share and decreased revenues.

The small electric household, specialty housewares appliances and commercial appliance industry does not have substantial entry barriers. As a result, HBB competes with many small manufacturers and distributors of housewares products. Additional competitors may also enter this market and cause competition to intensify. For example, some of HBB’s customers have expressed interest in sourcing, or expanding the extent of sourcing, small electric household and commercial appliances directly from manufacturers in Asia. We believe competition is based upon several factors, including product design and innovation, quality, price, product features, merchandising, promotion and warranty. If HBB fails to compete effectively with these manufacturers and distributors, it could lose market share and experience a decrease in revenues, which would adversely affect our results of operations.

 

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HBB also competes with established companies, a number of which have substantially greater facilities, personnel, financial and other resources. In addition, HBB competes with its own retail customers, who use their own private label brands, and importers and foreign manufacturers of unbranded products. Some competitors may be willing to reduce prices and accept lower profit margins to compete. As a result of this competition, HBB could lose market share and revenues.

Government regulations could impose costly requirements on HBB.

The SEC adopted conflict mineral rules under Section 1502 of the Dodd-Frank Act on August 22, 2012. The rules require disclosure of the use of certain minerals, commonly known as “conflict minerals,” which are mined from the DRC and adjoining countries. HBB incurs additional costs and expenses, which may be significant, to comply with these rules, including (i) due diligence to verify the sources of such conflict minerals; and (ii) any changes that HBB may make to its products, processes, or sources of supply as a result of such diligence and verification activities. Since HBB’s supply chain is complex, ultimately it may not be able to designate all products as “DRC conflict free” which may adversely affect its reputation with certain customers. In such event, HBB may also face difficulties in satisfying customers who require products purchased from HBB to be “DRC conflict free”. If HBB is not able to meet such requirements, customers may choose not to purchase HBB products, which could adversely affect sales and the value of portions of HBB’s inventory. Further, there may be only a limited number of suppliers offering products containing only DRC conflict free parts, components and subassemblies and, as a result, HBB cannot be sure that it will be able to satisfy its purchase requirements from such suppliers in sufficient quantities or at competitive prices. Any one or a combination of these various factors could harm HBB’s business, and materially and adversely affect HBB’s results of operations.

HBB may be subject to risks relating to increasing cash requirements of certain employee benefits plans, which may affect its financial position.

Because HBB’s defined benefit pension plans are frozen and no longer provide for the accrual of future benefits, the expenses recorded for, and cash contributions required to be made to its defined benefit pension plans are dependent on, changes in market interest rates and the value of plan assets, which are dependent on actual investment returns. Significant changes in market interest rates, decreases in the value of plan assets or investment losses on plan assets may require HBB to increase the cash contributed to its defined benefit pension plans which may affect its financial position.

HBB may become subject to claims under foreign laws and regulations, which may be expensive, time-consuming and distracting.

Because HBB has employees, property and business operations outside of the United States, HBB is subject to the laws and the court systems of many jurisdictions. HBB may become subject to claims outside the United States for violations or alleged violations of laws with respect to the current or future foreign operations of HBB. In addition, these laws may be changed or new laws may be enacted in the future. International litigation is often expensive, time-consuming and distracting. As a result, any of these risks could significantly reduce HBB’s profitability and its ability to operate its businesses effectively.

To the extent that HBB relies on newly acquired businesses or new product lines to expand its business, these acquisitions or new product lines may not contribute positively to HBB’s earnings because anticipated sales volumes and synergies may not materialize, cost savings may be less than expected or acquired businesses may carry unexpected liabilities.

HBB may acquire partial or full ownership in businesses or may acquire rights to market and distribute particular products or lines of products. The acquisition of a business or of the rights to market specific products or use specific product names may involve a financial commitment by HBB, either in the form of cash or stock consideration. HBB may not be able to acquire businesses and develop products that will contribute positively to

 

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HBB’s earnings. Anticipated synergies may not materialize, cost savings may be less than expected, sales of products may not meet expectations or acquired businesses may carry unexpected liabilities.

HBB’s business involves the potential for product recalls, which could affect HBB’s sales and profitability.

As a marketer and distributor of consumer products, HBB is subject to the Consumer Products Safety Act and the Federal Hazardous Substances Act, which empower the U.S. Consumer Products Safety Commission, which is referred to as the CPSC, to seek to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, the CPSC could require HBB to repair, replace or refund the purchase price of one or more of our products, or HBB may voluntarily do so. Any repurchases or recalls of our products could be costly to us and could damage our reputation or the value of our brands. If HBB is required to remove, or HBB voluntarily removes our products from the market, our reputation or brands could be tarnished, and HBB might have large quantities of finished products that could not be sold. Furthermore, failure to timely notify the CPSC of a potential safety hazard can result in fines being assessed against HBB. Additionally, laws regulating certain consumer products exist in some states, as well as in other countries in which HBB sells our products, and more restrictive laws and regulations may be adopted in the future. HBB’s results of operations are also susceptible to adverse publicity regarding the quality and safety of our products. In particular, product recalls may result in a decline in sales for a particular product.

HBB’s business subjects it to product liability claims, which could affect the reputation, sales and profitability of HBB and, potentially, KC.

HBB faces exposure to product liability claims if one of our products is alleged to have caused property damage, bodily injury or other adverse effects. HBB bears all costs associated with product liability claims up to a defined self-insured loss limit per claim and maintains product liability insurance for claims above this self-insured level. If a product liability claim is brought against HBB, our sales and profitability could be affected adversely as a result of negative publicity related to the claim, costs associated with any replacement of the product or expenses related to defending these claims. This could be true even if the claims themselves are ultimately settled for immaterial amounts. In addition, HBB may not be able to maintain product liability insurance on terms acceptable to HBB in the future. If the number of product liability claims HBB experiences exceeds historical amounts, if HBB is unable to maintain product liability insurance or if HBB’s product liability claims exceed the amount of our insurance coverage, HBB’s results of operations and financial condition could be affected adversely. The sales and profitability of KC, as an affiliate of HBB and a seller of certain HBB products, could also be affected adversely in the event of negative HBB publicity.

HBB’s actual liabilities relating to environmental matters may exceed our expectations.

HBB is subject to laws and regulations relating to the protection of the environment, including those governing the management and disposal of hazardous substances. If HBB fails to comply with these laws, then we could incur substantial costs, including cleanup costs, fines and civil and criminal sanctions. In addition, future changes to environmental laws could require HBB to incur significant additional expense.

HBB is investigating or remediating historical contamination at some current and former sites related to HBB’s prior manufacturing operations or the operations of businesses HBB acquired. In addition, the discovery of additional contamination at these or other sites could result in significant cleanup costs that could have a material adverse effect on HBB’s financial conditions and results of operations.

HBB could, under some circumstances, also be held financially liable for or suffer other adverse effects due to environmental violations or contamination caused by prior owners of businesses HBB has acquired. In certain circumstances, HBB’s financial liability for cleanup costs takes into account agreements with an unrelated third party. HBB’s liability for these costs could increase if the unrelated third party does not, or cannot, perform its obligations under those agreements. In addition, under some of the agreements through which HBB has sold real

 

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estate, HBB has retained responsibility for certain contingent environmental liabilities arising from pre-closing operations. These liabilities may not arise, if at all, until years after HBB sold these operations and could require us to incur significant additional expenses, which could materially adversely affect HBB’s results of operations and financial condition.

The Kitchen Collection, LLC

As consumer shopping habits change, foot traffic to brick and mortar stores could continue to decline and result in a loss of market share, revenues and profitability, and store closures at a more rapid pace than in the past.

The continuing and accelerating shift in consumer shopping patterns from traditional brick and mortar stores to e-commerce has resulted in declining mall traffic which has impacted most retailers. The majority of our stores are located in outlet and traditional malls and our success depends in part on the overall ability of these malls to successfully generate and maintain customer foot traffic. We cannot control the success of individual malls, or store closures by other retailers, which may lead to mall vacancies and reduced customer foot traffic. Reduced customer foot traffic could result in reduced revenues and profitability.

The market for KC’s products is highly seasonal and dependent on consumer spending, which could result in significant variations in our revenues and profitability.

Sales of products sold at KC stores are subject to a number of factors related to consumer spending, including general economic conditions affecting disposable consumer income such as unemployment rates, business conditions, interest rates, levels of consumer confidence, energy prices, mortgage rates, the level of consumer debt and taxation. In addition, KC generally recognizes a substantial portion of its revenues and operating profit in the last half of the year as sales to consumers increase significantly with the fall holiday-selling season. Accordingly, any economic downturn, decrease in consumer spending or a shift in consumer spending away from KC’s products could significantly reduce, or cause significant variations in, KC’s revenues and profitability.

KC faces an extremely competitive specialty retail market, and such competition could result in a reduction of KC’s prices and loss of market share.

The retail market is highly competitive. KC competes against a diverse group of retailers, including specialty stores, department stores, discount stores and internet and catalog retailers. Widespread sourcing of Chinese products allows many retailers to offer value-priced kitchen products. Many of KC’s competitors are larger and have significantly greater financial, marketing and other resources. This competition could result in the reduction of KC product prices and a loss of market share, revenues and profitability.

KC may not be able to forecast customer preferences accurately in its merchandise selections.

KC’s success depends in part on its ability to anticipate the tastes of its customers and to provide merchandise that appeals to their preferences. KC’s strategy requires merchandising staff to introduce products that meet current customer preferences and that are affordable and distinctive in quality and design. KC’s failure to anticipate, identify or react appropriately to changes in consumer trends could cause excess inventories and higher mark-downs or a shortage of products and could harm KC’s business and operating results.

KC depends on third-party suppliers for all of its products, which subjects KC to risks, including unanticipated increases in expenses, decreases in revenues and disruptions in the supply chain.

KC is dependent on third-party suppliers for all of its products. KC’s inability to select reliable suppliers who provide timely deliveries of quality products could reduce its success in meeting customer demand. Any

 

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inability of KC’s suppliers to timely deliver products or any unanticipated changes in suppliers could be disruptive and costly to KC. The loss of a supplier could, in the short term, adversely affect KC’s business until alternative supply arrangements are secured. In addition, KC may not be able to acquire desired merchandise in sufficient quantities on acceptable terms in the future. KC’s business could also be adversely affected by delays in product shipments due to freight difficulties, strikes or other difficulties at its principal transport providers. Any significant failure by KC to obtain products on a timely basis at an affordable cost or any significant delays or interruptions of supply could have a material adverse effect on KC’s profitability.

KC may be forced to close a significant number of stores, which could adversely impact its profitability.

Although we have slowed the opening of new Kitchen Collection ® stores and have continued to close underperforming stores, the continuing and accelerating shift in consumer shopping patterns from traditional brick and mortar stores to e-commerce has resulted in declining outlet and traditional mall traffic, which has impacted most retailers. In the past, we have closed stores that did not generate acceptable profitability, and we may close additional stores in the future at a more rapid pace than in the past.

In addition, continued consolidation in the commercial retail real estate market could affect our ability to successfully negotiate favorable rental terms for our stores in the future. Should significant consolidation continue, a large proportion of KC’s stores could be concentrated with one or a few entities that could then be in a position to dictate unfavorable terms to KC due to their significant negotiating leverage. If KC is unable to negotiate favorable lease terms with these entities or if KC decides to close stores in the future and is unable to negotiate favorable terms with the landlords regarding the remaining lease obligations, KC could be liable for significant lease termination costs, which could have a material adverse effect on KC’s financial results.

Hamilton Beach Holding

Hamilton Beach Holding has no history operating as an independent public company on which you can evaluate Hamilton Beach Holding’s business strategy.

Hamilton Beach Holding has no operating history as an independent public company. Accordingly, Hamilton Beach Holding’s public company business strategy may not be successful on a stand-alone basis.

Hamilton Beach Holding is dependent on key personnel and the loss of these key personnel could significantly reduce its profitability.

Hamilton Beach Holding is highly dependent on the skills, experience and services of its and its subsidiaries’ key personnel and the loss of key personnel could have a material adverse effect on its business, operating results and financial condition. Employment and retention of qualified personnel is important to the successful conduct of Hamilton Beach Holding’s business. Therefore, Hamilton Beach Holding’s success also depends upon its ability to recruit, hire, train and retain current and additional skilled and experienced management personnel. Hamilton Beach Holding’s inability to hire and retain personnel with the requisite skills could impair its ability to manage and operate its business effectively and could significantly reduce its profitability.

Hamilton Beach Holding’s financing arrangements will subject Hamilton Beach Holding to various restrictions that could limit operating flexibility.

HBB’s and KC’s respective credit facilities contain covenants and other restrictions that, among other things, require HBB and KC to satisfy certain financial tests, maintain certain financial ratios and restrict HBB’s and KC’s ability to incur additional indebtedness. The restrictions and covenants in HBB’s and KC’s respective credit facilities, and other future financing arrangements may limit HBB’s and KC’s ability to respond to market conditions, provide for capital investment needs or take advantage of business opportunities by limiting the amount of additional borrowings HBB and KC may incur.

 

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The terms we will receive in our agreements with NACCO could be less beneficial than the terms we may have otherwise received from unaffiliated third parties.

The agreements we will enter into with NACCO in connection with the spin-off, including a separation agreement, a transition services agreement, a tax allocation agreement, a transfer restriction agreement and a stockholders’ agreement, were prepared in the context of the spin-off while Hamilton Beach Holding was still a wholly owned subsidiary of NACCO. Accordingly, during the period when the terms of those agreements were prepared, Hamilton Beach Holding did not have a board of directors or a management team that was independent of NACCO. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated parties.

Hamilton Beach Holding’s business could suffer if HBB’s or KC’s information technology systems are disrupted, cease to operate effectively or become subject to a security breach.

Hamilton Beach Holding and its subsidiaries rely heavily on information technology systems to operate websites; record and process transactions; respond to customer inquiries; manage inventory; purchase, sell and ship merchandise on a timely basis; and maintain cost-efficient operations. Given the significant number of transactions that are completed annually, it is vital to maintain constant operation of computer hardware and software systems and maintain cyber security. Despite our cyber security efforts, our information technology systems may be vulnerable from time to time to damage or interruption from computer viruses, power outages, third-party intrusions and other technical malfunctions. If our systems are damaged, or fail to function properly, we may have to make monetary investments to repair or replace the systems and could endure delays in operations.

In addition, we regularly evaluate information technology systems and requirements and from time to time implement modifications and/or upgrades to our information technology systems. Modifications include replacing existing systems with successor systems, making changes to existing systems and acquiring new systems with new functionality. There are inherent risks associated with replacing and modifying these systems, including inaccurate system information, system disruptions and user acceptance and understanding. We believe we are taking appropriate action to mitigate the risks but there can be no assurance that our actions will be successful or sufficient.

Any material disruption or slowdown of our systems, including a disruption or slowdown caused by a security breach or our failure to successfully upgrade its systems, could cause information, including data related to customer orders, to be lost or delayed. Such a loss or delay could reduce demand and cause our sales and/or profitability to decline.

Through sales and marketing activities and business operations, we collect and store confidential information and certain personal information from its customers, vendors and employees. For example, KC handles, collects and stores personal information in connection with customers’ purchasing products or services, or otherwise communicating or interacting with KC. KC also accepts payments using a variety of methods, including debit and credit cards, gift cards, electronic transfer of funds and others. Although KC has taken steps designed to safeguard such information, there can be no assurance that such information will be protected against unauthorized access, use or disclosure. Unauthorized parties may attempt to penetrate our and our vendors’ network security and, if successful, misappropriate such information. Additionally, methods to obtain unauthorized access to confidential information change frequently and may be difficult to detect, which can impact our ability to respond appropriately. We could be subject to liability for failure to comply with privacy and information security laws, for failing to protect personal information or for failing to respond appropriately. Loss, unauthorized access to, or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.

 

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The transition services agreement Hamilton Beach Holding will enter into with NACCO contains early termination provisions that, if exercised by NACCO, could prevent Hamilton Beach Holding from operating Hamilton Beach Holding’s business in a cost-efficient manner and could disrupt Hamilton Beach Holding’s operations.

Hamilton Beach Holding will enter into a transition services agreement with NACCO. Under the terms of the transition services agreement, we will obtain certain services from NACCO on a transition basis for varying periods after the spin-off date, none of which is expected to exceed one year, with the option to extend the transition periods for one or more services. The transition services agreement is subject to early termination provisions. For instance, either Hamilton Beach Holding or NACCO may terminate the agreement if:

 

    the other party has violated any material provision of the agreement and such violation has not been remedied within 30 days after written notice thereof; or

 

    the other party has filed, or has had filed against it, a petition seeking relief under any bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditor’s rights.

In addition, both NACCO and Hamilton Beach Holding may terminate any transition service that is being provided at any time by giving such party 30 days’ prior written notice of its intention to do so. NACCO and Hamilton Beach Holding may also terminate the agreement by mutual written agreement. Early termination of this agreement by NACCO could increase Hamilton Beach Holding’s transition-related costs and could disrupt our new public company operations.

Hamilton Beach Holding may experience increased costs or decreased operational efficiencies as a result of its needing to replace corporate functions previously provided by NACCO.

NACCO has historically assisted with certain Hamilton Beach Holding operations, including accounting, finance, tax administration, internal audit and strategic development. After the spin-off and pursuant to the transition services agreement, NACCO will provide support to Hamilton Beach Holding with respect to some of these functions, including:

 

    general accounting support;

 

    support in responding to requests from regulatory and compliance agencies;

 

    tax compliance and consulting support;

 

    internal audit services and internal audit consulting and advisory services;

 

    general legal support;

 

    employee benefit and human resources legal and consulting support;

 

    compensation support; and

 

    investor relations support,

for varying periods after the spin-off date, none of which is expected to exceed one year, with the option to extend the transition periods for one or more services. Hamilton Beach Holding will need to replicate certain personnel and services to which Hamilton Beach Holding will no longer have access after our spin-off from NACCO. Hamilton Beach Holding may incur additional costs to implement and support these functions.

In addition, there may be an adverse operational impact on Hamilton Beach Holding’s businesses as a result of the significant Hamilton Beach Holding management and employee time that will be dedicated to building these capabilities during the first few years after the spin-off. If Hamilton Beach Holding begins to operate these functions independently, without implementing adequate business functions of our own, Hamilton Beach Holding may not be able to operate effectively and its profitability may decline.

 

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Hamilton Beach Holding’s future financial performance may be worse than the performance reflected in Hamilton Beach Holding’s historical financial information included in this prospectus.

The historical financial information included in this prospectus may not reflect what Hamilton Beach Holding’s results of operations, financial position and cash flows would have been had Hamilton Beach Holding been an independent public company during the periods presented or be indicative of what Hamilton Beach Holding’s results of operations, financial position and cash flows may be in the future when Hamilton Beach Holding is an independent public company. This is primarily because Hamilton Beach Holding’s historical financial information reflects allocations for services historically provided by NACCO, and Hamilton Beach Holding expects that the costs incurred for these services as a smaller independent public company may be higher than the share of total NACCO expenses allocated to us historically.

Accordingly, Hamilton Beach Holding’s future financial performance may be worse than the performance implied by the historical financial information presented in this prospectus.

For additional information about the past financial performance of Hamilton Beach Holding’s business and the basis of the presentation of Hamilton Beach Holding’s historical financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Audited Consolidated Financial Statements,” “Unaudited Condensed Consolidated Financial Statements” and the accompanying notes included elsewhere in this prospectus.

Risks Relating to Our Common Stock and the Securities Market

There is no existing market for our common stock and we cannot be certain that an active trading market will develop or be sustained after the spin-off, and following the spin-off our stock price may fluctuate significantly.

There is no current public trading market for our common stock. We cannot predict the prices at which our Class A Common may trade after the spin-off. These trading prices will be determined by the marketplace and may be influenced by many factors, including the depth and liquidity in the market for these shares, investor perceptions of us and the industry in which we participate, our dividend policy and general economic and market conditions. The trading prices for these shares may fluctuate significantly, depending on many factors, some of which may be beyond our control, including:

 

    our business profile and market capitalization may not fit the investment objectives of some NACCO stockholders and, as a result, these NACCO stockholders may sell our shares after the spin-off;

 

    actual or anticipated fluctuations in our operating results due to factors related to our business;

 

    success or failure of our business strategy;

 

    investor perception of our company or other comparable companies;

 

    the operating and stock price performance of other comparable companies;

 

    overall market fluctuations;

 

    changes in laws and regulations affecting our business;

 

    our quarterly or annual earnings, or those of other companies in our industry;

 

    changes in earnings estimates by securities analysts;

 

    the ability of securities analysts to identify the significant factors affecting our operations or the failure of securities analysts to cover our common stock after the spin-off;

 

    announcements by us or our competitors of significant acquisitions or dispositions;

 

    our ability to obtain third-party financing as needed;

 

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    results from any material litigation or government investigations;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    natural or other disasters or acts of terrorism that investors believe may affect us; and

 

    general economic conditions and other external factors.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.

Substantial sales of common stock may occur in connection with the spin-off, which could cause our stock price to decline.

The shares of our Class A Common that NACCO will distribute to our stockholders generally may be sold immediately. If a significant number of shares of our Class A Common are sold following the spin-off, the market price of the Class A Common may be adversely affected.

The market price of our Class A Common may be adversely affected if a significant number of shares of our Class B Common are converted into Class A Common and then sold.

Holders of our Class B Common may convert at any time and without cost Class B Common into Class A Common on a share-for-share basis. If a significant number of shares of our Class B Common are converted into Class A Common and then such shares of Class A Common are sold following the spin-off, the market price of our Class A Common may be adversely affected.

Your percentage ownership in Hamilton Beach Holding may be diluted in the future.

Your percentage ownership in Hamilton Beach Holding may be diluted in the future because of additional equity awards that we may grant to our directors, officers and employees in the future. We intend to establish an equity incentive plan that will provide for the grant of common stock-based equity awards to our directors, officers and other employees. In addition, we may issue equity as all or part of the consideration paid for acquisitions and strategic investments we may make in the future which may dilute your interests. For additional information regarding the risks relating to the relative voting power of the holders of our Class A Common and Class B Common, see “— The relative voting power of the remaining holders of Class B Common will increase as holders of our Class B Common convert their shares of our Class B Common into shares of our Class A Common” beginning on page 18.

The amount and frequency of dividend payments made on Hamilton Beach Holding’s common stock could change.

Hamilton Beach Holding’s Board has the power to determine the amount and frequency of the payment of dividends. Decisions regarding whether or not to pay dividends and the amount of any dividends are based on earnings, capital, and future expense requirements, financial conditions, contractual limitations and other factors our Board may consider.

Certain members of the extended founding family of NACCO will own a substantial amount of Hamilton Beach Holding’s Class A and Class B common stock, and if they were to act in concert, could control the outcome of director elections and other stockholder votes on significant actions.

Hamilton Beach Holding will have two classes of common stock: Class A Common and Class B Common. Holders of Class A Common will be entitled to cast one vote per share and, as of the expected date of the spin-

 

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off, will account for approximately 9.1% percent of the voting power of Hamilton Beach Holding. Holders of Class B Common will be entitled to cast ten votes per share and, as of the expected date of the spin-off, will account for the remaining voting power of Hamilton Beach Holding. As of the expected date of the spin-off, certain members of NACCO’s extended founding family are expected to hold approximately 49.2% percent of Hamilton Beach Holding’s Class A Common and 49.2% percent of Hamilton Beach Holding’s Class B Common due to the anticipated distribution by NACCO of one share Hamilton Beach Holding Class A Common and one share of Hamilton Beach Holding Class B Common for each share of NACCO Class A Common and Class B Common held by NACCO common stockholders as of the record date. On the basis of this common stock ownership, certain members of NACCO’s extended founding family could exercise 49.2% percent of Hamilton Beach Holding’s total voting power immediately following the spin-off. Although there is no voting agreement among such family members, in writing or otherwise, if they were to act in concert, they would exert significant control over the outcome of director elections and other stockholder votes on significant actions, such as certain amendments to Hamilton Beach Holding’s amended and restated certificate of incorporation and sales of Hamilton Beach Holding or substantially all of its assets. Because such family members could prevent other stockholders from exercising significant influence over significant corporate actions, Hamilton Beach Holding may be a less attractive takeover target, which could adversely affect the market price of its common stock. In addition, we anticipate that certain institutional stockholders who receive Class B Common in the spin-off will promptly convert such shares into Class A Common, which will have the effect of concentrating over 50% of Hamilton Beach Holding’s voting power among members of the extended founding family, which would allow them, if they were to act in concert, to control the outcome of director elections and other stockholder votes on significant actions.

Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt that stockholders may consider favorable.

Our certificate of incorporation and bylaws provisions, as amended and restated in connection with us becoming a public company, may have the effect of delaying, deferring or discouraging a prospective acquiror from making a tender offer for our shares or otherwise attempting to obtain control of us. These provisions, among other things, establish that our board of directors fixes the number of members of the board, and establish advance notice requirements for nomination of candidates for election to the board or for proposing matters that can be acted on by stockholders at stockholder meetings. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares. Moreover, these provisions could discourage accumulations of large blocks of our common stock, thus depriving stockholders of any advantages that large accumulations of stock might provide. See “Description of Capital Stock of Hamilton Beach Holding after the Spin-off — Provisions That May Have an Anti-Takeover Effect” below.

As a Delaware corporation, we will also be subject to provisions of Delaware law, including Section 203 of the General Corporation Law of the State of Delaware. Section 203 prevents some stockholders holding more than 15% of our voting stock from engaging in certain business combinations unless the business combination or the transaction that resulted in the stockholder becoming an interested stockholder was approved in advance by our board of directors, results in the stockholder holding more than 85% of our voting stock, subject to certain restrictions, or is approved at an annual or special meeting of stockholders by the holders of at least 66 2/3% of our voting stock not held by the stockholder engaging in the transaction.

Any provision of our amended and restated certificate of incorporation or our amended and restated bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

 

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We are an “emerging growth company” and as a result of the reduced disclosure requirements applicable to emerging growth companies, our common stock may be less attractive to investors and the reduced disclosures may make it more difficult to compare our performance with other public companies .

We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, which include, among other things:

 

    exemption from the auditor attestation requirements under Section 404 of the Sarbanes-Oxley Act of 2002;

 

    reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;

 

    exemption from the requirements of holding non-binding stockholder votes on executive compensation arrangements; and

 

    exemption from any rules of the Public Accounting Oversight Board (PCAOB) requiring mandatory audit firm rotation and auditor discussion and analysis and, unless the SEC otherwise determines, any future audit rules that may be adopted by the Public Company Accounting Oversight Board.

We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the consummation of the spin-off, or until the earliest of (i) the last day of the fiscal year in which we have annual gross revenue of $1,070,000,000 or more, (ii) the date on which we have, during the previous three year period, issued more than $1 billion in non-convertible debt or (iii) the date on which we are deemed to be a large accelerated filer under the federal securities laws. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.

Under the JOBS Act, emerging growth companies are also permitted to elect to delay adoption of new or revised accounting standards until companies that are not subject to periodic reporting obligations are required to comply with those standards, if such accounting standards apply to non-reporting companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with those of another public company which is neither (i) an emerging growth company nor (ii) an emerging growth company which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.

We cannot predict if investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that constitute “forward-looking statements.” These forward-looking statements include, without limitation, statements about our market opportunity strategies, competition, expected activities and investments, and the adequacy of our available cash resources. These forward-looking statements are usually accompanied by words such as “believe,” “anticipate,” “plan,” “seek,” “expect,” “intend” and similar expressions. The forward-looking information is based on various factors and was derived using numerous assumptions. Our actual results could be materially different or worse than those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors and uncertainties described above and elsewhere in this prospectus.

In addition, you should understand that the following important factors and assumptions could affect HBB future results:

 

    changes in the sales prices, product mix or levels of consumer purchases of small electric household and specialty housewares appliances;

 

    changes in consumer retail and credit markets, including the increasing volume of transactions made through third-party internet sellers;

 

    bankruptcy of or loss of major retail customers or suppliers;

 

    changes in costs, including transportation costs, of sourced products;

 

    delays in delivery of sourced products;

 

    changes in or unavailability of quality or cost effective suppliers;

 

    exchange rate fluctuations, changes in the import tariffs and monetary and other changes in the regulatory climate in the countries in which HBB buys, operates and/or sells products;

 

    product liability, regulatory actions or other litigation, warranty claims or returns of products;

 

    customer acceptance of, changes in costs of, or delays in the development of new products;

 

    increased competition, including consolidation within the industry;

 

    shift 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 our products; and

 

    changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation.

You should also understand that the following important factors and assumptions could affect KC future results:

 

    decreased levels of consumer visits to brick and mortar stores;

 

    increased competition, including through online channels;

 

    shift in consumer shopping patterns, gasoline prices, weather conditions, the level of consumer confidence and disposable income as a result of economic conditions, unemployment rates or other events or conditions that may adversely affect the number of customers visiting Kitchen Collection ®  stores;

 

    changes in the sales prices, product mix or levels of consumer purchases of kitchenware and small electric appliances;

 

    changes in costs, including transportation costs, of inventory;

 

    delays in delivery or the unavailability of inventory;

 

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    customer acceptance of new products;

 

    the anticipated impact of the opening of new stores, the ability to renegotiate existing leases and effectively and efficiently close under-performing stores; and

 

    changes in import tariffs and monetary policies and other changes in the regulatory climate in the countries in which KC operates and/or buys and sells products.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus. Neither we nor NACCO undertakes any obligation to publicly update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events, except as required by law.

 

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THE SPIN-OFF

The discussion in this prospectus of the spin-off and the principal terms of the separation agreement is subject to, and qualified by reference to, the separation agreement which is filed as an exhibit to the registration statement that contains this prospectus and is incorporated by reference into this prospectus.

General

On September 18, 2017, the NACCO board and our Board each approved the separation agreement.

Manner of Effecting the Spin-Off

All of our common stock outstanding, which is currently 100 shares, is owned by NACCO. Before the spin-off, those shares will be converted into the number of shares of our Class A Common and our Class B Common required to effect the spin-off. To effect the spin-off, NACCO will make a distribution of all of the outstanding shares of our Class A Common and Class B Common to holders of NACCO common stock as of the record date for the spin-off. The record date for the spin-off is September 26, 2017.

The NACCO Charter provides that each share of NACCO Class A Common and NACCO Class B Common is equal in respect of rights to dividends and any other distribution in cash, stock or property. Therefore, pursuant to the terms of the NACCO Charter, NACCO is required to distribute one share of Hamilton Beach Holding Class A Common and one share of Hamilton Beach Holding Class B Common for each share of NACCO common stock, whether NACCO Class A Common or NACCO Class B Common. As a result of this requirement for equal distribution, the proportionate interest that NACCO stockholders will have in Hamilton Beach Holding following the spin-off will differ from the interest those stockholders currently have in NACCO. In particular, the collective voting power in Hamilton Beach Holding of current holders of NACCO Class A Common after the spin-off will be approximately 77% while the collective voting power in Hamilton Beach Holding of current holders of NACCO Class B Common after the spin-off will be approximately 23%. See “Risk Factors – The relative voting power of holders of our Class B Common who convert their shares of our Class B Common into shares of our Class A Common will diminish” and “Risk Factors – The relative voting power of the remaining holders of Class B Common will increase as holders of our Class B Common convert their shares of our Class B Common into shares of our Class A Common.”

No fractional shares of our Class A Common or our Class B Common will be distributed in the spin-off. Instead, as soon as practicable after the spin-off, the transfer agent will convert the fractional shares of our Class B Common into an equal number of fractional shares of our Class A Common, aggregate all fractional shares of our Class A Common into whole shares of our Class A Common, sell these shares of our Class A Common in the open market at prevailing market prices and distribute the applicable portion of the aggregate net cash proceeds of these sales to each holder who otherwise would have been entitled to receive a fractional share in the spin-off. Cash payments in lieu of fractional shares will be made to the holders in the same account in which the underlying shares are held. If holders physically hold certificates representing their shares of NACCO common stock, a check for the cash that they may be entitled to receive in lieu of fractional shares of our common stock will be mailed to those holders separately. Any holders that receive cash in lieu of fractional shares will not be entitled to any interest on the amounts of those payments.

None of NACCO, the transfer agent or us will guarantee any minimum sale price for the fractional shares of our Class A Common. The receipt of cash in lieu of fractional shares will generally be taxable to the recipient stockholders. See “Material U.S. Federal Income Tax Consequences.”

NACCO stockholders will not be required to pay for shares of our common stock received in the spin-off or to surrender or exchange shares of NACCO common stock or take any other action to be entitled to receive our common stock in the distribution. The distribution of shares of our common stock will not cancel or affect the number of outstanding shares of NACCO common stock. NACCO stockholders should retain their NACCO stock certificates, if any.

 

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Immediately after the spin-off, holders of NACCO common stock as of the record date will hold all of the outstanding shares of our Class A Common and our Class B Common. Based on the number of shares of NACCO common stock outstanding on September 1, 2017, NACCO will distribute approximately 6.8 million shares of our Class A Common and approximately 6.8 million shares of our Class B Common to NACCO stockholders in the spin-off.

CORPORATE STRUCTURE BEFORE THE SPIN-OFF

 

LOGO

 

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CORPORATE STRUCTURE AFTER THE SPIN-OFF

 

LOGO

Reasons for the Spin-Off

NACCO is an operating holding company with the following principal businesses: mining and value-added mining services (NACoal), consumer, commercial and specialty small appliances (HBB) and specialty retail (KC). NACCO’s board determined that separating its consumer, commercial and specialty small appliances and specialty retail businesses from NACCO’s other business through the spin-off of Hamilton Beach Holding is in the best interests of NACCO and its stockholders and has concluded that the separation will provide NACCO and Hamilton Beach Holding with a number of significant opportunities and benefits, including:

 

    Create Opportunities for Growth . Create greater flexibility for Hamilton Beach Holding (i) to pursue strategic growth opportunities, such as acquisitions and joint ventures, in the housewares industry because it will have the ability, subject to certain restrictions relating to the requirements for a tax-free distribution, to offer its stock as consideration in connection with potential future acquisitions or other growth opportunities and (ii) to use its stock to raise funds for acquisitions or other growth opportunities.

 

    Access to Capital and Capital Structure . Provide Hamilton Beach Holding with direct access to equity capital markets and greater access to debt capital markets to fund its growth strategies and to establish a capital structure and dividend policy reflecting our business needs and financial position.

 

    Implement CEO Succession. Provide Hamilton Beach Holding and NACCO with the ability to immediately implement CEO succession for their respective companies. After the spin-off, Hamilton Beach Holding will be a focused company led by a seasoned and highly qualified CEO and executive team. NACCO’s current Chairman, President and Chief Executive Officer, who is also the current Chairman of HBB, Alfred M. Rankin, Jr., will be able to dramatically reduce his role at Hamilton Beach Holding by becoming Executive Chairman. If HBB were to remain a part of NACCO, designating a successor to Mr. Rankin as CEO of the combined company would be difficult because of the vastly different industries with respect to which the successor would be responsible.

 

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    Recruiting, Motivating and Retaining Employees . Strengthen the alignment of senior management incentives with the needs and performance of Hamilton Beach Holding through the use of equity compensation arrangements that will also improve our ability to motivate and retain current personnel and attract, retain and motivate additional qualified personnel.

 

    Management Focus . Reinforce NACCO management’s focus on operating the NACoal business since a majority of NACCO’s executive officers will remain with NACCO after the spin-off and no longer be required to oversee the HBB and KC businesses. Reinforce Hamilton Beach Holding management’s focus on serving each of Hamilton Beach Holding’s market segments and customer needs, and on responding flexibly to changing market conditions and growth markets.

The NACCO board considered the following factors, among others, in connection with its decision to spin-off Hamilton Beach Holding:

 

    Voting Power/Proportionate Interest . As of September 1, 2017, holders of NACCO Class A Common and NACCO Class B Common have 25.1% and 74.9% of the voting power of NACCO, respectively. NACCO’s Charter provides that each class of NACCO common stock has equal rights in connection with stock dividends. When the spin-off, structured as a stock dividend, occurs, the holders of Hamilton Beach Holding Class A Common will have 9.1% of the voting power of Hamilton Beach Holding, while holders of Hamilton Beach Holding Class B Common will have 90.9% of the voting power of Hamilton Beach Holding. The collective voting power in Hamilton Beach Holding of current holders of NACCO Class A Common after the spin-off will be approximately 77% while the collective voting power in Hamilton Beach Holding of current holders of NACCO Class B Common after the spin-off will be approximately 23%.

 

    Certain Restrictions Relating to Tax-Free Distributions . The ability of Hamilton Beach Holding to engage in equity transactions could be limited or restricted for a period of time after the spin-off in order to preserve the tax-free nature of the spin-off. See “Risk Factors — We might not be able to engage in desirable strategic transactions and equity issuances for some period of time following the spin-off because of certain restrictions relating to requirements for tax-free distributions.”

 

    No Existing Public Market . There is no existing public market for our common stock following the spin-off and the combined market values of NACCO common stock and our common stock may be less the value of NACCO common stock prior to the spin-off.

 

    Risks Factors. Certain other risks associated with the spin-off and our business after the spin-off, as described in this prospectus under the heading “Risk Factors” beginning on page 18.

Ownership of Hamilton Beach Holding after the Spin-Off

Immediately after the spin-off, NACCO stockholders as of the record date will hold all of the outstanding shares of our Class A Common and our Class B Common. Based on the number of shares of NACCO common stock outstanding on September 1, 2017, NACCO expects to distribute approximately 6.8 million shares of our Class A Common and approximately 6.8 million shares of our Class B Common in the spin-off.

Operations of Hamilton Beach Holding after the Spin-Off

We will continue to conduct business after completion of the spin-off under multiple brands and trade names. Our headquarters will be located in Glen Allen, Virginia.

Management of Hamilton Beach Holding after the Spin-Off

After the spin-off, our executive officers will be substantially the same as our executive officers immediately before the spin-off and will remain in office until their respective successors are duly elected or appointed and qualified in accordance with our amended and restated certificate of incorporation and our amended and restated bylaws or as otherwise provided by law.

 

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After the spin-off, we will be led by:

 

    Alfred M. Rankin, Jr. as our Executive Chairman;

 

    Gregory H. Trepp as our and HBB’s President and Chief Executive Officer and KC’s Chief Executive Officer;

 

    Keith B. Burns as HBB’s Vice President, Engineering and Information Technology;

 

    Gregory E. Salyers as HBB’s Senior Vice President, Global Operations;

 

    Dana B. Sykes as our and HBB’s Vice President, General Counsel and Secretary;

 

    James H. Taylor as our Vice President, Chief Financial Officer and Treasurer and HBB’s Vice President and Chief Financial Officer;

 

    R. Scott Tidey as HBB’s Senior Vice President, North America Sales and Marketing; and

 

    Robert O. Strenski as KC’s President.

See “Management” beginning on page 102 for additional information regarding our management after the spin-off.

Hamilton Beach Holding Board after the Spin-Off

After the spin-off, our Board will consist of Alfred M. Rankin, Jr., J.C. Butler, Jr., John P. Jumper, Dennis W. LaBarre, Michael S. Miller, Roger F. Rankin, Thomas T. Rankin, James A. Ratner, David F. Taplin, Gregory H. Trepp and Mark R. Belgya, who will remain in office until their respective successors are duly elected or appointed and qualified in accordance with our amended and restated certificate of incorporation and our amended and restated bylaws or as otherwise provided by law. Of these individuals, the following served as our directors prior to the spin-off: Alfred M. Rankin, Jr., John P. Jumper, Dennis W. LaBarre, Michael S. Miller, James A. Ratner and David F. Taplin.

After the spin-off, our Board will have an audit review committee, a compensation committee, a nominating and corporate governance committee and an executive committee. John P. Jumper, Dennis W. LaBarre, Michael S. Miller, James A. Ratner, David F. Taplin and Mark R. Belgya satisfy the criteria for director independence as set forth in the NYSE rules.

Immediately after the spin-off, the members of our Board, audit review committee, compensation committee, nominating and corporate governance committee and executive committee will be as follows:

 

Board

Members

 

Audit Review Committee

 

Compensation Committee

Alfred M. Rankin, Jr.

  Mark R. Belgya   Mark R. Belgya

J.C. Butler, Jr.

  John P. Jumper   John P. Jumper

John P. Jumper

  Dennis W. LaBarre   Dennis W. LaBarre

Dennis W. LaBarre

  Michael S. Miller   Michael S. Miller

Michael S. Miller

  James A. Ratner   James A. Ratner

Roger F. Rankin

   

Thomas T. Rankin

   

James A. Ratner

   

David F. Taplin

   

Gregory H. Trepp

   

Mark R. Belgya

     
   

Executive

Committee

 

Nominating and Corporate
Governance Committee

   
 

J.C. Butler, Jr.

 

John P. Jumper

 
 

Dennis W. LaBarre

 

Dennis W. LaBarre

 
 

Michael S. Miller

 

Michael S. Miller

 
 

Alfred M. Rankin, Jr.

  James A. Ratner  

 

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Interests of NACCO and Hamilton Beach Holding Directors and Executive Officers in the Spin-Off

Some NACCO and Hamilton Beach Holding directors and executive officers have interests in the spin-off that are different from, or in addition to, the interests of NACCO stockholders who will receive shares of our common stock in the spin-off. The NACCO board and our Board were aware of these interests and considered them in making their respective decisions to approve the separation agreement and the spin-off. These interests include:

 

    the designation of certain of our directors and officers before the spin-off as our directors or executive officers after the spin-off, including some who will serve as directors or executive officers of both Hamilton Beach Holding and NACCO;

 

    the rights of Alfred M. Rankin, Jr., our Executive Chairman, and J.C. Butler, Jr., Roger F. Rankin, Thomas T. Rankin and David F. Taplin, our directors, as parties to the stockholders’ agreement among Hamilton Beach Holding and certain members of the Rankin and Taplin families with respect to ownership of our common stock, as described in more detail in “Security Ownership of Certain Beneficial Owners and Management” beginning on page 93 and “Ancillary Agreements — Stockholders’ Agreement” beginning on page 149;

 

    the participation of our executive officers in various incentive compensation plans for 2017 prior to the spin-off, as previously approved by the NACCO compensation committee;

 

    the provision of NACCO equity compensation to our directors who were directors of NACCO prior to the spin-off under the NACCO Directors’ Plan, as described in more detail in “Management — Compensation of Directors” beginning on page 112;

 

    the provision of Hamilton Beach Holding equity to our directors and the participation by our directors in an equity compensation plan following the spin-off, as described in more detail in “Management — Compensation of Directors” beginning on page 112;

 

    the participation by our Executive Chairman in a NACCO equity incentive compensation plan before the spin-off, subject to the approval of grants of awards by the NACCO compensation committee, as described in more detail in “Executive Compensation — Long-Term Incentive Compensation — Historically” beginning on page 130; and

 

    the participation by executive officers in a Hamilton Beach Holding equity incentive compensation plan after the spin-off, subject to the approval of grants of awards by the Hamilton Beach Holding compensation committee, as described in more detail in “Executive Compensation — Long-Term Incentive Compensation — Going Forward” beginning on page 134.

Short-Term Incentive Compensation for Executive Officers and Other Management Employees

It is expected that the current short-term incentive compensation plans that cover our executive officers and other management employees will continue in effect through December 31, 2017 with few substantive changes:

 

    Alfred M. Rankin, Jr. is currently a participant in the NACCO Industries, Inc. Annual Incentive Compensation Plan (Effective September 28, 2012) which is sponsored by NACCO and is referred to as the NACCO Short-Term Plan. Mr. Rankin will cease to be a participant in the NACCO Short-Term Plan upon the spin-off, and his 2017 award will be pro-rated based on his pre-spin service with the NACCO-wide group.

 

    The current Hamilton Beach Brands, Inc. Annual Incentive Compensation Plan (Effective January 1, 2014), referred to as the HBB Short-Term Plan, which covers Messrs. Trepp and Tidey and other executive officers and management employees, will continue in effect through December 31, 2017 with no substantive changes. Mr. Rankin will not participate in the HBB Short-Term Plan.

For a further discussion of the short-term incentive compensation, see “Executive Compensation — Short-Term Incentive Compensation — Going Forward” beginning on page 130.

 

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Long-Term Incentive Compensation for Executive Officers and Other Management Employees

The current Hamilton Beach Brands, Inc. Long-Term Incentive Compensation Plan (Effective March 1, 2015), referred to as the HBB Long-Term Cash Plan, which covers certain of our executive officers and other management employees, will continue in effect through December 31, 2017 with no substantive changes. Currently, the HBB Long-Term Cash Plan covers senior management employees whose employment is in the United States and employees whose employment is located outside of the United States. Employees whose employment is located in the United States will not receive awards under the HBB Long-Term Cash Plan after 2017. The 2017 awards to these employees will be paid out under the terms of the HBB Long-Term Cash Plan. For award years after 2017, we expect the HBB Long-Term Cash Plan to continue to cover employees whose employment is located outside of the United States.

In addition to the current HBB Long-Term Cash Plan, NACCO, as our sole stockholder, approved the adoption of the Hamilton Beach Brands Holding Company Executive Long-Term Equity Incentive Plan (Effective September 29, 2017), which is referred to as the HBHC Long-Term Equity Plan. The HBHC Long-Term Equity Plan will cover Alfred M. Rankin, Jr. beginning on the spin-off date. Mr. Rankin is currently a participant in the NACCO Industries, Inc. Executive Long-Term Incentive Compensation Plan (Amended and Restated Effective March 1, 2017), referred to as the NACCO Long-Term Equity Plan. Mr. Rankin’s 2017 award under the NACCO Long-Term Equity Plan will be pro-rated based on his pre-spin service with the NACCO-wide group. He also will receive a separate, pro-rata award for his post-spin Hamilton Beach Holding service in 2017 under the HBHC Long-Term Equity Plan. Messrs. Trepp and Tidey and the other senior management employees, including employees who were participants in the HBB Long-Term Cash Plan and whose employment is located in the United States, will become participants in the HBHC Long-Term Equity Plan, and will no longer participate in the HBB Long-Term Cash Plan, in 2018. Senior management employees whose employment is located outside of the United States will continue to participate in the HBB Long-Term Cash Plan post-2017. We expect the performance factor for 2017 under the HBHC Long-Term Equity Plan will be based on Hamilton Beach Holding ROTCE (defined on page 124).

For a further discussion of the HBHC Long-Term Equity Plan, see “Executive Compensation — Long-Term Incentive Compensation — Going Forward” beginning on page 134.

Hamilton Beach Holding Non-Employee Directors’ Equity Compensation

Compensation that is paid to the directors who are not our officers will be paid pursuant to our Director Fee Policy, and a portion thereof will be paid under the Hamilton Beach Brands Holding Company Non-Employee Directors’ Equity Compensation Plan, referred to as the HBHC Directors’ Plan, which will be adopted in connection with the spin-off. Under the HBHC Directors’ Plan, each such director will receive $90,000 of the $150,000 annual retainer in shares of our Class A Common.

These shares are fully vested on the date of grant and the director is entitled to all rights of a stockholder, including the right to vote and receive dividends. However, the shares cannot be assigned, pledged, hypothecated or otherwise transferred by the director, voluntarily or involuntarily, other than the following:

 

    by will or the laws of descent and distribution;

 

    pursuant to a qualified domestic relations order; or

 

    to a trust for the benefit of the director, or the director’s spouse, children or grandchildren.

These restrictions on transfer lapse upon the earliest to occur of:

 

    ten years after the last day of the calendar quarter for which such shares were earned;

 

    the death or permanent disability of the director;

 

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    five years (or earlier with the approval of our Board) after the date of the retirement of the director from our Board;

 

    the date that a director is both retired from our Board and has reached 70 years of age; and

 

    at such other time as our Board may approve.

In addition, each director will have the right under the HBHC Directors’ Plan to receive shares of our Class A Common instead of cash for up to 100% of the balance of the director’s annual retainer, meeting attendance fees and any committee chair fees. Shares received instead of cash are not subject to the foregoing transfer restrictions.

For a further discussion of the HBHC Directors’ Plan see “Management — Compensation of Directors” beginning on page 112.

Listing of Hamilton Beach Holding Common Stock

Our Class A Common has been approved for listing on the NYSE under the symbol “HBB.” Our Class B Common will not be listed on the NYSE or any other stock exchange.

Market for Hamilton Beach Holding Common Stock

Currently, there is no public market for our Class A Common. Our Class A Common has been approved for listing on the NYSE. We expect that a “when-issued” trading market for our Class A Common will develop before the record date for the spin-off. “When-issued” trading refers to a transaction made conditionally because the stock has been authorized but is not yet issued or available. Even though when-issued trading may develop, none of these trades will settle before the distribution date for the spin-off, and if the spin-off does not occur, all when-issued trading will be null and void. On the first trading day after the spin-off, when-issued trading will end and “regular-way” trading will begin. “Regular-way” trading refers to trading after a stock has been issued and typically involves a transaction that settles on the second full business day after the date of a transaction.

Our Class B Common will not be listed on the NYSE or any other stock exchange or otherwise traded and will be subject to substantial restrictions on transfer, as described in more detail in “Description of Capital Stock of Hamilton Beach Holding after the Spin-Off — Common Stock — Restrictions on Transfer of Class B Common; Convertibility of Class B Common into Class A Common” beginning on page 150. Our Class B Common will, however, be convertible at all times, and without cost to the stockholder, into our Class A Common on a share-for-share basis. Therefore, stockholders desiring to sell the equity interest in us represented by their shares of our Class B Common may convert those shares into an equal number of shares of our Class A Common at any time and then sell the shares of our Class A Common.

Transferability of Hamilton Beach Holding Common Stock

The shares of Hamilton Beach Holding Class A Common that you will receive in the distribution will be freely transferable, unless you are considered an “affiliate” of ours under Rule 144 under the Securities Act of 1933 (the “Securities Act”). Persons who can be considered our affiliates after the spin-off generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with, us, and may include our directors and certain of our officers. Our affiliates may sell shares of our common stock received in the distribution only under a registration statement that the SEC has declared effective under the Securities Act, or under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144. Based on 5,263,374 shares of NACCO Class A Common and 1,570,448 shares of NACCO Class B Common outstanding, as of September 1, 2017, all individuals expected to

 

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be executive officers and directors of Hamilton Beach Holding will beneficially own [            ] shares of Hamilton Beach Holding Class A Common after the distribution. See “Security Ownership of Certain Beneficial Owners and Management.”

Accounting Treatment

The spin-off will be accounted for by NACCO as a spin-off of Hamilton Beach Holding. After the spin-off, Hamilton Beach Holding is expected to be accounted for as a discontinued operation by NACCO. If accounted for as a discontinued operation, the measurement date would be the spin-off date. After the spin-off, our assets and liabilities will be accounted for at the historical book values carried by NACCO prior to the spin-off. No gain or loss will be recognized as a result of the spin-off.

Completion of the Spin-Off

The spin-off is expected to be completed during the third quarter of 2017.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

The following discussion describes material U.S. federal income tax consequences of the spin-off to us, NACCO, and stockholders of NACCO common stock who hold such stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion is based on the Code, United States Treasury regulations issued under the Code and judicial and administrative interpretations thereof, all as in effect as of the date of this prospectus, and all of which are subject to change at any time, possibly with retroactive effect. Any such change could affect the tax consequences described below. This discussion does not address any state, local, or non-U.S. tax consequences or any estate, gift or other non-income tax consequences. The discussion assumes that the spin-off will be consummated in accordance with the separation agreement and as further described in this prospectus.

This discussion is not a complete description of all of the U.S. federal income tax consequences of the spin-off and, in particular, does not address U.S. federal income tax considerations applicable to NACCO stockholders subject to special treatment under U.S. federal income tax laws, such as:

 

    stockholders that own NACCO common stock through partnerships, S corporations, or other pass-through entities;

 

    foreign persons, foreign entities, and U.S. expatriates;

 

    mutual funds, banks, thrifts, and other financial institutions;

 

    dealers and traders in securities or currencies;

 

    insurance companies;

 

    tax-exempt entities and pension funds;

 

    stockholders who acquired their shares through a benefit plan or a tax-qualified retirement plan, or through the exercise of an employee stock option or similar derivative or otherwise as compensation;

 

    stockholders who own, or are deemed to own, 10% or more, by voting power or value, of NACCO equity;

 

    certain former citizens or long-term residents of the United States;

 

    stockholders who are subject to the alternative minimum tax;

 

    stockholders whose functional currency is not the U.S. dollar; or

 

    stockholders who hold NACCO common stock as part of a “hedge,” “straddle,” “conversion,” “constructive sale,” or other integrated investment or financial transaction.

If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds NACCO common stock, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult a tax advisor as to the tax consequences of the spin-off.

NACCO stockholders are urged to consult with their tax advisors regarding the tax consequences to them of the spin-off in light of their particular circumstances, including the applicability and effect of U.S.  federal, state, local, foreign and other tax laws.

Opinion of Tax Counsel McDermott Will & Emery LLP

The consummation of the spin-off is conditioned upon the receipt by NACCO of an opinion from McDermott Will & Emery LLP, tax counsel to NACCO, to the effect that the spin-off will qualify as tax-free

 

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under Section 355 of the Code, except for cash received in lieu of fractional shares. Specifically, we expect that the opinion of tax counsel will conclude:

 

  (i) Pursuant to Section 355(c)(1) of the Code, no gain or loss will be recognized by NACCO with respect to the stock of Hamilton Beach Holding by reason of the spin-off;

 

  (ii) Pursuant to Section 355(a)(1) of the Code, no gain or loss will be recognized by (and no amount will be includible in the income of) any NACCO stockholder by reason of such stockholder’s receipt of Hamilton Beach Holding common stock in the spin-off;

 

  (iii) Any NACCO stockholder who receives cash in lieu of a fractional share of Hamilton Beach Holding common stock in connection with the spin-off will recognize gain or loss measured by the difference between the amount of the cash received and the basis allocated to such fractional share, and any gain or loss will be treated as capital gain or loss, provided such fractional share is held as a capital asset on the date of the spin-off;

 

  (iv) Pursuant to Section 358 of the Code and Sections 1.358-1 and 1.358-2 of the Treasury regulations promulgated under the Code, the aggregate tax basis of the NACCO common stock and the Hamilton Beach Holding common stock in the hands of each NACCO stockholder immediately after the spin-off (including any fractional Hamilton Beach Holding shares deemed received) will be the same as the aggregate adjusted tax basis of the NACCO common stock held by such stockholder immediately before the spin-off, allocated between such stockholder’s NACCO common stock and Hamilton Beach Holding common stock in proportion to the relative fair market values of each on the date of the spin-off; and

 

  (v) Pursuant to Section 1223(1) of the Code, the holding period of the Hamilton Beach Holding common stock received by each NACCO stockholder in the spin-off (including any fractional shares deemed received) will include the holding period of such stockholder’s NACCO common stock, provided that such NACCO common stock is held as a capital asset on the date of the spin-off.

The opinion of tax counsel will not be binding on the Internal Revenue Service or the courts; there can be no certainty that the Internal Revenue Service will not challenge the conclusions reflected in the opinion or that a court would not sustain such a challenge. Furthermore, the opinion of tax counsel will rely, among other things, on specified assumptions, including assumptions regarding the absence of changes in existing facts and law and the consummation of the spin-off in accordance with the separation agreement, and on certain representations and undertakings as to factual matters made by, among others, NACCO and us regarding the past and future conduct of our respective business and other matters. Any inaccuracy in these assumptions or representations could jeopardize the conclusions reached by tax counsel in its opinion. A form of the opinion we expect to receive from tax counsel is filed as an exhibit to the registration statement that contains this prospectus. Neither we nor NACCO intends to request a ruling from the Internal Revenue Service regarding the U.S. federal income tax consequences of the spin-off.

 

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Additional Tax Considerations

Under the Tax Allocation Agreement, NACCO has agreed to make a protective election under Section 336(e) of the Code with respect to the spin-off. If, notwithstanding the receipt of an opinion of tax counsel, the spin-off fails to qualify as tax-free under Section 355 of the Code, the Section 336(e) election would generally cause a deemed sale of the assets of Hamilton Beach Holding and its subsidiaries, causing the NACCO group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Hamilton Beach Holding and its subsidiaries in such assets. In such case, to the extent that NACCO is responsible for the resulting transaction taxes, Hamilton Beach Holding generally would be required under the Tax Allocation Agreement to make periodic payments to NACCO equal to the tax savings arising from a “step up” in the tax basis of Hamilton Beach Holding’s assets.

In addition, if the spin-off fails to qualify as tax-free under Section 355 of the Code, NACCO stockholders could be taxed on the full value of the shares of Hamilton Beach Holding’s common stock that they receive, which generally would be treated first as a taxable dividend to the extent of NACCO’s earnings and profits, then as a non-taxable return of capital to the extent of each stockholder’s tax basis in shares of NACCO common stock, and thereafter as a capital gain with respect to any remaining value. The protective Section 336(e) election does not impact this treatment of NACCO stockholders.

Even if the spin-off qualifies as tax-free under Section 355 of the Code, the spin-off would become taxable to NACCO under Section 355(e) of the Code if a 50% or greater interest (by vote or value) in NACCO or Hamilton Beach Holding stock were treated as acquired, directly or indirectly, by certain persons as part of a plan or series of related transactions that included the spin-off. For this purpose, any acquisitions or issuances of NACCO’s common stock within two years before the spin-off and any acquisitions or issuances of our common stock or NACCO’s common stock within two years after the spin-off generally are presumed to be part of such a plan, although we or NACCO may be able to rebut that presumption. We are not aware of any acquisitions or issuances of NACCO’s common stock within the two years before the date of the spin-off (up through the date of this prospectus) that would be considered to occur as part of a plan or series of related transactions that includes the spin-off. It is unclear whether any increase in voting power by holders of our Class B Common Stock by reason of the conversion by other holders of Hamilton Beach Holding Class B Common Stock to Hamilton Beach Holding Class A Common Stock should be considered an acquisition of voting power as part of a plan or series of related transactions. However, even if so treated, any such voting shift would not alone cause an acquisition of 50% or more of the voting power of our Common Stock and, as a result, would not, by itself, cause the spin-off to be taxable to NACCO under Section 355(e) of the Code.

However, if the IRS were to determine that other acquisitions of NACCO shares before or after the spin-off, or Hamilton Beach Holding shares after the spin-off, were part of a plan or series of related transactions that included the spin-off for purposes of Section 355(e) of the Code, such determination could result in the recognition of a gain by NACCO under Section 355(e) of the Code. Because of the protective Section 336(e) election, Hamilton Beach Holding and its subsidiaries would be deemed to have sold all of their assets, thereby causing the NACCO group to recognize a gain to the extent the fair market value of the assets exceeded the basis of Hamilton Beach Holding and its subsidiaries in such assets. As described above, in such case, to the extent that NACCO is responsible for the resulting transaction taxes, Hamilton Beach Holding would generally be required under the Tax Allocation Agreement to make certain periodic payments to NACCO. Under the Tax Allocation Agreement, we generally would be required to indemnify NACCO after the spin-off against all of the tax on that taxable gain if it were triggered solely by certain actions by us (including our subsidiaries) or with respect to our stock. See “Ancillary Agreements — Tax Allocation Agreement” beginning on page 148.

If an acquisition or issuance of our stock or NACCO’s stock triggers the application of Section 355(e) of the Code, NACCO would recognize a taxable gain as described above.

 

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Reporting Requirements

United States Treasury regulations require certain stockholders that receive stock in a spin-off to attach to their United States federal income tax return for the year in which the spin-off occurs a detailed statement setting forth certain information relating to the tax-free nature of the spin-off. NACCO stockholders that have acquired different blocks of NACCO common stock at different times or at different prices should consult their tax advisors regarding the allocation of their aggregate adjusted basis among, and the holding period of, shares of our common stock distributed with respect to such blocks of NACCO common stock.

 

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USE OF PROCEEDS

We will not receive any proceeds from the distribution of our Class A Common or our Class B Common in the spin-off.

 

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DETERMINATION OF OFFERING PRICE

No consideration will be paid for the shares of our Class A Common or our Class B Common distributed in the spin-off.

 

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MARKET PRICE INFORMATION AND DIVIDEND POLICY

Market Price Data

There is no established trading market for shares of our Class A Common or our Class B Common. At September 1, 2017, there were 100 shares of our common stock outstanding, all of which immediately prior to the spin-off were owned by NACCO.

In connection with the spin-off, NACCO will distribute approximately 6.8 million shares of our Class A Common and approximately 6.8 million shares of our Class B Common to holders of NACCO Class A Common and NACCO Class B Common as of the record date for the spin-off. We have applied to list our Class A Common on the NYSE under the symbol “HBB.” Our Class B Common will not be listed on the NYSE or any other stock exchange or otherwise traded and will be subject to substantial restrictions on transfer.

Dividends

We paid dividends to NACCO in 2015 and 2016 in the aggregate amount of $57 million. We paid $3 million in dividends to NACCO from January 1, 2017 to June 30, 2017, and declared an additional $35 million dividend payable to NACCO prior to the spin-off.

Dividend Policy

We currently intend to pay regular quarterly dividends after the spin-off. The declaration of future dividends and the establishment of the per share amount, record dates and payout dates for such future dividends will be at the discretion of our Board and will depend on various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that our Board deems relevant. The HBB and KC credit facilities limit our ability to pay dividends or make distributions in respect of our capital stock in certain circumstances. For a discussion of these restrictions, see the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources of HBB — After the Spin-Off” beginning on page 67 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources of KC — After the Spin-Off” beginning on page 80.

 

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SELECTED HISTORICAL FINANCIAL DATA OF

HAMILTON BEACH BRANDS HOLDING COMPANY

The following table sets forth our selected historical financial data as of and for each of the periods indicated. We derived the summary historical financial data as of and for each of the two years ended December 31, 2016 from our audited consolidated financial statements. We derived the summary historical financial data as of and for the three and six months ended June 30, 2017 and 2016 from our unaudited condensed consolidated financial statements which, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of the interim period. This information is only a summary and you should read it in conjunction with the historical consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this prospectus.

 

     Three Months
Ended June 30
     Six Months
Ended June 30
    Year Ended
December 31
 
         2017               2016              2017              2016              2016               2015      
     (In thousands)  

Operating Statement Data:

               

Revenues

   $ 152,976      $ 154,918      $ 293,258     $ 298,052     $ 745,357      $ 767,862  

Operating profit (loss)

   $ 2,164      $ 1,684      $ (274   $ (1,205   $ 43,374      $ 35,554  

Net income (loss)

   $ 1,239      $ 964      $ (119   $ (1,184   $ 26,179      $ 19,711  

 

     June 30     December 31  
     2017     2016     2016     2015  
     (In thousands)  

Balance Sheet Data:

        

Total assets

   $ 277,182     $ 263,221     $ 310,833     $ 310,128  

Long-term debt

   $ 32,000     $ 34,156     $ 26,000     $ 50,000  

Stockholder equity

   $ 62,961     $ 69,766     $ 65,126     $ 82,824  
     Six Months
Ended June 30
    Year Ended
December 31
 
     2017     2016     2016     2015  
     (In thousands)  

Cash Flow Data:

        

Provided by (used for) operating activities

   $ (16,261   $ 18,834     $ 62,563     $ 26,488  

Used for investing activities

   $ (2,378   $ (2,989   $ ( 5,925 )     $ (6,543

Provided by (used for) financing activities

   $ 12,562     $ (28,251   $ (61,837 )     $ (10,088

Other Data:

        

Cash dividends paid

   $ 3,000     $ 10,000     $ 42,000     $ 15,000  

 

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     Trailing 12
Months
    Year Ended December 31  
     6/30/2017     2016     2015  
     (in thousands)  

HBB calculation of EBITDA (1) :

      

Net income

   $ 27,768     $ 26,557     $ 19,749  

Income tax provision

     15,306       14,541       11,751  

Interest expense

     1,179       1,165       1,831  

Interest income

     (1 )                (56

Depreciation and amortization

     4,757       4,681       4,750  
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 49,009     $ 46,944     $ 38,025  
  

 

 

   

 

 

   

 

 

 

KC calculation of EBITDA (1) :

      

Net loss

   $ (646 )     $ (355 )     $ (420

Income tax provision

     329       455       368  

Interest expense

     243       209       131  

Depreciation

     1,392       1,545       1,558  
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 1,318     $ 1,854     $ 1,637  
  

 

 

   

 

 

   

 

 

 

Hamilton Beach Holding calculation of EBITDA (1)(2) :

      

Net income

   $ 27,244     $ 26,179     $ 19,711  

Income tax provision

     15,612       14,984       12,325  

Interest expense

     1,422       1,374       1,962  

Interest income

     (1 )                (56

Depreciation and amortization

     6,149       6,226       6,308  
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 50,426     $ 48,763     $ 40,250  
  

 

 

   

 

 

   

 

 

 

 

(1) To provide investors with additional information about our financial results, we disclose within this prospectus EBITDA, a non-GAAP financial measure. We have provided a reconciliation between EBITDA and net income (loss), the most directly comparable GAAP financial measure. EBITDA is provided solely as a supplemental disclosure with respect to operating results. EBITDA does not represent net income, as defined by U.S. GAAP and should not be considered as a substitute for net income, or as an indicator of operating performance. Hamilton Beach Holding defines EBITDA as income (loss) before income tax provision, plus net interest expense and depreciation and amortization expense. EBITDA is not a measurement under U.S. GAAP and is not necessarily comparable with similarly titled measures of other companies. We believe this Non-GAAP Financial Measure is commonly used by investors to evaluate our performance and that of our competitors. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with GAAP.
(2) Hamilton Beach Holding includes HBB, KC and eliminations for intercompany transactions.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the risk factors contained in this prospectus as well as our historical consolidated financial statements, including the notes related to those statements, and other financial information included elsewhere in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from our historical financial results and those indicated in the forward-looking statements. See “Special Note Regarding Forward-Looking Statements” and “Risk Factors” beginning on pages 34 and 18, respectively. Unless otherwise specified, this section reflects our historical financial condition and results of operations. Tabular amounts are in thousands, except percentage data.

Hamilton Beach Brands Holding Company qualifies as an emerging growth company under the JOBS Act. As a result, Hamilton Beach Brands Holding Company is permitted to, and intends to, rely on exemptions from certain disclosure requirements. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Jobs Act for complying with new or revised accounting standards that have different effective dates for public and private companies. An emerging growth company can delay the adoption of such accounting standards until those standards would otherwise apply to private companies until the first to occur of the date the subject company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in Securities Act Section 7(a)(2)(B). Hamilton Beach Brands Holding Company has elected not to opt out of the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies and, as a result, Hamilton Beach Brands Holding Company’s financial statements may not be comparable to other public companies.

Overview

Hamilton Beach Brands Holding Company (“Hamilton Beach Holding” or the “Company”) is an operating holding company for two separate businesses: consumer, commercial and specialty small appliances and specialty retail. Results of operations and financial condition are discussed separately by segment, which corresponds with the industry groupings. Hamilton Beach Brands, Inc. (“HBB”) is a leading designer, marketer and distributor of branded small electric household and specialty housewares appliances, as well as commercial products for restaurants, bars and hotels. The Kitchen Collection, LLC (“KC”) is a national specialty retailer of kitchenware operating under the Kitchen Collection ® store name in outlet and traditional malls throughout the United States. Hamilton Beach Holding is a wholly-owned subsidiary of NACCO Industries, Inc.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities (if any). On an ongoing basis, we evaluate estimates based on historical experience, actuarial valuations and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.

We believe the following critical accounting policies affect more significant judgments and estimates used in the preparation of our consolidated financial statements.

Emerging Growth Company: Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that

 

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is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.

Revenue recognition: Revenues are generally recognized when title transfers and risk of loss passes to the customer. Revenues at HBB are recognized when customer orders are completed and shipped. Revenues at KC are recognized at the point of sale when payment is made and customers take possession of the merchandise in stores. Reserves for discounts and returns are maintained for anticipated future claims at HBB and KC. The accounting policies used to develop these product discounts and returns include:

Product discounts: We record estimated reductions to revenues for customer programs and incentive offerings, including special pricing agreements, price competition, promotions and other volume-based incentives. At HBB, net sales represent gross sales less cooperative advertising, other volume-based incentives, estimated returns and allowances for defective products. At KC, retail markdowns are incorporated into KC’s retail method of accounting for cost of sales. If market conditions were to decline or if competition were to increase, we may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenues at the time the incentive is offered. If our accrued cooperative advertising balance as of December 31, 2016 were to increase by one percent, the reserve for product discounts would increase and revenues would be reduced by $0.2 million. Our past results of operations have not been materially affected by a change in the estimate of product discounts, and although there can be no assurances, we are not aware of any circumstances that would be reasonably likely to materially change these estimates in the future.

Product returns: Products generally are not sold with the right of return. However, based on our historical experience, a portion of products sold are estimated to be returned due to reasons such as buyer remorse, duplicate gifts received, product failure and excess inventory stocked by the customer which, subject to certain terms and conditions, we will agree to accept. We record estimated reductions to revenues at the time of sale based on this historical experience and the limited right of return provided to certain customers. If future trends were to change significantly from those experienced in the past, incremental reductions to revenues may result based on this new experience. If our estimate of average return rates as of December 31, 2016 were to increase by one percent, the reserves for product returns would increase and revenues would be reduced by $0.1 million. Our past results of operations have not been materially affected by a change in the estimate of product returns and although there can be no assurances, we are not aware of any circumstances that would be reasonably likely to materially change these estimates in the future.

Retirement benefit plans: We maintain two defined benefit pension plans that provide benefits based on years of service and average compensation during certain periods. All eligible employees, including employees whose pension benefits are frozen, receive retirement benefits under defined contribution retirement plans. Our policy is to periodically make contributions to fund the defined benefit pension plans within the range allowed by applicable regulations. The defined benefit pension plan assets consist primarily of publicly traded stocks and government and corporate bonds. There is no guarantee the actual return on the plans’ assets will equal the expected long-term rate of return on plan assets or that the plans will not incur investment losses.

The expected long-term rate of return on defined benefit plan assets reflects management’s expectations of long-term rates of return on funds invested to provide for benefits included in the projected benefit obligations. In establishing the expected long-term rate of return assumption for plan assets, we

 

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consider the historical rates of return over a period of time that is consistent with the long-term nature of the underlying obligations of these plans as well as a forward-looking rate of return. The historical and forward-looking rates of return for each of the asset classes used to determine our estimated rate of return assumption were based upon the rates of return earned or expected to be earned by investments in the equivalent benchmark market indices for each of the asset classes.

Expected returns for pension plans are based on a calculated market-related value for U.S. pension plan assets. Under this methodology, asset gains and losses resulting from actual returns that differ from our expected returns are recognized ratably in the market-related value of assets over three years. Expected returns for pension plans are based on fair market value for non-U.S. pension plan assets.

The basis for the selection of the discount rate for each plan is determined by matching the timing of the payment of the expected obligations under the defined benefit plans and health care plans against the corresponding yield of high-quality corporate bonds of equivalent maturities.

Changes to the estimate of any of these factors could result in a material change to our pension obligation causing a related increase or decrease in reported net operating results in the period of change in the estimate. Because the 2016 assumptions are used to calculate 2017 pension expense amounts, a one percentage-point change in the expected long-term rate of return on plan assets would result in a change in pension expense for 2017 of approximately $0.3 million for the plans. A one percentage-point change in the discount rate would result in a change in pension expense for 2017 by approximately $0.1 million. A one percentage-point increase in the discount rate would have lowered the plans’ projected benefit obligation as of the end of 2016 by approximately $1.5 million; while a one percentage-point decrease in the discount rate would have raised the plans’ projected benefit obligation as of the end of 2016 by approximately $1.8 million.

Self-insurance liabilities: We are generally self-insured for product liability, environmental liability, medical claims and certain workers’ compensation claims. For product liability, catastrophic insurance coverage is retained for potentially significant individual claims. An estimated provision for claims reported and for claims incurred but not yet reported under the self-insurance programs is recorded and revised periodically based on industry trends, historical experience and management judgment. In addition, industry trends are considered within management’s judgment for valuing claims. Changes in assumptions for such matters as legal judgments and settlements, inflation rates, medical costs and actual experience could cause estimates to change in the near term. Changes in any of these factors could materially change our estimates for these self-insurance obligations causing a related increase or decrease in reported net operating results in the period of change in the estimate.

Inventory reserves: We write down inventory to the lower of cost or net realizable value, which includes an estimate for obsolescence or excess inventory based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Upon a subsequent sale or disposal of the impaired inventory, the corresponding reserve for impaired value is relieved to ensure that the cost basis of the inventory reflects any write-downs. An impairment in value of one percent of net inventories as of December 31, 2016 would result in additional expense of approximately $1.3 million.

Allowances for doubtful accounts: We maintain allowances for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk as well as general trends of the entire customer pool. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. An impairment in value of one percent of net accounts receivable as of December 31, 2016 would require an increase in the allowance for doubtful accounts and would result in additional expense of approximately $1.0 million.

Income taxes: The results of operations for Hamilton Beach Holding have historically been included in the consolidated income tax returns of NACCO Industries, Inc. The income tax amounts reflected in the

 

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accompanying financial statements have been allocated using the separate return method as if Hamilton Beach Holding was a separate taxpayer.

Tax law requires certain items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible for tax purposes, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities using currently enacted tax rates. The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year, and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or tax returns. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date. Management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted law and tax rates for the appropriate tax jurisdictions to determine the amount of such deferred tax assets and liabilities. Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances, including statutory income tax rate changes, statutory tax law changes, or changes in our structure or tax status.

Our tax assets, liabilities, and tax expense are supported by historical earnings and losses and our best estimates and assumptions of future earnings. We assess whether a valuation allowance should be established against our deferred tax assets based on consideration of all available evidence, both positive and negative, using a more likely than not standard. This assessment considers, among other matters, scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. When we determine, based on all available evidence, that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established.

Since significant judgment is required to assess the future tax consequences of events that have been recognized in our financial statements or tax returns, the ultimate resolution of these events could result in adjustments to our financial statements and such adjustments could be material. We believe the current assumptions, judgments and other considerations used to estimate the current year accrued and deferred tax positions are appropriate. If the actual outcome of future tax consequences differs from these estimates and assumptions, due to changes or future events, the resulting change to the provision for income taxes could have a material impact on our results of operations and financial position.

 

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CONSOLIDATED FINANCIAL SUMMARY

Hamilton Beach Holding is an operating holding company for two separate businesses that operate in the consumer, commercial and specialty small appliances market (HBB) and the specialty retail market (KC). Hamilton Beach Holding has no operations of its own, and only includes the required intercompany eliminations between HBB and KC. Selected consolidated results of Hamilton Beach Holding were as follows:

 

    Three Months
Ended June 30
    Six Months
Ended June 30
    Year Ended
December 31
 
    2017     2016     2017     2016     2016     2015  

Revenues

           

HBB

  $ 127,574     $ 127,054     $ 241,728     $ 242,794     $ 605,170     $ 620,977  

KC

    25,868       28,634       52,533       57,017       144,351       150,988  

Eliminations

    (466     (770     (1,003     (1,759     (4,164     (4,103
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated revenues

  $ 152,976     $ 154,918     $ 293,258     $ 298,052     $ 745,357     $ 767,862  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

           

HBB

  $ 5,164     $ 4,696     $ 5,946     $ 4,763     $ 43,033     $ 34,801  

KC

    (3,008     (3,011     (6,287     (5,901     376       165  

Eliminations

    8       (1     67       (67     (35     588  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating profit (loss)

  $ 2,164     $ 1,684     $ (274   $ (1,205   $ 43,374     $ 35,554  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

           

HBB

  $ 3,195     $ 2,934     $ 3,884     $ 2,673     $ 26,557     $ 19,749  

KC

    (1,970     (1,954     (4,113     (3,822     (355     (420

Eliminations

    14       (16     110       (35     (23     382  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

  $ 1,239     $ 964     $ (119   $ (1,184   $ 26,179     $ 19,711  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table identifies, by segment, the components of change in Revenues, Operating profit (loss) and Net income (loss):

 

     Revenues      Operating profit      Net income  

Consolidated results for the three months ended June 30, 2016

   $ 154,918      $ 1,684      $ 964  

Increase (decrease) in 2017

        

HBB

     520        468        261  

KC

     (2,766      3        (16

Eliminations

     304        9        30  
  

 

 

    

 

 

    

 

 

 

Consolidated results for the three months ended June 30, 2017

   $ 152,976      $ 2,164      $ 1,239  
  

 

 

    

 

 

    

 

 

 
     Revenues      Operating profit
(loss)
     Net income
(loss)
 

Consolidated results for the six months ended June 30, 2016

   $ 298,052      $ (1,205    $ (1,184

Increase (decrease) in 2017

        

HBB

     (1,066      1,183        1,211  

KC

     (4,484      (386      (291

Eliminations

     756        134        145  
  

 

 

    

 

 

    

 

 

 

Consolidated results for the six months ended June 30, 2017

   $ 293,258      $ (274    $ (119
  

 

 

    

 

 

    

 

 

 
     Revenues      Operating profit      Net income  

Consolidated results for the year ended December 31, 2015

   $ 767,862      $ 35,554      $ 19,711  

Increase (decrease) in 2016

        

HBB

     (15,807      8,232        6,808  

KC

     (6,637      211        65  

Eliminations

     (61      (623      (405
  

 

 

    

 

 

    

 

 

 

Consolidated results for the year ended December 31, 2016

   $ 745,357      $ 43,374      $ 26,179  
  

 

 

    

 

 

    

 

 

 

The components of change are discussed below in “Segment Results”.

Liquidity and Capital Resources of Hamilton Beach Holding - Before and After the Spin-off

Although Hamilton Beach Holding’s subsidiaries have entered into borrowing agreements, Hamilton Beach Holding has not guaranteed any borrowings of its subsidiaries. Dividends from its subsidiaries (to the extent permitted by its subsidiaries’ borrowing agreements) will be used to enable Hamilton Beach Holding to pay dividends to stockholders.

Contractual Obligations, Contingent Liabilities and Commitments

As a holding company, Hamilton Beach Holding has no contractual obligations, contingent liabilities and commitments.

 

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Off Balance Sheet Arrangements

As a holding company, Hamilton Beach Holding has not entered into any off balance sheet financing arrangements. See HBB and KC’s contractual obligations tables in the HBB and KC segment results.

Capital Structure

Hamilton Beach Holding’s consolidated capital structure at June 30, 2017 compared with both June 30, 2016 and December 31, 2016, and December 31, 2016 compared with December 31, 2015 is presented below:

June 30, 2017 Compared with June 30, 2016

 

     JUNE 30
2017
    JUNE 30
2016
    Change  

Cash and cash equivalents

   $ 5,328     $ 4,283     $ 1,045  

Other net tangible assets

     99,066       91,573       7,493  

Goodwill and intangible assets, net

     12,843       14,224       (1,381
  

 

 

   

 

 

   

 

 

 

Net assets

     117,237       110,080       7,157  

Total debt

     (54,276 )       (40,314     (13,962
  

 

 

   

 

 

   

 

 

 

Total equity

   $ 62,961     $ 69,766     $ (6,805
  

 

 

   

 

 

   

 

 

 

Debt to total capitalization

     46 %       37     9

June 30, 2017 Compared with December 31, 2016

 

     JUNE 30
2017
    DECEMBER 31
2016
    Change  

Cash and cash equivalents

   $ 5,328     $ 11,340     $ (6,012

Other net tangible assets

     99,066       78,965       20,101  

Goodwill and intangible assets, net

     12,843       13,535       (692
  

 

 

   

 

 

   

 

 

 

Net assets

     117,237       103,840       13,397  

Total debt

     (54,276 )       (38,714     (15,562
  

 

 

   

 

 

   

 

 

 

Total equity

   $ 62,961     $ 65,126     $ (2,165
  

 

 

   

 

 

   

 

 

 

Debt to total capitalization

     46 %       37     9

December 31, 2016 Compared with December 31, 2015

 

     December 31        
     2016     2015     Change  

Cash and cash equivalents

   $ 11,340     $ 16,798     $ (5,458

Other net tangible assets

     78,965       109,475       (30,510

Goodwill and intangible assets, net

     13,535       14,916       (1,381
  

 

 

   

 

 

   

 

 

 

Net assets

     103,840       141,189       (37,349

Total debt

     (38,714 )       (58,365     19,651  
  

 

 

   

 

 

   

 

 

 

Total equity

   $ 65,126     $ 82,824     $ (17,698
  

 

 

   

 

 

   

 

 

 

Debt to total capitalization

     37 %       41     (4 )% 

The components of change are discussed below in “Segment Results”.

 

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OUTLOOK

Looking forward and taking into account the additional expenses associated with becoming a public company, Hamilton Beach Holding is expected to have ongoing annual incremental expenses of up to $3 million pre-tax. These expenses will commence on completion of the spin-off of Hamilton Beach Holding when the normal and customary expenses associated with being a public company are expected to be incurred, such as expenses related to its public reporting obligations, directors fees and insurance.

SEGMENT RESULTS

Hamilton Beach Brands, Inc.

HBB’s business is seasonal and a majority of revenues and operating profit typically occurs in the second half of the year when sales of small electric appliances to retailers and consumers increase significantly for the fall holiday-selling season.

Financial Review

Operating Results

Second Quarter of 2017 Compared with Second Quarter of 2016

The results of operations for HBB were as follows for the three months ended June 30:

 

     Three Months Ended
June 30
    % of Sales
Revenue, net
 
     2017     2016     2017     2016  

Revenues

   $ 127,574     $ 127,054       100.0     100.0

Cost of goods sold

     100,446       101,434       78.7     79.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     27,128       25,620       21.3     20.2

Operating expenses (1)

     21,964       20,924       17.2     16.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     5,164       4,696       4.0     3.7

Interest expense

     383       323       0.3     0.3

Other income, net

     (311     (247     (0.2 )%      (0.2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     5,092       4,620       4.0     3.6

Income tax expense

     1,897       1,686       1.5     1.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,195     $ 2,934       2.5     2.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     37.3     36.5    

 

(1) Operating expenses include selling, general and administrative expenses, amortization of intangibles and (gain)/loss on sale of assets.

 

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The following table identifies the components of change in revenues for the second quarter of 2017 compared with the second quarter of 2016:

 

     Revenues  

2016

   $ 127,054  

Increase (decrease) from:

  

Unit volume and product mix

     932  

Other

     312  

Foreign currency

     (724
  

 

 

 

2017

   $ 127,574  
  

 

 

 

Revenues for the second quarter of 2017 were comparable to the second quarter of 2016 as an increase in sales volumes was partially offset by unfavorable foreign currency movements.

The following table identifies the components of change in operating profit for the second quarter of 2017 compared with the second quarter of 2016:

 

     Operating Profit  

2016

   $ 4,696  

Increase (decrease) from:

  

Gross profit

     1,463  

Foreign currency

     45  

Selling, general and administrative expenses

     (1,040
  

 

 

 

2017

   $ 5,164  
  

 

 

 

HBB’s operating profit increased $0.5 million in the second quarter of 2017 compared with the second quarter of 2016 as a result of $0.5 million in increased revenues and a $0.9 million decrease in cost of goods sold, both of which contributed to the increase in gross profit, which was partially offset by a $1.0 million increase in Selling, general and administrative expenses.

The decrease in cost of goods sold and the improvement in gross margin, which was 21.3% in the second quarter of 2017 compared with 20.2% in the second quarter of 2016, resulted primarily from $1.4 million in lower product costs as well as a $0.6 million favorable shift in sales mix to higher-margin and higher-priced products. These favorable changes were partially offset by $0.5 million in higher transportation, warehouse and product liability costs within cost of goods sold, as well as increased Selling, general and administrative expenses primarily due to $0.9 million of higher employee-related costs. The increase in employee-related costs was primarily due to higher salaries and hourly compensation.

HBB’s Interest expense, Other income, net, Income tax expense and the effective income tax rates, 37.3% and 36.5%, respectively, were comparable in the second quarter of 2017 and the second quarter of 2016. HBB recognized net income of $3.2 million in the second quarter of 2017 compared with net income of $2.9 million in the second quarter of 2016, primarily due to the factors affecting operating profit.

 

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First Six Months of 2017 Compared with First Six Months of 2016

The results of operations for HBB were as follows for the six months ended June 30:

 

     Six Months Ended
June 30
    % of Sales
Revenue, net
 
     2017     2016     2017     2016  

Revenues

   $ 241,728     $ 242,794       100.0     100.0

Cost of goods sold

     191,985       196,016       79.4     80.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     49,743       46,778       20.6     19.3

Operating expenses (1)

     43,797       42,015       18.1     17.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     5,946       4,763       2.5     2.0

Interest expense

     763       749       0.3     0.3

Other income, net

     (1,011     (204     (0.4 )%      (0.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     6,194       4,218       2.6     1.7

Income tax expense

     2,310       1,545       1.0     0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,884     $ 2,673       1.6     1.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     37.3     36.6    

 

(1) Operating expenses include selling, general and administrative expenses, amortization of intangibles and (gain)/loss on sale of assets.

The following table identifies the components of change in revenues for the first six months of 2017 compared with the first six months of 2016:

 

     Revenues  

2016

   $ 242,794  

Increase (decrease) from:

  

Foreign currency

     (1,192

Unit volume and product mix

     (311

Other

     437  
  

 

 

 

2017

   $ 241,728  
  

 

 

 

Revenues decreased $1.1 million during the first six months of 2017 compared to the first six months of 2016 primarily due to unfavorable foreign currency movements.

The following table identifies the components of change in operating profit for the first six months of 2017 compared with the first six months of 2016:

 

     Operating Profit  

2016

   $ 4,763  

Increase (decrease) from:

  

Gross profit

     3,081  

Selling, general and administrative expenses

     (1,782

Foreign currency

     (116
  

 

 

 

2017

   $ 5,946  
  

 

 

 

 

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HBB’s operating profit increased $1.2 million, or 24.8%, in the first six months of 2017 compared with the first six months of 2016 primarily as a result of a $4.1 million decrease in cost of goods sold, partially offset by $1.1 million in decreased revenues and a $1.8 million increase in Selling, general and administrative expenses.

The decrease in cost of goods sold and the improvement in gross margin, which was 20.6% in the first six months of 2017 compared with 19.3% in the first six months of 2016, was due to $3.7 million in lower product costs and a $3.6 million favorable shift in sales mix to higher-margin and higher-priced products. This was partially offset by $1.8 million of increased transportation and warehouse costs in cost of goods sold as well as $1.6 million in lower sales volumes. An increase in selling, general and administrative expenses, primarily due to $1.3 million of higher employee-related costs for higher salaries, hourly compensation and incentive compensation, also partially offset the improvement in operating profit.

HBB recognized $0.7 million of higher Other income, net, due to an increase in foreign currency gains. These favorable variances were partially offset by $0.8 million in increased Income tax expense due to higher Income before income taxes. HBB’s Interest expense and the effective income tax rates, 37.3% and 36.6%, respectively, were comparable in the first six months of 2017 and the first six months of 2016. As a result of these factors, HBB’s net income increased to $3.9 million in the first six months of 2017 compared with net income of $2.7 million in the first six months of 2016.

2016 Compared with 2015

The results of operations for HBB were as follows for the years ended December 31:

 

     Year Ended
December 31
    % of Sales
Revenue, net
 
     2016     2015     2016     2015  

Revenues

   $ 605,170     $ 620,977       100.0     100.0

Cost of Goods Sold

     476,756       497,838       78.8     80.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     128,414       123,139       21.2     19.8

Operating expenses(1)

     85,381       88,338       14.1     14.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     43,033       34,801       7.1     5.6

Interest expense

     1,165       1,831       0.2     0.3

Other expense, net

     770       1,470       0.1     0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     41,098       31,500       6.8     5.1

Income tax expense

     14,541       11,751       2.4     1.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 26,557     $ 19,749       4.4     3.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     35.4     37.3    

 

(1) Operating expenses include selling, general and administrative expenses, amortization of intangibles and (gain)/loss on sale of assets.

 

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The following table identifies the components of change in revenues for 2016 compared with 2015:

 

     Revenues  

2015

   $ 620,977  

Increase (decrease) from:

  

Unit volume and product mix

     (9,259

Foreign currency

     (7,700

Average sales price

     1,152  
  

 

 

 

2016

   $ 605,170  
  

 

 

 

Revenues for 2016 decreased 2.5% compared with 2015 primarily due to decreased sales volumes, mainly in the U.S. consumer retail market, and unfavorable foreign currency movements as both the Mexican peso and Canadian dollar weakened against the U.S. dollar.

The following table identifies the components of change in operating profit for 2016 compared with 2015:

 

     Operating Profit  

2015

   $ 34,801  

Increase (decrease) from:

  

Gross profit

     6,543  

Selling, general and administrative expenses

     2,957  

Foreign currency

     (1,268
  

 

 

 

2016

   $ 43,033  
  

 

 

 

HBB’s operating profit increased $8.2 million, or 23.7%, in 2016 compared with 2015 primarily as a result of a $22.4 million decrease in cost of goods sold, partially offset by $15.8 million in decreased revenues and $1.3 million in unfavorable foreign currency movements as the Mexican peso weakened against the U.S. dollar. A $3.0 million decrease in Selling, general and administrative expenses also contributed to the increase in operating profit.

The decrease in costs of goods sold and the improvement in gross margin, which was 21.2% in 2016 compared with 19.8% in 2015, resulted from a $8.4 million shift in sales mix to higher-priced and higher-margin products and $3.6 million in lower product costs, partially offset by $3.9 million in reduced sales volumes. Selling, general and administrative expenses decreased as a result of lower professional and outside service fees ($1.9 million), decreased advertising and marketing expenses ($1.5 million) and a reduction in environmental expenses in 2016 compared with 2015. HBB recorded $1.5 million in 2015 for environmental investigation and remediation at HBB’s Picton, Ontario facility. These decreases in Selling, general and administrative expenses were partially offset by higher employee-related costs of $2.9 million for higher incentive compensation and salaries.

The improvement in operating profit, a reduction in Interest expense of $0.7 million due to fewer borrowings and lower Other expense, net, of $0.8 million due to foreign currency fluctuations also contributed to the increase in net income. These favorable variances were partially offset by $2.8 million in increased Income tax expense due to higher Income before income taxes. Despite the increase in Income tax expense, HBB had a lower effective income tax rate in 2016 compared with 2015 as HBB realized a $0.6 million tax benefit related to the reversal of a reserve previously established for an uncertain tax position due to favorable resolution of a state tax matter in 2016. Net income increased to $26.6 million in 2016 compared with $19.7 million in 2015 primarily due to these factors.

 

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Liquidity and Capital Resources of HBB — Before the Spin-Off

Cash Flows

The following tables detail the changes in cash flow for the six months ended June 30:

 

     2017      2016      Change  

Operating activities:

        

Net income

   $ 3,884      $ 2,673      $ 1,211  

Depreciation and amortization

     1,926        1,850        76  

Other

     294        (439      733  

Working capital changes

     (10,058      25,984        (36,042
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used for) operating activities

     (3,954      30,068        (34,022

Investing activities:

        

Expenditures for property, plant and equipment

     (1,939      (2,290      351  

Other

     21        15        6  
  

 

 

    

 

 

    

 

 

 

Net cash used for investing activities

     (1,918      (2,275      357  
  

 

 

    

 

 

    

 

 

 

Cash flow before financing activities

   $ (5,872    $ 27,793      $ (33,665
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used for) operating activities changed by $34.0 million in the first six months of 2017 compared with the first six months of 2016 primarily as a result of the change in working capital. The change in working capital was mainly due to a decrease in accounts payable during the first six months of 2017 compared with an increase in accounts payable during 2016, and an increase in inventory during the first six months of 2017 compared with a decrease in inventory during 2016. The changes in accounts payable and inventory were primarily attributable to the timing of purchases due in part to higher forecasted sales for the second half of 2017, as well as lower sales in the first six months of 2017 compared with the sales forecast.

 

     2017      2016      Change  

Financing activities:

        

Net additions (reductions) to revolving credit agreement and other

   $ 8,362      $ (24,409    $ 32,771  
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used for) financing activities

   $ 8,362      $ (24,409    $ 32,771  
  

 

 

    

 

 

    

 

 

 

The change in net cash provided by (used for) financing activities was mainly the result of an increase in borrowings as HBB required more cash to fund working capital during the first six months of 2017 compared with the first six months of 2016.

 

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The following tables detail the change in cash flow for the years ended December 31:

 

     2016      2015      Change  

Operating activities:

        

Net income

   $ 26,557      $ 19,749      $ 6,808  

Depreciation and amortization

     4,681        4,750        (69

Other

     1,279        (2,361      3,640  

Working capital changes

     26,214        (8,197      34,411  
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     58,731        13,941        44,790  

Investing activities:

        

Expenditures for property, plant and equipment

     (4,814      (4,365      (449

Acquisition of business

     —          (413      413  

Other

     26        3        23  
  

 

 

    

 

 

    

 

 

 

Net cash used for investing activities

     (4,788      (4,775      (13
  

 

 

    

 

 

    

 

 

 

Cash flow before financing activities

   $ 53,943      $ 9,166      $ 44,777  
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities increased $44.8 million in 2016 compared with 2015 primarily due to the change in working capital, which was largely attributable to a change in accounts payable partially offset by the change in accounts receivable. Accounts payable had a significant increase during 2016 compared with a large decrease in 2015 primarily due to a change in the timing of payments. Accounts receivable increased during 2016 compared with a decrease in 2015 attributable to a shift in the timing of sales and collections in 2016 compared with 2015.

 

     2016      2015      Change  

Financing activities:

        

Net additions (reductions) to revolving credit agreement

   $ (19,651    $ 4,912      $ (24,563

Cash dividends paid to NACCO

     (32,000      (15,000      (17,000

Other

     (186      —          (186
  

 

 

    

 

 

    

 

 

 

Net cash used for financing activities

   $ (51,837    $ (10,088    $ (41,749
  

 

 

    

 

 

    

 

 

 

The change in net cash used for financing activities was primarily the result of a reduction in borrowings under the revolving credit facility in 2016 compared with an increase in borrowings in 2015, as well as an increase in cash dividends paid to NACCO in 2016.

Liquidity and Capital Resources of HBB — After the Spin-Off

After completion of the spin-off, our primary source of liquidity will continue to be cash flow generated from operations.

Financing Activities of HBB — Before the Spin-Off

HBB has a $115.0 million senior secured floating-rate revolving credit facility (the “HBB Facility”) that expires in June 2021. The obligations under the HBB Facility are secured by substantially all of HBB’s assets. The approximate book value of HBB’s assets held as collateral under the HBB Facility was $234.8 million as of

 

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June 30, 2017. At June 30, 2017, the borrowing base under the HBB Facility was $104.0 million and borrowings outstanding under the HBB Facility were $47.1 million. At June 30, 2017, the excess availability under the HBB Facility was $56.9 million.

The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible accounts receivable, inventory and trademarks of the borrowers, as defined in the HBB Facility. Adjustments to reserves booked against these assets, including inventory reserves, will change the eligible borrowing base and thereby impact the liquidity provided by the HBB Facility. A portion of the availability is denominated in Canadian dollars to provide funding to HBB’s Canadian subsidiary. Borrowings bear interest at a floating rate, which can be a base rate or LIBOR, as defined in the HBB Facility, plus an applicable margin. The applicable margins, effective June 30, 2017, for base rate loans and LIBOR loans denominated in U.S. dollars were 0.00% and 1.50%, respectively. The applicable margins, effective June 30, 2017, for base rate loans and bankers’ acceptance loans denominated in Canadian dollars were 0.00% and 1.50%, respectively. The HBB Facility also requires a fee of 0.25% per annum on the unused commitment. The margins and unused commitment fee under the HBB Facility are subject to quarterly adjustment based on average excess availability. The floating rate of interest applicable to the HBB Facility at June 30, 2017 was 2.94% including the floating rate margin and the effect of interest rate swap agreements discussed below.

To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of the HBB Facility. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate. HBB has interest rate swaps with notional values totaling $20.0 million at June 30, 2017 at an average fixed rate of 1.4%. HBB also has delayed start interest rate swaps with notional values totaling $25.0 million at June 30, 2017, with fixed rates of 1.6% and 1.7%.

The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends to NACCO, subject to achieving availability thresholds. HBB expects to declare a dividend of $35 million to NACCO prior to the spin-off in September 2017, which under Amendment No. 5 to the HBB Facility, has been excluded from the covenants. Other than the expected $35 million dividend in September 2017, dividends are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $25.0 million. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility. At June 30, 2017, HBB was in compliance with all financial covenants in the HBB Facility.

HBB believes funds available from cash on hand, the HBB Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the HBB Facility.

Financing Activities of HBB - After the Spin-Off

Our financing will continue to be provided by our HBB Facility.

 

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Contractual Obligations, Contingent Liabilities and Commitments — Before the Spin-Off

Following is a table which summarizes the contractual obligations of HBB as of December 31, 2016:

 

     Payments Due by Period  

Contractual Obligations

   Total      2017      2018      2019      2020      2021      Thereafter  

HBB Facility

   $ 37,917      $ 11,917      $ —        $ —        $ —        $ 26,000      $ —    

Variable interest payments on HBB Facility

     8,218        1,296        1,555        1,908        2,213        1,246        —    

Other debt

     798        798        —          —          —          —          —    

Purchase and other obligations

     175,085        164,979        3,560        3,471        3,075        —          —    

Operating leases

     40,848        5,889        5,556        5,362        5,295        3,547        15,199  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 262,866      $ 184,879      $ 10,671      $ 10,741      $ 10,583      $ 30,793      $ 15,199  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Not included in the table above, HBB has a long-term liability of approximately $0.5 million for unrecognized tax benefits, including interest and penalties, as of December 31, 2016. At this time, we are unable to make a reasonable estimate of the timing of payments due to, among other factors, the uncertainty of the timing and outcome of its audits.

An event of default, as defined in the HBB Facility and in HBB’s operating agreements, could cause an acceleration of the payment schedule. No such event of default has occurred or is anticipated to occur.

HBB’s variable interest payments are calculated based upon HBB’s anticipated payment schedule and the December 31, 2016 base rate and applicable margins, as defined in the HBB Facility. A 1/8% increase in the base rate would increase HBB’s estimated total annual interest payments on the HBB Facility by approximately $0.3 million.

The purchase and other obligations are primarily for accounts payable, open purchase orders and accrued payroll and incentive compensation.

Pension funding can vary significantly each year due to plan amendments, changes in the market value of plan assets, legislation and our decisions to contribute above the minimum regulatory funding requirements. As a result, pension funding has not been included in the table above. HBB does not expect to contribute to its U.S. pension plans in 2017 and expects to contribute less than $0.1 million to its non-U.S. pension plans in 2017. Pension benefit payments are made from assets of the pension plans.

Contractual Obligations, Contingent Liabilities and Commitments — After the Spin-Off

After completion of the spin-off, we do not expect our contractual obligations to change materially.

Off Balance Sheet Arrangements

HBB has not entered into any off balance sheet financing arrangements, other than operating leases, which are disclosed in the contractual obligations table above.

Capital Expenditures

Expenditures for property, plant and equipment were $1.9 million for the first six months of 2017 and are estimated to be an additional $4.8 million for the remainder of 2017. These planned capital expenditures are primarily for tooling for new products and improvements to HBB’s information technology infrastructure. These expenditures are expected to be funded from internally generated funds and bank borrowings.

 

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Capital Structure

Working capital is significantly affected by the seasonality of HBB’s business. The following is a discussion of the changes in HBB’s capital structure at June 30, 2017 compared with both June 30, 2016 and December 31, 2016, and December 31, 2016 compared with December 31, 2015.

June 30, 2017 Compared with June 30, 2016

 

     JUNE 30
2017
    JUNE 30
2016
    Change  

Cash and cash equivalents

   $ 4,876     $ 3,749     $ 1,127  

Other net tangible assets

     78,252       68,359       9,893  

Goodwill and intangible assets, net

     12,843       14,224       (1,381
  

 

 

   

 

 

   

 

 

 

Net assets

     95,971       86,332       9,639  

Total debt

     (47,076     (34,156     (12,920
  

 

 

   

 

 

   

 

 

 

Total equity

   $ 48,895     $ 52,176     $ (3,281
  

 

 

   

 

 

   

 

 

 

Debt to total capitalization

     49     40     9

Other net tangible assets increased $9.9 million from June 30, 2016 primarily due to increases in inventory and receivables, partially offset by an increase in accounts payable. The changes in inventory and accounts payable were primarily attributable to the timing of purchases and a higher sales forecast for the second half of 2017. Receivables increased due to timing as well as changes in other receivables.

Total debt increased $12.9 million to fund working capital.

June 30, 2017 Compared with December 31, 2016

 

     JUNE 30
2017
    DECEMBER 31
2016
    Change  

Cash and cash equivalents

   $ 4,876     $ 2,321     $ 2,555  

Other net tangible assets

     78,252       66,917       11,335  

Goodwill and intangible assets, net

     12,843       13,534       (691
  

 

 

   

 

 

   

 

 

 

Net assets

     95,971       82,772       13,199  

Total debt

     (47,076     (38,714     (8,362
  

 

 

   

 

 

   

 

 

 

Total equity

   $ 48,895     $ 44,058     $ 4,837  
  

 

 

   

 

 

   

 

 

 

Debt to total capitalization

     49     47     2

Other net tangible assets increased $11.3 million from December 31, 2016 primarily due to decreases in accounts payable, accrued cooperative advertising and accrued payroll as well as an increase in inventory, partially offset by a decrease in accounts receivable. The changes in accounts payable, inventory and accounts receivable were primarily attributable to the seasonality of the business. Accrued payroll and accrued cooperative advertising decreased as payments were made during the first six months of of 2017.

Total debt increased $8.4 million to fund working capital as a result of the seasonality of the business.

 

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December 31, 2016 Compared with December 31, 2015

 

     December 31        
     2016     2015     Change  

Cash and cash equivalents

   $ 2,321     $ 474     $ 1,847  

Other net tangible assets

     66,916       94,353       (27,437

Goodwill and intangible assets, net

     13,535       14,915       (1,380
  

 

 

   

 

 

   

 

 

 

Net assets

     82,772       109,742       (26,970

Total debt

     (38,714     (58,365     19,651  
  

 

 

   

 

 

   

 

 

 

Total equity

   $ 44,058     $ 51,377     $ (7,319
  

 

 

   

 

 

   

 

 

 

Debt to total capitalization

     47     53     (6 )% 

Net assets decreased $27.0 million from December 31, 2015 primarily due to increases in accounts payable, other current liabilities and accrued payroll. The increase in accounts payable was primarily due to a change in the timing of payments in 2016 compared with 2015. The other current liabilities increase is primarily attributable to changes in accrued cooperative advertising in 2016 compared with 2015.

Total debt decreased $19.7 million primarily due to the timing of working capital payments partially offset by dividends paid to NACCO during 2016.

Total equity decreased $7.3 million primarily due to $32.0 million of dividends paid to NACCO during 2016 and a $2.8 million increase in accumulated other comprehensive loss, mainly due to changes in the foreign currency translation adjustment, partially offset by HBB’s 2016 net income of $26.6 million.

 

     HBB  
     (in thousands)  

Calculation of Return on Capital Employed and Return on Equity:

  

Trailing 12 months 6/30/2017

  

Average Equity (6/30/17, 3/31/17, 12/31/16, 9/30/16 and 6/30/16)

   $ 50,441  

Average Debt (6/30/17, 3/31/17, 12/31/16, 9/30/16 and 6/30/16)

     39,071  

Average Cash (6/30/17, 3/31/17, 12/31/16, 9/30/16 and 6/30/16)

     (4,190
  

 

 

 

Total Trailing 12 months average capital employed

   $ 85,322  

Trailing 12 months Net income (loss), as reported

   $ 27,768  

Plus: Trailing 12 months Interest expense, net

     1,179  

Less: Income taxes on Trailing 12 months interest expense at 38%*

     (448
  

 

 

 

Actual return on capital employed = actual net income (loss) before interest expense, net, after tax

   $ 28,499  
  

 

 

 

Actual return on capital employed percentage (1)

     33.4
  

 

 

 

Actual return on equity percentage (2)

     55.1
  

 

 

 

 

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     HBB  
     (in thousands)  

2016

  

2016 Average Equity (12/31/2015 and each of 2016’s quarter ends)

   $ 51,954  

2016 Average Debt (12/31/2015 and at each of 2016’s quarter ends)

     40,167  

2016 Average Cash (12/31/2015 and at each of 2016’s quarter ends)

     (2,616
  

 

 

 

Total 2016 average capital employed

   $ 89,505  

2016 Net income (loss), as reported

   $ 26,557  

Plus: 2016 Interest expense, net

     1,165  

Less: Income taxes on 2016 interest expense at 38%*

     (443
  

 

 

 

Actual return on capital employed = actual net income (loss) before interest expense, net, after tax

   $ 27,279  
  

 

 

 

Actual return on capital employed percentage (1)

     30.5
  

 

 

 

Actual return on equity percentage (2)

     51.1
  

 

 

 

2015

  

2015 Average Equity (12/31/2014 and each of 2015’s quarter ends)

   $ 51,541  

2015 Average Debt (12/31/2014 and at each of 2015’s quarter ends)

     58,870  

2015 Average Cash (12/31/2014 and at each of 2015’s quarter ends)

     (1,373
  

 

 

 

Total 2015 average capital employed

   $ 109,038  

2015 Net income (loss), as reported

   $ 19,749  

Plus: 2015 Interest expense, net

     1,775  

Less: Income taxes on 2016 interest expense at 38%*

     (675
  

 

 

 

Actual return on capital employed = actual net income (loss) before interest expense, net, after tax

   $ 20,849  
  

 

 

 

Actual return on capital employed percentage (1)

     19.1
  

 

 

 

Actual return on equity percentage (2)

     38.3
  

 

 

 

 

(1) Return on capital employed is provided solely as a supplemental disclosure with respect to income generation because management believes it provides useful information with respect to earnings in a form that is comparable to the Company’s cost of capital employed, which includes both equity and debt securities, net of cash.
(2) Return on equity is defined as net income divided by average equity.
* Tax rate of 38% represents the Company’s target marginal tax rate.

OUTLOOK

Overall consumer confidence and changing consumer buying patterns continue to create uncertainty about the overall growth prospects for the U.S. retail market for small appliances. In this context, U.S. and Canadian consumer retail markets for small kitchen appliances in the second half of 2017 are expected to be comparable to the second half of 2016, while international and commercial markets in which HBB participates are expected to continue to grow moderately. Sales are expected to continue to shift from in-store channels to internet sales channels.

HBB continues to focus on strengthening the consumer market position of its various product lines through product innovation, promotions, increased placements and branding programs. HBB will continue to leverage its strong brand portfolio by introducing new innovative products, as well as upgrades to certain existing products

 

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across a wide range of brands, price points and categories in both retail and commercial marketplaces. HBB continues to pursue opportunities to create or add product lines and brands that can be distributed in high-end or specialty stores and on the Internet, including the addition of a new CHI ® -branded garment care line under a multi-year licensing deal, which began initial shipments during the first half of 2017 and is gaining distribution traction. HBB also expects its growing global commercial business to benefit from broader distribution of several newer products. HBB’s robust commercial and retail product pipeline is expected to affect both revenues and operating profit positively.

As a result of this market environment and new product introductions, HBB’s sales volumes and revenues are expected to increase in the second half of 2017 compared with the second half of 2016, resulting in overall modest full-year increases provided consumer spending is at expected levels. These increases are expected to be slightly more than the anticipated market growth due to enhanced distribution and increased higher-margin product placements resulting from the execution of the company’s strategic initiatives, both domestically and internationally.

Net income in the second half of 2017 and for full-year 2017 is expected to increase modestly compared with the prior year periods as benefits from increased revenues are expected to be partially offset by the costs to implement HBB’s strategic initiatives, as well as increased distribution, advertising and employee-related costs. HBB continues to monitor currency effects, as well as commodity and other input costs, closely, and intends to continue to adjust product prices and product placements as market conditions permit.

For both the second half and full-year 2017, cash flow before financing activities is expected to be substantial but lower than full-year 2016. Capital expenditures are expected to be approximately $7 million in 2017, of which approximately $2 million was expended in the first half of 2017.

Longer term, HBB will work to improve return on sales through economies of scale derived from market growth and its strategic revenue growth initiatives. These initiatives are focused on enhancing HBB’s placements in the North American consumer business, enhancing sales in the e-commerce market, expanding its participation in the “only-the-best” market by investing in new products to be sold under the Wolf Gourmet ® , Weston ® , Hamilton Beach ® Professional and CHI ® brand names, expanding internationally in emerging growth markets, increasing its global commercial presence through enhanced global product lines for chains and distributors serving the global food service and hospitality markets and leveraging its other strategic initiatives to drive category and channel expansion.

The Kitchen Collection, LLC

KC’s business is seasonal, and a majority of its revenues and operating profit is typically earned in the second half of the year when sales of kitchenware to consumers increase significantly for the fall holiday-selling season.

At June 30, 2017, KC operated 209 stores compared with 220 stores at June 30, 2016 and 223 stores at December 31, 2016.

 

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Financial Review

Operating Results

Second Quarter of 2017 Compared with Second Quarter of 2016

The results of operations for KC were as follows for the three months ended June 30:

 

     Three Months Ended
June 30
    % of Sales
Revenue, net
 
     2017     2016         2017             2016      

Revenues

   $ 25,868     $ 28,634       100.0     100.0

Cost of goods sold

     14,173       15,961       54.8     55.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     11,695       12,673       45.2     44.3

Operating expenses (1)

     14,703       15,684       56.8     54.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (3,008     (3,011     (11.6 )%      (10.5 )% 

Interest expense

     79       52       0.3     0.2

Other expense

     14       16       0.1     0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes (benefit)

     (3,101     (3,079     (12.0 )%      (10.8 )% 

Income tax expense (benefit)

     (1,131     (1,125     (4.4 )%      (3.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (1,970   $ (1,954     (7.6 )%      (6.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     36.5     36.5    

 

(1) Operating expenses include selling, general and administrative expenses and (gain)/loss on sale of assets.

The following table identifies the components of change in revenues for the second quarter of 2017 compared with the second quarter of 2016:

 

     Revenues  

2016

   $ 28,634  

Increase (decrease) from:

  

Closed stores

     (2,237

Comparable stores

     (1,733

New stores

     1,039  

Other, primarily e-commerce

     165  
  

 

 

 

2017

   $ 25,868  
  

 

 

 

Revenues for the second quarter of 2017 decreased $2.8 million compared with the second quarter of 2016 due to the loss of sales from closing underperforming stores since June 30, 2016 and a decline in comparable store sales. The decrease in comparable store sales resulted from fewer customer visits and a reduction in store transactions for the second quarter of 2017 compared with the second quarter of 2016. These decreases were partially offset by sales at newly opened stores and e-commerce sales.

KC’s cost of goods sold for the second quarter of 2017 decreased $1.8 million compared with the second quarter of 2016, primarily as a result of the decrease in sales, but also due to a shift in sales mix which resulted in a 0.9% improvement in gross margin.

 

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The following table identifies the components of change in operating loss for the second quarter of 2017 compared with the second quarter of 2016:

 

     Operating Loss  

2016

   $ (3,011

(Increase) decrease from:

  

Comparable stores

     (441

New stores

     (106

Selling, general and administrative expenses and other

     328  

Closed stores

     222  
  

 

 

 

2017

   $ (3,008
  

 

 

 

KC’s operating loss in the second quarter of 2017 was comparable to the second quarter of 2016 as the decline in sales at comparable stores was offset by lower selling, general and administrative expenses, primarily due to a $0.2 million reduction in employee-related expenses.

KC’s income tax benefit and effective tax rates were comparable in the second quarter of 2017 and the second quarter of 2016. KC recognized a net loss of $2.0 million in both the second quarter of 2017 and the second quarter of 2016.

First Six Months of 2017 Compared with First Six Months of 2016

The results of operations for KC were as follows for the six months ended June 30:

 

     Six Months Ended
June 30
    % of Sales
Revenue, net
 
     2017     2016         2017             2016      

Revenues

   $ 52,533     $ 57,017       100.0     100.0

Cost of goods sold

     28,935       31,400       55.1     55.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     23,598       25,617       44.9     44.9

Operating expenses(1)

     29,885       31,518       56.9     55.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (6,287     (5,901     (12.0 )%      (10.3 )% 

Interest expense

     114       80       0.2     0.1

Other expense

     32       35       0.1     0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes (benefit)

     (6,433     (6,016     (12.2 )%      (10.6 )% 

Income tax expense (benefit)

     (2,320     (2,194     (4.4 )%      (3.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (4,113   $ (3,822     (7.8 )%      (6.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     36.1     36.5    

 

(1) Operating expenses include selling, general and administrative expenses and (gain)/loss on sale of assets.

 

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The following table identifies the components of change in revenues for the first six months of 2017 compared with the first six months of 2016:

 

     Revenues  

2016

   $ 57,017  

Increase (decrease) from:

  

Closed stores

     (4,502

Comparable stores

     (2,366

New stores

     1,914  

Other, primarily e-commerce

     470  
  

 

 

 

2017

   $ 52,533  
  

 

 

 

Revenues for the first six months of 2017 decreased $4.5 million compared with the first six months of 2016 primarily due to the loss of sales from closing underperforming stores since June 30, 2016 as well as a decline in comparable store sales. The decrease in comparable store sales resulted from fewer customer visits and a reduction in store transactions, partially offset by an increase in the average sales transaction value for the first six months of 2017 compared with the first six months of 2016. These decreases were partially offset by sales at newly opened stores and e-commerce sales.

KC’s cost of goods sold for the first six months of 2017 decreased $2.5 million compared with the first six months of 2016 as a result of the decrease in sales. Gross margin is 44.9% in both six month periods.

The following table identifies the components of change in operating loss for the first six months of 2017 compared with the first six months of 2016:

 

     Operating Loss  

2016

   $ (5,901

(Increase) decrease from:

  

Comparable stores

     (735

New stores

     (211

Selling, general and administrative expenses and other

     312  

Closed stores

     248  
  

 

 

 

2017

   $ (6,287
  

 

 

 

KC’s operating loss increased $0.4 million in the first six months of 2017 compared with the first six months of 2016 as a result of a decline in sales at comparable stores, partially offset by lower selling, general and administrative expenses, primarily due to a $0.4 million reduction in employee-related expenses.

KC’s income tax benefit and effective tax rates were comparable in the second quarter of 2017 and the second quarter of 2016. KC reported a net loss of $4.1 million in the first six months of 2017 compared with a net loss of $3.8 million in the first six months of 2016 primarily due to the factors affecting the operating loss.

 

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2016 Compared with 2015

The results of operations for KC were as follows for the years ended December 31:

 

     Year Ended December 31     % of Sales
Revenue, net
 
     2016     2015         2016         2015      

Revenues

   $ 144,351     $ 150,988       100.0     100.0

Cost of goods sold

     78,960       83,988       54.7     55.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     65,391       67,000       45.3     44.4

Operating expenses (1)

     65,015       66,835       45.0     44.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     376       165       0.3     0.1

Interest expense

     209       131       0.1     0.1

Other expense

     67       86           0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     100       (52     0.1    

Income tax expense

     455       368       0.3     0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (355   $ (420     (0.2 )%      (0.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

     n/m       n/m      

 

(1) Operating expenses include selling, general and administrative expenses and (gain)/loss on sale of assets.

The following table identifies the components of change in revenues for 2016 compared with 2015:

 

     Revenues  

2015

   $ 150,988  

Increase (decrease) from:

  

Closed stores

     (7,907

Comparable stores

     (3,981

New stores

     5,028  

Other

     223  
  

 

 

 

2016

   $ 144,351  
  

 

 

 

Revenues decreased 4.4% in 2016 compared with 2015. The decrease was primarily the result of the loss of sales from closing unprofitable stores during 2016 and 2015 and a decline in comparable store sales. The decrease in comparable store sales resulted from fewer customer visits and a reduction in store transactions as a result of reduced consumer traffic, partially offset by an increase in the average sales transaction value for 2016 compared with 2015. These decreases were also offset by sales at newly opened stores.

KC’s cost of goods sold for 2016 decreased $5.0 million compared with 2015, primarily as a result of the decrease in sales, but also due to a shift in sales mix which resulted in a 0.9% improvement in gross margin.

 

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The following table identifies the components of change in operating profit for 2016 compared with 2015:

 

     Operating profit  

2015

   $ 165  

Increase (decrease) from:

  

Closed stores

     369  

Comparable stores

     101  

Selling, general and administrative expenses and other

     31  

Affordable Care Act (“ACA”) penalty

     (156

New stores

     (134
  

 

 

 

2016

   $ 376  
  

 

 

 

KC’s operating profit increased $0.2 million in 2016 compared with 2015 primarily as a result of closing unprofitable stores. Selling, general and administrative expenses were comparable in both 2016 and 2015.

KC reported a net loss of $0.4 million in both years as the $0.2 million improvement in operating profit in 2016 was offset by higher interest expense of $0.1 million and increased income tax expense of $0.1 million. KC’s income tax expense does not correlate with its income before tax as income before tax includes recognition of the ACA penalty that is not deductible for tax purposes.

Liquidity and Capital Resources of KC — Before the Spin-Off

Cash Flows

The following tables detail the changes in cash flow for the six months ended June 30:

 

     2017      2016      Change  

Operating activities:

        

Net loss

   $ (4,113    $ (3,822    $ (291

Depreciation and amortization

     556        709        (153

Other

     106        497        (391

Working capital changes

     (8,856      (8,618      (238
  

 

 

    

 

 

    

 

 

 

Net cash used for operating activities

     (12,307      (11,234      (1,073

Investing activities:

        

Expenditures for property, plant and equipment

     (460      (765      305  

Other

     —          51        (51
  

 

 

    

 

 

    

 

 

 

Net cash used for investing activities

     (460      (714      254  
  

 

 

    

 

 

    

 

 

 

Cash flow before financing activities

   $ (12,767    $ (11,948    $ (819
  

 

 

    

 

 

    

 

 

 

 

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The $1.1 million change in net cash used for operating activities was primarily the result of the change in other in the first six months of 2017 compared with the first six months of 2016. The change in other was primarily the result of the change in deferred income taxes.

 

     2017      2016      Change  

Financing activities:

        

Net additions to revolving credit agreement

   $ 7,200      $ 6,158      $ 1,042  

Cash dividends paid to NACCO

     (3,000      (10,000      7,000  
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used for) financing activities

   $ 4,200      $ (3,842    $ 8,042  
  

 

 

    

 

 

    

 

 

 

The change in net cash provided by (used for) financing activities was primarily the result of a decrease in cash dividends paid to NACCO during the first six months of 2017 compared with the first six months of 2016, as well as an increase in borrowings during the first six months of 2017 compared with the first six months of 2016.

The following tables detail the change in cash flow for the years ended December 31:

 

     2016      2015      Change  

Operating activities:

        

Net loss

   $ (355    $ (420    $ 65  

Depreciation

     1,545        1,558        (13

Other

     (219      771        (990

Working capital changes

     2,862        10,639        (7,777
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     3,833        12,548        (8,715

Investing activities:

        

Expenditures for property, plant and equipment

     (1,188      (1,806      618  

Other

     51        38        13  
  

 

 

    

 

 

    

 

 

 

Net cash used for investing activities

     (1,137      (1,768      631  
  

 

 

    

 

 

    

 

 

 

Cash flow before financing activities

   $ 2,696      $ 10,780      $ (8,084
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities decreased $8.7 million during 2016 compared with 2015 primarily due to the change in working capital. The change in working capital was attributable to an increase in inventory during 2016 compared with a large decrease during 2015, partially offset by a large increase in accounts payable during 2016 compared with a decrease during 2015. The increase in inventory during 2016 was primarily attributable to an increase in inventory per store at December 31, 2016 and the increase in accounts payable during 2016 was due to the timing of inventory purchases.

 

     2016      2015      Change  

Financing activities:

     

Cash dividends paid to NACCO

   $ (10,000    $ —        $ (10,000
  

 

 

    

 

 

    

 

 

 

Net cash used for financing activities

   $ (10,000    $         $ (10,000 )  
  

 

 

    

 

 

    

 

 

 

The $10.0 million change in net cash used for financing activities during 2016 compared with 2015 was the result of cash dividends paid to NACCO.

 

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Liquidity and Capital Resources of KC — After the Spin-Off

After completion of the spin-off, our primary source of liquidity will continue to be cash flow generated from operations.

Financing Activities of KC — Before the Spin-Off

KC has a $25.0 million secured revolving line of credit that expires in September 2019 (the “KC Facility”). The obligations under the KC Facility are secured by substantially all of the assets of KC. The approximate book value of KC’s assets held as collateral under the KC Facility was $38.7 million as of June 30, 2017. At June 30, 2017, the borrowing base under the KC Facility was $17.2 million and borrowings outstanding under the KC Facility were $7.2 million. At June 30, 2017, the excess availability under the KC Facility was $10.0 million.

The maximum availability under the KC Facility is derived from a borrowing base formula using KC’s eligible inventory and eligible credit card accounts receivable, as defined in the KC Facility. Borrowings bear interest at a floating rate plus a margin based on the excess availability under the agreement, as defined in the KC Facility, which can be either a base rate plus a margin of 1.00% or LIBOR plus a margin of 2.00% as of June 30, 2017. The KC Facility also requires a commitment fee of 0.32% per annum on the unused commitment.

The KC Facility allows for the payment of dividends to NACCO, subject to certain restrictions based on availability and meeting a fixed charge coverage ratio as described in the KC Facility. Dividends are limited to (i) $6.0 million in any twelve-month period, so long as KC has excess availability, as defined in the KC Facility, of at least $6.3 million after giving effect to such payment and maintaining a minimum fixed charge coverage ratio of 1.1 to 1.0, as defined in the KC Facility; (ii) $2.0 million in any twelve-month period, so long as KC has excess availability, as defined in the KC Facility, of at least $6.3 million after giving effect to such payment and (iii) in such amounts as determined by KC, so long as KC has excess availability under the KC Facility of $12.5 million after giving effect to such payment. At June 30, 2017, KC was in compliance with all financial covenants in the KC Facility.

KC believes funds available from cash on hand, the KC Facility and operating cash flows will provide sufficient liquidity to meet its operating needs and commitments arising during the next twelve months and until the expiration of the KC Facility.

Financing Activities of KC — After the Spin-Off

Our financing will continue to be provided by our KC Facility.

Contractual Obligations, Contingent Liabilities and Commitments — Before the Spin-off

Following is a table which summarizes the contractual obligations of KC as of December 31, 2016:

 

     Payments Due by Period  

Contractual Obligations

   Total      2017      2018      2019      2020      2021      Thereafter  

Purchase and other obligations

   $ 33,829      $ 33,829      $ —        $ —        $ —        $ —        $ —    

Operating leases

     66,940        18,753        14,451        10,543        8,096        5,208        9,889  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 100,769      $ 52,582      $ 14,451      $ 10,543      $ 8,096      $ 5,208      $ 9,889  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

An event of default, as defined in KC’s operating lease agreements, could cause an acceleration of the payment schedule. No such event of default has occurred or is anticipated to occur.

 

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The purchase and other obligations are primarily for accounts payable, open purchase orders, accrued payroll and incentive compensation.

Contractual Obligations, Contingent Liabilities and Commitments — After the Spin-Off

After completion of the spin-off, we do not expect our contractual obligations to change materially.

Off Balance Sheet Arrangements

KC has not entered into any off balance sheet financing arrangements, other than operating leases, which are disclosed in the contractual obligations table above.

Capital Expenditures

Expenditures for property, plant and equipment were $0.5 million for the first six months of 2017 and are estimated to be an additional $1.0 million for the remainder of 2017. These planned capital expenditures are primarily for improvements to KC’s information technology infrastructure, store remodels and new store fixtures. These expenditures are expected to be funded from internally generated funds and bank borrowings.

Capital Structure

Working capital is significantly affected by the seasonality of KC’s business. The following is a discussion of the changes in KC’s capital structure at June 30, 2017 compared with both June 30, 2016 and December 31, 2016, and December 31, 2016 compared with December 31, 2015.

June 30, 2017 Compared with June 30, 2016

 

     JUNE 30
2017
    JUNE 30
2016
    Change  

Cash and cash equivalents

   $ 443     $ 524     $ (81

Other net tangible assets

     21,039       23,562       (2,523
  

 

 

   

 

 

   

 

 

 

Net assets

     21,482       24,086       (2,604

Total debt

     (7,200     (6,158     (1,042
  

 

 

   

 

 

   

 

 

 

Total equity

   $ 14,282     $ 17,928     $ (3,646
  

 

 

   

 

 

   

 

 

 

Debt to total capitalization

     34     26     8

The $2.5 million decrease in other net tangible assets at June 30, 2017 compared with June 30, 2016 was the result of a decrease in inventory, due to fewer stores at June 30, 2017 compared with June 30, 2016, and an increase in the liability related to the Affordable Care Act penalty at June 30, 2017.

 

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June 30, 2017 Compared with December 31, 2016

 

     JUNE 30
2017
    DECEMBER 31
2016
     Change  

Cash and cash equivalents

   $ 443     $ 9,010      $ (8,567

Other net tangible assets

     21,039       12,384        8,655  
  

 

 

   

 

 

    

 

 

 

Net assets

     21,482       21,394        88  

Total debt

     (7,200     —          (7,200
  

 

 

   

 

 

    

 

 

 

Total equity

   $ 14,282     $ 21,394      $ (7,112
  

 

 

   

 

 

    

 

 

 

Debt to total capitalization

     34     (a      (a

 

(a) Debt to total capitalization is not meaningful.

Other net tangible assets increased $8.7 million at June 30, 2017 compared with December 31, 2016 primarily as a result of a decrease in accounts payable and changes in net intercompany tax receivable/payable, partially offset by a decrease in inventory. The decreases in accounts payable and inventory are due to the seasonality of the business and fewer stores at June 30, 2017 compared with December 31, 2016.

December 31, 2016 Compared with December 31, 2015

 

     December 31         
     2016      2015      Change  

Cash and cash equivalents

   $ 9,010      $ 16,314      $ (7,304

Other net tangible assets

     12,384        15,436        (3,052
  

 

 

    

 

 

    

 

 

 

Net assets

     21,394        31,750        (10,356

Total debt

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total equity

   $ 21,394      $ 31,750      $ (10,356
  

 

 

    

 

 

    

 

 

 

Debt to total capitalization

     (a      (a      (a

 

(a) Debt to total capitalization is not meaningful as KC has no outstanding debt at December 31, 2016 or December 31, 2015.

Other net tangible assets decreased $3.1 million from December 31, 2015 primarily due to an increase in accounts payable partially offset by an increase in inventory. The increases in accounts payable and inventory are primarily attributable to timing and an increase in average inventory per store at December 31, 2016 compared with December 31, 2015.

OUTLOOK

A shift in consumer shopping patterns has led to declining consumer traffic to physical retail locations and reduced in-store transactions as consumers buy more over the Internet or utilize the Internet for comparison shopping. These factors are expected to increasingly minimize KC’s target consumers’ spending on housewares and small appliances in mall locations. Given this market environment, KC closed 18 stores in the first half of 2017, and it expects to continue to aggressively manage its store portfolio with a continued focus on a smaller core group of profitable Kitchen Collection ® outlet stores in more favorable mall locations. As a result of these actions, KC anticipates revenues and results to continue to decline in the second half of 2017 compared with the

 

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second half of 2016, with full-year 2017 operating results also expected to decrease compared with 2016. KC expects 2017 cash flow before financing activities to be close to break even. Capital expenditures are expected to be approximately $1.5 million in 2017, of which $0.5 million was expended in the first half of 2017.

KC aims to provide consumers with products they want at affordable prices. KC’s continued focus on increasing the average sale per transaction, the average closure rate and the number of items per transaction through the continued refinement of its format and improved customer interactions to enhance customers’ store experience is expected to generate sales growth over time. Additionally, improved product offerings, a focus on sales of higher-margin products, merchandise mix and displays, new store profitability, closure of underperforming stores and optimizing expense structure are expected to generate improved operating profit over time. As a result, KC believes its smaller core store portfolio is well positioned to take advantage of any future market rebound.

Recently Issued Accounting Standards

Accounting Standards Not Yet Adopted: The Company is an emerging growth company and has elected not to opt out of an extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company can adopt the new or revised standard at the time private companies adopt the new or revised standard.

In May 2014, the FASB codified in ASC 606, “Revenue Recognition - Revenue from Contracts with Customers,” which supersedes most current revenue recognition guidance, including industry-specific guidance, and requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers and provide additional disclosures. As amended, the effective date for public entities is annual reporting periods beginning after December 15, 2017 and interim periods therein. The effective date for all other entities (nonpublic entities), is annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

The Company anticipates using the modified retrospective method with the cumulative effect of initially applying the standard recognized as an adjustment to equity. The Company has developed a project plan with respect to its implementation of this standard, including identification of revenue streams and review of contracts and procedures currently in place. To date, the Company has completed its initial review of the revenue streams related to its HBB and KC subsidiaries. The Company is also in the process of identifying and implementing any necessary changes to processes and controls to meet the standard’s updated reporting and disclosure requirements. The Company continues to assess the potential impact of the standard and has not yet reached a conclusion as to how the adoption of the standard will impact the Company’s financial position, results of operations or cash flows. The adoption of this guidance will result in increased disclosures to help users of financial statements understand the nature, amount and timing of revenue and cash flows arising from contracts.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires an entity to recognize assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. For nonpublic entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating how and to what extent ASU 2016-02 will affect the Company’s financial position, results of operations, cash flows and related disclosures.

Effects of Foreign Currency

We operate internationally and enter into transactions denominated in foreign currencies. As a result, we are subject to the variability that arises from exchange rate movements. The effects of foreign currency on our

 

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operating results are discussed above. Our use of foreign currency derivative contracts is discussed in “Quantitative and Qualitative Disclosures about Market Risk” below.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk — Before the Spin-Off

We have entered into certain financing arrangements that require interest payments based on floating interest rates. As such, the our 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, we have entered into interest rate swap agreements for a portion of their floating rate financing arrangements. We do not enter into interest rate swap agreements for trading purposes. Terms of the interest rate swap agreements provide for the subsidiaries to receive a variable interest rate and pay a fixed interest rate. See Note 2 and Note 9 to the Consolidated Financial Statements.

For purposes of risk analysis, we use sensitivity analysis to measure the potential loss in fair value of financial instruments sensitive to changes in interest rates. We assume that a loss in fair value is an increase to our liabilities. The fair value of our interest rate swap agreements was a net receivable of $0.8 million at December 31, 2016. A hypothetical 10% decrease in interest rates would cause an increase of $0.6 million in the fair value of interest rate swap agreements and the resulting fair value would be a receivable of $1.4 million.

Interest Rate Risk — After the Spin-Off

After completion of the spin-off, we do not expect our interest rate risk to change materially.

Foreign Currency Exchange Rate Risk — Before the Spin-Off

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, our financial results are subject to the variability that arises from exchange rate movements. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. The potential impact of currency fluctuation increases as international expansion increases.

HBB uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies and not for trading purposes. These contracts generally mature within twelve months and require HBB to buy or sell the functional currency in which the applicable subsidiary operates and buy or sell U.S. dollars at rates agreed to at the inception of the contracts. See Note 2 and Note 9 to the Consolidated Financial Statements.

For purposes of risk analysis, we use sensitivity analyses to measure the potential loss in fair value of financial instruments sensitive to changes in foreign currency exchange rates. We assume that a loss in fair value is either a decrease to our assets or an increase to our liabilities. The fair value of our foreign currency exchange contracts was a net receivable of $0.1 million at December 31, 2016. Assuming a hypothetical 10% weakening of the U.S. dollar compared with the Canadian dollar at December 31, 2016, the fair value of foreign currency-sensitive financial instruments, which represents forward foreign currency exchange contracts, would be decreased by $1.1 million compared with its fair value at December 31, 2016. It is important to note that the change in fair value indicated in this sensitivity analysis would be somewhat offset by changes in the fair value of the underlying receivables and payables.

Foreign Currency Exchange Rate Risk — Before the Spin-Off

After completion of the spin-off, we do not expect our foreign currency exchange rate risk to change materially.

 

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Related Party Transactions

Hyster-Yale Materials Handling, Inc. (“Hyster-Yale”) is a former subsidiary of NACCO Industries, Inc. that was spun-off to stockholders in 2012. In the ordinary course of business, HBB and KC lease or buy Hyster-Yale lift trucks.

NACCO charges management fees to its operating subsidiaries for services provided by corporate headquarters. NACCO charged management fees to the Company as follows:

 

     Three Months Ended June 30      Six Months Ended June 30      Year Ended December 31  
              2017                       2016                       2017                       2016                         2016                        2015          

HBB

   $ 920      $ 989      $ 1,840      $ 1,930      $ 3,860      $ 3,654  

KC

   $ 73      $ 70      $ 145      $ 140      $ 280      $ 270  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 993      $ 1,059      $ 1,985