UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 _______________________________________________________________________________________________________________________________________________________________________________________________________
FORM 10-Q
(Mark One)
 
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2018
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from                       to                     
Commission file number 001-38214
 
HAMILTON BEACH BRANDS HOLDING COMPANY
 
 
 
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
 
 
DELAWARE  
 
31-1236686
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
4421 WATERFRONT DR.
GLEN ALLEN, VA
 
23060
 
 
(Address of principal executive offices)
 
(Zip code)
 
 
 
 
 
 
 
 
(804) 273-9777
 
 
 
 
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
N/A
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
 

Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
 
Emerging growth company þ
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

Number of shares of Class A Common Stock outstanding at July 27, 2018: 9,230,373
Number of shares of Class B Common Stock outstanding at July 27, 2018: 4,473,453
 
 
 
 
 


HAMILTON BEACH BRANDS HOLDING COMPANY
TABLE OF CONTENTS
 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

Part I
FINANCIAL INFORMATION
Item 1. Financial Statements

HAMILTON BEACH BRANDS HOLDING COMPANY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
JUNE 30
2018
 
DECEMBER 31
2017
 
JUNE 30
2017
 
(In thousands, except share data)
ASSETS
 

 
 
 
 
Cash and cash equivalents
$
1,962

 
$
10,906

 
$
5,328

Accounts receivable, net
83,876

 
114,100

 
69,857

Inventories
165,237

 
134,744

 
135,397

Prepaid expenses and other
14,743

 
8,835

 
10,019

Total current assets
265,818

 
268,585

 
220,601

Property, plant and equipment, net
21,839

 
19,083

 
16,550

Goodwill
6,253

 
6,253

 
6,253

Other intangibles, net
5,209

 
5,900

 
6,590

Deferred income taxes
10,894

 
12,825

 
15,477

Deferred costs
9,973

 
10,466

 
8,609

Other non-current assets
3,282

 
3,121

 
3,102

Total assets
$
323,268

 
$
326,233

 
$
277,182

LIABILITIES AND EQUITY
 

 
 

 
 
Accounts payable
$
103,461

 
$
143,012

 
$
98,480

Accounts payable to NACCO Industries, Inc.
2,769

 
9,189

 
1,969

Revolving credit agreements
75,476

 
31,346

 
22,276

Accrued payroll
12,531

 
17,302

 
10,998

Accrued cooperative advertising
4,532

 
11,418

 
6,898

Other current liabilities
24,215

 
18,679

 
14,133

Total current liabilities
222,984


230,946

 
154,754

Revolving credit agreements
30,000

 
20,000

 
32,000

Other long-term liabilities
24,274

 
28,879

 
27,325

Total liabilities
277,258

 
279,825

 
214,079

Stockholders' equity
 

 
 

 
 
Common stock, par value $1.00 per share, 1,000 shares authorized, 100 shares outstanding as of June 30, 2017
—

 
—

 
—

Preferred stock, par value $0.01 per share, 5 million shares authorized, no shares outstanding as of June 30, 2018, December 31, 2017, and June 30, 2017
—

 
—

 
—

Class A Common stock, par value $0.01 per share, 70 million shares authorized, 9,218,372 shares outstanding, (8,865,207 shares outstanding as of December 31, 2017 and no shares outstanding as of June 30, 2017)
92

 
88

 
—

Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis, 30 million shares authorized, 4,476,796 shares outstanding, (4,808,225 shares outstanding as of December 31, 2017 and no shares outstanding as of June 30, 2017)
45

 
48

 
—

Capital in excess of par value
50,721

 
47,773

 
75,031

Retained earnings
10,152

 
12,603

 
3,619

Accumulated other comprehensive loss
(15,000
)
 
(14,104
)
 
(15,547
)
Total stockholders' equity
46,010

 
46,408

 
63,103

Total liabilities and equity
$
323,268

 
$
326,233

 
$
277,182

    

See notes to Unaudited Condensed Consolidated Financial Statements.

2
Table of Contents

HAMILTON BEACH BRANDS HOLDING COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share data)
Revenues
$
157,941

 
$
152,976

 
$
304,574

 
$
293,258

Cost of sales
117,088

 
114,145

 
225,928

 
219,850

Gross profit
40,853

 
38,831

 
78,646

 
73,408

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
39,914

 
36,322

 
77,699

 
72,992

Amortization of intangible assets
346

 
345

 
691

 
690

 
40,260

 
36,667

 
78,390

 
73,682

Operating profit (loss)
593

 
2,164

 
256

 
(274
)
Other (income) expense
 

 
 

 
 

 
 

Interest expense
926

 
462

 
1,470

 
877

Other, net, including interest income
859

 
(297
)
 
542

 
(979
)
 
1,785

 
165

 
2,012

 
(102
)
Income (loss) before income tax provision (benefit)
(1,192
)
 
1,999

 
(1,756
)
 
(172
)
Income tax provision (benefit)
(318
)
 
760

 
(464
)
 
(53
)
Net income (loss)
$
(874
)
 
$
1,239

 
$
(1,292
)
 
$
(119
)
 
 

 
 

 
 

 
 

Basic and diluted earnings (loss) per share
$
(0.06
)
 
$
0.09

 
$
(0.09
)
 
$
(0.01
)
 
 
 
 
 
 
 
 
Basic and diluted weighted average shares outstanding
13,695

 
13,673

 
13,689

 
13,673

 
 
 
 
 
 
 
 
Cash Dividends on Class A Common and Class B Common per share
$
0.085

 
$
—

 
$
0.170

 
$
—


See notes to Unaudited Condensed Consolidated Financial Statements.

3
Table of Contents

HAMILTON BEACH BRANDS HOLDING COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
THREE MONTHS ENDED
JUNE 30
 
SIX MONTHS ENDED
JUNE 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income (loss)
$
(874
)
 
$
1,239

 
$
(1,292
)
 
$
(119
)
Foreign currency translation adjustment
(892
)
 
672

 
25

 
1,743

Loss on intra-entity foreign currency transactions, net of $94 tax benefit in the three and six months ended June 30, 2018.
(1,013
)
 
—

 
(1,013
)
 
—

Current period cash flow hedging activity, net of $160 and $250 tax expense in the three and six months ended June 30, 2018, respectively, and $230 and $369 tax benefit in the three and six months ended June 30, 2017, respectively.
464

 
(522
)
 
753

 
(859
)
Reclassification of hedging activities into earnings, net of $13 and $77 tax benefit in the three and six months ended June 30, 2018, respectively, and $11 and $29 tax expense in the three and six months ended June 30, 2017, respectively.
41

 
(31
)
 
207

 
(81
)
Reclassification of pension adjustments into earnings, net of $46 and $88 tax benefit in the three and six months ended June 30, 2018, respectively, and $51 and $102 tax benefit in the three and six months ended June 30, 2017, respectively.
142

 
71

 
300

 
151

Total other comprehensive income (loss)
(1,258
)
 
190

 
272

 
954

Comprehensive income (loss)
$
(2,132
)
 
$
1,429

 
$
(1,020
)
 
$
835


See notes to Unaudited Condensed Consolidated Financial Statements.



4
Table of Contents


HAMILTON BEACH BRANDS HOLDING COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
SIX MONTHS ENDED
 
JUNE 30
 
2018
 
2017
 
(In thousands)
Operating activities
 
 
 
Net loss
$
(1,292
)
 
$
(119
)
Adjustments to reconcile from net loss to net cash used for operating activities:
 
 
 
Depreciation and amortization
2,462

 
2,482

Amortization of deferred financing fees
101

 
111

Deferred income taxes
1,795

 
2,027

Other
(1,940
)
 
(1,738
)
Working capital changes:
 
 
 
Affiliates receivable/payable
(6,420
)
 
(8,685
)
Accounts receivable
30,224

 
34,218

Inventories
(30,493
)
 
(6,982
)
Other current assets
(5,908
)
 
(382
)
Accounts payable
(39,551
)
 
(22,773
)
Other liabilities
(5,152
)
 
(14,420
)
Net cash used for operating activities
(56,174
)
 
(16,261
)
 
 
 
 
Investing activities
 
 
 
Expenditures for property, plant and equipment
(4,555
)
 
(2,399
)
Other
6

 
21

Net cash used for investing activities
(4,549
)
 
(2,378
)
 
 
 
 
Financing activities
 
 
 
Net additions to revolving credit agreements
54,130

 
15,562

Cash dividends to NACCO Industries, Inc.
—

 
(3,000
)
Cash dividends on Class A Common and Class B Common
(2,327
)
 
—

Net cash provided by financing activities
51,803

 
12,562

 
 
 
 
Effect of exchange rate changes on cash
(24
)
 
65

 
 
 
 
Cash and cash equivalents
 
 
 
Decrease for the period
(8,944
)
 
(6,012
)
Balance at the beginning of the period
10,906

 
11,340

Balance at the end of the period
$
1,962

 
$
5,328


See notes to Unaudited Condensed Consolidated Financial Statements.

5
Table of Contents

HAMILTON BEACH BRANDS HOLDING COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Class A Common stock
Class B Common Stock
Capital in Excess of Par Value
Retained Earnings
Foreign Currency
 
Deferred Gain (Loss) on Cash Flow Hedging
Pension Plan Adjustment
 
Total Stockholders' Equity
 
(In thousands)
Balance, January 1, 2017
$
—

$
—

$
75,031

$
6,738

 
$
(8,623
)
 
$
616

 
$
(8,494
)
 
$
65,268

Net loss
—

—

—

(119
)
 
—

 
—

 
—

 
(119
)
Cash dividends to NACCO Industries, Inc.
—

—

—

(3,000
)
 
—

 
—

 
—

 
(3,000
)
Current period other comprehensive income (loss)
—

—

—

—

 
1,743

 
(859
)
 
—

 
884

Reclassification adjustment to net income (loss)
—

—

—

—

 
—

 
(81
)
 
151

 
70

Balance, June 30, 2017
$
—

$
—

$
75,031

$
3,619

 
$
(6,880
)
 
$
(324
)
 
$
(8,343
)
 
$
63,103

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
$
88

$
48

$
47,773

$
12,603

 
$
(7,934
)
 
$
508

 
$
(6,678
)
 
$
46,408

Issuance of common stock, net of conversions
4

(3
)
521

—

 
—

 
—

 
—

 
522

Net loss
—

—

—

(1,292
)
 
—

 
—

 
—

 
(1,292
)
Share-based compensation expense
—

—

2,427

—

 
—

 
—

 
—

 
2,427

Cash dividends on Class A Common and Class B Common: $0.17 per share
—

—

—

(2,327
)
 
—

 
—

 
—

 
(2,327
)
Reclassification due to adoption of ASU 2018-02
—

—

—

1,168

 
—

 
118

 
(1,286
)
 
—

Current period other comprehensive income
—

—

—

—

 
(988
)
 
753

 
—

 
(235
)
Reclassification adjustment to net income
—

—

—

—

 
—

 
207

 
300

 
507

Balance, June 30, 2018
$
92

$
45

$
50,721

$
10,152

 
$
(8,922
)
 
$
1,586

 
$
(7,664
)
 
$
46,010


See notes to Unaudited Condensed Consolidated Financial Statements.

6
Table of Contents

HAMILTON BEACH BRANDS HOLDING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2018
(Tabular amounts in thousands, except as noted and per share amounts)

NOTE 1— Nature of Operations and Basis of Presentation

Nature of Operations

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Hamilton Beach Brands Holding Company ("Hamilton Beach Holding” or the “Company”).

Hamilton Beach Holding is an operating holding company for two separate businesses. The Company includes the required intercompany eliminations between the two separate businesses and certain federal tax attributes. Costs incurred as a stand-alone public entity are allocated to the HBB segment. The only material assets held by Hamilton Beach Holding are its investments in consolidated subsidiaries. Substantially all of its cash flows are provided by dividends paid or distributions made by its subsidiaries. The Company's subsidiaries operate in the following principal industries: consumer, commercial and specialty small appliances and specialty retail. The Company manages its subsidiaries primarily by segment.

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 in outlet and traditional malls throughout the United States.

On September 29, 2017, NACCO Industries, Inc. ("NACCO"), Hamilton Beach Holding's former parent company, spun-off the Company to NACCO stockholders. In the spin-off, NACCO stockholders, in addition to retaining their shares of NACCO common stock, received  one share of Hamilton Beach Holding Class A common stock and  one  share of Hamilton Beach Holding Class B common stock for each share of NACCO Class A or Class B common stock. In accordance with applicable authoritative accounting guidance, the Company accounted for the spin-off from NACCO based on the historical carrying value of assets and liabilities. As a result of the distribution of one share of Hamilton Beach Holding Class A common stock and one share of Hamilton Beach Holding Class B common stock for each share of NACCO Class A or NACCO Class B common stock, the earnings per share amounts for the Company for periods prior to the spin-off have been calculated based upon the number of shares distributed in the spin-off. NACCO did not receive any proceeds from the spin-off.

Basis of Presentation

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position of the Company at June 30, 2018 and the results of its operations, comprehensive income (loss), cash flows and changes in equity for the six months ended June 30, 2018 and 2017 have been included. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

The balance sheet at December 31, 2017 has been derived from the audited financial statements at that date, but does not include all of the information or notes required by U.S. GAAP for complete financial statements.

Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2018. The HBB and KC businesses are seasonal and a majority of revenues and operating profit typically occurs in the second half of the calendar year when sales of small electric household appliances to retailers and consumers increase significantly for the fall holiday-selling season. For further information regarding seasonality of these businesses, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

NOTE 2— Recently Issued Accounting Standards

The Company is an emerging growth company and has elected not to opt out of the extended transition period for complying with new or revised accounting standards, which means that when a standard is issued or revised and it has different application

7

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.

Accounting Standards Adopted

In May 2014, the FASB codified in ASC 606, "Revenue Recognition - Revenue from Contracts with Customers" ("ASC 606"), which supersedes ASC 605, "Revenue Recognition" ("ASC 605"), including industry-specific guidance, and requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers and provide additional disclosures. The effective date for nonpublic entities is annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. The Company has adopted the guidance for all contracts at the date of initial application of January 1, 2018. The amount and timing of revenue recognition is not materially impacted by the new standard, thus no cumulative adjustment was recognized upon adoption. See Note 3 for further discussion on the nature, amount and timing of revenue and cash flows arising from contracts with customers.

In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act (the "Tax Act") of 2017 from accumulated other comprehensive income ("AOCI") into retained earnings.  ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company elected to early adopt ASU 2018-02 as of January 1, 2018. As a result of adopting this standard, the Company reclassified $1.2 million from AOCI to retained earnings.

Accounting Standards Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)," which requires an entity to recognize assets and liabilities for the rights and obligations created by leased assets. For nonpublic entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is planning to adopt ASU 2016-02 for its fiscal year ending December 31, 2020 and is currently evaluating to what extent ASU 2016-02 will affect the Company's financial position, results of operations, cash flows and related disclosures.

NOTE 3— Revenues

The Company accounts for revenue in accordance with ASC 606, which was adopted on January 1, 2018, using the modified retrospective method. The amount and timing of revenue recognition was not impacted by the new standard and therefore no cumulative adjustment was recognized upon adoption. Results for the reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts continue to be reported in accordance with historical accounting methods under ASC 605. The classification of refund liabilities, which is now reported in Other current liabilities on the Consolidated Balance Sheet, was previously classified as an allowance against Accounts Receivable.
 
Revenues are recognized when control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Sales taxes are excluded from revenue. At contract inception, the Company assesses the goods and services promised in its contracts with customers and identifies a performance obligation for each promised good or service that is distinct. A description of our performance obligations for each segment is included below.

Hamilton Beach Brands

•
Product revenues - Product revenues consist of sales of small electric household and specialty housewares appliances to traditional brick and mortar and e-commerce retailers, distributors and directly to the end consumer as well as sales of commercial products for restaurants, bars and hotels. Transactions with these customers generally originate upon the receipt of a purchase order from the customer, which in some cases are governed by master sales agreements, specifying product(s) that the customer desires. Contracts for product revenues generally have an original duration of one year or less, and payment terms are generally standard and based on customer creditworthiness. Revenue from product sales is recognized at the point in time when control transfers to the customer, which is either when product is shipped from the Company's facility, or delivered to customers, depending on the shipping terms. The amount of consideration received and revenue recognized varies with changes in incentives, returns and consideration paid to customers for advertising arrangements. The Company has elected to account for shipping and handling activities

8

performed after a customer obtains control of the goods as activities to fulfill the promise to transfer the goods, and therefore these activities are not assessed as a separate service to customers.

•
License revenues - From time to time, the Company enters into licensing agreements which grant the right to use, on a non-exclusive basis, certain of the Company’s intellectual property (IP) in connection with designing, manufacturing, distributing, advertising, promoting and selling the licensees’ products during the term of the agreement. The IP that is licensed generally consists of trademarks, tradenames, trade dress, and/or logos (the “Licensed IP”). In exchange for granting the right to use the Licensed IP, the Company receives a royalty payment, which is a function of (1) the total net sales of products that use the Licensed IP and (2) the royalty percentage that is stated in the licensing agreement. The Company recognizes revenue at the later of when the subsequent sales occur or satisfying the performance obligation (over time).

Kitchen Collection

•
Product revenues - KC sells a variety of kitchenware products from a number of highly recognizable name brands to individual consumers. Products are predominantly sold through brick and mortar retail stores whereby customers come into KC stores, explore the assortment of merchandise available for sale, select various products that they desire to purchase, bring those products to the sales register and pay the cashier the agreed-upon price using either cash, check or credit card. Once the sale is complete, a receipt is generated and provided to the customer as proof of purchase. Therefore, the sales process is both originated and completed simultaneously at the point of sale. Revenue from product sales is recognized at the point in time when control transfers to the customer, which occurs when the products are scanned at the sales register. The amount of consideration received and revenue recognized varies with changes in returns.
 
HBB’s warranty program to the consumer consists generally of an assurance-type limited warranty lasting for varying periods of up to ten years for electric appliances, with the majority of products having a warranty of one year.  There is no guarantee to the customer as HBB may repair or replace, at its option, those products returned under warranty.  Accordingly, the Company determined no separate performance obligation exists.

HBB products are not sold with the right of return. However, based on historical experience, a portion of HBB and KC products sold are estimated to be returned due to reasons such as buyer remorse, duplicate gifts received, product failure and excess inventory stocked by the customer, which, subject to certain terms and conditions, the Company will agree to accept. The Company accounts for these product returns as variable consideration. Other forms of variable consideration include customer programs and incentive offerings, including special pricing agreements, price competition, promotions and other volume-based incentives. To estimate variable consideration, the Company applies both the “expected value” method and “most likely amount” method based on the form of variable consideration, according to which method would provide the better prediction. The expected value method involves a probability weighted determination of the expected amount, whereas the most likely amount method identifies the single most likely outcome in a range of possible amounts.

The following table presents the Company's revenues on a disaggregated basis for the three and six months ending:
 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30, 2018
 
JUNE 30, 2018
 
HBB
 
KC
 
Consolidated (1)
 
HBB
 
KC
 
Consolidated (1)
Type of good or service:
 
 
 
 
 
 
 
 
 
 
 
  Products
$
135,014

 
$
22,762

 
$
157,086

 
$
259,595

 
$
44,862

 
$
302,886

  Licensing
855

 
—

 
855

 
1,688

 
—

 
1,688

     Total revenues
$
135,869

 
$
22,762

 
$
157,941

 
$
261,283

 
$
44,862

 
$
304,574

(1) Includes the required intercompany eliminations between HBB and KC.

9

NOTE 4— Inventories

Inventories are summarized as follows:
 
JUNE 30
2018
 
DECEMBER 31
2017
 
JUNE 30
2017
Sourced inventories - HBB
$
138,721

 
$
111,493

 
$
104,342

Retail inventories - KC
26,516

 
23,251

 
31,055

 Total inventories
$
165,237

 
$
134,744

 
$
135,397


NOTE 5— Fair Value Disclosure

Recurring Fair Value Measurements : The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
 
 
 
 
Fair Value Measurements at Reporting Date Using
 
 
 
 
Quoted Prices in
 
 
 
Significant
 
 
 
 
Active Markets for
 
Significant Other
 
Unobservable
 
 
 
 
Identical Assets
 
Observable Inputs
 
Inputs
Description
 
Date
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
June 30, 2018
 
 
 
 
 
 
Assets:
 

 
 
 
 
 
 
Interest rate swap agreements
 
$
1,593

 
$
—

 
$
1,593

 
$
—

Foreign currency exchange contracts
 
474

 
—

 
474

 
—

 
 
$
2,067

 
$
—

 
$
2,067

 
$
—

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
894

 
$
—

 
$
894

 
$
—

Foreign currency exchange contracts
 
245

 
—

 
245

 
—

 
 
$
1,139

 
$
—

 
$
1,139

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
93

 
$
—

 
$
93

 
$
—

 
 
$
93

 
$
—

 
$
93

 
$
—

 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
623

 
$
—

 
$
623

 
$
—

 
 
$
623

 
$
—

 
$
623

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
903

 
$
—

 
$
903

 
$
—

 
 
$
903

 
$
—

 
$
903

 
$
—


The Company uses significant other observable inputs to value derivative instruments used to hedge foreign currency and interest rate risk; therefore, they are classified within Level 2 of the valuation hierarchy. The fair value for these contracts is determined based on exchange rates and interest rates, respectively.

At June 30, 2018 , December 31, 2017, and June 30, 2017, there were no transfers into or out of Levels 1, 2 or 3.


10

NOTE 6— Contingencies

Various legal and regulatory proceedings and claims have been or may be asserted against Hamilton Beach Holding and certain subsidiaries relating to the conduct of their businesses, including product liability, patent infringement, asbestos related claims, environmental and other claims. These proceedings and claims are incidental to the ordinary course of business of the Company. Management believes that it has meritorious defenses and will vigorously defend the Company in these actions. Any costs that management estimates will be paid as a result of these claims are accrued when the liability is considered probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is probable or reasonably possible and which are material, the Company discloses the nature of the contingency and, in some circumstances, an estimate of the possible loss.

These matters are subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of an adverse impact on the Company’s financial position, results of operations and cash flows of the period in which the ruling occurs, or in future periods.

Environmental matters

HBB is investigating or remediating historical environmental contamination at some current and former sites operated by HBB or by businesses it acquired. Based on the current stage of the investigation or remediation at each known site, HBB estimates the total investigation and remediation costs and the period of assessment and remediation activity required for each site. The estimate of future investigation and remediation costs is primarily based on variables associated with site clean-up, including, but not limited to, physical characteristics of the site, the nature and extent of the contamination and applicable regulatory programs and remediation standards. No assessment can fully characterize all subsurface conditions at a site. There is no assurance that additional assessment and remediation efforts will not result in adjustments to estimated remediation costs or the time frame for remediation at these sites.

HBB's estimates of investigation and remediation costs may change if it discovers contamination at additional sites or additional contamination at known sites, if the effectiveness of its current remediation efforts change, if applicable federal or state regulations change or if HBB's estimate of the time required to remediate the sites changes. HBB's revised estimates may differ materially from original estimates.

At June 30, 2018 , December 31, 2017 and June 30, 2017 , HBB had accrued undiscounted obligations of $8.5 million , $8.9 million and $8.9 million , respectively, for environmental investigation and remediation activities. In addition, HBB estimates that it is reasonably possible that it may incur additional expenses in the range of zero to $5.2 million related to the environmental investigation and remediation at these sites.


11

NOTE 7— Business Segments

Hamilton Beach Holding is an operating holding company with HBB and KC as reportable segments. See Note 1 for a discussion of the Company’s industries. Financial information for each of Hamilton Beach Holding’s reportable segments is presented in the following table. The line “Eliminations” in the revenues section eliminates revenues from HBB sales to KC. The amounts of these revenues are based on current market prices of similar third-party transactions. No other sales transactions occur among reportable segments.
 
THREE MONTHS
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
HBB
$
135,869

 
$
127,574

 
$
261,283

 
$
241,728

KC
22,762

 
25,868

 
44,862

 
52,533

Eliminations
(690
)
 
(466
)
 
(1,571
)
 
(1,003
)
Total
$
157,941

 
$
152,976

 
$
304,574

 
$
293,258

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 

 
 

 
 

HBB
$
4,399

 
$
5,164

 
$
8,392

 
$
5,946

KC
(3,834
)
 
(3,008
)
 
(8,138
)
 
(6,287
)
Eliminations
28

 
8

 
2

 
67

Total
$
593

 
$
2,164

 
$
256

 
$
(274
)
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
HBB
$
1,967

 
$
3,195

 
$
4,769

 
$
3,884

KC
(2,900
)
 
(1,970
)
 
(6,538
)
 
(4,113
)
Eliminations
59

 
14

 
477

 
110

Total
$
(874
)
 
$
1,239

 
$
(1,292
)
 
$
(119
)

NOTE 8— Income Taxes

On December 22, 2017, the U.S. federal government enacted the Tax Act, which significantly revises U.S. tax law. The Company’s effective income tax rate was 26.7% and 26.4% for the three and six months ended June 30, 2018 , respectively, compared with 38.0% and 30.8% for the three and six months ended June 30, 2017, respectively, primarily due to the reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent during 2018.
Subsequent to the enactment of the Tax Act, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides a measurement period of up to one year after the enactment date for companies to finalize the recognition of the income tax effects of the Tax Act. As a result of the Tax Act and pursuant to SAB 118, the Company recorded a provisional net tax charge of $4.7 million during the year ended December 31, 2017; however, there is still uncertainty as to the application of the Tax Act, in particular as it relates to state income taxes. Further, management has not yet completed the analysis of the amount of foreign earnings subject to U.S. income tax, and the portion of foreign earnings held in cash or other specified assets. No adjustments were recorded to the provisional amounts during the three and six months ending June 30, 2018 .
The ultimate impact of the Tax Act may differ from these provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and the computation of state income taxes as there is uncertainty on conformity to the U.S. federal tax system following the Tax Act.
NOTE 9— Transfer of Financial Assets
The Company has entered into an arrangement with a financial institution to sell certain U.S. accounts receivable on a non-recourse basis. The Company utilizes this arrangement as an integral part of financing working capital.  Under the terms of the agreement, the Company receives cash proceeds and retains no rights or interest and has no obligations with respect to the sold receivables.  These transactions are accounted for as sales and result in a reduction in accounts receivable because the agreement transfers effective control over and risk related to the receivables to the buyer.  Under this arrangement, the Company derecognized $38.8 million and $70.2 million of accounts receivable during the three and six months ending June 30, 2018 , respectively, and $32.7 million and $62.4 million of accounts receivable during the three and six months ending June 30,

12

2017 , respectively. The loss incurred on sold receivables in the consolidated results of operations for the three and six months ended June 30, 2018 and 2017 was not material. The Company does not carry any servicing assets or liabilities. Cash proceeds from this arrangement are reflected as operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows.

13

Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Dollars in thousands, except as noted and per share data)

Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and are subject to various uncertainties and changes in circumstances. Important factors that could cause actual results to differ materially from those described in these forward-looking statements are set forth below under the heading “Forward-Looking Statements."
Hamilton Beach Brands Holding Company (“Hamilton Beach Holding” or the “Company”) is an operating holding company for two separate businesses: consumer, commercial and specialty small appliances and specialty retail. Hamilton Beach Brands, Inc. (“HBB”) is a leading designer, marketer and distributor of branded, small electric household and specialty housewares appliances, as well as commercial products for restaurants, bars and hotels. The Kitchen Collection, LLC (“KC”) is a national specialty retailer of kitchenware in outlet and traditional malls throughout the United States. Results of operations and financial condition are discussed separately by segment, which corresponds with the industry groupings.
On September 29, 2017, NACCO Industries, Inc. ("NACCO"), Hamilton Beach Holding's former parent company, spun-off the Company to NACCO stockholders. In the spin-off, NACCO stockholders, in addition to retaining their shares of NACCO common stock, received one share of Hamilton Beach Holding Class A common stock and one share of Hamilton Beach Holding Class B common stock for each share of NACCO Class A or Class B common stock. In accordance with applicable authoritative accounting guidance, the Company accounted for the spin-off from NACCO based on the historical carrying value of assets and liabilities. As a result of the distribution of one share of Hamilton Beach Holding Class A common stock and one share of Hamilton Beach Holding Class B common stock for each share of NACCO Class A or NACCO Class B common stock, the earnings per share amounts for the Company for periods prior to the spin-off have been calculated based upon the number of shares distributed in the spin-off. NACCO did not receive any proceeds from the spin-off.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company has updated its revenue recognition policy in connection with the adoption of ASC 606 as further described in Note 2 to the accompanying Unaudited Condensed Consolidated Financial Statements. Also refer to the discussion of the Company's Critical Accounting Policies and Estimates as disclosed on pages 19 through 23 in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The Company's Critical Accounting Policies and Estimates have not materially changed since December 31, 2017.

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 includes the required intercompany eliminations between HBB and KC and certain federal tax attributes. Costs incurred as a stand-alone public entity are allocated to the HBB segment. The only material assets held by Hamilton Beach Holding are its investments in consolidated subsidiaries, and substantially all of its cash flows are provided by dividends paid or distributions made by its subsidiaries. The cash to pay dividends to Hamilton Beach Holding’s stockholders is derived from these cash flows. As a result, certain statutory limitations or regulatory or financing agreements could affect the levels of distributions allowed to be made by its subsidiaries.


14
Table of Contents

Selected consolidated results of Hamilton Beach Holding are as follows:
 
THREE MONTHS ENDED
 
SIX MONTHS ENDED
 
JUNE 30
 
JUNE 30
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
    HBB
$
135,869

 
$
127,574

 
$
261,283

 
$
241,728

    KC
22,762

 
25,868

 
44,862

 
52,533

    Eliminations
(690
)
 
(466
)
 
(1,571
)
 
(1,003
)
Total
$
157,941

 
$
152,976

 
$
304,574

 
$
293,258

 
 
 
 
 
 
 
 
Operating profit (loss)
 
 
 
 
 
 
 

    HBB
$
4,399

 
$
5,164

 
$
8,392

 
$
5,946

    KC
(3,834
)
 
(3,008
)
 
(8,138
)
 
(6,287
)
    Eliminations
28

 
8

 
2

 
67

Total
$
593

 
$
2,164

 
$
256

 
$
(274
)
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
    HBB
$
1,967

 
$
3,195

 
$
4,769

 
$
3,884

    KC
(2,900
)
 
(1,970
)
 
(6,538
)
 
(4,113
)
    Eliminations
59

 
14

 
477

 
110

Total
$
(874
)
 
$
1,239

 
$
(1,292
)
 
$
(119
)

The following table identifies, by segment, the components of change in Revenues, Operating profit (loss) and Net income (loss):
 
Revenues
 
Operating profit (loss)
 
Net income (loss)
Consolidated results for the three months ended June 30, 2017
$
152,976

 
$
2,164

 
$
1,239

Increase (decrease) from:
 
 
 
 
 
HBB
8,295

 
(765
)
 
(1,228
)
KC
(3,106
)
 
(826
)
 
(930
)
     Eliminations
(224
)
 
20

 
45

Consolidated results for the three months ended June 30, 2018
$
157,941

 
$
593

 
$
(874
)
 
Revenues
 
Operating profit (loss)
 
Net income (loss)
Consolidated results for the six months ended June 30, 2017
$
293,258

 
$
(274
)
 
$
(119
)
Increase (decrease) from:
 
 
 
 
 
HBB
19,555

 
2,446

 
885

KC
(7,671
)
 
(1,851
)
 
(2,425
)
     Eliminations
(568
)
 
(65
)
 
367

Consolidated results for the six months ended June 30, 2018
$
304,574

 
$
256

 
$
(1,292
)

The components of change are discussed below in "Segment Results".

15
Table of Contents


Liquidity and Capital Resources of Hamilton Beach Holding

Although Hamilton Beach Holding’s subsidiaries have entered into borrowing agreements, Hamilton Beach Holding has not guaranteed any borrowings of its subsidiaries. Dividends from its subsidiaries (to the extent permitted by its subsidiaries’ borrowing agreements) will be used to enable Hamilton Beach Holding to pay dividends to its stockholders. The declaration of future dividends, record dates and payout dates for such future dividends will be at the discretion of Hamilton Beach Holding's board of directors (the "Board") and will depend on various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, restrictions imposed by applicable law, general business conditions and other factors that the Board deems relevant.

The Company believes funds available from cash on hand, its subsidiaries' credit facilities and anticipated funds generated from operations are sufficient to finance all of the subsidiaries' scheduled principal repayments, and its operating needs and commitments arising during the next twelve months and until the expiration of its subsidiaries' credit facilities.

Contractual Obligations, Contingent Liabilities and Commitments

Since December 31, 2017, there have been no significant changes in the total amount of Hamilton Beach Holding contractual obligations, contingent liabilities, commitments, or the timing of cash flows in accordance with those obligations as reported on page 24 in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

Off Balance Sheet Arrangements

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

Capital Structure

Hamilton Beach Holding's consolidated capital structure at June 30, 2018 compared with both June 30, 2017 and December 31, 2017 is presented below:

June 30, 2018 Compared with June 30, 2017
 
JUNE 30
2018
 
JUNE 30
2017
 
Change
Cash and cash equivalents
$
1,962

 
$
5,328

 
$
(3,366
)
Other net tangible assets
138,062

 
99,208

 
38,854

Goodwill and intangible assets, net
11,462

 
12,843

 
(1,381
)
Net assets
151,486

 
117,379

 
34,107

Total debt
(105,476
)
 
(54,276
)
 
(51,200
)
Total equity
$
46,010

 
$
63,103

 
$
(17,093
)
Debt to total capitalization
69.6
%
 
46.2
%
 
23.4
%

June 30, 2018 Compared with December 31, 2017
 
JUNE 30
2018
 
DECEMBER 31
2017
 
Change
Cash and cash equivalents
$
1,962

 
$
10,906

 
$
(8,944
)
Other net tangible assets
138,062

 
74,695

 
63,367

Goodwill and intangible assets, net
11,462

 
12,153

 
(691
)
Net assets
151,486

 
97,754

 
53,732

Total debt
(105,476
)
 
(51,346
)
 
(54,130
)
Total equity
$
46,010

 
$
46,408

 
$
(398
)
Debt to total capitalization
69.6
%
 
52.5
%
 
17.1
%

The components of change are discussed below in "Segment Results".


16
Table of Contents

OUTLOOK

In the current market environment and including the various factors noted in the HBB and KC segment outlooks, Hamilton Beach Holding expects second half and full-year 2018 consolidated net income to increase substantially over the same periods in 2017 primarily due to lower income tax expense and the absence of the provisional tax charges recorded in 2017. As a result of the Tax Act, Hamilton Beach Holding expects its effective income tax rate to be in the range of 26% to 28% in 2018.


17
Table of Contents

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 2018 Compared with Second Quarter of 2017

The results of operations for HBB were as follows for the three months ended June 30 :
 
Three Months Ended
June 30
 
% of Revenue
 
2018
 
2017
 
2018
 
2017
Revenues
$
135,869

 
$
127,574

 
100.0
%
 
100.0
 %
Cost of sales
105,421

 
100,446

 
77.6
%
 
78.7
 %
Gross profit
30,448

 
27,128

 
22.4
%
 
21.3
 %
Operating expenses (1)
26,049

 
21,964

 
19.2
%
 
17.2
 %
Operating profit
4,399

 
5,164

 
3.2
%
 
4.0
 %
Interest expense
846

 
383

 
0.6
%
 
0.3
 %
Other, net, including interest income
851

 
(311
)
 
0.6
%
 
(0.2
)%
Income before income tax provision
2,702

 
5,092

 
2.0
%
 
4.0
 %
Income tax provision
735

 
1,897

 
0.5
%
 
1.5
 %
Net income
$
1,967

 
$
3,195

 
1.4
%
 
2.5
 %
 
 
 
 
 
 
 
 
Effective income tax rate
27.2
%
 
37.3
%
 
 
 
 
(1) Operating expenses include selling, general and administrative expenses, amortization of intangibles and (gain)/loss on sale of assets.

The following table identifies the components of change in revenues for the second quarter of 2018 compared with the second quarter of 2017 :
 
Revenues
2017
$
127,574

Increase (decrease) from:
 
Unit volume and product mix
7,871

Other
486

Foreign currency
(62
)
2018
$
135,869


Revenues increased $8.3 million , or 6.5% , during the second quarter of 2018 compared with the second quarter of 2017 primarily due to increased sales of new and higher-priced products, mainly in the U.S. consumer and Global commercial markets.
 

18
Table of Contents

The following table identifies the components of change in operating profit for the second quarter of 2018 compared with the second quarter of 2017 :
 
Operating Profit
2017
$
5,164

Increase (decrease) from:
 
Selling, general and administrative expenses
(4,085
)
Gross profit
2,732

Foreign currency
588

2018
$
4,399


HBB's operating profit decreased $0.8 million in the second quarter of 2018 compared with the second quarter of 2017 primarily due to a $4.1 million increase in Selling, general and administrative expenses, which was partially offset by a $2.7 million increase in gross profit.

The increase in Selling, general and administrative expenses was primarily due to a $2.2 million increase in employee-related expenses and a $1.7 million increase in professional and outside service fees. The increase in employee-related expenses was mainly due to a $1.4 million increase in incentive compensation, which includes a $0.5 million non-cash adjustment driven by the 37% increase in the market price of HBBHC's stock during the second quarter of 2018. Professional and outside service fees increased mainly due to additional patent litigation expenses.

The improvement in gross margin, which was 22.4% in the second quarter of 2018 compared with 21.3% in the second quarter of 2017, was primarily due to increased sales of new and higher-margin products. A $0.8 million increase in warehouse and transportation costs, primarily resulting from higher sales volumes, partially offset the improvement in gross margin during the second quarter of 2018.

HBB's interest expense increased $0.5 million in the second quarter of 2018 compared with 2017 due to an increase in average borrowings outstanding and higher interest rates under HBB's revolving credit facility.

Other, net, including interest income, decreased $1.2 million primarily due to currency losses of $0.7 million in the second quarter of 2018 compared with currency gains of $0.2 million in the second quarter of 2017 .

HBB's effective income tax rate decreased to 27.2% in the second quarter of 2018 from 37.3% in the second quarter of 2017 primarily due to a reduction in the U.S. federal corporate tax rate as a result of the Tax Act.

HBB recognized net income of $2.0 million in the second quarter of 2018 compared with $3.2 million in the second quarter of 2017 . The decrease in net income is primarily due to the factors affecting operating profit, interest expense, other, net, including interest income and the change in the income tax provision.


19
Table of Contents

First Six Months of 2018 Compared with First Six Months of 2017

The results of operations for HBB were as follows for the six months ended June 30 :
 
Six Months Ended
June 30
 
% of Revenue
 
2018
 
2017
 
2018
 
2017
Revenues
$
261,283

 
$
241,728

 
100.0
%
 
100.0
 %
Cost of sales
203,131

 
191,985

 
77.7
%
 
79.4
 %
Gross profit
58,152

 
49,743

 
22.3
%
 
20.6
 %
Operating expenses (1)
49,760

 
43,797

 
19.0
%
 
18.1
 %
Operating profit
8,392

 
5,946

 
3.2
%
 
2.5
 %
Interest expense
1,368

 
763

 
0.5
%
 
0.3
 %
Other, net, including interest income
522

 
(1,011
)
 
0.2
%
 
(0.4
)%
Income before income tax provision
6,502

 
6,194

 
2.5
%
 
2.6
 %
Income tax provision
1,733

 
2,310

 
0.7
%
 
1.0
 %
Net income
$
4,769

 
$
3,884

 
1.8
%
 
1.6
 %
 
 
 
 
 
 
 
 
Effective income tax rate
26.7
%
 
37.3
%
 
 
 
 
(1) Operating expenses include selling, general and administrative expenses, amortization of intangibles and (gain)/loss on sale of assets.

The following table identifies the components of change in revenues for the first six months of 2018 compared with the first six months of 2017 :
 
Revenues
2017
$
241,728

Increase (decrease) from:
 
Unit volume and product mix
17,800

Foreign currency
1,095

Other
660

2018
$
261,283


Revenues increased $19.6 million , or 8.1% , during the first six months of 2018 compared with the first six months of 2017 primarily due to increased sales of new and higher-priced products, mainly in the U.S. consumer and Global commercial markets and higher sales volume in the International consumer market. Favorable currency movements also contributed to the increase in revenues as both the Canadian dollar and Mexican peso strengthened against the U.S. dollar.

The following table identifies the components of change in operating profit for the first six months of 2018 compared with the first six months of 2017 :
 
Operating Profit
2017
$
5,946

Increase (decrease) from:
 
Gross profit
7,240

Foreign currency
1,169

Selling, general and administrative expenses
(5,963
)
2018
$
8,392


HBB's operating profit increased $2.4 million for the first six months of 2018 compared with the first six months of 2017 primarily due to a $7.2 million increase in gross profit, partially offset by a $6.0 million increase in Selling, general and administrative expenses.


20
Table of Contents

The improvement in gross margin, which was 22.3% for the six months ended June 30, 2018 compared with 20.6% for the six months ended June 30, 2017, was primarily due to increased sales of new and higher-margin products. A $1.6 million increase in warehouse and transportation costs, primarily resulting from higher sales volumes, partially offset the improvement in gross margin during the first six months of 2018.

The increase in Selling, general and administrative expenses was primarily due to a $3.8 million increase in employee-related expenses and a $2.4 million increase in professional and outside service fees. The increase in employee-related expenses was mainly due to a $1.9 million increase in incentive compensation in the first six months of 2018. Professional and outside service fees increased mainly due to patent litigation expenses.

HBB's interest expense increased $0.6 million for the first six months of 2018 compared with 2017 due to an increase in average borrowings outstanding and higher interest rates under HBB's revolving credit facility.

Other, net, including interest income, decreased $1.5 million primarily due to foreign currency losses of $0.3 million in the first six months of 2018 compared with foreign currency gains of $1.0 million in the first six months of 2017 .

HBB's effective income tax rate decreased to 26.7% in the first six months of 2018 from 37.3% in the first six months of 2017 primarily due to a reduction in the U.S. federal corporate tax rate as a result of the Tax Act.

HBB recognized net income of $4.8 million in the first six months of 2018 compared with $3.9 million in the first six months of 2017 . The increase in net income is primarily due to the factors affecting operating profit, interest expense, other, net, including interest income and the change in the income tax provision.

Liquidity and Capital Resources of HBB

Cash Flows

The following tables detail the changes in cash flow for the six months ended June 30 :
 
2018
 
2017
 
Change
Operating activities:
 
 
 
 
 
Net income
$
4,769

 
$
3,884

 
$
885

Depreciation and amortization
2,014

 
1,926

 
88

Other
(1,378
)
 
294

 
(1,672
)
Working capital changes
(43,766
)
 
(10,058
)
 
(33,708
)
Net cash used for operating activities
(38,361
)
 
(3,954
)
 
(34,407
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(4,354
)
 
(1,939
)
 
(2,415
)
Other
—

 
21

 
(21
)
Net cash used for investing activities
(4,354
)
 
(1,918
)
 
(2,436
)
 
 
 
 
 
 
Cash flow before financing activities
$
(42,715
)
 
$
(5,872
)
 
$
(36,843
)
 
Net cash used for operating activities increased by $34.4 million in the first six months of 2018 compared with the first six months of 2017 primarily due to the changes in working capital. The change in working capital is attributable to a larger increase in inventory and less of a decrease in accounts payable during the first six months of 2018 compared with 2017, partially offset by a larger decrease in accounts receivable in the first six months of 2018 compared with 2017. The increase in inventory was primarily due to higher inventory levels in the first half of 2018 to support higher sales forecasts in both the first and second half of 2018. The changes in accounts payable and accounts receivable were mainly attributable to the timing of purchases and the timing of collections, respectively, during the first six months of 2018 compared with 2017.


21
Table of Contents

 
2018
 
2017
 
Change
Financing activities:
 
 
 
 
 
Net additions to revolving credit agreement
$
44,980

 
$
8,362

 
$
36,618

Cash dividends paid to Hamilton Beach Holding
(2,327
)
 
—

 
(2,327
)
Net cash provided by financing activities
$
42,653

 
$
8,362

 
$
34,291


The change in net cash provided by financing activities is primarily the result of increased borrowings under the revolving credit facility to fund working capital.

Financing Activities of HBB

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 $283.1 million as of June 30, 2018 . At June 30, 2018 , the borrowing base under the HBB Facility was $114.8 million and borrowings outstanding were $96.3 million . At June 30, 2018 , the excess availability under the HBB Facility was $18.9 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, LIBOR or bankers' acceptance rate, as defined in the HBB Facility, plus an applicable margin. The applicable margins, effective June 30, 2018 , for base rate loans and LIBOR loans denominated in U.S. dollars were 0.0% and 1.5% , respectively. The applicable margins, effective June 30, 2018 , for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.0% and 1.5% , respectively. The HBB Facility also requires a fee of 0.25% per annum on the unused commitment. The margins and unused commitment fee under the HBB Facility are subject to quarterly adjustment based on average excess availability. The weighted average interest rate applicable to the HBB Facility at June 30, 2018 was 3.5% including the floating rate margin and the effect of the interest rate swap agreements described below.

To reduce the exposure to changes in the market rate of interest, HBB has entered into interest rate swap agreements for a portion of the HBB Facility. Terms of the interest rate swap agreements require HBB to receive a variable interest rate and pay a fixed interest rate. HBB has interest rate swaps with notional values totaling $35.0 million at June 30, 2018 at a fixed interest rate of 1.5% . HBB also has delayed-start interest rate swaps with notional values totaling $10.0 million at June 30, 2018 , with fixed rates of 1.7%.

The HBB Facility includes restrictive covenants, which, among other things, limit the payment of dividends to Hamilton Beach Holding, subject to achieving availability thresholds. Under Amendment No. 6 to the HBB Facility, dividends to Hamilton Beach Holding are not to exceed $5.0 million during any calendar year to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less than $15.0 million. Dividends to Hamilton Beach Holding are discretionary to the extent that for the thirty days prior to the dividend payment date, and after giving effect to the dividend payment, HBB maintains excess availability of not less 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, 2018 , 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.

Contractual Obligations, Contingent Liabilities and Commitments
    
In the six months ended June 30, 2018 , there were no significant changes in the total amount of HBB's contractual obligations, contingent liabilities or commitments, or the timing of cash flows in accordance with those obligations as reported on page 31 in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 other than the increase in borrowings outstanding under the HBB Facility.




22
Table of Contents

Capital Expenditures

Expenditures for property, plant and equipment were $4.4 million for the first six months of 2018 and are estimated to be an additional $5.3 million for the remainder of 2018 . These planned capital expenditures are primarily for improvements to HBB’s information technology infrastructure, tooling for new products and distribution warehouse improvements. These expenditures are expected to be funded from internally generated funds and bank borrowings.

Capital Structure

Working capital is significantly affected by the seasonality of HBB's business. The following is a discussion of the changes in HBB's capital structure at June 30, 2018 compared with both June 30, 2017 and December 31, 2017 .

June 30, 2018 Compared with June 30, 2017
 
JUNE 30
2018
 
JUNE 30
2017
 
Change
Cash and cash equivalents
$
1,393

 
$
4,876

 
$
(3,483
)
Other net tangible assets
120,543

 
78,252

 
42,291

Goodwill and intangible assets, net
11,462

 
12,843

 
(1,381
)
Net assets
133,398

 
95,971

 
37,427

Total debt
(96,326
)
 
(47,076
)
 
(49,250
)
Total equity
$
37,072

 
$
48,895

 
$
(11,823
)
Debt to total capitalization
72.2
%
 
49.1
%
 
23.1
%

Other net tangible assets increased $42.3 million from June 30, 2017 primarily due to an increase in inventory and accounts receivable partially offset by an increase in accounts payable. Inventory increased primarily due to higher inventory levels in the first half of 2018 to support higher sales forecasts in both the first and second half of 2018. The changes in accounts payable and accounts receivable were primarily attributable to the timing of purchases and the timing of collections, respectively, during the first six months of 2018 compared with 2017.

Total debt increased $49.3 million to fund working capital.

June 30, 2018 Compared with December 31, 2017
 
JUNE 30
2018
 
DECEMBER 31
2017
 
Change
Cash and cash equivalents
$
1,393

 
$
1,480

 
$
(87
)
Other net tangible assets
120,543

 
69,122

 
51,421

Goodwill and intangible assets, net
11,462

 
12,153

 
(691
)
Net assets
133,398

 
82,755

 
50,643

Total debt
(96,326
)
 
(51,346
)
 
(44,980
)
Total equity
$
37,072

 
$
31,409

 
$
5,663

Debt to total capitalization
72.2
%
 
62.0
%
 
10.2
%