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 September 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 October 26, 2018: 9,249,846
Number of shares of Class B Common Stock outstanding at October 26, 2018: 4,462,920
 
 
 
 
 


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
 
SEPTEMBER 30
2018
 
DECEMBER 31
2017
 
SEPTEMBER 30
2017
 
(In thousands, except share data)
ASSETS
 

 
 
 
 
Cash and cash equivalents
$
2,139

 
$
10,906

 
$
3,113

Accounts receivable, net
121,660

 
114,100

 
93,019

Inventories
183,831

 
134,744

 
162,891

Prepaid expenses and other
12,789

 
8,835

 
9,413

Total current assets
320,419

 
268,585

 
268,436

Property, plant and equipment, net
23,309

 
19,083

 
17,633

Goodwill
6,253

 
6,253

 
6,253

Other intangibles, net
4,864

 
5,900

 
6,245

Deferred income taxes
10,450

 
12,825

 
19,409

Deferred costs
10,306

 
10,466

 
8,494

Other non-current assets
3,322

 
3,121

 
2,879

Total assets
$
378,923

 
$
326,233

 
$
329,349

LIABILITIES AND EQUITY
 

 
 

 
 
Accounts payable
$
143,955

 
$
143,012

 
$
136,689

Accounts payable to NACCO Industries, Inc.
2,480

 
9,189

 
9,996

Revolving credit agreements
69,883

 
31,346

 
35,462

Accrued payroll
16,575

 
17,302

 
14,791

Accrued cooperative advertising
8,950

 
11,418

 
8,900

Other current liabilities
27,790

 
18,679

 
18,252

Total current liabilities
269,633


230,946

 
224,090

Revolving credit agreements
30,000

 
20,000

 
45,000

Other long-term liabilities
24,840

 
28,879

 
27,960

Total liabilities
324,473

 
279,825

 
297,050

Stockholders' equity
 

 
 

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

 
—

 
—

Class A Common stock, par value $0.01 per share, 70 million shares authorized, 9,238,410 shares outstanding, (8,865,207 shares outstanding as of December 31, 2017 and 6,836,716 shares outstanding as of September 30, 2017)
92

 
88

 
68

Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis, 30 million shares authorized, 4,465,416 shares outstanding, (4,808,225 shares outstanding as of December 31, 2017 and 6,836,716 shares outstanding as of September 30, 2017)
45

 
48

 
68

Capital in excess of par value
51,366

 
47,773

 
47,773

Retained earnings
17,031

 
12,603

 
—

Accumulated other comprehensive loss
(14,084
)
 
(14,104
)
 
(15,610
)
Total stockholders' equity
54,450

 
46,408

 
32,299

Total liabilities and equity
$
378,923

 
$
326,233

 
$
329,349

    
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
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share data)
Revenues
$
196,901

 
$
181,713

 
$
501,475

 
$
474,971

Cost of sales
146,550

 
133,586

 
372,478

 
353,436

Gross profit
50,351

 
48,127

 
128,997

 
121,535

Operating expenses
 
 
 
 
 
 
 
Selling, general and administrative expenses
39,003

 
40,351

 
116,702

 
113,343

Amortization of intangible assets
345

 
346

 
1,036

 
1,036

 
39,348

 
40,697

 
117,738

 
114,379

Operating profit
11,003

 
7,430

 
11,259

 
7,156

Other (income) expense
 

 
 

 
 

 
 

Interest expense
1,059

 
423

 
2,529

 
1,300

Other, net, including interest income
(276
)
 
40

 
266

 
(939
)
 
783

 
463

 
2,795

 
361

Income before income tax provision
10,220

 
6,967

 
8,464

 
6,795

Income tax provision
2,176

 
2,708

 
1,712

 
2,655

Net income
$
8,044

 
$
4,259

 
$
6,752

 
$
4,140

 
 

 
 

 
 

 
 

Basic and diluted earnings per share
$
0.59

 
$
0.31

 
$
0.49

 
$
0.30

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
13,704

 
13,673

 
13,694

 
13,673

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
13,713

 
13,673

 
13,697

 
13,673

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

 
$
—

 
$
0.255

 
$
—


See notes to Unaudited Condensed Consolidated Financial Statements.

3
Table of Contents

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

 
THREE MONTHS ENDED
SEPTEMBER 30
 
NINE MONTHS ENDED
SEPTEMBER 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
8,044

 
$
4,259

 
$
6,752

 
$
4,140

Foreign currency translation adjustment
1,257

 
(18
)
 
1,282

 
1,725

Loss on intra-entity foreign currency transactions, net of $66 tax expense and $29 tax benefit in the three and nine months ended September 30, 2018, respectively.
(53
)
 
—

 
(1,066
)
 
—

Current period cash flow hedging activity, net of $124 tax benefit and $125 tax expense in the three and nine months ended September 30, 2018, respectively, and $21 and $390 tax benefit in the three and nine months ended September 30, 2017, respectively.
(301
)
 
(72
)
 
452

 
(931
)
Reclassification of hedging activities into earnings, net of $41 tax expense and $36 tax benefit in the three and nine months ended September 30, 2018, respectively, and $13 and $42 tax expense in the three and nine months ended September 30, 2017, respectively.
(102
)
 
(35
)
 
105

 
(116
)
Reclassification of pension adjustments into earnings, net of $37 and $125 tax benefit in the three and nine months ended September 30, 2018, respectively, and $53 and $155 tax benefit in the three and nine months ended September 30, 2017, respectively.
115

 
62

 
415

 
213

Total other comprehensive income (loss)
916

 
(63
)
 
1,188

 
891

Comprehensive income
$
8,960

 
$
4,196

 
$
7,940

 
$
5,031


See notes to Unaudited Condensed Consolidated Financial Statements.


4
Table of Contents


HAMILTON BEACH BRANDS HOLDING COMPANY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
2018
 
2017
 
(In thousands)
Operating activities
 
 
 
Net income
$
6,752

 
$
4,140

Adjustments to reconcile from net income to net cash used for operating activities:
 
 
 
Depreciation and amortization
3,775

 
3,709

Deferred income taxes
1,900

 
(1,905
)
Other
448

 
(1,154
)
Working capital changes:
 
 
 
Affiliates payable
(6,709
)
 
(513
)
Accounts receivable
(7,560
)
 
11,053

Inventories
(49,087
)
 
(34,476
)
Other current assets
(3,954
)
 
149

Accounts payable
943

 
15,421

Other liabilities
6,912

 
(4,124
)
Net cash used for operating activities
(46,580
)
 
(7,700
)
 
 
 
 
Investing activities
 
 
 
Expenditures for property, plant and equipment
(7,240
)
 
(4,366
)
Other
7

 
21

Net cash used for investing activities
(7,233
)
 
(4,345
)
 
 
 
 
Financing activities
 
 
 
Net additions to revolving credit agreements
48,538

 
41,747

Cash dividends to NACCO Industries, Inc.
—

 
(38,000
)
Cash dividends on Class A Common and Class B Common
(3,492
)
 
—

Net cash provided by financing activities
45,046

 
3,747

 
 
 
 
Effect of exchange rate changes on cash
—

 
71

 
 
 
 
Cash and cash equivalents
 
 
 
Decrease for the period
(8,767
)
 
(8,227
)
Balance at the beginning of the period
10,906

 
11,340

Balance at the end of the period
$
2,139

 
$
3,113


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

Issuance of common stock, net of conversions
68

68

(136
)
 
 
 
 
 
 
 
 
—

Net income
 
 
—

4,140

 
—

 
—

 
—

 
4,140

Cash dividends to NACCO Industries, Inc.
—

—

(27,122
)
(10,878
)
 
—

 
—

 
—

 
(38,000
)
Current period other comprehensive income (loss)
—

—

—

—

 
1,725

 
(931
)
 
—

 
794

Reclassification adjustment to net income (loss)
—

—

—

—

 
—

 
(116
)
 
213

 
97

Balance, September 30, 2017
$
68

$
68

$
47,773

$
—

 
$
(6,898
)
 
$
(431
)
 
$
(8,281
)
 
$
32,299

 
 
 
 
 
 
 
 
 
 
 
 
 
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
)
767

—

 
—

 
—

 
—

 
768

Net income
—

—

—

6,752

 
—

 
—

 
—

 
6,752

Share-based compensation expense
—

—

2,826

—

 
—

 
—

 
—

 
2,826

Cash dividends on Class A Common and Class B Common: $0.255 per share
—

—

—

(3,492
)
 
—

 
—

 
—

 
(3,492
)
Reclassification due to adoption of ASU 2018-02
—

—

—

1,168

 
—

 
118

 
(1,286
)
 
—

Current period other comprehensive income
—

—

—

—

 
216

 
452

 
—

 
668

Reclassification adjustment to net income
—

—

—

—

 
—

 
105

 
415

 
520

Balance, September 30, 2018
$
92

$
45

$
51,366

$
17,031

 
$
(7,718
)
 
$
1,183

 
$
(7,549
)
 
$
54,450


See notes to Unaudited Condensed Consolidated Financial Statements.

6
Table of Contents

HAMILTON BEACH BRANDS HOLDING COMPANY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 the three and nine months ended September 30, 2017 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 September 30, 2018 and the results of its operations, comprehensive income (loss), cash flows and changes in equity for the nine months ended September 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 nine months ended September 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 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 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.


8

•
License revenues - From time to time, the Company enters into exclusive and non-exclusive licensing agreements which grant the right to use 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 that 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 nine months ending:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30, 2018
 
SEPTEMBER 30, 2018
 
HBB
 
KC
 
Consolidated (1)
 
HBB
 
KC
 
Consolidated (1)
Type of good or service:
 
 
 
 
 
 
 
 
 
 
 
  Products
$
171,346

 
$
25,884

 
$
195,783

 
$
430,941

 
$
70,746

 
$
498,669

  Licensing
1,118

 
—

 
1,118

 
2,806

 
—

 
2,806

     Total revenues
$
172,464

 
$
25,884

 
$
196,901

 
$
433,747

 
$
70,746

 
$
501,475

(1) Includes the required intercompany eliminations between HBB and KC.
NOTE 4— Inventories

Inventories are summarized as follows:
 
SEPTEMBER 30
2018
 
DECEMBER 31
2017
 
SEPTEMBER 30
2017
Sourced inventories - HBB
$
155,744

 
$
111,493

 
$
133,018

Retail inventories - KC
28,087

 
23,251

 
29,873

 Total inventories
$
183,831

 
$
134,744

 
$
162,891



9

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)
 
 
September 30, 2018
 
 
 
 
 
 
Assets:
 

 
 
 
 
 
 
Interest rate swap agreements
 
$
1,708

 
$
—

 
$
1,708

 
$
—

Foreign currency exchange contracts
 
29

 
—

 
29

 
—

 
 
$
1,737

 
$
—

 
$
1,737

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
310

 
$
—

 
$
310

 
$
—

 
 
$
310

 
$
—

 
$
310

 
$
—

 
 
 
 
 
 
 
 
 
 
 
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

 
$
—

 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
603

 
$
—

 
$
603

 
$
—

 
 
$
603

 
$
—

 
$
603

 
$
—

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
694

 
$
—

 
$
694

 
$
—

 
 
$
694

 
$
—

 
$
694

 
$
—


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

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

10

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 September 30, 2018 , December 31, 2017 and September 30, 2017 , HBB had accrued undiscounted obligations of $8.6 million , $8.9 million and $9.0 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
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
HBB
$
172,464

 
$
153,592

 
$
433,747

 
$
395,320

KC
25,884

 
28,644

 
70,746

 
81,177

Eliminations
(1,447
)
 
(523
)
 
(3,018
)
 
(1,526
)
Total
$
196,901

 
$
181,713

 
$
501,475

 
$
474,971

 
 
 
 
 
 
 
 
Operating profit (loss)
 

 
 

 
 

 
 

HBB (a)
$
13,446

 
$
9,001

 
$
21,838

 
$
14,947

KC
(2,407
)
 
(1,581
)
 
(10,545
)
 
(7,868
)
Eliminations
(36
)
 
10

 
(34
)
 
77

Total
$
11,003

 
$
7,430

 
$
11,259

 
$
7,156

 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
HBB (a)
$
10,174

 
$
5,245

 
$
14,943

 
$
9,129

KC
(1,938
)
 
(1,155
)
 
(8,476
)
 
(5,268
)
Eliminations
(192
)
 
169

 
285

 
279

Total
$
8,044

 
$
4,259

 
$
6,752

 
$
4,140


(a) HBB's operating profit and net income includes the recognition of one-time transaction-related expenses of $2.5 million related to the spin-off in the three and nine months ended September 30, 2017.

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 21.3% and 20.2% for the three and nine months ended September 30, 2018 , respectively, compared with 38.9% and 39.1% for the three and nine months ended September 30, 2017, respectively, primarily due to a reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent during 2018 and the effect of non-deductible spin-off related expenses recognized in the three and nine months ended September 30, 2017.
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. No material adjustments were recorded to the provisional amounts during the three and nine months ending September 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.


12

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 $37.0 million and $107.2 million of accounts receivable during the three and nine months ending September 30, 2018 , respectively, and $36.2 million and $98.6 million of accounts receivable during the three and nine months ending September 30, 2017 , respectively. The loss incurred on sold receivables in the consolidated results of operations for the three and nine months ended September 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 the three and nine months ended September 30, 2017 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
 
NINE MONTHS ENDED
 
SEPTEMBER 30
 
SEPTEMBER 30
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
    HBB
$
172,464

 
$
153,592

 
$
433,747

 
$
395,320

    KC
25,884

 
28,644

 
70,746

 
81,177

    Eliminations
(1,447
)
 
(523
)
 
(3,018
)
 
(1,526
)
Total
$
196,901

 
$
181,713

 
$
501,475

 
$
474,971

 
 
 
 
 
 
 
 
Operating profit (loss)
 
 
 
 
 
 
 

    HBB
$
13,446

 
$
9,001

 
$
21,838

 
$
14,947

    KC
(2,407
)
 
(1,581
)
 
(10,545
)
 
(7,868
)
    Eliminations
(36
)
 
10

 
(34
)
 
77

Total
$
11,003

 
$
7,430

 
$
11,259

 
$
7,156

 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
    HBB
$
10,174

 
$
5,245

 
$
14,943

 
$
9,129

    KC
(1,938
)
 
(1,155
)
 
(8,476
)
 
(5,268
)
    Eliminations
(192
)
 
169

 
285

 
279

Total
$
8,044

 
$
4,259

 
$
6,752

 
$
4,140


The following table identifies, by segment, the components of change in Revenues, Operating profit and Net income:
 
Revenues
 
Operating profit
 
Net income
Consolidated results for the three months ended September 30, 2017
$
181,713

 
$
7,430

 
$
4,259

Increase (decrease) from:
 
 
 
 
 
HBB
18,872

 
4,445

 
4,929

KC
(2,760
)
 
(826
)
 
(783
)
     Eliminations
(924
)
 
(46
)
 
(361
)
Consolidated results for the three months ended September 30, 2018
$
196,901

 
$
11,003

 
$
8,044

 
Revenues
 
Operating profit
 
Net income
Consolidated results for the nine months ended September 30, 2017
$
474,971

 
$
7,156

 
$
4,140

Increase (decrease) from:
 
 
 
 
 
HBB
38,427

 
6,891

 
5,814

KC
(10,431
)
 
(2,677
)
 
(3,208
)
     Eliminations
(1,492
)
 
(111
)
 
6

Consolidated results for the nine months ended September 30, 2018
$
501,475

 
$
11,259

 
$
6,752


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

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.

15
Table of Contents


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 September 30, 2018 compared with both September 30, 2017 and December 31, 2017 is presented below:

September 30, 2018 Compared with September 30, 2017
 
SEPTEMBER 30
2018
 
SEPTEMBER 30
2017
 
Change
Cash and cash equivalents
$
2,139

 
$
3,113

 
$
(974
)
Other net tangible assets
141,077

 
97,150

 
43,927

Goodwill and intangible assets, net
11,117

 
12,498

 
(1,381
)
Net assets
154,333

 
112,761

 
41,572

Total debt
(99,883
)
 
(80,462
)
 
(19,421
)
Total equity
$
54,450

 
$
32,299

 
$
22,151

Debt to total capitalization
64.7
%
 
71.4
%
 
(6.7
)%

September 30, 2018 Compared with December 31, 2017
 
SEPTEMBER 30
2018
 
DECEMBER 31
2017
 
Change
Cash and cash equivalents
$
2,139

 
$
10,906

 
$
(8,767
)
Other net tangible assets
141,077

 
74,695

 
66,382

Goodwill and intangible assets, net
11,117

 
12,153

 
(1,036
)
Net assets
154,333

 
97,754

 
56,579

Total debt
(99,883
)
 
(51,346
)
 
(48,537
)
Total equity
$
54,450

 
$
46,408

 
$
8,042

Debt to total capitalization
64.7
%
 
52.5
%
 
12.2
%

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

OUTLOOK

In the current market environment and including the various factors noted in the HBB and KC segments' outlooks, the Company expects fourth-quarter and full-year 2018 consolidated net income to increase substantially over the same periods in 2017, including the effect of lower income tax expense and the absence of the provisional tax charges recorded in 2017. As a result of the Tax Act, the Company expects its effective income tax rate to be in the range of 24% to 26% in 2018. In 2019, the Company expects consolidated net income to increase compared with 2018.

16
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

Third Quarter of 2018 Compared with Third Quarter of 2017

The results of operations for HBB were as follows for the three months ended September 30 :
 
Three Months Ended
September 30
 
% of Revenue
 
2018
 
2017
 
2018
 
2017
Revenues
$
172,464

 
$
153,592

 
100.0
 %
 
100.0
%
Cost of sales
134,082

 
118,569

 
77.7
 %
 
77.2
%
Gross profit
38,382

 
35,023

 
22.3
 %
 
22.8
%
Operating expenses (1)(2)
24,936

 
26,022

 
14.5
 %
 
16.9
%
Operating profit
13,446

 
9,001

 
7.8
 %
 
5.9
%
Interest expense
944

 
343

 
0.5
 %
 
0.2
%
Other, net, including interest income
(283
)
 
26

 
(0.2
)%
 
—
%
Income before income tax provision
12,785

 
8,632

 
7.4
 %
 
5.6
%
Income tax provision
2,611

 
3,387

 
1.5
 %
 
2.2
%
Net income
$
10,174

 
$
5,245

 
5.9
 %
 
3.4
%
 
 
 
 
 
 
 
 
Effective income tax rate
20.4
%
 
39.2
%
 
 
 
 
(1) Operating expenses include selling, general and administrative expenses, amortization of intangibles and (gain) loss on sale of assets.
(2) In connection with the spin-off, HBB recognized one-time transaction-related expenses of $2.5 million in the third quarter of 2017.

The following table identifies the components of change in revenues for the third quarter of 2018 compared with the third quarter of 2017 :
 
Revenues
2017
$
153,592

Increase (decrease) from:
 
Unit volume and product mix
18,164

Average Sales Price
2,265

Foreign currency
(1,557
)
2018
$
172,464


Revenues increased $18.9 million , or 12.3% , during the third quarter of 2018 compared with the third quarter of 2017 primarily due to higher sales volume in all markets, but primarily in the U.S. and International consumer markets.
 

17
Table of Contents

The following table identifies the components of change in operating profit for the third quarter of 2018 compared with the third quarter of 2017 :
 
Operating Profit
2017
$
9,001

Increase (decrease) from:
 
Gross profit
3,317

Selling, general and administrative expenses
1,087

Foreign currency
41

2018
$
13,446


HBB's operating profit increased $4.4 million in the third quarter of 2018 compared with the third quarter of 2017 primarily due to a $3.3 million increase in gross profit and a $1.1 million decrease in selling, general and administrative expenses.

Gross profit increased mainly as a result of higher sales volumes, partially offset by increased warehouse and transportation expenses and higher product costs.

The decrease in selling, general and administrative expenses was mainly attributable to the absence of $2.5 million of one-time costs incurred in the prior year to effect the spin-off from NACCO, partially offset by an increase of $1.4 million in professional and outside services fees, primarily due to patent litigation expenses.

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

Other, net, including interest income, increased $0.3 million primarily due to currency gains in the third quarter of 2018 compared with the third quarter of 2017 .

HBB's effective income tax rate decreased to 20.4% in the third quarter of 2018 from 39.2% in the third quarter of 2017 primarily due to a reduction in the U.S. federal corporate tax rate as a result of the Tax Act and the absence of non-deductible spin-off related expenses incurred in the third quarter of 2017.

As a result of the factors discussed above, HBB's net income increased to $10.2 million in the third quarter of 2018 compared with net income of $5.2 million in the third quarter of 2017 .


18
Table of Contents

First Nine Months of 2018 Compared with First Nine Months of 2017

The results of operations for HBB were as follows for the nine months ended September 30 :
 
Nine Months Ended
September 30
 
% of Revenue
 
2018
 
2017
 
2018
 
2017
Revenues
$
433,747

 
$
395,320

 
100.0
%
 
100.0
 %
Cost of sales
337,213

 
310,554

 
77.7
%
 
78.6
 %
Gross profit
96,534

 
84,766

 
22.3
%
 
21.4
 %
Operating expenses (1)(2)
74,696

 
69,819

 
17.2
%
 
17.7
 %
Operating profit
21,838

 
14,947

 
5.0
%
 
3.8
 %
Interest expense
2,312

 
1,106

 
0.5
%
 
0.3
 %
Other, net, including interest income
239

 
(985
)
 
0.1
%
 
(0.2
)%
Income before income tax provision
19,287

 
14,826

 
4.4
%
 
3.8
 %
Income tax provision
4,344

 
5,697

 
1.0
%
 
1.4
 %
Net income
$
14,943

 
$
9,129

 
3.4
%
 
2.3
 %
 
 
 
 
 
 
 
 
Effective income tax rate
22.5
%
 
38.4
%
 
 
 
 
(1) Operating expenses include selling, general and administrative expenses, amortization of intangibles and (gain) loss on sale of assets.
(2) In connection with the spin-off, HBB recognized transaction-related expenses of $2.5 million in the first nine months of 2017.

The following table identifies the components of change in revenues for the first nine months of 2018 compared with the first nine months of 2017 :
 
Revenues
2017
$
395,320

Increase (decrease) from:
 
Unit volume and product mix
35,964

Average Sales Price
2,925

Foreign currency
(462
)
2018
$
433,747


Revenues increased $38.4 million , or 9.7% , during the first nine months of 2018 compared with the first nine months of 2017 primarily due to higher sales volumes in all markets, but primarily in the International and U.S. consumer markets.

The following table identifies the components of change in operating profit for the first nine months of 2018 compared with the first nine months of 2017 :
 
Operating Profit
2017
$
14,947

Increase (decrease) from:
 
Gross profit
10,558

Foreign currency
1,209

Selling, general and administrative expenses
(4,876
)
2018
$
21,838


HBB's operating profit increased $6.9 million for the first nine months of 2018 compared with the first nine months of 2017 primarily due to a $10.6 million increase in gross profit, partially offset by a $4.9 million increase in selling, general and administrative expenses.


19
Table of Contents

Gross profit increased mainly as a result of higher sales volumes and increased sales of higher-margin products in the U.S. Consumer and Global Commercial markets for the nine months ended September 30, 2018. A $3.0 million increase in warehouse and transportation costs, primarily resulting from higher inventory levels and increased sales volumes, partially offset the improvement in gross profit during the first nine months of 2018.

The increase in selling, general and administrative expenses was primarily due to a $4.3 million increase in employee-related expenses and a $3.7 million increase in professional and outside service fees, which was partially offset by the absence of $2.5 million of one-time costs incurred in the prior year to effect the spin-off from NACCO. The increase in employee-related expenses was mainly due to incentive and merit compensation increases, as well as additional headcount to support HBB's strategic initiatives. Professional and outside service fees increased mainly due to patent litigation expenses.

HBB's interest expense increased $1.2 million for the first nine months of 2018 compared with the first nine months of 2017 due to an increase in average borrowings outstanding under HBB's revolving credit facility and higher average interest rates.

Other, net, including interest income, decreased $1.2 million primarily due to foreign currency losses of $0.1 million in the first nine months of 2018 compared with foreign currency gains of $0.9 million in the first nine months of 2017 .

HBB's effective income tax rate decreased to 22.5% in the first nine months of 2018 from 38.4% in the first nine months of 2017 primarily due to a reduction in the U.S. federal corporate tax rate as a result of the Tax Act and the absence of non-deductible spin-off related expenses incurred in the first nine months of 2017.

As a result of the factors discussed above, HBB's net income increased to $14.9 million in the first nine months of 2018 compared with net income of $9.1 million in the first nine months of 2017 .

Liquidity and Capital Resources of HBB

Cash Flows

The following tables detail the changes in cash flow for the nine months ended September 30 :
 
2018
 
2017
 
Change
Operating activities:
 
 
 
 
 
Net income
$
14,943

 
$
9,129

 
$
5,814

Depreciation and amortization
2,991

 
2,886

 
105

Other
1,001

 
258

 
743

Working capital changes
(47,130
)
 
(8,681
)
 
(38,449
)
Net cash (used for) provided by operating activities
(28,195
)
 
3,592

 
(31,787
)
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
Expenditures for property, plant and equipment
(6,964
)
 
(3,677
)
 
(3,287
)
Other
—

 
21

 
(21
)
Net cash used for investing activities
(6,964
)
 
(3,656
)
 
(3,308
)
 
 
 
 
 
 
Cash flow before financing activities
$
(35,159
)
 
$
(64
)
 
$
(35,095
)
 
Net cash used for operating activities increased by $31.8 million in the first nine months of 2018 compared with the first nine months of 2017 primarily due to the change in working capital. The change in working capital is attributable to a larger decrease in accounts receivable and a larger increase in accounts payable in the first nine months of 2017 compared with the first nine months of 2018 and a larger increase in inventory in the first nine months of 2018 compared with the first nine months of 2017. The changes in accounts receivable and accounts payable were mainly attributable to the timing of collections and the timing of purchases, respectively, during the first nine months of 2018 compared with 2017. The increase in inventory was primarily due to higher inventory levels to support higher sales forecasts in the second half of 2018 and increased product costs compared with 2017.
 


20
Table of Contents

 
2018
 
2017
 
Change
Financing activities:
 
 
 
 
 
Net additions to revolving credit agreement
$
38,738

 
$
35,147

 
$
3,591

Cash dividends paid to Hamilton Beach Holding
(3,492
)
 
(35,000
)
 
31,508

Net cash provided by financing activities
$
35,246

 
$
147

 
$
35,099


The change in net cash provided by financing activities is primarily the result of the absence of the cash dividends paid to NACCO, which was funded by HBB, during the first nine months of 2017.

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 $338.0 million as of September 30, 2018 . At September 30, 2018 , the borrowing base under the HBB Facility was $114.4 million and borrowings outstanding were $90.1 million . At September 30, 2018 , the excess availability under the HBB Facility was $25.8 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 September 30, 2018 , for base rate loans and LIBOR loans denominated in U.S. dollars were 0.0% and 1.8% , respectively. The applicable margins, effective September 30, 2018 , for base rate loans and bankers' acceptance loans denominated in Canadian dollars were 0.0% and 1.8% , 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 September 30, 2018 was 3.7% 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 September 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 as of September 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  September 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 nine months ended September 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.




21
Table of Contents

Capital Expenditures

Expenditures for property, plant and equipment were $7.0 million for the first nine months of 2018 and are estimated to be an additional $1.6 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 September 30, 2018 compared with both September 30, 2017 and December 31, 2017 .

September 30, 2018 Compared with September 30, 2017
 
SEPTEMBER 30
2018
 
SEPTEMBER 30
2017
 
Change
Cash and cash equivalents
$
1,567

 
$
2,475

 
$
(908
)
Other net tangible assets
125,039

 
77,966

 
47,073

Goodwill and intangible assets, net
11,117

 
12,498

 
(1,381
)
Net assets
137,723

 
92,939

 
44,784

Total debt
(90,083
)
 
(73,862
)
 
(16,221
)
Total equity
$
47,640

 
$
19,077

 
$
28,563

Debt to total capitalization
65.4
%
 
79.5
%
 
(14.1
)%

Other net tangible assets increased $47.1 million from September 30, 2017 primarily due to an increase in inventory and accounts receivable partially offset by a decrease in deferred income taxes. The increase in inventory was primarily due to higher inventory levels to support higher sales forecasts in the second half of 2018 and increased product costs compared with 2017. The changes in accounts receivable is primarily attributable to increased revenues in the first nine months of 2018 compared with 2017 and the timing of collections. Deferred income taxes decreased primarily due to the reduction in the U.S. federal corporate tax rate as a result of the Tax Act.

Total debt increased $16.2 million to fund working capital.

September 30, 2018 Compared with December 31, 2017
 
SEPTEMBER 30
2018
 
DECEMBER 31
2017
 
Change
Cash and cash equivalents
$
1,567

 
$
1,480