NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
(Tabular amounts in thousands, except as noted and per share amounts)
NOTE 1—Basis of Presentation and Recently Issued Accounting Standards
Basis of Presentation
Hamilton Beach Brands Holding Company is a holding company and operates through its wholly-owned subsidiary, Hamilton Beach Brands, Inc. (“HBB”) (collectively “Hamilton Beach Holding” or the “Company”). HBB is a leading designer, marketer, and distributor of a wide range of branded small electric household and specialty housewares appliances, as well as commercial products for restaurants, fast food chains, bars, and hotels. HBB operates in the consumer, commercial and specialty small appliance markets.
The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. These 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, 2022.
Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the remainder of the year due to the highly seasonal nature of the Company's primary markets. A majority of revenue and operating profit typically occurs in the second half of the calendar year when sales of products to retailers and consumers historically increase significantly for the fall holiday-selling season.
Accounting Standards Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)," which requires an entity to recognize and present financial assets at the net amount expected to be collected. This guidance replaces the current incurred loss impairment methodology for recognizing credit losses for financial assets and requires consideration of a broader range of reasonable and supportable information for estimating credit losses. The Company considers a combination of factors, such as historical losses, the aging of trade receivables, customers’ financial strength, credit standing and payment and default history in determining the appropriate estimate of expected credit losses. The Company adopted ASU 2016-13 and related amendments for the fiscal year beginning January 1, 2023 and the adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In September 2022, the FASB issued ASU 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” The new accounting rules create certain disclosure requirements for a buyer in a supplier finance program. The new accounting rules require qualitative and quantitative disclosures including key terms of the program, balance sheet presentation of related amounts, and the obligation amount the buyer has confirmed as valid to the finance provider, including a rollforward of the obligation. Only the amount of the obligation outstanding is required to be disclosed in interim periods. The accounting rules do not impact the recognition, measurement, or financial statement presentation of supplier finance program obligations. The Company adopted this guidance in the first quarter of 2023. The new accounting rules did not have an impact on our financial condition, results of operations or cash flows. The Company included a new disclosure in accordance with the new accounting rules.
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. The Company previously qualified as an emerging growth company and elected to use the extended transition period for complying with new and revised financial accounting standards. The amendments were effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. On January 1, 2022, the Company adopted Topic 842. The impacts of the adoption were reflected in the Annual Report on Form 10-K for the year ended December 31, 2022. The Company lost the emerging growth company status as of December 31, 2022, the last day of the fiscal year following the fifth anniversary of our spin-off from NACCO Industries, Inc. The Consolidated Balance Sheet as of March 31, 2022 and the Consolidated Statement of Cash Flows for the three months ended March 31, 2022 have been revised to reflect the Company's adoption of Topic 842 on January 1, 2022.
U.S. Pension Plan Termination
In the second quarter of 2022, the Company began the process of terminating its U.S. defined benefit pension plan (the "Plan"), which could take up to an estimated 24 months to complete. Benefit obligations under the Plan will be settled through a combination of lump sum payments to eligible plan participants and the purchase of a group annuity contract, under which future benefit obligations will be transferred to a third-party insurance company. The Plan continues to be overfunded and the Company expects that there will be no further required minimum contributions to the Plan. We currently expect that all surplus assets remaining after the Plan termination will be transferred to a qualified replacement plan. The deferred loss within Accumulated Other Comprehensive Income will be fully recognized when the plan is terminated or as settlements occur, which would trigger accelerated recognition.
Accounts payable - Supplier Finance Program
The Company has an agreement with a third-party administrator to provide an accounts payable tracking system which facilitates participating suppliers’ ability to monitor and voluntarily elect to sell payment obligations from the Company to the designated third-party financial institution. Participating suppliers can sell one or more of our payment obligations at their sole discretion, and our rights and obligations to our suppliers are not impacted. The Company has no economic interest in a supplier’s decision to enter into these agreements. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers’ decisions to sell amounts under these arrangements. The payment of these obligations by the Company is included in cash used in operating activities in the Consolidated Statement of Cash Flows. As of March 31, 2023, December 31, 2022 and March 31, 2022, $30.4 million, $23.3 million and $40.2 million, respectively, of the Company’s outstanding payment obligations had been placed in the accounts payable tracking system.
NOTE 2—Transfer of Financial Assets
HBB has entered into an arrangement with a financial institution to sell certain U.S. trade receivables on a non-recourse basis. HBB utilizes this arrangement as an integral part of financing working capital. Under the terms of the agreement, HBB 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 sold receivables which result in a reduction in trade receivables because the agreement transfers effective control over and risk related to the receivables to the buyer. Under this arrangement, HBB derecognized $29.7 million and $27.6 million of trade receivables during the three months ending March 31, 2023 and March 31, 2022, respectively, and $118.5 million during the year ending December 31, 2022. The loss incurred on sold receivables in the consolidated results of operations for the three months ended March 31, 2023 and 2022 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 Consolidated Statements of Cash Flows.
NOTE 3—Fair Value Disclosure
The following table presents the Company's assets and liabilities accounted for at fair value on a recurring basis:
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Description | | Balance Sheet Location | | MARCH 31 2023 | | DECEMBER 31 2022 | | MARCH 31 2022 |
Assets: | | | | | | | | |
Interest rate swap agreements | | | | | | | | |
Current | | Prepaid expenses and other current assets | | $ | 1,064 | | | $ | 837 | | | $ | 400 | |
Long-term | | Other non-current assets | | 3,168 | | | 4,539 | | | 1,656 | |
Foreign currency exchange contracts | | | | | | | | |
Current | | Prepaid expenses and other current assets | | 49 | | | 174 | | | — | |
| | | | $ | 4,281 | | | $ | 5,550 | | | $ | 2,056 | |
Liabilities: | | | | | | | | |
Interest rate swap agreements | | | | | | | | |
Current | | Other current liabilities | | $ | — | | | $ | — | | | $ | — | |
Long-term | | Other long-term liabilities | | — | | | — | | | — | |
Foreign currency exchange contracts | | | | | | | | |
Current | | Other current liabilities | | 357 | | | 101 | | | 383 | |
| | | | $ | 357 | | | $ | 101 | | | $ | 383 | |
The Company measures its derivatives at fair value using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. The Company uses a present value technique that incorporates the SOFR swap curve, foreign currency spot rates and foreign currency forward rates to value its derivatives, including its interest rate swap agreements and foreign currency exchange contracts, and also incorporates the effect of its subsidiary and counterparty credit risk into the valuation.
Other Fair Value Measurement Disclosures
The carrying amounts of cash and cash equivalents, trade receivables and accounts payable approximate fair value due to the short-term maturities of these instruments. The fair value of the revolving credit agreement, including book overdrafts, which approximate book value, was determined using current rates offered for similar obligations taking into account subsidiary credit risk, which is Level 2 as defined in the fair value hierarchy.
There were no transfers into or out of Levels 1, 2, or 3 during the three months ended March 31, 2023.
NOTE 4—Stockholders' Equity
Capital Stock
The following table sets forth the Company's authorized capital stock information:
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| MARCH 31 2023 | | DECEMBER 31 2022 | | MARCH 31 2022 |
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Preferred stock, par value $0.01 per share | | | | | |
Preferred stock authorized | 5,000 | | | 5,000 | | | 5,000 | |
Preferred stock outstanding | — | | | — | | | — | |
Class A Common stock, par value $0.01 per share | | | | | |
Class A Common authorized | 70,000 | | | 70,000 | | | 70,000 | |
Class A Common issued(1)(2) | 11,070 | | | 10,663 | | | 10,566 | |
Treasury Stock | 626 | | | 626 | | | 365 | |
Class B Common stock, par value $0.01 per share, convertible into Class A on a one-for-one basis | | | | | |
Class B Common authorized | 30,000 | | | 30,000 | | | 30,000 | |
Class B Common issued(1) | 3,629 | | | 3,844 | | | 3,869 | |
(1) Class B Common converted to Class A Common were 215 and 131 shares during the three months ending March 31, 2023 and 2022, respectively.
(2) The Company issued Class A Common of 192 and 168 shares during the three months ending March 31, 2023 and 2022, respectively.
Stock Repurchase Program: In February 2022, the Company's Board approved a stock repurchase program for the purchase of up to $25 million of the Company's Class A Common outstanding starting February 22, 2022 and ending December 31, 2023. There were no share repurchases during the three months ended March 31, 2023 or 2022. During the year ended December 31, 2022, the Company repurchased 261,049 shares for an aggregate purchase price of $3.0 million.
Accumulated Other Comprehensive Loss: The following table summarizes changes in accumulated other comprehensive loss by component and related tax effects for periods shown:
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| Foreign Currency | | Deferred Gain (Loss) on Cash Flow Hedging | | Pension Plan Adjustment | | Total |
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Balance, January 1, 2023 | $ | (8,924) | | | $ | 4,158 | | | $ | (7,152) | | | $ | (11,918) | |
Other comprehensive income (loss) | 715 | | | (1,881) | | | — | | | (1,166) | |
Reclassification adjustment to net income (loss) | — | | | 252 | | | 87 | | | 339 | |
Tax effects | (194) | | | 379 | | | (23) | | | 162 | |
Balance, March 31, 2023 | $ | (8,403) | | | $ | 2,908 | | | $ | (7,088) | | | $ | (12,583) | |
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Balance, January 1, 2022 | $ | (9,877) | | | $ | (638) | | | $ | (3,728) | | | $ | (14,243) | |
Other comprehensive income (loss) | 359 | | | 2,691 | | | — | | | 3,050 | |
Reclassification adjustment to net income (loss) | 1,267 | | | (126) | | | 50 | | | 1,191 | |
Tax effects | 727 | | | (609) | | | (25) | | | 93 | |
Balance, March 31, 2022 | $ | (7,524) | | | $ | 1,318 | | | $ | (3,703) | | | $ | (9,909) | |
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NOTE 5—Revenue
Revenue is 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, which includes an estimate for variable consideration.
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 to three years. 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 a general right of return. However, based on historical experience, a portion of products sold are estimated to be returned due to reasons such as product failure and excess inventory stocked by the customer, which, subject to certain terms and conditions, HBB will agree to accept. Product returns, customer programs and incentive offerings, including special pricing agreements, price competition, promotions, and other volume-based incentives are accounted for as variable consideration.
A description of revenue sources and performance obligations for HBB are as follows:
Consumer and Commercial product revenue
Transactions with both consumer and commercial 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 revenue 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 a product is shipped from the Company's facility, or delivered to customers, depending on the shipping terms. The amount of revenue recognized varies primarily with price concessions and changes in returns. The Company offers price concessions to our customers for incentive offerings, special pricing agreements, price competition, promotions or other volume-based arrangements. The Company evaluated such agreements with our customers and determined returns and price concessions should be accounted for as variable consideration.
Consumer product revenue consists of sales of small electric household and specialty housewares appliances to traditional brick and mortar and ecommerce retailers, distributors and directly to the end consumer. A majority of this revenue is in North America.
Commercial product revenue consists of sales of products for restaurants, fast-food chains, bars and hotels. Approximately one-half of our commercial sales is in the U.S. and the other half is in markets across the globe.
License revenue
From time to time, the Company enters into exclusive and non-exclusive licensing agreements which grant the right to use certain of HBB’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, trade names, patents, trade dress, logos and/or products (the “Licensed IP”). In exchange for granting the right to use the Licensed IP, HBB 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. HBB recognizes revenue at the later of when the subsequent sales occur or satisfying the performance obligation (over time).
The following table sets forth Company's revenue on a disaggregated basis for the three months ended March 31:
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| THREE MONTHS ENDED MARCH 31 | | |
| 2023 | | 2022 | | | | |
Type of good or service: | | | | | | | |
Consumer products | $ | 113,432 | | | $ | 129,760 | | | | | |
Commercial products | 13,404 | | | 15,080 | | | | | |
Licensing | 1,416 | | | 1,511 | | | | | |
Total revenues | $ | 128,252 | | | $ | 146,351 | | | | | |
NOTE 6—Contingencies
Hamilton Beach Holding and its subsidiary are involved in various legal and regulatory proceedings and claims that have arisen in the ordinary course of business, including product liability, patent infringement, asbestos related claims, environmental and other claims. Although it is difficult to predict the ultimate outcome of these proceedings and claims, the Company believes the ultimate disposition of these matters will not have a material adverse effect on the financial condition, results of operation or cash flows of the Company. Any costs that the Company 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.
Proceedings and claims asserted against the Company or its subsidiary 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 for 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 March 31, 2023, December 31, 2022, and March 31, 2022, HBB had accrued undiscounted obligations of $3.3 million, $3.2 million and $3.4 million respectively, for environmental investigation and remediation activities. HBB estimates that it is reasonably possible that it may incur additional expenses in the range of zero to $1.5 million related to the environmental investigation and remediation at these sites. As of March 31, 2023, HBB has $1.0 million, classified as restricted cash, associated with reimbursement of environmental investigation and remediation costs from a responsible party in exchange for release from all future obligations for one site. Additionally, HBB has a $1.2 million asset associated with the reimbursement of costs associated with two sites.
NOTE 7—Income Taxes
The Company's provision for income taxes for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company makes a cumulative adjustment in such period.
The effective tax rate on loss was 24.7% for the three months ended March 31, 2023, and 32.0% on income for the three months ended March 31, 2022. The effective tax rate for the three months ended March 31, 2022 was unfavorably impacted by interest and penalties on unrecognized tax benefits and a valuation allowance on certain foreign deferred tax assets related to the Brazil liquidation as discrete expense items that did not recur in 2023.