# Hamilton Beach Brands Holding Co (HBB) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Hamilton Beach Brands Holding Co's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1709164/000170916425000008/hbb-20241231.htm
Accession: 0001709164-25-000008
Filing date: 2025-02-26
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HBB/
All MD&A years: /company/HBB/mda/
Previous year: /company/HBB/mda/fy2023/ (FY 2023)
Next year: /company/HBB/mda/fy2025/ (FY 2025)

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report on Form 10-K. The following discussion and analysis focuses on our financial results for the years ended December 31, 2024 and 2023 and year-to-year comparisons between these years. A discussion of our results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2023.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and disclosure of contingent assets and liabilities (if any). Actual results could differ from those estimates.

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

Revenue Recognition: Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Sales taxes are excluded from revenue. At contract inception, we assess the goods and services promised in our contracts with customers and identify a performance obligation for each promised good or service that is distinct. We have 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. The amount of revenue recognized varies primarily with price concessions and changes in returns. We offer price concessions to our customers for incentive offerings, special pricing agreements, price competition, promotions or other volume-based arrangements. We determine whether price concessions offered to our customers are a reduction of the transaction price and revenue or are advertising expense, depending on whether we receive a distinct good or service from our customers and, if so, whether we can reasonably estimate the fair value of that distinct good or service. We evaluated such agreements with our customers and determined they should be accounted for as variable consideration.

To estimate variable consideration, we apply 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.

We monitor our estimates of variable consideration, which includes returns and price concessions, and periodically make adjustments to the carrying amounts as appropriate. During 2024, there were no material adjustments to the aforesaid estimates and our past results of operations have not been materially affected by a change in these estimates. Although there can be no assurances, we are not aware of any circumstances that would be reasonably likely to materially change these estimates in the future.

Deferred Taxes: We determine deferred tax assets and/or liabilities by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled if there is no change in law. The effect on deferred taxes of a change in tax rates is recognized in net income in the period that includes the enactment date. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

RESULTS OF OPERATIONS

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

2024 Compared with 2023

[[GREPCENT_TABLE]]
[["","Year Ended December 31"],["","2024","","% of Revenue","","2023","","% of Revenue","","$ Change","","% Change"],["Revenue","$","654,693","","","100.0","%","","$","625,625","","","100.0","%","","$","29,068","","","4.6","%"],["Cost of sales","484,486","","","74.0","%","","481,949","","","77.0","%","","2,537","","","0.5","%"],["Gross profit","170,207","","","26.0","%","","143,676","","","23.0","%","","26,531","","","18.5","%"],["Selling, general and administrative expenses","126,703","","","19.4","%","","108,395","","","17.3","%","","18,308","","","16.9","%"],["Amortization of intangible assets","302","","","\u2014","%","","200","","","\u2014","%","","102","","","51.0","%"],["Operating profit","43,202","","","6.6","%","","35,081","","","5.6","%","","8,121","","","23.1","%"],["Interest expense, net","613","","","0.1","%","","3,000","","","0.5","%","","(2,387)","","","(79.6)","%"],["Pension termination expense","7,611","","","1.2","%","","\u2014","","","\u2014","%","","7,611","","","n/m"],["Other expense (income), net","1,602","","","0.2","%","","385","","","0.1","%","","1,217","","","316.1","%"],["Income before income taxes","33,376","","","5.1","%","","31,696","","","5.1","%","","1,680","","","5.3","%"],["Income tax expense","2,617","","","0.4","%","","6,454","","","1.0","%","","(3,837)","","","(59.5)","%"],["Net income","$","30,759","","","4.7","%","","$","25,242","","","4.0","%","","$","5,517","","","21.9","%"],["n/m = not meaningful"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Effective income tax rate","7.8","%","","","","20.4","%"]]
[[/GREPCENT_TABLE]]

The following table identifies the components of the change in revenue for 2024 compared with 2023:

[[GREPCENT_TABLE]]
[["","Revenue"],["2023","$","625,625"],["Increase (decrease) from:"],["Unit volume and product mix","62,530"],["Foreign currency","(2,903)"],["Average sales price","(30,559)"],["2024","$","654,693"]]
[[/GREPCENT_TABLE]]

Revenue - Revenue increased $29.1 million, or 4.6% compared to the prior year due to increased unit volume and a more favorable product mix, primarily driven by the North America Consumer markets. These increases were partially offset by lower average selling prices reflecting lower costs during the year and unfavorable foreign currency fluctuations. Additionally, the acquisition of HealthBeacon added a new revenue stream during the year and contributed $4.3 million in revenue for 2024.

Gross profit - Gross profit margin increased to 26.0% in the current year compared to 23.0% in the prior year primarily due to lower product and transportation costs and a favorable product mix.

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

Selling, general and administrative expenses - Selling, general and administrative expenses increased $18.3 million compared to 2023. The increase is primarily due to the addition of $7.7 million of HealthBeacon expenses, a $5.9 million increase in employee-related costs, including $4.0 million of increased incentive compensation due to higher achievement percentage, an increase in outside services and non-recurring items, which include an incremental $1.0 million of HealthBeacon transaction costs and the absence of a $0.9 million insurance recovery that occurred in the prior year.    

Interest expense - Interest expense, net decreased $2.4 million due to decreased average borrowings outstanding under the HBB Facility, and lower interest rates compared to 2023.

Pension termination expense - During 2024, a one-time non-cash expense of $7.6 million was incurred in connection with the termination of the Company’s U.S. defined benefit pension plan related to the reclassification of historical unrecognized losses from Accumulated Other Comprehensive Income.

Other expense (income), net - Other expense (income), net increased $1.2 million. In 2024, other expense (income), net includes currency losses of $0.9 million in the current year compared to currency gains of $0.3 million in 2023.

Income tax expense - The effective tax rate on income was 7.8% and 20.4% for the years ended December 31, 2024 and 2023, respectively. The effective tax rate was lower for the year ended December 31, 2024 due to a tax benefit for foreign operations and a tax benefit related to a tax accounting method change in the U.S. which are not expected to recur. These were partially offset by non-deductible executive compensation and a valuation allowance on HealthBeacon losses.

LIQUIDITY AND CAPITAL RESOURCES

Our cash flows are provided by dividends paid or distributions made by HBB. The only material assets held by us are the investment in our consolidated subsidiary. As a result, certain statutory limitations or regulatory or financing agreements could affect the levels of distributions allowed to be made by our subsidiary. We have not guaranteed any of the obligations of HBB.

Our principal sources of cash to fund liquidity needs are: (1) cash generated from operations and (2) borrowings available under the HBB Facility. Our primary use of funds consists of working capital requirements, operating expenses, payment of dividends, repurchase of shares, capital expenditures, payments of principal and interest on debt and acquisitions. As of December 31, 2024, we had cash and cash equivalents of $45.6 million, compared to $15.4 million as of December 31, 2023. We believe our liquidity and access to capital markets will be adequate to fund our cash requirements for the next twelve months and for the foreseeable future.

The Company has an agreement with a third-party administrator to provide an accounts payable tracking system which facilitates a participating supplier’s ability to monitor and voluntarily elect to sell payment obligations owed by the Company to the designated third-party financial institution. Participating suppliers can sell one or more of the Company’s payment obligations at their sole discretion. The Company has no economic interest in a supplier’s decision to sell one or more of its payment obligations. The Company’s rights and obligations with respect to such payment obligations, including amounts due and scheduled payment terms, are not impacted by suppliers’ decisions to sell amounts under these arrangements. The agreement has a limit of $65.0 million in payment obligations. There is no requirement to provide assets pledged as security or other forms of guarantees under the agreement. The Company pays the third-party administrator based upon the original payment terms negotiated with participating suppliers. 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 December 31, 2024 and 2023, the Company has $56.9 million and $55.0 million, respectively, in outstanding payment obligations that are presented in Accounts payable on the Consolidated Balance Sheets. Of these totals, the third-party financial institution has made payments to participating suppliers to settle $48.2 million and $48.9 million, respectively, of our outstanding payment obligations.

See Note 1 “Nature of Operations and Summary of Significant Accounting Policies” included in our Financial Statements and Supplementary Data contained in Part IV of this Form 10-K for a rollforward of the Company’s outstanding payment obligations confirmed as valid under our supplier finance program.

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

We do not rely on the supplier finance program as a means to manage our cash flow, as our payment terms to the third-party financial institution are the same as our terms to our participating suppliers. Therefore, we do not face a material risk if any party terminates the agreement. Our participation has not had a material impact on our Consolidated Balance Sheets, Statement of Cash Flows or liquidity.

The following table presents selected cash flow information:

[[GREPCENT_TABLE]]
[["","Year Ended December 31"],["","(In thousands)"],["","2024","","2023"],["Net cash provided by (used for) operating activities","$","65,415","","","$","88,636"],["Net cash provided by (used for) investing activities","$","(13,884)","","","$","(5,174)"],["Net cash provided by (used for) financing activities","$","(20,948)","","","$","(70,072)"]]
[[/GREPCENT_TABLE]]

December 31, 2024 Compared with December 31, 2023

    Operating activities - Net cash provided by operating activities was $65.4 million, representing more normalized post-pandemic working capital, compared to $88.6 million in the prior year, which benefited from significant excess inventory reduction activities. Net working capital provided cash of $14.5 million in 2024 compared to cash provided of $49.5 million in 2023. The 2024 period benefited from the Company's continued focus on working capital management which led to improvements in days sales outstanding. The net cash provided by operating activities during 2024 reflects the net working capital changes and increased net income which includes non-cash pension termination and stock compensation expenses, offset by a deferred income tax benefit.

    Investing activities - Net cash used for investing activities increased in 2024 compared to 2023 related primarily to the acquisition of HealthBeacon offset by the extinguishment of our secured loan to HealthBeacon in 2024 which provided net cash of $1.6 million. Additionally, the Company used excess cash on hand to invest in a six-month U.S. Treasury bill during 2024.

    Financing activities - Net cash used for financing activities was $20.9 million in 2024 compared to cash used for financing activities of $70.1 million in 2023. The change is due to a decrease in HBB’s net borrowing activity on the HBB Facility. This decrease was partially offset by increased purchases of treasury stock.

Capital Resources

On December 13, 2024, HBB entered into the Second Amended and Restated Credit Agreement (the “Agreement”). The Agreement restated HBB’s prior credit agreement (the “Prior HBB Facility”) in its entirety and extended the term of HBB's senior secured floating-rate revolving credit facility (the “HBB Facility”) to December 13, 2029, decreased the credit facility from $150 million to $125 million, added an optional $25.0 million term loan, and removed the Canadian subsidiary from the credit facility. As a result of the Agreement, repayment of the HBB Facility is due on December 13, 2029, therefore all borrowings are classified as long term debt as of December 31, 2024. The obligations under the HBB Facility are secured by substantially all of HBB’s U.S. assets. The HBB Facility also requires HBB to achieve a minimum fixed charge coverage ratio in certain circumstances, as defined in the HBB Facility.

As of December 31, 2024, the borrowing base under the HBB Facility was $107.3 million and borrowings outstanding were $50.0 million. As of December 31, 2024, the excess availability under the HBB Facility was $57.3 million.

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

The maximum availability under the HBB Facility is governed by a borrowing base derived from advance rates against eligible trade receivables and inventory of HBB. As of December 31, 2024, interest on outstanding loans under the HBB Facility accrues at a per annum rate equal to, at HBB’s option, either Term Secured Overnight Financing Rate (SOFR) (as defined in the HBB Facility) plus 1.65% or the Base Rate (as defined in the HBB) plus 0.00%. As of December 31, 2024, the HBB Facility requires a fee of 0.20% per annum on the unused commitment thereunder. The weighted average interest rate applicable to the HBB Facility and the Prior HBB Facility for the year ended December 31, 2024 was 2.50% (after giving effect to the interest rate swap agreements described below).

To reduce the exposure to changes in the market rate of interest, we have entered into interest rate swap agreements for a portion of the HBB Facility. Terms of the interest rate swap agreements require us to receive a variable interest rate and pay a fixed interest rate.

The HBB Facility contains customary representations and warranties, events of default and covenants, including, among other things, covenants applicable to HBB and its subsidiaries limiting indebtedness, liens, investments, dispositions and restricted payments. Additionally, if Excess Availability (as defined in the HBB Facility) is less than $15.0 million at any time, the HBB Facility will require that HBB maintain a minimum Fixed Charge Coverage Ratio (as defined in the HBB Facility) of 1.00 to 1.00 until Excess Availability is greater than or equal to $15.0 million for 30 consecutive days. As of December 31, 2024, we were in compliance with all applicable financial covenants in the HBB Facility.

HBB does not expect to make voluntary repayments within the next twelve months under the HBB Facility as the rate of return to invest excess cash exceeds the average interest rate of the HBB Facility. A material decrease in interest rates could cause HBB to re-evaluate.

We maintain an arrangement with a financial institution to sell certain U.S. trade receivables on a non-recourse basis.

Contractual Obligations, Contingent Liabilities and Commitments

Following is a table which summarizes the contractual obligations of Hamilton Beach Holding as of December 31, 2024:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["Contractual Obligations","Total","","2025","","2026","","2027","","2028","","2029","","Thereafter"],["Revolving credit agreements","$","50,000","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","50,000","","","$","\u2014"],["Variable interest payments on HBB Facility","9,539","","","1,641","","","1,640","","","1,656","","","2,157","","","2,445","","","\u2014"],["Purchase and other obligations","240,503","","","240,318","","","53","","","68","","","64","","","\u2014","","","\u2014"],["Operating lease obligations","54,087","","","7,263","","","6,567","","","6,103","","","5,787","","","5,691","","","22,676"],["Finance lease obligations","385","","","107","","","107","","","106","","","64","","","1","","","\u2014"],["Total contractual cash obligations","$","354,514","","","$","249,329","","","$","8,367","","","$","7,933","","","$","8,072","","","$","58,137","","","$","22,676"]]
[[/GREPCENT_TABLE]]

Our variable interest payments are calculated based upon our contractual payment schedule and the December 31, 2024 Base Rate (as defined in the HBB Facility) plus an applicable margin of 0.00%. A 0.25% increase in the Base Rate would increase our estimated total annual interest payments on the HBB Facility by approximately $0.6 million. Variable interest payments could change in the event HBB decides to make voluntary repayments.

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

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

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Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAMILTON BEACH BRANDS HOLDING COMPANY

(Tabular Amounts in Thousands, Except Per Share and Percentage Data)

Given the funded status of the one defined benefit pension plan, we do not expect to contribute to the pension plan in 2025. Pension benefit payments are made from assets of the pension plan.

Off Balance Sheet Arrangements

We have not entered into any off balance sheet financing arrangements.

Recently Issued and Adopted Accounting Standards

Refer to Note 1 to the consolidated financial statements for discussion of recently issued and adopted accounting standards.

FORWARD-LOOKING STATEMENTS

The statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere throughout this Annual Report on Form 10-K that are not historical facts are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These forward-looking statements are made subject to certain risks and uncertainties, which could cause actual results to differ materially from those presented. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Such risks and uncertainties include, without limitation: (1) uncertain or unfavorable global economic conditions and impacts from global military conflicts; (2) the Company’s ability to source and ship products to meet anticipated demand; (3) the Company’s ability to successfully manage constraints throughout the global transportation supply chain; (4) changes in the sales prices, product mix or levels of consumer purchases of small electric and specialty housewares appliances; (5) changes in consumer retail and credit markets, including the increasing volume of transactions made through third-party internet sellers; (6) bankruptcy of or loss of major retail customers or suppliers; (7) changes in costs, including transportation costs, of sourced products; (8) delays in delivery of sourced products; (9) changes in or unavailability of quality or cost effective suppliers; (10) exchange rate fluctuations, changes in the import tariffs and monetary policies and other changes in the regulatory climate in the countries in which the Company operates or buys and/or sells products; (11) the impact of tariffs on customer purchasing patterns; (12) product liability, regulatory actions or other litigation, warranty claims or returns of products; (13) customer acceptance of, changes in costs of or delays in the development of new products; (14) increased competition, including consolidation within the industry; (15) changes in customers’ inventory management strategies; (16) shifts in consumer shopping patterns, gasoline prices, weather conditions, the level of consumer confidence and disposable income as a result of economic conditions, unemployment rates or other events or conditions that may adversely affect the level of customer purchases of the Company’s products; (17) changes mandated by federal, state and other regulation, including tax, health, safety or environmental legislation; (18) the Company’s ability to identify, acquire or develop, and successfully integrate, new businesses or new product lines; and (19) other risk factors, including those described in the Company’s filings with the Securities and Exchange Commission, including, but not limited to, this Annual Report on Form 10-K. Furthermore, the future impact of unfavorable economic conditions, including inflation, changing interest rates, availability of capital markets and consumer spending rates remains uncertain. In uncertain economic environments, we cannot predict whether or when such circumstances may improve or worsen, or what impact, if any, such circumstances could have on our business, results of operations, cash flows and financial position.

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