Discontinued Operations

On October 10, 2019, the Board approved the wind down of KC's retail operation due to further deterioration in foot traffic which lowered the Company's outlook for the prospect of a future return to profitability. By December 31, 2019 all retail stores were closed and operations ceased. Accordingly, KC meets the requirements to be reported as discontinued operations.

The Company expects the wind down to continue through the first half of 2020 to facilitate the settlement of remaining liabilities.

KC’s operating results are reflected as discontinued operations in the Consolidated Statements of Operation for all periods presented. The major line items constituting the loss from discontinued operations, net of tax are as follows:



	Year Ended December 31
	2019			2018			2017
	(In thousands)
Revenue	$	100,860		$	113,469		$	128,520
Cost of sales	62,927			61,972			69,708
Gross profit	37,933			51,497			58,812
Selling, general and administrative expenses ⁽¹⁾	54,047			58,035			61,033
Lease termination expense⁽²⁾	15,186			—			435
Operating loss	(31,300		)	(6,538		)	(2,656		)
Interest expense	583			361			258
Other expense, net	26			33			57
Loss from discontinued operations before income taxes	(31,909		)	(6,932		)	(2,971		)
Income tax benefit	(3,309		)	(1,571		)	(746		)
Loss from discontinued operations, net of tax	$	(28,600	)	$	(5,361	)	$	(2,225	)


(1)	Selling, general and administrative expenses includes $1.8 million of severance termination benefits of which $0.4 remains unpaid as of December 31, 2019 and included within accrued compensation (current liabilities of discontinued operations).

(2)

KC recognized lease termination expense of $15.2 million for the estimated costs to terminate lease agreements in 2019 as a result of the decision to wind down the business. The lease termination obligation is measured at fair value using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. The fair value of the lease termination obligation is based on the remaining lease rentals, including common area maintenance costs, real estate taxes, and penalties, adjusted for the effects of deferred rent, and reduced by estimated sublease rentals that could be reasonably obtained.

KC’s assets and liabilities are reflected as assets and liabilities of discontinued operations in the Company’s Consolidated Balance Sheets for all periods presented. The major classes of assets and liabilities included as part of discontinued operations are as follows:



	December 31
	2019		2018
	(In thousands)
Assets
Cash and cash equivalents	$	5,022	$	1,932
Credit card receivables	51		1,771
Inventory	—		21,994
Prepaid expenses and other current assets	310		2,182
Current assets of discontinued operations	$	5,383	$	27,879

Property, plant and equipment, net	$	—	$	1,788
Deferred income taxes	614		2,645
Other non-current assets	—		173
Non-current assets of discontinued operations	$	614	$	4,606

Liabilities
Accounts payable	$	4,594	$	13,704
Accrued compensation	1,058		1,498
Accrued product returns	—		243
Lease termination liability	17,248		—
Other current liabilities	6,823		7,375
Current liabilities of discontinued operations	$	29,723	$	22,820

Other long-term liabilities	—		$	1,960
Non-current liabilities of discontinued operations	$	—	$	1,960

KC has operating leases for retail stores, a distribution warehouse and corporate office that contractually expire at various dates through 2026. Future minimum operating lease payments at December 31, 2019 are:



	Operating Leases
2020	$	10,942
2021	5,863
2022	4,027
2023	2,458
2024	1,534
Subsequent to 2024	1,669
Total minimum lease payments ⁽¹⁾	$	26,493


(1)	Minimum lease payments have not been reduced by minimum sublease rentals of $6.2 million due in the future under contractual sublease agreements.

Rental expense from discontinued operations net of sublease rental income and excluding termination costs for all operating leases, is reported in selling, general and administrative expenses of discontinued operations and was $14.3 million, $18.0 million and $19.7 million in 2019, 2018 and 2017, respectively.

KC maintained a separate revolving line of credit facility (the "KC Facility") that was secured by substantially all of the assets of KC. The Company's decision to wind down KC and its retail operations constituted an event of default under the KC Facility. As a result, on October 23, 2019, KC and its lender entered into a Forbearance Agreement (the “Forbearance Agreement”). Under the terms of the Forbearance Agreement, the lender agreed to forebear from exercising its rights and remedies as a result of the events of default pending accelerated payment in full of the obligations under the KC facility on or before December 15, 2019. All obligations under the KC Facility were paid in full in accordance with the Forbearance Agreement and the KC Facility was terminated on December 3, 2019.

Neither Hamilton Beach Brands Holding Company nor HBB has guaranteed any obligations of KC.