TUPPERWARE BRANDS CORPORATION The following is a discussion of the results of operations for the 26 weeks endedJune 27, 2020 , compared with the 26 weeks endedJune 29, 2019 , and changes in financial condition during the 26 weeks endedJune 27, 2020 . The Company's core sales are derived from the distribution of its products through independent sales organizations and individuals,who may also be its customers,who then, in turn, sell to end consumerswho are not members of its sales force. The Company is largely dependent upon these independent sales organizations and individuals to reach end consumers, and any significant disruption of this distribution network would have a negative financial impact on the Company and its ability to generate sales, earnings and operating cash flows. The Company's primary business drivers are the size, activity, diversity and productivity of its independent sales organizations. In 2020, the Company continued to sell directly and/or through its sales force as well as to end consumers via the internet and through business-to-business transactions, in which it sells products to a partner company. As the impacts of foreign currency translation are an important factor in understanding period-to-period comparisons, the Company believes the presentation of results on a local currency basis, as a supplement to reported results, helps improve readers' ability to understand the Company's operating results and evaluate performance in comparison with prior periods. The Company presents local currency information that compares results between periods as if current period exchange rates had been used to translate results in the prior period. The Company uses results on a local currency basis as one measure to evaluate performance. The Company generally refers to such amounts as calculated on a "local currency" basis, or "excluding the impact of foreign currency." These results should be considered in addition to, not as a substitute for, results reported in accordance with generally accepted accounting principles inthe United States ("GAAP"). Results on a local currency basis may not be comparable to similarly titled measures used by other companies. The global spread of the novel coronavirus (COVID-19), which has been declared by theWorld Health Organization to be a "pandemic," has spread to many countries and is impacting worldwide economic activity. Many governments have implemented policies intended to stop or slow the further spread of the disease, such as shelter-in-place orders, resulting in the temporary closure of schools and non-essential businesses, and these measures may remain in place for a significant period of time. During the second quarter of 2020, the impact of COVID-19 on the Company's business was most pronounced inEurope andAsia Pacific where the Company experienced partial or country-wide lockdowns of operations in various markets. The second quarter impact of COVID-19 largely affected revenues, financial results and liquidity. While the duration and severity of this pandemic is uncertain, the Company currently expects that its results of operations in the second half of 2020 may also be negatively impacted by COVID-19, mainly inEurope andAsia . The extent to which the COVID-19 pandemic ultimately impacts the Company's business, financial condition, results of operations, cash flows, and liquidity may differ from management's current estimates due to inherent uncertainties regarding the duration and further spread of the outbreak, its severity, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. A top priority for the Company as it navigates through the global COVID-19 pandemic is the safety of its employees and their families, sales force and consumers, and to mitigate the impact on its operations and financial results. The Company will continue to proactively respond to the situation and may take further actions that alter the Company's business operations as may be required by governmental authorities, or that the Company determines are in the best interests of its employees, sales force and consumers. The Company also continues to take certain measures as part of its Turnaround Plan and in response to COVID-19, designed to enhance its liquidity position, provide additional financial flexibility and maintain forecasted financial covenant compliance. These measures include reductions in discretionary spending and reducing payroll costs, including through organizational redesign, employee furloughs and permanent reductions. These actions resulted in approximately$60 million of gross cost reductions in the second quarter. Additionally, the Company believes that improved profitability and revenue growth through the Turnaround Plan, together with the anticipated sale of the Company'sOrlando real estate and other non-core assets in the coming year, will contribute to its ability to meet all future debt obligations. During the second quarter endedJune 27, 2020 the Company generated$101.8 million of cash flow from operating activities, net of investing activities, through reductions in discretionary spending, revisiting investment strategies, improvements in working capital including inventory reductions, and reducing payroll costs, including through organizational redesign, employee furloughs, and permanent reductions in employee headcount. 33 --------------------------------------------------------------------------------
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Results of Operations
13 weeks ended Change excluding the
(In millions, except per share Jun 27, Jun 29, impact of foreign
amounts) 2020 2019 Change exchange Foreign exchange impact
Net sales $ 397.4 $ 475.3 (16.4) % (7.9) % $ (43.8)
Gross margin as percent of sales 66.4 % 67.5 % (1.1) pp n/a n/a
DS&A as percent of sales 52.4 % 52.1 % 0.3 pp n/a n/a
Operating income $ 46.5 $ 68.8 (32.4) % (20.6) % $ (10.3)
Net income $ 63.8 $ 39.4 62.0 % 97.8 % $ (7.1)
Net income per diluted share $ 1.30 $ 0.81 60.5 % 97.0 % $ (0.15)
26 weeks ended Change excluding the
(In millions, except per share Jun 27, Jun 29, impact of foreign
amounts) 2020 2019 Change exchange Foreign exchange impact
Net sales $ 773.3 $ 962.6 (19.7) % (12.8) % $ (76.0)
Gross margin as percent of sales 66.0 % 67.2 % (1.2) pp n/a n/a
DS&A as percent of sales 58.3 % 53.0 % 5.3 pp n/a n/a
Operating income $ 45.8 $ 127.0 (63.9) % (58.4) % $ (16.7)
Net income $ 56.0 $ 76.3 (26.6) % (13.2) % $ (11.8)
Net income per diluted share $ 1.14 $ 1.56 (26.9) % (13.6) % $ (0.24)
n/a not applicable
pp percentage points
Net Sales
Reported sales decreased 16.4 percent in the second quarter of 2020 compared
with the second quarter of 2019. Excluding the impact of changes in foreign
currency exchange rates, sales decreased 7.9 percent. The average impact of
higher prices was about 1 percent.
The net decrease in local currency sales was mainly driven by decreases in:
•Brazil, from lower sales force activity and productivity, partially offset by
higher recruiting and sales force size through leveraging of digital tools
•China, from a net reduction in studios, shift in product mix, lower consumer
spending and studio activities disruption from COVID-19. China continued to
partially mitigate the impact of COVID-19 through support programs to studio
owners
•France, the Philippines and South Africa , mainly due to longer closures and
disruptions from government mandated lock down due to COVID-19
•Partially offset by increases in Australia and New Zealand and the United
States and Canada , mainly from a larger, more active sales force and use of
digital tools
Excluding the estimated impact from COVID-19 of negative 8pp local currency
sales would have been in-line with 2019. The Company continues to monitor the
effects of COVID-19 on its sales and has taken several steps to mobilize its
resources to ensure adequate liquidity, business continuity and employee safety
during this pandemic. The Company continues to provide digital tools and
training to its sales force, where available, to enable them to connect with end
consumers through social media and sell through the internet.
Reported sales for the year-to-date period decreased 19.7 percent. Excluding the
impact of changes in foreign currency exchange rates, sales decreased 12.8
percent. The factors impacting the year-to-date sales comparisons were largely
the same as those impacting the second quarter.
A more detailed discussion of the sales results by reporting segment is included
in the segment results section in this Part I, Item 2.
As discussed in Note 3 to the Consolidated Financial Statements in Part I, Item
1 of this Report, the Company includes certain promotional costs in DS&A. As a
result, the Company's net sales may not be comparable with other companies that
treat these costs as a reduction of revenue.
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Gross Margin
Gross margin as a percentage of sales was 66.4 percent and 67.5 percent in the
second quarters of 2020 and 2019, respectively. The factors leading to the 1.1pp
decrease primarily reflected:
•increased obsolescence and manufacturing variances, mainly volume, related to
Brazil and Mexico
•more aggressive promotional pricing in Mexico
•the impact of the shift from premium priced products to mid-priced products in
China
•partially offset by lower resin costs
For the year-to-date periods, gross margin as a percentage of sales was 66.0
percent in 2020, compared with 67.2 percent for the same period of 2019. The
factors leading to the 1.2pp decrease were largely the same as those impacting
the second quarter.
As discussed in Note 2 to the Consolidated Financial Statements in Part I, Item
1 of this Report, the Company includes costs related to the distribution of its
products in DS&A. As a result, the Company's gross margin may not be comparable
with other companies that include these costs in costs of products sold.
Operating Expenses
DS&A as a percentage of sales was 52.4 percent in the second quarter of 2020,
compared with 52.1 percent in 2019. The 0.3pp increase in comparison primarily
reflected:
•increased administration and other expenses mainly due to fees for professional
services firms supporting business turnaround efforts and lower absorption of
fixed costs (2.4pp)
•increased selling expenses mainly from higher bad debt expense, primarily in
France , higher commissions in Indonesia reflecting the new compensation program
and higher commissions in the United States and Canada from higher sales volume
and sales force engagement (1.4pp)
•increased distribution expenses mainly from lower fixed costs absorption
predominantly impacting France and the Philippines and higher freight expenses
from increased direct consumer shipment of smaller cartons in the United States
and Canada (1.1pp)
•partially offset by decreased promotional and marketing expenses (4.6pp)
reflecting the benefits from implementation of cost savings initiatives
For the year-to-date period of 2020, DS&A as a percentage of sales increased
5.3pp to 58.3 percent, from 53.0 percent in 2019, primarily reflecting increased
administration and other expenses, selling and distribution expenses, partially
offset by decreased promotional expenses.
The Company segregates corporate operating expenses into allocated and
unallocated components based upon the estimated time spent managing segment
operations. The allocated costs are then apportioned on a local currency basis
to each segment based primarily upon segment revenues. The unallocated expenses
reflect amounts unrelated to segment operations. Operating expenses to be
allocated are determined at the beginning of the year based upon estimated
expenditures. Total unallocated expenses in the second quarter of 2020 decreased
$35.6 million compared with 2019, reflecting a net gain from debt extinguishment
($40 million ), partially offset by non-recurring fees for professional services
firms supporting business turnaround efforts (about $5 million ).
Specific segment impacts are discussed in the segment results section in this
Part I, Item 2.
Re-engineering Charges
Refer to Note 7 to the Consolidated Financial Statements in Part I, Item 1 of
this Report, for a discussion of re-engineering activities and accruals.
The multi-year decline in revenue led the Company to evaluate its operating
structure leading to actions designed to reduce costs, improve operating
efficiency and otherwise turnaround its business. These actions often result in
re-engineering costs related to headcount reductions and to facility downsizing
and closure, other costs that may be necessary in light of the revised operating
landscape including structural changes impacting how its sales force operates,
as well as related asset write downs. The Company may recognize gains or losses
upon disposal of excess facilities or other activities directly related to its
re-engineering efforts.
The Company recorded $23.2 million and $4.1 million in re-engineering charges
during the second quarters of 2020 and 2019, and $27.1 million and $8.4 million
of charges for the year-to-date periods, respectively. These re-engineering
costs were mainly related to the Turnaround Plan.
The Turnaround Plan has a global focus to drive operational efficiency and right
size cost structure with an emphasis on organizational realignment, leveraging
of procurement and sourcing, driving innovation, and improving sales force
engagement and consumer experiences. The Company incurred $22.4 million and $4.2
million in the second quarters of 2020 and 2019, respectively, primarily related
to severance costs. In the second quarter of 2020 the Company realized cost
savings of approximately $60 million . For full year 2020 the Company is expected
to incur approximately $30.0 million in pretax cost, with 100 percent paid in
cash and generate about $180.0 million in savings. This plan is expected to run
through 2021.
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In relation to the 2017 program, the Company incurred charges of $0.8 million
and a benefit of $0.5 million in the second quarters of 2020 and 2019,
respectively. Under this program, the Company has incurred $85.5 million of
pretax costs starting in the second quarter of 2017 through the second quarter
of 2020 and expects to incur an additional $1.2 million of pretax re-engineering
costs in the remaining of 2020. The annualized benefit of these actions has been
approximately $36.0 million . After reinvestment of a portion of the benefits,
improved profitability is reflected most significantly through lower cost of
products sold, but also through lower DS&A; however, overall profitability has
not risen in light of lower sales and higher costs.
The Company incurred $0.4 million in the second quarter of 2019, related to
other re-engineering charges.
Net Interest Expense
Net interest expense was $11.9 million in the second quarter of 2020, an
increase of $1.5 million compared to the second quarter of 2019. In the
year-to-date periods, net interest expense was $21.6 million in 2020, compared
with $20.0 million in 2019.The increase in interest expense was related to
impact of higher interest on borrowings.
Income Taxes
The effective tax rate for the second quarter and year-to-date periods of 2020
was 22.8 percent and 24.6 percent, respectively compared with 36.2 percent and
32.9 percent for the corresponding 2019 periods. The decrease in the rate was
primarily attributable to a change in the jurisdictional mix of earnings between
the periods compared and the Company's ability to offset the taxable gain from
gain on debt extinguishment with a mixture of assets previously reserved and
global intangible low-taxed income ("GILTI") credits that would have otherwise
been lost.
As discussed in Note 14 to the Consolidated Financial Statements in Part I, Item
1 of this Report, the Company's uncertain tax positions increase the potential
for volatility in its tax rate. As such, it is reasonably possible that the
effective tax rates in any individual quarter will vary from the full year
expectation. At this time, the Company is unable to estimate what impact that
may have on any individual quarter.
Net Income
Net income increased $24.4 million in the second quarter of 2020 compared with
2019, which included a $7.1 million negative impact on the comparison from
changes in foreign currency exchange rates.
The net increase primarily reflected:
•gain from the debt extinguishment
•gain from the sale of manufacturing and distribution facility in Australia
•benefits from the implementation of Turnaround Plan
partially offset by:
•decreased segment profit, including impact from COVID-19
•increased unallocated expenses related to fees for professional services firms
supporting business turnaround efforts
•increased re-engineering costs, related to the Turnaround Plan
For the year-to-date period, net income decreased 20.3 million, compared with
2019, including a negative $11.8 million translation impact from changes in
foreign currency exchange rates. The factors impacting the comparison were
largely the same as for the quarter though there was a greater impact from lower
segment profit and higher unallocated expenses on the year-to-date comparison.
A more detailed discussion of the results by reporting segment is included in the segment results section below in this Part I, Item 2.
International operations generated 88 percent and 90 percent of sales in the
second quarter and year-to-date periods of 2020, respectively, and 92 percent
and 93 percent of sales in the second quarter and year-to-date periods of 2019,
respectively. These units generated 92 percent and 95 percent of net segment
profit in the second quarter and year-to-date periods of 2020, respectively and
98 percent of net segment profit in the second quarter and year-to-date periods
of 2019.
The sale of beauty products generated 13 percent and 14 percent of sales in the
second quarter and year-to-date periods of 2020, respectively, and 13 percent in
the second quarter and year-to-date periods of 2019.
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Segment Results
The Company had an impact to sales and profit results by reporting segment in
the second quarter of 2020 as a result of COVID-19. While the duration and
severity of this pandemic is uncertain, the Company currently expects that its
results of operations in the second half of 2020 may also be negatively impacted
by COVID-19, mainly in Europe and Asia . The Company continues to monitor the
effects of COVID-19 on its reported sales and profit and has taken several steps
to mobilize its resources to ensure adequate liquidity, business continuity and
employee safety during this pandemic.
Europe
Change excluding
13 weeks ended the impact Foreign Percent of total
Jun 27, Jun 29, of foreign exchange
(In millions) 2020 2019 Change exchange impact 2020 2019
Net sales $ 90.8 $ 121.5 (25.3) % (20.2) % $ (7.7) 23 26
Segment profit 10.9 12.8 (14.6) % (4.3) % (1.4) 15 15
Segment profit as percent of sales 12.0 % 10.5 % 1.5 pp n/a n/a n/a n/a
26 weeks ended Change excluding the Foreign Percent of total
Jun 27, Jun 29, impact of foreign exchange
(In millions) 2020 2019 Change exchange impact 2020 2019
Net sales $ 196.5 $ 260.1 (24.5) % (19.8) % $ (15.1) 25 27
Segment profit 13.4 30.5 (56.0) % (52.2) % (2.4) 13 19
Segment profit as percent of sales 6.8 % 11.7 % (4.9) pp n/a n/a n/a n/a
_________________________
n/a not applicable
pp percentage points
Reported sales decreased 25.3 percent compared with the second quarter of 2019.
Excluding the impact of changes in foreign currency exchange rates, sales
decreased 20.2 percent compared with the second quarter of 2019, primarily
driven by:
•partial or country-wide lockdowns due to COVID-19, mainly in Austria , France ,
Italy and South Africa
•decreased business-to-business sales
This segment had the most pronounced impact from COVID-19 in the second quarter.
Excluding the estimated impact from COVID-19 of negative 20pp, sales would have
been in-line with 2019. On average, there were no significant impact of price
changes in the second quarter compared with 2019.
Segment profit decreased $1.9 million in the second quarter of 2020 versus 2019.
Excluding the impact of changes in foreign currency exchange rates, segment
profit decreased $0.5 million compared to the second quarter of 2019, primarily
driven by:
•lower sales volume
•decreased business-to-business sales with higher than average profitability
•increased selling expenses from higher bad debt expense, mainly in France
•impact from COVID-19
•partially offset by benefits from the implementation of the Turnaround Plan
On a year-to-date basis, reported sales decreased 24.5 percent compared with
2019. Excluding the impact of changes in foreign currency exchange rates, sales
in 2020 decreased 19.8 percent compared with 2019. The factors impacting the
year-to-date sales comparison largely mirrored those of the quarter.
Year-to-date segment profit decreased 56.0 percent on a reported basis, and 52.2
percent in local currency. Local segment profit variances largely mirrored those
of the quarter except for the benefits from the Turnaround Plan.
The South African rand was the main currency that impacted the second quarter
and year-to-date sales and profit comparisons.
37
--------------------------------------------------------------------------------Table of ContentsAsia Pacific Change excluding 13 weeks ended the impact Foreign Percent of total Jun 27, Jun 29, of foreign exchange (In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 134.4 $ 155.5 (13.5) % (10.9) % $ (4.6) 34 33 Segment profit 34.4 37.2 (7.6) % (4.0) % (1.4) 46 45 Segment profit as percent of sales 25.6 % 23.9 % 1.7 pp n/a n/a n/a n/a 26 weeks ended Change excluding the Foreign Percent of total Jun 27, Jun 29, impact of foreign exchange (In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 254.8 $ 311.6 (18.2) % (15.5) %$ (10.0) 33 32 Segment profit 51.7 67.2 (23.1) % (20.2) % (2.5) 49 43 Segment profit as percent of sales 20.3 % 21.6 % (1.3) pp n/a n/a n/a n/a ______________________ n/a not applicable pp percentage points Reported sales decreased 13.5 percent compared with the second quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, sales decreased 10.9 percent, primarily driven by: •China, from a net reduction in studio openings, lower productivity from a shift in mix to mid-priced products from premium priced products due to lower consumer spending trends and studio activities disruption from COVID-19.China continued to partially mitigate the impact of this health crisis through special support programs to studio owners •India,Japan ,Malaysia &Singapore andthe Philippines from sales force recruitment and engagement disruptions and lower consumer spending, including from lockdown due to COVID-19 •partially offset byAustralia and New Zealand , mainly from a larger, more active sales force and use of digital tools The COVID-19 impact on net sales in the second quarter of 2020 is estimated at negative 8pp. On average, the impact of higher prices was about 1 percent in the second quarter compared with 2019, primarily related to less promotional pricing. Segment profit decreased 7.6 percent compared with the second quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, segment profit decreased 4.0 percent, primarily reflecting: •the impact from lower sales volume •lower gross margin inChina from product mix •impact from COVID-19 •partially offset by benefits from implementation of the Turnaround Plan On a year-to-date basis, reported sales decreased 18.2 percent compared with 2019. Excluding the impact of changes in foreign currency exchange rates, sales in 2020 decreased 15.5 percent compared with 2019. The factors impacting the year-to-date sales comparison largely mirrored those of the quarter. Year-to-date segment profit decreased 23.1 percent on a reported basis, and 20.2 percent in local currency. Local segment profit variances largely mirrored those of the quarter except for the benefits from the Turnaround Plan. The Chinese renminbi had the most meaningful impact on the second quarter and year-to-date sales and profit comparisons. 38 --------------------------------------------------------------------------------
Table of ContentsNorth America 13 weeks ended Change excluding the Foreign Percent of total Jun 27, Jun 29, impact of foreign exchange (In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 124.0 $ 124.7 (0.6) % 10.4 %$ (12.5) 31 26 Segment profit 18.7 20.4 (7.9) % 7.9 % (3.0) 25 23 Segment profit as percent of sales 15.1 % 16.4 % (1.3) pp n/a n/a n/a n/a 26 weeks ended Change excluding the Foreign Percent of total Jun 27, Jun 29, impact of foreign exchange (In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 225.3 $ 244.3 (7.8) % (0.1) %$ (19.0) 29 26 Segment profit 25.2 37.8 (33.2) % (23.2) % (5.0) 24 24 Segment profit as percent of sales 11.2 % 15.5 % (4.3) pp n/a n/a n/a n/a _________________________ n/a not applicable pp percentage points Reported sales in the second quarter of 2020 decreased 0.6 percent compared with the second quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, sales increased 10.4 percent. The net increase in local currency sales was mainly driven bythe United States andCanada , reflecting a larger sales force from higher recruiting and increased activity.The United States andCanada was able to navigate the COVID-19 with positive sales and profit impact by leveraging digital tools and training. This increase was partially offset by Tupperware Mexico, due to a less active and less productive sales force mainly from lower recruiting, negatively impacted by COVID-19. Estimated COVID-19 impact in the second quarter was positive at about 1pp, as increased sales fromthe United States andCanada more than offset the negative impact at the rest of the units within the segment. The average impact of higher prices was about 2 percent. Reported segment profit decreased 7.9 percent and the local currency increased 7.9 percent in the second quarter of 2020, primarily related to: •Fuller Mexico, due to lower operating expenses from the efforts to align cost structure with sales levels •theUnited States andCanada , from higher sales volume and higher gross margin •partially offset by Tupperware Mexico, from lower sales volume and promotional pricing On a year-to-date basis, reported sales decreased 7.8 percent compared with 2019. Excluding the impact of changes in foreign currency exchange rates, sales in 2020 were in-line compared with 2019. The factors impacting the year-to-date sales comparison largely mirrored those of the quarter. Year-to-date segment profit decreased 33.2 percent on a reported basis, and 23.2 percent in local currency. Local segment profit variances largely mirrored those of the quarter except for the benefits from the Turnaround Plan. The Mexican peso had the most meaningful impact on the second quarter and year-to-date sales and profit comparisons. 39 --------------------------------------------------------------------------------
Table of ContentsSouth America 13 weeks ended Change excluding the Foreign Percent of total Jun 27, Jun 29, impact of foreign exchange (In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 48.2 $ 73.6 (34.5) % (11.6) %$ (19.0) 12 15 Segment profit 11.3 13.1 (13.1) % 19.7 % (3.6) 15 16 Segment profit as percent of sales 23.4 % 17.8 % 5.6 pp n/a n/a n/a n/a 26 weeks ended Change excluding the Foreign Percent of total Jun 27, Jun 29, impact of foreign exchange (In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 96.7 $ 146.6 (34.0) % (15.6) %$ (32.0) 13 15 Segment profit 14.3 22.0 (34.8) % (14.6) % (5.2) 14 14 Segment profit as percent of sales 14.8 % 15.0 % (0.2) pp n/a n/a n/a n/a _________________________ n/a not applicable pp percentage points Reported sales for the segment decreased 34.5 percent in the second quarter of 2020. Excluding the impact of changes in foreign currency exchange rates, sales decreased 11.6 percent, reflecting lower sales force activity and productivity inBrazil due to the need for increased digitalization to attract and retain the sales force and lower consumer spending. The COVID-19 impact on net sales in the second quarter of 2020 is estimated at negative 3pp. The average impact of higher prices was about 3 percent. Reported segment profit decreased$1.8 million or 13.1 percent in the second quarter of 2020. Excluding the impact of changes in foreign currency exchange rates, segment profit increased 19.7 percent, primarily reflecting lower promotional and selling expenses from implementation of Turnaround Plan, partially offset by lower sales volume and lower gross margin driven by unfavorable product mix and higher product costs inBrazil . On a year-to-date basis, reported sales decreased 34.0 percent compared with 2019. Excluding the impact of changes in foreign currency exchange rates, sales in 2020 decreased 15.6 percent compared with 2019. The factors impacting the year-to-date sales comparison largely mirrored those of the quarter. Year-to-date segment profit decreased 34.8 percent on a reported basis, and 14.6 percent in local currency. Local segment profit variances largely mirrored those of the quarter except for the benefits from the Turnaround Plan. The Argentine peso and the Brazilian real were the main currencies that impacted the second quarter and year-to-date sales comparisons while the Brazilian real had a meaningful impact on profit comparisons. Financial Condition Liquidity and Capital Resources: The Company's net working capital position decreased by$580.4 million compared with the end of 2019. Excluding the impact of changes in foreign currency exchange rates, net working capital decreased$562.6 million , primarily reflecting: •a$521.1 million increase in short-term borrowings, net of cash and cash equivalents as the Senior Notes became current inJune 2020 •a$31.2 million net increase in accrued liabilities due to the timing of payments in light of COVID-19 and higher accruals for professional services in support of business turnaround efforts •a$13.7 million decrease in non-trade receivables and prepaid expenses mainly driven by lower tax receivables atMexico unit •a$11.1 million decrease in inventory mainly related to improved inventory management to mitigate sales impact from COVID-19, and timing of sales and shipments •partially offset by favorable impacts from a$13.6 million increase in accounts receivable driven by higher sales at quarter-end 40 -------------------------------------------------------------------------------- Table of Contents OnFebruary 26, 2020 , S&P downgraded the Company's credit rating from BB+ to B and placed all of its ratings on Credit Watch with negative implication. OnFebruary 27, 2020 Moody's downgraded the Company's credit rating from Baa3 to B1. Subsequent to those dates, the Company's credit ratings have been downgraded further by S&P and Moody's, with S&P's rating of the Company currently at CCC-, and Moody's rating of the Company currently at Caaa3. If the Company faces continued downgrades in its credit rating, the Company could also experience further strains on its liquidity and capital resources. OnFebruary 28, 2020 , the Company amended the Credit Agreement (the "Amendment") and among other things, the Amendment eliminated the requirement that a Non-Investment Grade Ratings Event, as defined in the Credit Agreement, must occur before the Company is required to cause the Additional Guarantee and Collateral Requirement, as defined in the Credit Agreement, to be satisfied. As a result, the Company is required to cause certain of its domestic subsidiaries to become guarantors and the Company and certain of its domestic subsidiaries are required to pledge additional collateral. The Amendment also modified the financial covenant. Previously, the Company had to maintain at specified measurement periods a Consolidated Leverage Ratio that was not greater than or equal to 3.75 to 1.00. The Credit Agreement was amended to prevent the Company from exceeding the Consolidated Leverage Ratio for the four fiscal quarters ending inMarch 2020 , and continuing through the calculation for the four fiscal quarters ending inMarch 2021 . If the Company had exceeded the Consolidated Leverage Ratio, this could have constituted an Event of Default, potentially resulting in a cross default under cross-default provisions with respect to other of the Company's debt obligations, giving the lenders the ability to terminate the revolving commitments, accelerate outstanding amounts under the Credit Agreement, exercise certain remedies relating to the collateral securing the Credit Agreement, and require the Company to post cash collateral for all outstanding letters of credit. In addition to the relief provided in the Amendment, the Company has reduced certain operating expenses beginning in 2020 and could use available cash, including repatriating cash held outside ofthe United States , to make debt repayments to lower its Consolidated Leverage Ratio. Following the Amendment, the Company is required to maintain at the last day of each quarterly measurement period a Consolidated Leverage Ratio not greater than or equal to the ratio as set forth below opposite the period that includes such day (or, if such day does not end on the last day of the calendar quarter, that includes the last day of the calendar quarter that is nearest to such day): Period Consolidated Leverage Ratio From the Amendment effective date to and including June 27, 2020 5.75 to 1.00 September 26, 2020 5.25 to 1.00 December 26, 2020 4.50 to 1.00 March 27, 2021 4.00 to 1.00 June 26, 2021 and thereafter 3.75 to 1.00 See the Company's Form 8-K with a filing date ofMarch 2, 2020 for more information. As ofJune 27, 2020 , the Company had total borrowings of$298.8 million outstanding under the Credit Agreement, with$137.2 million of that amount denominated in Euro. As ofJune 27, 2020 , the Company had a weighted average interest rate of 2.0 percent with a base rate spread of 188 basis points on LIBOR-based borrowings under the Credit Agreement. As ofJune 27, 2020 , and currently, the Company was in compliance with the financial covenants in the Credit Agreement. As ofJune 27, 2020 , the Company had$403.4 million of unused lines of credit, including$345.6 million under the committed, secured Credit Agreement, and$57.8 million available under various uncommitted lines around the world. With the agreement of its lenders, the Company is permitted to increase its borrowing capacity under the Credit Agreement by a total of up to$200.0 million (for a maximum aggregate Facility Amount of$850.0 million ) subject to certain conditions. The Company currently has outstanding$501.3 million aggregate principal amount of 4.75% senior notes (the "Senior Notes"). The Senior Notes will mature onJune 1, 2021 . The Notes were issued under an indenture (the "Indenture"), by and among the Company, its 100 percent subsidiary, the Guarantor, andWells Fargo Bank, N.A ., as trustee. As security for its obligations under the guarantee of the Senior Notes, the Guarantor has granted a security interest in certain "Tupperware" trademarks and service marks. As security for its obligations under the guarantee of the Credit Agreement, the Guarantor has granted a security interest in those certain "Tupperware" trademarks and service marks as well. The Indenture includes, among others, covenants that limit the ability of the Company and its subsidiaries to (i) incur indebtedness secured by liens on certain real property, (ii) enter into certain sale and leaseback transactions, (iii) with respect to the Company only, consolidate or merge with another entity, or sell or transfer all or substantially all of its properties and assets and (iv) sell the capital stock of the Guarantor or sell or transfer all or substantially all of its assets or properties. See Note 8 to the Consolidated Financial Statements in Part II, Item 8 in the Company's Annual Report on Form 10-K for the year endedDecember 28, 2019 filed with theSEC (the "2019 Form 10-K") for further details regarding the Senior Notes. During the second quarter endedJune 27, 2020 the Company paid$56.4 million through Tender Offers and open-market purchases for the purchase of Senior Notes with a face value of$98.7 million . These transactions resulted in a pre-tax gain on debt extinguishment (including costs associated with the Senior Notes repurchase) of$40.0 million which was recorded in the Other expense (income), net line item. The gain on debt extinguishment resulted in basic earnings per share of$0.82 for the second quarter of 2020 and the respective year-to-date period. Any deferred debt issuance costs related to the purchased Senior Notes were expensed and recorded in the interest expense line item. 41
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SinceJune 27, 2020 and throughJuly 29, 2020 , the Company paid$10.7 million through open-market purchases for the purchase of Senior Notes with a face value of$13.4 million . Independent of these transactions the Company continues to work with its advisors to explore opportunities to repurchase, refinance or extend the maturity of its debt. Whether the Company will be able to repay or refinance the Senior Notes will depend on economic, financial, competitive and other factors that may be beyond its control, including the COVID-19 pandemic, and on the Company's financial performance at the time. The COVID-19 pandemic and measures implemented to slow the spread of COVID-19 may negatively impact the Company's ability to repay or refinance the Senior Notes. The extent to which the COVID-19 pandemic ultimately impacts the Company's ability to repay or refinance the Senior Notes will depend on future developments, which are highly uncertain and cannot be predicted with certainty. Any refinancing of the Senior Notes may be at a higher interest rate and may require the Company to comply with additional covenants and obligations, which could further restrict the Company's business operations. If the Company is unable to repay or refinance the Senior Notes, the holders of the Senior Notes may pursue certain remedies relating to the collateral securing the guaranty of the Senior Notes or pursue other remedies, in each case in accordance with the Indenture and the documents relating to such collateral, all of which could have a material adverse effect on the Company. Given the fast-moving nature of the COVID-19 pandemic and the resulting uncertainty on financial markets and the economy as a whole, the Company's capital position and availability of capital to fund the Company's liquidity requirements, including repayment or refinancing of the Senior Notes, could be adversely impacted. The Company is taking proactive measures to maximize liquidity and increase available cash by reducing costs and spending across the organization. See Note 10 to the Consolidated Financial Statements in Part I, Item 1 of this Report for further details regarding the Company's debt. The Company monitors the third-party depository institutions that hold its cash and cash equivalents with an emphasis primarily on safety and liquidity of principal and secondarily on maximizing yield on those funds. The Company diversifies its cash and cash equivalents among counterparties, which minimizes exposure to any one of these entities. Furthermore, the Company is exposed to financial market risk resulting from changes in interest rates, foreign currency rates, and the possible liquidity and credit risks of its counterparties. The Company believes that it has sufficient liquidity to fund its working capital, capital spending needs and current and anticipated restructuring actions. This liquidity includes to the extent that it is accessible, its cash and cash equivalents, which totaled$120.0 million as ofJune 27, 2020 , cash flows from operating activities, and access to its Credit Agreement, as well as access to other various uncommitted lines of credit around the world. The Company has not experienced any limitations on its ability to access its committed facility. Cash and cash equivalents ("cash") totaled$120.0 million as ofJune 27, 2020 . Of this amount,$115.8 million was held by foreign subsidiaries. Of the cash held outsidethe United States , less than 1 percent was deemed ineligible for repatriation. Other than deferred tax liability of$10.8 million for the withholding tax liability for future distribution of unrepatriated foreign earnings, noU.S. federal income taxes or other foreign taxes have been recorded related to permanently reinvested earnings. The Company's most significant foreign currency exposures include: •Brazilian real •Chinese renminbi •Indonesian rupiah •Malaysian ringgit •Mexican peso •South African rand Business units in which the Company generated at least$100 million of sales in 2019 included: •Brazil •China •Fuller Mexico •Tupperware Mexico •theUnited States andCanada A significant downturn in the Company's business in these units would adversely impact its ability to generate operating cash flows. Operating cash flows would also be adversely impacted by significant difficulties in the additions, retention and activity of the Company's independent sales force or the success of new products, promotional programs and/or possibly changes in sales force compensation programs. Pursuant to ASC 205, Presentation of Financial Statements, the Company is required to and does evaluate at each annual and interim period whether there are conditions or events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. As ofJune 27, 2020 the Company has$501.3 million of Senior Notes that will mature onJune 1, 2021 , which is within one year of the date that the consolidated financial statements are issued for the second quarter endedJune 27, 2020 . Based on the definitions in the relevant 42 -------------------------------------------------------------------------------- Table of Contents accounting standards, management has determined that this condition raises substantial doubt about the Company's ability to continue as a going concern. This evaluation does not consider the potential mitigating effect of management's plans that have not been fully implemented. Management may evaluate the mitigating effect of its plans to determine if it is probable that (1) the plans will be effectively implemented within one year after the date the financial statements are issued, and (2) when implemented, the plans will mitigate the relevant conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. The Company expects to continue to address its outstanding current indebtedness through open-market purchases, future tender offers, exchange offers of debt for debt, cash or equity, or otherwise ("debt refinancing"). The Company has successfully retired$98.7 million of those Senior Notes at a discount to par during the second quarter and an additional$13.4 million subsequent to the end of second quarter and throughJuly 29, 2020 . In addition to the debt refinancing, the Company believes that its improved profitability and revenue growth through the Turnaround Plan, together with the anticipated sale of the Company'sOrlando real estate and other non-core assets, and its forecasted availability under its Credit Agreement, will enable the Company to meet all its future debt obligations. However, as the debt refinancing and sale of non-core assets is conditional upon the execution of agreements with new or existing investors or the execution of sales agreements with third parties, which are considered outside of the Company's control, the debt refinancing and sales of assets are not considered probable of occurring until such time as they are completed. The Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. During the second quarter endedJune 27, 2020 the Company generated$101.8 million of cash flows from operating activities, net of investing activities, through reductions in discretionary spending, revisiting investment strategies, improvements in working capital including inventory reductions, and reducing payroll costs, including through organizational redesign, employee furloughs, and permanent reductions in employee headcount. As ofJune 27, 2020 , the Company is in compliance with its financial covenants under its Credit Agreement. The Company currently forecasts that it will be in compliance with its financial covenants for at least one year from the issuance of these interim financial statements, after taking into consideration the measures noted above. If the impact of COVID-19 is more severe than currently forecasted this may impact the Company's compliance with its financial covenants which could have a material adverse effect on the Company. See Note 10 to the Consolidated Financial Statements for further discussion of the impact of an Event of Default. See Part II, Item 1A under "The Outbreak of the Novel Coronavirus (COVID-19) Pandemic" for more information regarding COVID-19 and how it could affect the Company's business, financial condition, results of operations, cash flows and liquidity. Operating Activities: Net cash from operating activities in the year-to-date periods endedJune 27, 2020 andJune 29, 2019 were inflows of$45.3 million and$1.3 million , respectively. The net favorable comparison was primarily due to a favorable impact from higher accrued liabilities due to the timing of payments in light of COVID-19, cash impact from hedging activities, reduction in inventory and lower cash tax payments. Investing Activities: During the year-to-date period endedJune 27, 2020 , the Company had$15.9 million proceeds from the sale of long-term assets partially offset by$14.1 million of capital expenditures primarily invested in: •$5.7 million related to molds used in the manufacturing of products •$4.8 million related to global information technology projects •$3.1 million related to buildings and improvements, and other machinery and equipment •$0.5 million primarily related to land development near the Company'sOrlando, Florida headquarters In the year-to-date period endedJune 29, 2019 , the Company had$4.7 million proceeds from the sale of long-term assets partially offsetting the$27.2 million of capital expenditures mainly consisting of: •$11.1 million on various global information technology projects •$9.1 million related to molds used in the manufacturing of products •$7.0 million related to the land development near the Company'sOrlando, Florida headquarter, buildings and improvements, and other machinery and equipment Financing Activities: In the year-to-date period of 2020, the Company paid$56.4 million related to the retirement of its Senior Notes. The Company had increase in revolver borrowings of$17.8 million and$85.2 million in the year-to-date periods of 2020 and 2019, respectively, for the funding of operating, investing and financing activities. Dividends paid to shareholders were$47.3 million in the first half of 2019. The Company suspended its dividend beginning the fourth quarter of 2019. Repurchases under the Company's stock incentive programs are made when employees use shares to satisfy the minimum statutorily required withholding taxes. In the year-to-date periods of 2020 and 2019, 1,699 and 25,673 shares were retained to fund withholding taxes, totaling$0.01 million and$0.80 million , respectively. New Pronouncements Refer to Note 19 to the Consolidated Financial Statements in Part I, Item 1 of this Report for a discussion of new pronouncements. 43
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