TUPPERWARE BRANDS CORPORATION The following is a discussion of the results of operations for the 13 and 39 weeks endedSeptember 26, 2020 , compared with the 13 and 39 weeks endedSeptember 28, 2019 , and changes in financial condition during the 39 weeks endedSeptember 26, 2020 . The Company's core sales of environmentally friendly, reusable products, 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 GAAP. Results on a local currency basis may not be comparable to similarly titled measures used by other companies. COVID-19 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 third quarter of 2020, the impact of COVID-19 on the Company's business was most pronounced inAsia Pacific andEurope where the Company experienced partial or country-wide lockdowns of operations in various markets. The third quarter impact of COVID-19 affected 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 fourth quarter may also be negatively impacted by COVID-19. 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 of the pandemic 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. In order to ensure safety and protect the health of the employees, and to comply with applicable government directives, the Company has modified its business practices to allow its employees to work remotely from home wherever possible, incorporate virtual meetings and restrict all non-essential employee travel. The Company also continues to take certain measures as part of its Turnaround Plan (as defined in Note 6: Re-engineering Charges of the Consolidated Financial Statements in Part I, Item 1 of this Report) 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. Additionally, the Company believes that improved profitability and revenue growth through the Turnaround Plan, together with the anticipated proceeds from the sale of real estate and other non-core assets in the coming year, will contribute to its ability to meet future debt obligations. 36 --------------------------------------------------------------------------------
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Results of Operations
13 weeks ended Change excluding Foreign
Sep 26, Sep 28, the impact of exchange
(In millions, except per share amounts) 2020 2019 Change foreign exchange impact
Net sales $ 477.2 $ 418.1 14.2 % 20.5 % $ (22.1)
Gross margin as percent of sales 68.1 % 66.2 % 1.9 pp n/a n/a
Delivery, sales and administrative
expense as percent of sales 49.0 % 57.8 % (8.8) pp n/a n/a
Operating income $ 55.5 $ 19.9 + + $ (5.1)
Net income $ 34.4 $ 7.8 + + $ (3.5)
Net income per diluted share $ 0.65 $ 0.16 + + $ (0.07)
39 weeks ended Change excluding Foreign
Sep 26, Sep 28, the impact of exchange
(In millions, except per share amounts) 2020 2019 Change foreign exchange impact
Net sales $ 1,250.5 $ 1,380.7 (9.4) % (2.5) % $ (98.2)
Gross margin as percent of sales 66.8 % 66.9 % (0.1) pp n/a n/a
Delivery, sales and administrative
expense as percent of sales 54.8 % 54.5 % 0.3 pp n/a n/a
Operating income $ 101.3 $ 146.9 (31.0) % (19.0) % $ (21.8)
Net income $ 90.4 $ 84.1 7.5 % 31.3 % $ (15.3)
Net income per diluted share $ 1.76 $ 1.72 2.3 % 24.8 % $ (0.31)
+ change greater than ±100%
n/a not applicable
pp percentage points
Net Sales
Reported sales increased 14.2 percent in the third quarter of 2020 compared with
the third quarter of 2019. Excluding the impact of changes in foreign currency
exchange rates, sales increased 20.5 percent, primarily driven by:
•Brazil from higher recruiting and a more active sales force, and use of digital
tools
•Italy from an increase in business-to-business sales and higher core sales from
a larger sales force
•Mexico (Fuller and Tupperware) from an increase in sales force activity and
higher business-to-business sales
•the United States and Canada mainly from a larger and more active sales force
and use of digital tools
The adverse impact to net sales in the third quarter of 2020 as a result of
COVID-19 is estimated at 3 percent versus the third quarter of 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. As a result of the
pandemic, the Company has seen a rapid adoption of digital tools and techniques
by its sales force to reach and sell product solutions to more customers than
ever before. Additionally, a positive consumer trend resulting from COVID-19 is
in the rise in more people cooking at home, and consumers concerned with food
storage and food safety. This, along with new sales and marketing techniques,
resulted in an 18 percent increase in our core sales as compared to 2019. The
average impact of higher prices was approximately 3 percent.
Reported sales for the year-to-date period decreased 9.4 percent. Excluding the
impact of changes in foreign currency exchange rates, sales decreased 2.5
percent, primarily driven by:
•China from a net reduction in studios, shift in product mix, lower consumer
spending and studio activities disruption from COVID-19
•France from decrease in business-to-business sales
•the Philippines mainly due to longer closures and disruptions from government
mandated lockdowns due to COVID-19
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 4: Promotional Costs to the Consolidated Financial
Statements in Part I, Item 1 of this Report, the Company includes certain
promotional costs in delivery, sales and administrative expense. 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 68.1 percent and 66.2 percent in the
third quarters of 2020 and 2019, respectively. The factors leading to the 1.9 pp
increase primarily reflected:
•lower manufacturing costs in Europe
•lower resin costs in Europe and North America
•cost savings from the Turnaround Plan
For the year-to-date periods, gross margin as a percentage of sales was 66.8
percent in 2020, compared with 66.9 percent for the same period of 2019. The
decrease was mainly from product mix primarily in Asia Pacific and North
America , partially offset by lower resin costs in Europe and North America .
As discussed in Note 3: Distribution Costs 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 delivery, sales and administrative
expense. As a result, the Company's gross margin may not be comparable with
other companies that include these costs in costs of products sold.
Delivery, Sales and Administrative Expense
Delivery, sales and administrative expense as a percentage of sales was 49.0
percent in the third quarter of 2020, compared with 57.8 percent in 2019. The
8.8pp decrease in comparison primarily reflected:
•lower promotional expenses reflecting the benefits from implementation of
right-sizing initiatives related to the Turnaround Plan, primarily in Brazil ,
Germany , Indonesia , Italy and Mexico (3.5pp)
•lower selling expenses mainly from lower bad debt expense, primarily in France
and Fuller Mexico (3.1pp)
•lower administration and other expenses, reflecting the benefits from
implementation of right-sizing initiatives related to the Turnaround Plan
(2.8pp)
For the year-to-date period of 2020, delivery, sales and administrative expense
as a percentage of sales increased 0.3 pp to 54.8 percent, from 54.5 percent in
2019, primarily reflecting increased administration and other expenses mainly
due to fees for professional services firms supporting business turnaround
efforts and higher management incentives, higher commissions mainly in Indonesia
and the United States and Canada , partially offset by lower promotional expenses
predominantly in Brazil , Germany , Indonesia , Italy and Mexico.
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 third quarter of 2020 decreased
$3.0 million compared with 2019, reflecting a net gain on debt extinguishment of
$9.8 million , partially offset by higher management incentives, currency
translation losses mainly related to Argentina , non-recurring fees for
professional services firms supporting business turnaround efforts and pension
settlement costs.
Specific segment impacts are discussed in the segment results section in this
Part I, Item 2.
Re-engineering Charges
Refer to Note 6: Re-engineering Charges 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 include 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 $3.2 million and $7.5 million in re-engineering charges
during the third quarters of 2020 and 2019, and $30.3 million and $15.9 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 the 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 $2.7 million and
$4.6 million in the third quarters of 2020 and 2019, respectively, primarily
related to severance costs. In the third quarter of 2020 the Company realized
cost savings of approximately $60 million . For full year 2020 the Company is
expected to incur approximately $30 million in pretax cost, with 100 percent
paid in cash and to generate about $180 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 $0.5 million
and $1.1 million in the third quarters of 2020 and 2019, respectively. Under
this program, the Company has incurred $86.0 million of pretax costs starting in
the third quarter of 2017 through the third quarter of 2020 and expects to incur
an additional $0.7 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 delivery, sales and administrative expense; however, overall
profitability has not risen in light of lower sales and higher costs.
The Company incurred $1.8 million in the third quarter of 2019, related to other
re-engineering charges.
Impairment of Goodwill and Intangible Assets
Impairment of goodwill and intangible assets was $19.7 million in the third
quarter and year-to-date periods of 2019. The 2019 expense was primarily related
to impairment of Fuller Mexico goodwill.
The Company's goodwill and tradenames relate primarily to the December 2005
acquisition of the direct-to-consumer businesses of Sara Lee Corporation . In the
third quarter of 2020, the Company completed the annual impairment assessments
for all of its reporting units and indefinite-lived intangible assets. As part
of this testing, the Company analyzed certain qualitative and quantitative
factors in completing the annual impairment assessment. The Company's
assessments reflected a number of significant management assumptions and
estimates including the Company's forecast of sales, profit margins, and
discount rates, along with the royalty rate related to tradenames. Changes in
these assumptions could materially impact the Company's conclusions. Based on
its assessments, the Company concluded there were no impairments.
Although no reporting units failed the assessments noted above, in management's
opinion, the goodwill associated with the Japan reporting unit is at risk of
impairment in the near term if there is a negative change in the long-term
outlook for the business or in other factors such as the discount rate. The
significant assumptions for the goodwill associated with the Japan quantitative
impairment assessment included annual revenue growth rates and a discount rate
utilized within the analysis, which impact the Company's conclusion regarding
the likelihood of goodwill impairment for the unit. Total goodwill associated
with this reporting unit was $11.0 million as of September 26, 2020 . Based on
the 2020 annual impairment test, the estimated fair value of Japan reporting
unit exceeded its carrying value by approximately 11.0 percent. The projected
future cash flows, which included revenue growth rates ranging from negative
15.5 percent to positive 9.0 percent with an average growth rate of 1.3 percent,
were discounted at 9.0 percent. Based on the discounted cash flow model and
holding other valuation assumptions constant, Japan's projected operating
profits across all future periods would have to be reduced approximately 13.3
percent, or the discount rate increased to 10.0 percent, in order for the
estimated fair value to fall below the reporting unit's carrying value.
Similarly, while no tradenames failed the assessment, in management's opinion,
the NaturCare tradename is at risk of impairment in the near term if there is a
negative change in the long-term outlook for the business or in other factors
such as the royalty rate or discount rate. The significant assumptions for the
quantitative impairment assessment of the NaturCare tradename included annual
revenue growth rates, royalty rate, and the discount rate utilized within the
analysis, which impact the Company's conclusion regarding the likelihood of
impairment of the tradename. Total carrying value of the NaturCare tradename was
$11.5 million as of September 26, 2020 . Based on the 2020 annual impairment
test, the estimated fair value of the NaturCare exceeded its carrying value by
approximately 11.0 percent. The projected future cash flows, which included
annual revenue growth rates ranging from negative 4.0 percent to 2.0 percent
with an average growth rate of 1.3 percent and a royalty rate of 4.0 percent,
were discounted at 10.0 percent. Based on the discounted cash flow model and
holding other valuation assumptions constant, the projected revenue associated
with the tradename, across all future periods, would have to be reduced
approximately 9.9 percent, the royalty rate reduced to 3.6 percent, or the
discount rate increased to 10.9 percent, in order for the estimated fair value
to fall below the tradename's carrying value.
Gain (loss) on Disposal of Assets
Gain (loss) on disposal of assets was a loss of $32.6 million and gain of $12.1
million in the third quarters of 2020 and 2019, respectively, and a loss of
$18.8 million and gain of $11.1 million in the respective year-to-date periods.
The loss in the third quarter of 2020 was related to the write-off of
capitalized software implementation costs related to the front and back office
standardization project that initiated in 2017, due to a shift in the business
model and digital strategy set forward by the new leadership team. The 2020
year-to-date loss includes the write-off of capitalized software implementations
costs that were partially offset by gains from the sale of a manufacturing and
distribution facility in Australia . The 2019 gain was related to the sale of
land near the Company's Orlando, Florida headquarters and the sale of the French
marketing office.
Interest Income
Interest income was $0.3 million and $0.6 million in the third quarters of 2020
and 2019, respectively, and $1.0 million and $1.6 million in the respective
year-to-date periods. Interest income is related to the interest earned on our
cash balances.
Interest Expense
Interest expense was $8.2 million and $10.4 million in the third quarters of
2020 and 2019, respectively, and $30.5 million and $31.4 million in the
respective year-to-date periods. The change in interest expense is related to a
decrease in the Company's borrowings.
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Other expense (income), net
Other expense (income), net was a gain of $10.1 million and $3.8 million in the
third quarters of 2020 and 2019, respectively, and a gain of $60.2 million and
$10.5 million in the respective year-to-date periods. The Company records
foreign currency translation impacts and pension costs in this line item. This
line item includes the gain on debt extinguishment of $9.8 million and $49.9
million in the third quarter and year-to-date periods of 2020.
Provision (Benefit) for Income Taxes
The effective tax rate for the third quarter and year-to-date periods of 2020
was 40.4 percent and 31.5 percent, respectively, compared with 43.9 percent and
34.1 percent for the corresponding 2019 periods. The change in effective tax
rate in the third quarters of 2020 and 2019, respectively, and in the respective
year-to-date periods was impacted by:
•a favorable treatment of gain on debt extinguishment sheltered by a mixture of
previously valued foreign tax credits and global intangible low-taxed income
("GILTI") tax credits, partially offset by:
•a change in jurisdictional mix of earnings
•an unfavorable adjustment related to a continued limitation of interest expense
deductions requiring a valuation allowance
As discussed in Note 7: Income Taxes 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 was $34.4 million and $7.8 million in the third quarters of 2020 and
2019, respectively, and $90.4 million and $84.1 million in the respective
year-to-date periods. See above discussion for the main drivers of changes in
net income. A more detailed discussion of the results by reporting segment is
included in the segment results section below in this Part I, Item 2.
International operations generated 90.3 percent and 90.1 percent of sales in the
third quarter and year-to-date periods of 2020, respectively, and 93.0 percent
and 92.7 percent of sales in the third quarter and year-to-date periods of 2019,
respectively. These units generated 96.6 percent and 96.0 percent of net segment
profit in the third quarter and year-to-date periods of 2020, respectively, and
99.5 percent and 98.1 percent of net segment profit in the third quarter and
year-to-date periods of 2019.
The sale of beauty products generated 13.2 percent and 13.4 percent of sales in
the third quarter and year-to-date periods of 2020, respectively, and 14.5
percent and 13.8 percent in the third quarter and year-to-date periods of 2019.
Segment Results
The Company had a negative impact to sales and profit results by reporting
segment in the third quarter and year-to-date periods of 2020 as a result of
COVID-19. While the duration and severity of this pandemic is uncertain, the
Company currently expects that its results of operations in the fourth quarter
may also be negatively impacted by COVID-19. The Company continues to monitor
the effects of COVID-19 on its reported sales and profit and has taken several
steps to mobilize its resources to ensure adequate liquidity, business
continuity and employee safety during this pandemic.
Asia Pacific
Change excluding
13 weeks ended the impact Foreign Percent of total
Sep 26, Sep 28, of foreign exchange(In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 140.1 $ 148.8 (6.0) % (7.0) %$ 1.6 29 36 Segment profit 38.8 32.7 18.8 % 17.9 % 0.3 36 71 Segment profit as percent of sales 27.7 % 22.0 % 5.7 pp n/a n/a n/a n/a 39 weeks ended Change excluding Foreign Percent of total Sep 26, Sep 28, the impact of exchange
(In millions) 2020 2019 Change foreign exchange impact 2020 2019 Net sales$ 394.9 $ 460.4 (14.3) % (12.7) %$ (8.4) 32 33 Segment profit 90.5 99.9 (9.4) % (7.3) % (2.2) 44 49 Segment profit as percent of sales 22.9 % 21.7 % 1.2 pp n/a n/a n/a n/a 40
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Table of Contents ______________________ n/a not applicable pp percentage points Reported sales decreased 6.0 percent compared with the third quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, sales decreased 7.0 percent, primarily driven by: •China, from a net reduction in studio openings, lower productivity from a shift to mid-priced products from premium priced products due to lower consumer spending trends and studio activities disruption from COVID-19 •Indonesia,Korea , andthe Philippines mainly from disruption of sales force activities and lower consumer spending, negatively impacted by COVID-19 •partially offset byAustralia &New Zealand , andMalaysia &Singapore , mainly from a more active sales force and in the case ofAustralia &New Zealand , the use of digital tools The COVID-19 impact on net sales in the third quarter of 2020 is estimated at negative 9 percent. On average, the impact of higher prices was about 4 percent in the third quarter compared with 2019, primarily related to less promotional pricing. Reported segment profit increased 18.8 percent compared with the third quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, segment profit increased 17.9 percent, primarily reflecting: •benefits from implementation of right-sizing initiatives related to the Turnaround Plan, •partially offset by the impact from lower sales volume, lower gross margin inChina from product mix, and negative impact from COVID-19 On a year-to-date basis, reported sales decreased 14.3 percent compared with 2019. Excluding the impact of changes in foreign currency exchange rates, sales in 2020 decreased 12.7 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 9.4 percent on a reported basis, and decreased 7.3 percent in local currency. Local segment profit variances largely mirrored those of the quarter. The Chinese Renminbi had the most meaningful impact on the third quarter and year-to-date sales and profit comparisons. 41 --------------------------------------------------------------------------------
Table of ContentsEurope Change excluding 13 weeks ended the impact Foreign Percent of total Sep 26, Sep 28, of foreign exchange (In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 121.2 $ 98.9 22.7 % 24.9 %$ (1.8) 25 24 Segment profit 29.3 (0.9) + + (1.6) 28 (2) Segment profit as percent of sales 24.2 % (0.9) % 25.1 pp n/a n/a n/a n/a 39 weeks ended Change excluding Foreign Percent of total Sep 26, Sep 28, the impact of exchange
(In millions) 2020 2019 Change foreign exchange impact 2020 2019 Net sales$ 317.7 $ 359.0 (11.5) % (7.1) %$ (16.9) 25 26 Segment profit 42.7 29.6 44.3 % 66.6 % (4.0) 20 15 Segment profit as percent of sales 13.4 % 8.2 % 5.2 pp n/a n/a n/a
n/a
_________________________
+ change greater than ±100% n/a not applicable pp percentage points Reported sales increased 22.7 percent compared with the third quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, sales increased 24.9 percent compared with the third quarter of 2019, primarily driven by: •Commonwealth of Independent States and Iberia, from higher recruiting and increased activity •Germany andItaly , from higher business-to-business sales, as well as core sales improvement mainly from a more active sales force •partially offset by lower business-to-business sales inAustria , and lower sales inSouth Africa mainly due to disruptions from COVID-19 The COVID-19 impact on net sales in the third quarter of 2020 is estimated at negative 5 percent. On average, the impact of higher prices was about 2 percent in the third quarter compared with 2019. Reported segment profit increased$30.2 million compared with the third quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, segment profit increased$31.7 million compared to the third quarter of 2019, primarily driven by: •the impact from higher sales volume •higher gross margin •lower bad debt, mainly inFrance •benefits from implementation of right-sizing initiatives related to the Turnaround Plan •partially offset by impact from COVID-19, primarily inSouth Africa On a year-to-date basis, reported sales decreased 11.5 percent compared with 2019. Excluding the impact of changes in foreign currency exchange rates, sales in 2020 decreased 7.1 percent compared with 2019. The factors impacting the year-to-date sales comparison largely mirrored those of the quarter. Year-to-date segment profit increased 44.3 percent on a reported basis, and 66.6 percent in local currency, compared with 2019. Local segment profit variances largely mirrored those of the quarter. The South African Rand was the main currency that impacted the third quarter and year-to-date sales and profit comparisons. 42 -------------------------------------------------------------------------------- Table of Contents North America Change excluding 13 weeks ended the impact of Foreign Percent of total Sep 26, Sep 28, foreign exchange (In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 146.3 $ 103.5 41.6 % 51.0 %$ (6.4) 31 25 Segment profit 21.9 3.3 + + (0.4) 21 7 Segment profit as percent of sales 15.0 % 3.2 % 11.8 pp n/a n/a n/a n/a 39 weeks ended Change excluding Foreign Percent of total Sep 26, Sep 28, the impact of exchange
(In millions) 2020 2019 Change foreign exchange impact 2020 2019 Net sales$ 371.6 $ 347.8 6.9 % 15.3 %$ (25.4) 30 25 Segment profit 47.1 41.1 14.8 % 32.1 % (5.4) 22 20 Segment profit as percent of sales 12.7 % 11.8 % 0.9 pp n/a n/a n/a
n/a
_________________________
+ change greater than ±100% n/a not applicable pp percentage points Reported sales increased 41.6 percent compared with the third quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, sales increased 51.0 percent, primarily driven by: •Fuller Mexico and Tupperware Mexico, from higher business-to-business sales and a more active sales force •theUnited States andCanada , reflecting a larger sales force from higher recruiting, increased activity and leveraging of digital tools Estimated COVID-19 impact in the third quarter was positive at about 7 percent, mainly fromthe United States andCanada . On average, the impact of higher prices was about 2 percent in the third quarter compared with 2019. Reported Segment profit increased$18.6 million compared with the third quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, segment profit increased$19.0 million compared to the third quarter of 2019, primarily driven by: •Fuller Mexico, from lower bad debt costs and obsolescence charges, and to higher sales volume •Tupperware Mexico, from higher sales volume and cost savings from the implementation of right-sizing initiatives related to the Turnaround Plan, partially offset by lower gross profit due to promotional pricing and higher obsolescence •theUnited States andCanada , from higher sales volume and higher gross margin On a year-to-date basis, reported sales increased 6.9 percent compared with 2019. Excluding the impact of changes in foreign currency exchange rates, sales in 2020 increased 15.3 percent compared with 2019. The factors impacting the year-to-date sales comparison largely mirrored those of the quarter. Year-to-date segment profit increased 14.8 percent on a reported basis, and increased 32.1 percent in local currency, compared with 2019. Local segment profit variances largely mirrored those of the quarter. The Mexican Peso had the most meaningful impact on the third quarter and year-to-date sales and profit comparisons. 43 -------------------------------------------------------------------------------- Table of Contents South America Change excluding 13 weeks ended the impact of Foreign Percent of total Sep 26, Sep 28, foreign exchange
(In millions) 2020 2019 Change exchange impact 2020 2019 Net sales$ 69.6 $ 66.9 4.0 % 35.6 %$ (15.5) 15 15 Segment profit 16.0 11.3 40.4 % 87.4 % (2.8) 15 24 Segment profit as percent of sales 23.0 % 16.9 % 6.1 pp n/a n/a n/a n/a 39 weeks ended Change excluding Foreign Percent of total Sep 26, Sep 28, the impact of exchange
(In millions) 2020 2019 Change foreign exchange impact 2020 2019 Net sales$ 166.3 $ 213.5 (22.1) % 0.2 %$ (47.5) 13 16 Segment profit 30.3 33.3 (9.2) % 19.7 % (8.0) 14 16 Segment profit as percent of sales 18.2 % 15.6 % 2.6 pp n/a n/a n/a
n/a
_________________________
n/a not applicable pp percentage points Reported sales increased 4.0 percent compared with the third quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, sales increased 35.6 percent, primarily driven by: •Argentina from higher recruiting and increased sales force activity and productivity, including from higher prices due to inflation •Brazil from higher recruiting and a more active sales force, and use of digital tools The COVID-19 impact on net sales in the third quarter of 2020 is estimated at negative 1 percent. On average, the impact of higher prices was about 2 percent in the third quarter compared with 2019. Reported Segment profit increased 40.4 percent compared with the third quarter of 2019. Excluding the impact of changes in foreign currency exchange rates, segment profit increased 87.4 percent, primarily reflecting lower promotional and selling expenses from implementation of right-sizing initiatives related to the Turnaround Plan, higher sales volume in the segment, and to higher gross margin inBrazil . On a year-to-date basis, reported sales decreased 22.1 percent compared with 2019. Excluding the impact of changes in foreign currency exchange rates, sales in 2020 increased 0.2 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 9.2 percent on a reported basis, and increased 19.7 percent in local currency, compared with 2019. Local segment profit variances largely mirrored those of the quarter. The Brazilian Real had the most meaningful impact on the third quarter and year-to-date sales and profit comparisons. 44 -------------------------------------------------------------------------------- Table of Contents Financial Condition Liquidity and Capital Resources: The Company's net working capital position decreased by$505.1 million compared with the end of 2019. Excluding the impact of changes in foreign currency exchange rates, net working capital decreased$484.5 million , primarily reflecting: •a$456.1 million increase in short-term borrowings, net of cash and cash equivalents as the Senior Notes became current inJune 2020 and an increase in borrowings under the Credit Agreement •a$52.1 million net increase in accrued liabilities mainly due to the timing of payments in light of COVID-19 and an increase in deferred revenue •partially offset by favorable impacts from a$23.9 million increase in accounts receivable driven by higher sales at quarter-end and to a$9.0 million increase in prepaid expenses and other current assets, mainly related to higher prepayments of raw materials and insurance premiums, primarily inMexico andthe United States andCanada 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 Caa3. If the Company faces continued downgrades in its credit rating, the Company could also experience further strains on its liquidity and capital resources, higher cost of capital and decreased access to the capital markets. 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 specified ratio of (i) Consolidated Funded Indebtedness to (ii) Consolidated EBITDA (the "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 ofSeptember 26, 2020 , the Company had total borrowings of$384.1 million outstanding under the Credit Agreement, with$171.1 million of that amount denominated in Euro. As ofSeptember 26, 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 ofSeptember 26, 2020 , and currently, the Company was in compliance with the financial covenants in the Credit Agreement. As ofSeptember 26, 2020 , the Company had$299.6 million of unused lines of credit, including$259.3 million under the committed, secured Credit Agreement, and$40.3 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. 45 -------------------------------------------------------------------------------- Table of Contents The Company currently has outstanding$380.2 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,Dart Industries Inc. (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: Financing Obligations 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 third quarter and year-to-date periods of 2020 the Company retired Senior Notes through tender offers and open-market purchases and recorded the pre-tax gain on debt extinguishment in the Other expense (income), net line item. Any deferred debt issuance costs related to the purchased Senior Notes were expensed and recorded in the interest expense line item. The details of these Senior Notes were as follows: 13 weeks ended 39 weeks ended September 26, September 26, (In millions) 2020 2020 Senior notes retired (face value)$ 121.1 $ 219.8 Less: Cash paid$ 107.5 $ 163.9 Less: Costs incurred $ 3.8 $ 6.0 Gain on debt extinguishment (pre-tax) $
9.8 $ 49.9
Earnings per share from gain on debt extinguishment $
0.20 $ 1.02
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 accurately predicted. 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 16: Debt 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$148.8 million as ofSeptember 26, 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. 46 -------------------------------------------------------------------------------- Table of Contents Cash and cash equivalents ("cash") totaled$148.8 million as ofSeptember 26, 2020 . Of this amount,$147.8 million was held by foreign subsidiaries. Of the cash held outsidethe United States , less than 1 percent was deemed ineligible for repatriation. Other than a 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 to and 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 ofSeptember 26, 2020 the Company has$380.2 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 third quarter endedSeptember 26, 2020 . Based on the definitions in the relevant 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, tender offers, exchange offers of debt for debt, cash or equity, refinancing transactions or otherwise ("debt refinancing"). The Company has successfully retired$98.7 million and$121.1 million of Senior Notes at a discount to par during the second and third quarters of 2020, respectively. In addition to the expected debt refinancing, the Company believes that its improved profitability and revenue growth through the Turnaround Plan, together with the anticipated proceeds from the sale of real estate and other non-core assets, and its forecasted availability under its Credit Agreement, will enable the Company to meet 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 until such time as they are completed. The 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 third quarter endedSeptember 26, 2020 the Company generated$60.7 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 ofSeptember 26, 2020 , the Company is in compliance with its financial covenants under its Credit Agreement, and the Company believes that it will continue to be in compliance with its financial covenants under its Credit Agreement. 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 16: Debt to the Consolidated Financial Statements for further discussion of the impact of an Event of Default. Operating Activities: Net cash from operating activities in the year-to-date periods endedSeptember 26, 2020 andSeptember 28, 2019 were inflows of$111.8 million and$19.5 million , respectively. The net favorable comparison was primarily due to a favorable impact from higher accrued liabilities due to timing of payments, including lower cash tax payments due to government approved deferrals as relief for the impact of COVID-19, and to higher deferred revenue, primarily inthe United States andCanada . 47 -------------------------------------------------------------------------------- Table of Contents Investing Activities: During the year-to-date period endedSeptember 26, 2020 , the Company had$16.7 million proceeds from the sale of long-term assets, partially offset by$20.7 million of capital expenditures primarily invested in: •$8.2 million related to molds used in the manufacturing of products •$7.2 million related to global information technology projects •$3.7 million related to machinery and equipment •$0.9 million related to buildings and improvement including land development near the Company'sOrlando, Florida headquarters During the year-to-date period endedSeptember 28, 2019 , the Company had$20.4 million proceeds from the sale of long-term assets partially offsetting the$44.0 million of capital expenditures mainly consisting of: •$16.9 million related to global information technology projects •$14.0 million related to molds used in the manufacturing of products •$13.1 million of expenditures primarily related to the combination of land development near the Company'sOrlando, Florida headquarters, buildings and improvements, and other machinery and equipment Financing Activities: During the year-to-date period endedSeptember 26, 2020 , the Company paid$163.9 million related to the retirement of its Senior Notes. The Company had an increase in revolver borrowings of$100.3 million and$46.7 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$60.5 million during the year-to-date period endedSeptember 28, 2019 . The Company suspended its dividend beginning in 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, 11,187 and 25,947 shares were retained to fund withholding taxes, totaling$0.2 million and$0.8 million , respectively. New Pronouncements Refer to Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements in Part I, Item 1 of this Report for a discussion of new pronouncements. 48
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