TUPPERWARE BRANDS CORPORATION The following is a discussion of the results of operations for 2020 compared with 2019, and changes in financial condition during 2020 and 2019. Discussion of the results of operations for 2019 compared with 2018 are included in the Form 10-K for the period endedDecember 28, 2019 and filed with theSEC onMarch 12, 2020 . This information should be read in conjunction with the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Report. The Company primarily designs innovative, functional, and environmentally responsible products to help store, serve, and prepare food. The core of the Tupperware brand product line consists of design-centric preparation, storage, and serving solutions for the kitchen and home, in addition to lines of cookware, knives, microwave products, microfiber textiles, water-filtration related items and an array of products for on-the-go consumers. Products are primarily sold directly to independent distributors, directors, managers and dealers (the "sales force") throughout the world. Sales force members purchase products at a discount from the Company and then sell them to their customers. Sales methods can differ based on the market. The Company is largely dependent upon the sales force and individuals to reach the end customer, 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 the 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 foreign exchange impact". 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 impact in 2020 was most pronounced inAsia Pacific andEurope where the Company experienced partial or country-wide lockdowns of operations in various markets which 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 first quarter of 2021 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, availability and distribution of vaccines, additional and new variants of the virus, and how quickly and to what extent normal economic and operating conditions can resume. Estimates included herein are those of the Company's management and are subject to the risks and uncertainties as described in the section entitled Forward-Looking Statements in Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 20 --------------------------------------------------------------------------------
Table of contents
Results of Operations
Changeexcluding the foreign exchange
Year Ended Change Foreign impact
(In millions, except per share
exchange
amounts) 2020 2019 Amount Percent impact Amount Percent
Net sales $ 1,740.1 $ 1,797.9 $ (57.8) (3)% $ (108.3) $ 50.5 3%
Gross margin as a percent of sales 67.2 % 66.0 % N/A 1.2 pp N/A N/A N/A
Selling, general and administrative
expense as a percent of sales 54.6 % 55.6 % N/A (1.0) pp N/A N/A N/A
Operating income $ 197.6 $ 125.9 $ 71.7 57% $ (24.1) $ 95.8 94%
Net income $ 112.2 $ 12.4 $ 99.8 + $ (14.9) $ 114.7 +
Diluted earnings per share $ 2.14 $ 0.25 $ 1.89 + $ (0.30) $ 2.19 +
____________________
N/A - not applicable
pp - percentage points
+ - change greater than ±100%
21
--------------------------------------------------------------------------------
Table of contents
Net Sales
Net sales were
•Brazil,United States andCanada mainly from a larger and more active sales force, and use of digital tools •Fuller Mexico from an increase in sales force size and activity, and higher business-to-business sales •partially offset byChina 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 andthe Philippines mainly due to longer closures and disruptions from government mandated lockdowns due to COVID-19
The negative impact to net sales in 2020 as a result of COVID-19 is estimated at 4 percent. The average impact of higher prices was approximately 3 percent compared 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. 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 of more people cooking at home, and consumers concerned with food storage and food safety. This, along with new sales and marketing techniques, resulted in a 3 percent increase in our core sales as compared with 2019. A more detailed discussion of the sales results by reporting segment is included in the segment results section in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. As discussed in Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Report, the Company includes certain promotional costs in selling, general 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 net sales. Gross Margin Gross margin was$1,169.3 million and$1,187.1 million in 2020 and 2019, respectively. Gross margin as a percentage of sales was 67.2 percent and 66.0 percent in 2020 and 2019, respectively. The improvement of 1.2 percentage points ("pp") is primarily due to: •lower manufacturing costs inEurope andSouth America •lower resin costs inAsia Pacific ,Europe andNorth America •favorable mix of products sold and the combined impact from a favorable mix of sales from units with higher than average gross margins, including from cost savings from the Turnaround Plan
Selling, General and Administrative Expense
Selling, general and administrative expense were
•lower promotional expenses reflecting the benefits from implementation of right-sizing initiatives related to the Turnaround Plan and cancellation of certain events and travel due to COVID-19, primarily inBrazil ,Germany ,Indonesia ,Italy and Tupperware Mexico •partially offset by higher freight and commission expense predominantly inthe United States andCanada reflecting higher sales, higher management incentives, and the absence of an enterprise award received from the local Chinese government in 2019 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. 22 -------------------------------------------------------------------------------- Table of contents Total unallocated expenses in 2020 decreased$0.1 million compared with 2019, primarily due to:
•a pre-tax gain on debt extinguishment of
As discussed in Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Report, the Company includes distribution costs of its products in selling, general and administrative expense. As a result, the Company's gross margin may not be comparable with other companies which include this expense in cost of products sold.
Re-engineering Charges
Re-engineering charges were$36.1 million and$34.7 million in 2020 and 2019, respectively. 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 charges 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. These re-engineering charges were mainly related to the transformation program, which was announced inJanuary 2019 and re-assessed inDecember 2019 (collectively the "Turnaround Plan") and theJuly 2017 revitalization program ("2017 program").
The re-engineering charges were:
Year Ended
December 26, December 28,
(In millions) 2020 2019
Turnaround plan $ 33.0 $ 26.4
2017 program 3.1 4.5
Other - 3.8
Total re-engineering charges $ 36.1 $ 34.7 Costs incurred under these programs were included in Consolidated Statements of Income under the following captions:
Year Ended
December 26, December 28,
(In millions) 2020 2019
Re-engineering charges $ 36.1 $ 34.7
Cost of products sold - 0.9
Selling, general and administrative expense - 0.4
Total re-engineering charges recorded in different line items $
36.1
The key elements of the Turnaround Plan include: increasing the Company's rightsizing plans to improve profitability, accelerating the divestiture of non-core assets to strengthen the balance sheet, restructuring the Company's debt to enhance liquidity, and structurally fixing the Company's core business to create a more sustainable business model. The Company incurred$32.2 million and$13.1 million in 2020 and 2019, respectively, primarily related to severance costs. In 2020 the Company realized cost savings of approximately$192 million . This plan is expected to run through 2021. The 2017 program has incurred$87.2 million of pretax costs starting in the second quarter of 2017 through 2020 and expects to incur an additional$1.6 million of pretax re-engineering costs in 2021. The annualized benefit of these actions has been approximately$36 million . After reinvestment of a portion of the benefits, improved profitability is reflected most significantly through lower cost of products sold and also through lower selling, general and administrative expense.
Refer to Note 3: Re-engineering Charges to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for further information.
23
--------------------------------------------------------------------------------
Table of contents
Gain on Disposal of Assets
Gain on disposal of assets was a gain of $14.0 million and gain of $12.9 million
in 2020 and 2019, respectively. In 2020 the Company realized a gain of $13.2
million from the sale of a manufacturing and distribution facility in Australia
and $31.6 million from the sale-leaseback of the Company headquarters in
Orlando, Florida along with sale of certain surrounding land. The gain was
offset by a $30.5 million write-off of capitalized software implementation costs
related to the front and back office standardization project that was initiated
in 2017, due to a shift in the business model and digital strategy set forward
by the new leadership team. In 2019 the Company realized a gain of $8.8 million
from sale of land near the Company headquarters in Orlando, Florida and $5.8
million for the sale of the marketing office in France .
Impairment Expense
Impairment expense was
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 trade names. 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 theJapan 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 theJapan quantitative impairment assessment included annual revenue growth rates and a discount rate utilized within the analysis, which impacts 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 ofSeptember 26, 2020 . Based on the 2020 annual impairment test, the estimated fair value of theJapan 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 trade names failed the assessment, in management's opinion, the NaturCare trade name 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 trade name included annual revenue growth rates, royalty rate, and the discount rate utilized within the analysis, which impacts the Company's conclusion regarding the likelihood of impairment of the trade name. Total carrying value of the NaturCare trade name was$11.5 million as ofSeptember 26, 2020 . Based on the 2020 annual impairment test, the estimated fair value of the NaturCare trade name 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 positive 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 trade name, 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 trade name's carrying value.
In 2019, the Company recorded goodwill impairment of
In the third quarter of 2019, the Company completed the annual assessments for all of its reporting units and indefinite-lived intangible assets, concluding$19.7 million impairment existed as of the third quarter 2019, mainly for the impairment of goodwill associated with the Fuller Mexico beauty and personal care products business in the amount of$17.5 million . This was a triggering event to assess the recoverability of the Fuller trade name, which concluded no impairment as of the third quarter of 2019 based on actual and forecasted results of the units which support the Fuller trade name value.
The Nutrimetics trade name was also impaired by
24
--------------------------------------------------------------------------------
Table of contents
The impairment evaluation of the goodwill associated with the Fuller Mexico
reporting unit involved comparing the fair value of the reporting unit to its
carrying value, including the goodwill balance, after consideration of
impairment to its long-lived assets. There were no impairments of any long-lived
assets. The fair value analysis for Fuller Mexico was completed using the income
approach, which was considered a Level 3 measurement within the fair value
hierarchy. The significant assumptions used in the income approach included
estimates regarding future operations and the ability to generate cash flows,
including projections of revenue, costs, utilization of assets and capital
requirements. The income approach, or discounted cash flow approach, also
requires an estimate as to the appropriate discount rate to be used. The most
sensitive estimate in this valuation is the projection of operating cash flows,
as these provide the basis for the estimate of fair market value. The Company's
cash flow model used a forecast period of ten years with annual revenue growth
rates ranging from negative 8.0 percent to positive 4.0 percent, a compound
average growth rate of 0.2 percent, and a 2.5 percent growth rate used in
calculating the terminal value. The discount rate used was 14.9 percent. The
growth rates were determined by reviewing historical results of the operating
unit and the historical results of the Company's other similar business units,
along with the expected contribution from growth strategies being implemented.
As the fair value of Fuller Mexico was less than the carrying value by more than
the recorded goodwill balance, the remaining balance of goodwill recorded at
Fuller Mexico was written off.
In the fourth quarter of 2019, as part of the on-going assessment of goodwill
and intangible assets, the Company noted that the financial performance of the
units selling Fuller products had fallen below their previous trend lines and it
concluded that they would fall significantly short of previous expectations.
Sales further declined in the fourth quarter of 2019 and margins significantly
declined from third to fourth quarter resulting in an approximate 30 percent
decrease in margins in the forecasted period. This significant impact to margins
also impacted the royalty rate which was reduced from the rate utilized in the
third quarter of 2019. These declines in the financial performance were deemed
to be a triggering event and a test for recoverability and impairment was
performed over the definite-lived intangible asset which included comparing the
sum of the estimated undiscounted future cash flows attributable to the Fuller
trade name to its carrying value. The result of the impairment test was to
record a $20.3 million impairment to the Fuller trade name included in the
impairment of goodwill and intangible assets caption of the Company's
Consolidated Statements of Income. As the units that sell Fuller products are in
different geographical areas, impairments of $6.0 million , $13.6 million and
$0.7 million were recorded for the Asia Pacific , North America and South America
segments, respectively. The Fuller trade name carrying value was $6.5 million as
of December 28, 2019 .
Refer to Note 12:
Gain on Debt Extinguishment Gain on debt extinguishment was$40.2 million and$0.0 million in 2020 and 2019, respectively. The change in interest expense is related to a decrease in the Company's borrowings. During the second, third, and fourth quarters of 2020 the Company retired its Senior Notes in the aggregate principal amount of$600.0 million through tender offers, open-market purchases, and redemption.
Interest Expense
Interest expense was
Interest Income
Interest income was
Other Expense (Income), Net
Other expense (income), net, was a gain of$11.6 million and$16.8 million in 2020 and 2019, respectively. The Company records foreign currency translation impacts and pension costs in this line item. 25 -------------------------------------------------------------------------------- Table of contents Provision for Income Taxes Provision for income taxes was$100.1 million and$91.0 million in 2020 and 2019, respectively. The effective tax rate was 47.2 percent and 88.0 percent in 2020 and 2019, respectively. The change in effective tax rate in 2020 from 2019 was primarily due to: •a favorable treatment of gain on debt extinguishment and gain from the sale-leaseback of the Company headquarters inOrlando, Florida along with sale of certain surrounding land, sheltered by a mixture of previously valued foreign tax credits and global intangible low-taxed income ("GILTI") tax credits •partially offset by losses inUnited States that currently have no tax benefit, and •an unfavorable adjustment related to a continued limitation of interest expense deductions requiring a valuation allowance
Refer to Note 4: Income Taxes to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for further information.
Net Income
Net income was
26
--------------------------------------------------------------------------------
Table of contents
Segment Results
International operations accounted for 90 percent of sales in 2020 and 93 percent in 2019. They accounted for 97 percent and 98 percent of segment profit in 2020 and 2019, respectively.
The Company, continues focusing on its core business while considering strategic alternatives for non-core assets, including potential divestitures of its beauty and personal care products businesses. During 2020, the beauty businesses in total generated$233.9 million in net sales and$15.4 million in operating income. In the first quarter of 2021, the Company completed the sale of its Avroy Shlain beauty business inSouth Africa for$33.6 million . In 2021, the Company will continue its efforts to divest non-core assets, specifically concentrating on its remaining beauty businesses. The Company had a negative impact to sales and profit results by reporting segment in 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 first quarter of 2021 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. Change excluding the foreign Percent of total Year Ended Change Foreign exchange impact Year EndedDecember 26 ,December 28 , exchangeDecember 26 ,December 28 , (Dollars in millions) 2020 2019 Amount Percent impact Amount Percent 2020 2019Net Sales Asia Pacific $ 523.3 $ 590.5 $ (67.2) (11) %$ (3.3) $ (63.9) (11) % 30 % 33 %Europe 446.2 475.2 (29.0) (6) % (14.5) (14.5) (3) % 26 26North America 525.7 453.5 72.2 16 % (28.5) 100.7 24 % 30 25South America 244.9 278.7 (33.8) (12) % (62.0) 28.2 13 % 14 16 Total net sales$ 1,740.1 $ 1,797.9 $ (57.8) (3) %$ (108.3) $ 50.5 3 % 100 % 100 % Segment profitAsia Pacific $ 123.7 $ 124.3 $ (0.6) (1) %$ (1.0) $ 0.4 - % 39 % 50 %Europe $ 78.6 $ 38.0 $ 40.6 +$ (4.2) $ 44.8 + 25 % 15 %North America $ 62.5 $ 40.2 $ 22.3 56 %$ (5.4) $ 27.7 82 % 20 % 16 %South America $ 48.4 $ 43.8 $ 4.6 11 %$ (10.7) $ 15.3 46 % 15 % 18 % Segment profit as a percent of sales Asia Pacific 23.6 % 21.0 % N/A 2.6 pp Europe 17.6 % 8.0 % N/A 9.6 pp North America 11.9 % 8.9 % N/A 3.0 pp South America 19.8 % 15.7 % N/A 4.1 pp
____________________
N/A - not applicable
pp - percentage points
+ - change greater than ±100%
27
--------------------------------------------------------------------------------
Table of contents
Asia Pacific
Net sales were $523.3 million and $590.5 million in 2020 and 2019, respectively.
Excluding foreign exchange impact, sales decreased $63.9 million or 11 percent,
primarily due to:
•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 and the Philippines mainly from disruption of sales force activities
and lower consumer spending, negatively impacted by COVID-19
•partially offset by Australia and New Zealand , mainly from a larger and more
active sales force and the use of digital tools
The negative impact to net sales in 2020 as a result of COVID-19 is estimated at 6 percent. The average impact of higher prices was approximately 4 percent compared with 2019.
Segment profit was
•Benefits from implementation of right-sizing initiatives related to the Turnaround Plan and cancellation of certain events and travel due to COVID-19 •partially offset by the impact from lower sales volume, lower gross margin inChina from a shift to mid-priced products from premium priced products due to lower consumer spending trends, and negative impact from COVID-19
The Indonesian Rupiah had the most meaningful impact on the year-over-year net sales and segment profit comparisons.
Net sales were$446.2 million and$475.2 million in 2020 and 2019, respectively. Excluding foreign exchange impact, sales decreased$14.5 million or 3 percent, primarily due to:
•France,
The negative impact to net sales in 2020 as a result of COVID-19 is estimated at 9 percent. The average impact of higher prices was approximately 2 percent compared with 2019.
Segment profit was
•higher gross margin •lower bad debt, mainly inFrance andGermany •lower promotional spending reflecting cancellation of certain events and travel due to COVID-19 and benefits from implementation of right-sizing initiatives related to the Turnaround Plan, mainly inGermany andItaly •partially offset by impact from COVID-19, primarily inFrance ,Italy andSouth Africa
The South African Rand had the most meaningful impact on the year-over-year net sales and segment profit comparisons.
28
--------------------------------------------------------------------------------
Table of contents
North America
Net sales were $525.7 million and $453.5 million in 2020 and 2019, respectively.
Excluding foreign exchange impact, sales increased $100.7 million or 24 percent,
primarily due to:
•the United States and Canada , reflecting a larger sales force from higher
recruiting, increased activity and leveraging of digital tools
•Fuller Mexico, from higher business-to-business sales and a larger and more
active sales force
The positive impact to net sales in 2020 as a result of COVID-19 is estimated at 5 percent. The average impact of higher prices was approximately 2 percent compared with 2019.
Segment profit was
•Fuller Mexico, from lower bad debt costs and obsolescence charges, and to higher sales volume •theUnited States andCanada from higher sales volume, lower promotional spending reflecting cancellation of certain events and benefits from implementation of right-sizing initiatives related to the Turnaround Plan, and to higher gross margin mainly related to manufacturing efficiencies The Mexican Peso had the most meaningful impact on the year-over-year net sales and segment profit comparisons.South America Net sales were$244.9 million and$278.7 million in 2020 and 2019, respectively. Excluding foreign exchange impact, sales increased$28.2 million or 13 percent, primarily due to: •Brazil from a larger and more active sales force, and the use of digital tools •Argentina from a larger sales force count and increased sales force activity and productivity, including from higher prices due to inflation
The negative impact to net sales in 2020 as a result of COVID-19 is estimated at 3 percent. The average impact of higher prices was approximately 2 percent compared with 2019.
Segment profit was
•Brazil from lower promotional spending reflecting cancellation of certain events and travel due to COVID-19 and benefits from implementation of right-sizing initiatives related to the Turnaround Plan, and to higher sales volume •Argentina from higher sales volume and implementation of right-sizing initiatives related to the Turnaround Plan
The Brazilian Real had the most meaningful impact on the year-over-year net sales and segment profit comparisons.
29
--------------------------------------------------------------------------------
Table of contents
Financial Condition
Liquidity and Capital Resources
The Company's net working capital position decreased by $213.2 million at the
end of 2020 compared with the end of 2019. Excluding the foreign exchange
impact, net working capital decreased $196.6 million , primarily due to:
•a $127.4 million increase in short-term borrowings, net of cash and cash
equivalents, due to an increase in borrowings under the Credit Agreement
•a $82.0 million net increase, from an increase in accrued liabilities due to
higher management incentives and freight liabilities, higher accounts payables
reflecting the timing of payments in light of COVID-19, and an increase in net
hedges payable.
On February 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. On
February 27, 2020 Moody's downgraded the Company's credit rating from Baa3 to
B1. Subsequent to those dates, the Company's credit ratings have changed further
by S&P and Moody's, with S&P's rating of the Company currently at B with a
positive outlook, and Moody's rating of the Company currently at B3 with a
stable outlook. If the Company faces 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 capital markets.
During the first quarter of 2020, the Company completed an Amendment(a) related
to its $650.0 million Credit Agreement(a) providing debt covenant relief through
increasing the leverage ratio(a) allowing the needed flexibility to execute the
Turnaround Plan and respond to COVID-19. During the second, third, and fourth
quarters of 2020 the Company retired its Senior Notes(a) in the aggregate
principal amount of $600.0 million through tender offers, open-market purchases,
and redemption by using cash on hand and the proceeds from the Term Loan
received in December 2020 (a) that it successfully obtained during the fourth
quarter of 2020. These measures successfully reduced total debt and improved the
overall liquidity of the Company, and as a result of these actions, the earliest
maturity of the Company's long-term debt is now in 2023. The Company, has also
improved its overall liquidity by focusing on its core business while
considering strategic alternatives for non-core assets, including potential
divestitures of its beauty and personal care products businesses. During 2020,
the beauty businesses in total generated $233.9 million in net sales and $15.4
million in operating income. In the first quarter of 2021, the Company completed
the sales of its Avroy Shlain beauty business in South Africa for $33.6 million .
In 2021, the Company will continue its efforts to divest non-core assets,
specifically concentrating on its remaining beauty businesses. The Company also
accelerated its land and property divestitures in 2020 and realized a gain of
$13.2 million from the sale of a manufacturing and distribution facility in
Australia and $31.6 million from the sale-leaseback of the Company headquarters
in Orlando, Florida along with sale of certain surrounding land. The Company
completed the sale of the manufacturing facility in France for approximately
$9.1 million in the first quarter of 2021. The Company will endeavor to continue
to divest land and property in 2021 that is deemed non-core to its ongoing
operations.
____________________
(a)as defined or noted below.
30
--------------------------------------------------------------------------------
Table of contents
Debt Summary
The debt portfolio consisted of:
As of
December 26, December 28,
(In millions) 2020 2019
Term loan $ 275.0 $ -
Credit agreement 423.3 272.0
Finance leases (a) 3.3 3.6
Senior notes (face value) - 600.0
Unamortized debt issuance costs (18.3) (0.2)
Total debt$ 683.3 $
875.4
Current debt and finance lease obligations
258.6 602.2
Total debt $ 683.3 $ 875.4
____________________(a)See Note 18: Leases for further details.
Term Loan
On
1.the Company, as borrower, the Lenders party thereto andAlter Domus (US) LLC , as administrative agent and collateral agent, providing for a secured term loan facility (the "Parent Term Loan") in an aggregate principal amount of$200.0 million and 2.Dart Industries, Inc. , as borrower, Company, as a guarantor, the Lenders party thereto andAlter Domus (US) LLC , as administrative agent and collateral agent, providing for a secured term loan facility (the "Dart Term Loan" and, together with the Parent Term Loan, the "Term Loan") in an aggregate principal amount of$75.0 million . The Company used the aggregate borrowings of$275.0 million from the Term Loan and cash on hand to retire outstanding Senior Notes (as defined below). The Term Loan has an original issue discount and commitment fee of 4.5% or$12.4 million which has been recorded as a contra liability to the carrying value of the Term Loan and is included in the unamortized debt issuance costs balance noted above. The original issue discount and related debt issuance costs will be amortized over the term of the Term Loan. The Term Loan matures onDecember 3, 2023 . The Company has prepayment options, as well as mandatory prepayments at the option of the Lenders. The prepayments have premium protections depending on the timing of the prepayment and the source of cash used for prepayment.
Interest is payable quarterly in arrears and on maturity. The Company has the option, to pay interest equal to either:
1.the aggregate borrowing rate ("ABR"), determined by reference to the highest
of:
a.the "United States Prime Lending Rate" published by The Wall Street Journal,
b.the federal funds effective rate from time to time plus 0.50% per annum and
c.the one-month Eurodollar Rate, plus 1.00% per annum, which shall, regardless
of rate used, be no less than 2.0% per annum, or
2.a Eurodollar Rate for a specified period appearing on Reuters Screen LIBOR01
Page, which shall be no less than 1.00% per annum, in each case, plus an
applicable margin.
31
--------------------------------------------------------------------------------
Table of contents
The applicable margin is initially 7.75% per annum for ABR borrowings and 8.75%
per annum for Eurodollar Rate borrowings, and in each case, from and after the
delivery of the applicable financial statements for the first full fiscal
quarter following the Closing Date, the applicable margin shall then be:
1.for ABR borrowings, either:
a.7.75% per annum, if the consolidated leverage ratio is greater than 2.75 to
1.00 or
b.7.25% per annum, if the consolidated leverage ratio is less than or equal to
2.75 to 1.00 and
2.for Eurodollar Rate borrowings, either:
a.8.75% per annum, if the consolidated leverage ratio is greater than 2.75 to
1.00 or
b.8.25% per annum, if the consolidated leverage ratio is less than or equal to
2.75 to 1.00.
The Parent Term Loan is fully and unconditionally guaranteed on a joint and
several basis by all of the Company's existing and future domestic subsidiaries
that provide a guaranty under the Company's Second Amended and Restated Credit
Agreement, dated as of March 29, 2019 (as amended on August 28, 2019 and on
February 28, 2020 , the "Existing Revolving Credit Agreement") among, inter alia,
the Company, the other borrowers party thereto, the lenders party thereto and
JPMorgan Chase Bank, N.A ., as administrative agent. The Dart Term Loan is fully
and unconditionally guaranteed on a joint and several basis by the Company and
certain of the Company's existing and future domestic and foreign subsidiaries.
The Term Loan includes a financial covenant as well as customary affirmative and
negative covenants, including, among other things, as to compliance with laws,
delivery of quarterly and annual financial statements, restrictions on the
incurrence of liens, indebtedness, asset dispositions, fundamental changes,
restricted payments and other customary covenants. The Term Loan includes events
of default relating to customary matters (and customary notice and cure
periods), including, among other things, nonpayment of principal, interest or
other amounts; violation of covenants; incorrectness of representations and
warranties in any material respect; cross-payment default and cross acceleration
with respect to material indebtedness; bankruptcy; material judgments; and
certain ERISA events.
Credit Agreement
OnMarch 29, 2019 , the Company and its wholly owned subsidiaries,Tupperware Nederland B.V. , Administradora Dart,S. de R.L. de C.V. , andTupperware Brands Asia Pacific Pte. Ltd. (the "Subsidiary Borrowers"), amended and restated their multicurrency Credit Agreement (as further amended via an Amendment No. 1 datedAugust 28, 2019 , the "Credit Agreement"), withJPMorgan Chase Bank, N.A . as administrative agent (the "Administrative Agent"), swingline lender, joint lead arranger and joint bookrunner, andCredit Agricole Corporate and Investment Bank ,HSBC Securities (USA) Inc. ,Mizuho Bank, Ltd. andWells Fargo Securities, LLC , as syndication agents, joint lead arrangers and joint bookrunners. The Credit Agreement replaces the credit agreement datedSeptember 11, 2013 , and as amended (the "Old Credit Agreement"), and, other than an increased aggregate amount that may be borrowed, an improvement in the consolidated leverage ratio covenant and a slightly more favorable commitment fee rate, has terms and conditions similar to that of the Old Credit Agreement. The Credit Agreement makes available to the Company and the Subsidiary Borrowers a committed credit facility in an aggregate amount of$650.0 million (the "Facility Amount"). The Credit Agreement provides (i) a revolving credit facility, available up to the full amount of the Facility Amount, (ii) a letter of credit facility, available up to$50.0 million of the Facility Amount, and (iii) a swingline facility, available up to$100.0 million of the Facility Amount. Each of such facilities is fully available to the Company and the Facility Amount is available to the Subsidiary Borrowers up to an aggregate amount not to exceed$325.0 million . With the agreement of its lenders, the Company is permitted to increase, on up to three occasions, the Facility Amount by a total of up to$200.0 million (for a maximum aggregate Facility Amount of$850.0 million ), subject to certain conditions. As ofDecember 26, 2020 , the Company had total borrowings of$423.3 million outstanding under its Credit Agreement, with$160.3 million of that amount denominated in Euro. Loans made under the Credit Agreement will be composed of (i) "Eurocurrency Borrowings", bearing interest determined in reference to the LIBOR or the EURIBOR rate for the applicable currency and interest period, plus a margin, and/or (ii) "ABR Borrowings", bearing interest at the sum of (A) the greatest of (x) the Prime Rate, (y) the NYFRB rate plus 0.5 percent, and (z) adjusted LIBOR on such day (or if such day is not a business day, the immediately preceding business day) for a deposit inUnited States Dollars with a maturity of one month plus 1.0 percent, and (B) a margin. The applicable margin in each case will be determined by reference to a pricing schedule and will be based upon the better for the Company of (a) the Consolidated Leverage Ratio (computed as consolidated funded indebtedness of the Company and its subsidiaries to the consolidated EBITDA (as defined in the Credit Agreement) of the Company and its subsidiaries for the four fiscal quarters then most recently ended) for the fiscal quarter referred to in the quarterly or annual financial statements most recently delivered, or (b) the Company's then existing long-term debt securities rating byMoody's Investor Service, Inc. orStandard and Poor's Financial Services, Inc. Under the Credit Agreement, the applicable margin for ABR Borrowings ranges from 0.375 percent to 0.875 percent, the applicable margin for Eurocurrency Borrowings ranges from 1.375 percent to 1.875 percent, and the applicable margin for the commitment fee ranges from 0.150 percent to 0.275 percent. Loans made under the swingline facility will bear interest, if denominated inUnited States Dollars, at the same rate as an ABR Borrowing and, if denominated in another currency, at the same rate as a Eurocurrency Borrowing. As ofDecember 26, 2020 , the Company had a weighted average interest rate of 1.97 percent with a baser rate spread of 188 basis points on LIBOR-based borrowings under the Credit Agreement that has a final maturity date ofMarch 29, 2024 . 32
--------------------------------------------------------------------------------
Table of contents
Similar to the Old Credit Agreement, the Credit Agreement contains customary covenants that, among other things, limit the ability of the Company's subsidiaries to incur indebtedness and limit the ability of the Company and its subsidiaries to create liens on and sell assets, engage in certain liquidations or dissolutions, engage in certain mergers or consolidations, or change lines of business. These covenants are subject to significant exceptions and qualifications. OnFebruary 28, 2020 , the Company amended the Credit Agreement (the "Amendment") in order to modify certain provisions, including the consolidated leverage ratio 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. 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 No. 2 effective date to and includingJune 27, 2020 5.75 to 1.00September 26, 2020 5.25 to 1.00December 26, 2020 4.50 to 1.00March 27, 2021 4.00 to 1.00June 26, 2021 and thereafter 3.75 to 1.00 Under the Credit Agreement and consistent with the Old Credit Agreement,Dart Industries Inc. (the "Guarantor") unconditionally guarantees all obligations and liabilities of the Company and the Subsidiary Borrowers relating to the Credit Agreement, supported by a security interest in certain "Tupperware" trademarks and service marks. 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. Pursuant to the Amendment, 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 "Additional Guarantee and Collateral"). For purposes of the Credit Agreement, consolidated EBITDA represents earnings before interest, income taxes, depreciation and amortization, as adjusted to exclude unusual, non-recurring gains as well as non-cash charges and certain other items. The Company is in compliance with the financial covenants in the Credit Agreement. 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. The Company routinely increases its revolver borrowings under the Credit Agreement during each quarter to fund operating, investing and financing activities and uses cash available at the end of each quarter to temporarily reduce borrowing levels. As a result, the Company incurs more interest expense and has higher foreign exchange exposure on the value of its cash and debt during each quarter than would relate solely to the quarter end balances.
At
Senior Notes
The Company had outstanding$600.0 million aggregate principal amount of 4.75% senior notes (the "Senior Notes"). The Senior Notes were to mature onJune 1, 2021 . The Notes were issued under an indenture (the "Indenture"), by and among the Company, theGuarantor andWells Fargo Bank , N.A., as trustee. As security for its obligations under the guarantee of the Senior Notes, the Guarantor had 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 had granted a security interest in those certain "Tupperware" trademarks and service marks as well. The security interest may be released under certain customary circumstances specified in the Indenture. These customary circumstances include payment in full of principal of and premium, if any, and interest on the Senior Notes. The Indenture included, among others, covenants that limit the ability of the Company and its subsidiaries to (i) incur indebtedness secured by liens 33 -------------------------------------------------------------------------------- Table of contents 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. During the second, third, and fourth quarters of 2020 the Company retired its Senior Notes in the aggregate principal amount of$600.0 million through tender offers, open-market purchases, and redemption by using cash on hand and the proceeds from the Term Loan received inDecember 2020 . Any deferred debt issuance costs related to the purchased Senior Notes were expensed and recorded in the interest expense line item. The details of these Senior Notes retirement were as follows: Year Ended December 26, (In millions) 2020 Senior notes retired (face value)$ 600.0 Less: Cash paid 552.3 Less: Costs incurred 7.5 Gain on debt extinguishment (pre-tax)$ 40.2
Earnings per share from gain on debt extinguishment
Cash
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 its year-end 2020 cash and cash equivalents balance of$139.1 million , 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 balance as ofDecember 26, 2020 includes$138.2 million 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$10.9 million for the withholding tax liability for future distribution of unrepatriated foreign earnings, noUnited States 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 2020 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. See Item 1A. Risk Factors under "Natural Disasters and Unusual Weather Conditions, Pandemic Outbreaks (Including COVID-19), Terrorist Acts, Global Political Events and Other Serious Catastrophic Events" for more information regarding COVID-19 and how it could affect the Company's business, financial condition, or results of operations. 34 -------------------------------------------------------------------------------- Table of contents Cash Flow Activity Operating Activities Net cash provided by operating activities in 2020 was$166.1 million , compared with$87.4 million in 2019. The net favorable comparison was primarily due to: •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 •higher deferred revenue, primarily inthe United States andCanada •partially offset by gain on debt extinguishment Investing Activities During 2020, the Company had$27.9 million of capital expenditures primarily consisting of: •$10.9 million related to molds used in the manufacturing of products •$8.3 million related to global information technology projects •$6.4 million related to machinery and equipment •$1.5 million related to buildings and improvement including land development near the Company headquarters inOrlando, Florida
In 2020, proceeds from disposal of property, plant and equipment were
During 2019, the Company had$61.0 million of capital expenditures consisting of: •$22.8 million related to global information technology projects •$20.2 million related to molds used in the manufacturing of products •$15.9 million related to buildings and improvements, and other machinery and equipment •$2.1 million primarily related to land development near the Company headquarters inOrlando, Florida
In 2019, proceeds from disposal of property, plant and equipment were
Financing Activities
During 2020, the Company had
•$552.3 million outflow related to the retirement of Senior Notes
•$20.7 million outflow related to debt issuance costs
•partially offset by
During 2019, the Company had
•$74.3 million outflow related to dividends paid •$6.2 million outflow related to short-term debt
Dividends
Dividends paid to shareholders were
Stock Repurchases
Open market stock repurchases by the Company were permitted under an authorization that ran throughFebruary 1, 2020 and allowed up to$2.0 billion to be spent and was not extended. Under this program, there were no stock repurchases in 2020 and 2019. Since 2007, the Company has spent$1.39 billion to repurchase 23.8 million shares under this program. 35 -------------------------------------------------------------------------------- Table of contents Stock repurchases under the Company's incentive plans are made when employees use shares to satisfy the minimum statutorily required withholding taxes. In 2020 and 2019, 59,636 and 44,131 shares were retained to fund withholding taxes, totaling$1.6 million and$0.9 million , respectively.
Contractual Obligations
The following summarizes the Company's contractual obligations atDecember 26, 2020 and the effect such obligations are expected to have on its liquidity and cash flow in future periods. Less than 1 More than 5 (In millions) Total year 1-3 years 3-5 years years Debt - principal (a)$ 701.6 $ 424.7 $ 276.9 $ - $ - Debt - interest only (b) 74.6 27.6 47.0 - - Pension benefits 120.4 15.6 23.9 22.1 58.8 Post-employment medical benefits 11.8 1.1 2.1 1.8 6.8 Capital commitments (c) 8.5 8.5 - - - Lease obligations 117.4 31.7 37.8 17.1 30.8
Total contractual obligations (d)
____________________
(a)These amounts relate to principal owed on the Term Loan, Credit Agreement and finance leases. See Note 17: Debt to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional information. (b)These amounts relate to interest payments on the Term Loan, Credit Agreement and finance leases. For the Term Loan the Company assumed the effective interest rate of 9.75% as ofDecember 26, 2020 . Future interest rates can differ based on leverage ratio and other factors. See Note 17: Debt to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional information. (c)Capital commitments represent signed agreements as ofDecember 26, 2020 on several capital projects in process at the Company's various units. (d)The table excludes information on recurring purchases of inventory as these are made under non-binding purchase orders, are generally consistent from year to year, and are short-term in nature. The table does not include future anticipated income tax settlements. See Note 4: Income Taxes to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for additional information.
Application of Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon the Company's Consolidated Financial Statements that have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires management to make estimates and assumptions that affect the reported and disclosed amounts. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the implementation of the following critical accounting policies are the most significantly affected by its judgments and estimates.
Allowance for Doubtful Accounts
The Company maintains current receivable amounts with most of its independent
distributors and sales force in certain markets. It also maintains long-term
receivable amounts with certain of these customers. The Company regularly
monitors and assesses its risk of not collecting amounts owed by customers. This
evaluation is based upon an analysis of amounts current and past due, along with
relevant history and facts particular to the customer. It is also based upon
estimates of distributor business prospects, particularly related to the
evaluation of the recoverability of long-term amounts due. This evaluation is
performed by business unit and account by account, based upon historical
experience, market penetration levels and similar factors. It also considers
collateral of the customer that could be recovered to satisfy debts. The Company
records its allowance for doubtful accounts based on the results of this
analysis. The analysis requires the Company to make significant estimates and as
such, changes in facts and circumstances could result in material changes in the
allowance for doubtful accounts. The Company considers as past due any
receivable balance not collected within its contractual terms.
36
--------------------------------------------------------------------------------
Table of contents
Inventories
The Company writes down its inventory for obsolescence or unmarketability in an
amount equal to the difference between the cost of the inventory and estimated
market value based upon expected future demand and pricing. The demand and
pricing is estimated based upon the historical success of product lines as well
as the projected success of promotional programs, new product introductions and
the availability of new markets or distribution channels. The Company prepares
projections of demand and pricing on an item by item basis for all of its
products. If inventory on hand exceeds projected demand or the expected market
value is less than the carrying value, the excess is written down to its net
realizable value. If actual demand or the estimate of market value decreases,
additional write-downs would be required.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities on the financial statements and their respective tax bases. Deferred tax assets also are recognized for net operating losses and credit carryforwards. Deferred tax assets and liabilities are measured using the enacted rates applicable to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. An assessment is made as to whether or not a valuation allowance is required to offset deferred tax assets. This assessment requires estimates as to future operating results, as well as an evaluation of the effectiveness of the Company's tax planning strategies. These estimates are made on an ongoing basis based upon the Company's business plans and growth strategies in each market and consequently, future material changes in the valuation allowance are possible. The Company accounts for uncertain tax positions in accordance with ASC 740, Income Taxes. This guidance prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Interest and penalties related to tax contingency or settlement items are recorded as a component of the provision for income taxes in the Company's Consolidated Statements of Income. The Company records accruals for tax contingencies as a component of accrued liabilities or other long-term liabilities on its Consolidated Balance Sheet.
Refer to Note 4: Income Taxes to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Report for additional discussions of the Company's tax positions.
Promotional Costs
The Company frequently makes promotional offers to members of its independent sales force to encourage them to fulfill specific goals or targets for other activities, ancillary to the Company's business, but considered separate and distinct services from sales, which are measured by defined group/team sales levels, party attendance, addition of new sales force members or other business-critical functions. The awards offered are in the form of product awards, special prizes or trips. The Company accrues for the costs of these awards during the period over which the sales force qualifies for the award and reports these costs primarily as a component of selling, general and administrative expense. These accruals require estimates as to the cost of the awards, based upon estimates of achievement and actual cost to be incurred. During the qualification period, actual results are monitored, and changes to the original estimates are made when known.
The Company's recorded goodwill relates primarily to theDecember 2005 acquisition of the direct selling businesses ofSara Lee Corporation . The Company does not amortize its goodwill. Instead, the Company performs an annual assessment during the third quarter of each year to evaluate the assets in each of its reporting units for impairment, or more frequently if events or changes in circumstances indicate that a triggering event for an impairment evaluation has occurred. 37 -------------------------------------------------------------------------------- Table of contents The annual process for evaluating goodwill begins with an assessment for each entity of qualitative factors to determine whether a quantitative evaluation of the unit's fair value compared with its carrying value is appropriate for determining potential goodwill impairment. The qualitative factors evaluated by the Company include: macro-economic conditions of the local business environment, overall financial performance, sensitivity analysis from the most recent quantitative fair value evaluation ("fair value test"), as prescribed under Accounting Standards Codification ("ASC") 350, Intangibles -Goodwill and Other, and other entity specific factors as deemed appropriate. When the Company determines a fair value test is appropriate, it estimates the fair value of the reporting unit and compares the result with its carrying amount, including goodwill, after any long-lived asset impairment charges. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recorded equal to the amount by which the carrying value exceeds the fair value, up to the amount of goodwill associated with the reporting unit. Any fair value test necessary is done by using either the income approach or a combination of the income and market approaches, with generally a greater weighting on the income approach (75 percent). The income approach, or discounted cash flow approach, requires significant assumptions to estimate the fair value of each reporting unit. These include assumptions regarding future operations and the ability to generate cash flows, including projections of revenue, expenses, utilization of assets and capital requirements, along with an appropriate discount rate to be used. The most sensitive estimate in the fair value test is the projection of operating cash flows, as these provide the basis for the estimate of fair market value. The Company's cash flow model uses a forecast period of 10 years and a terminal value. The growth rates are determined by reviewing historical results of the operating unit and the historical results of the Company's similar business units, along with the expected contribution from growth strategies being implemented. The market approach relies on an analysis of publicly-traded companies similar to the Company and deriving a range of revenue and profit multiples. The publicly-traded companies used in the market approach are selected based on their having similar product lines of consumer goods, beauty products and/or companies using a direct selling distribution method. The resulting multiples are then applied to the reporting unit to determine fair value. The Company's indefinite-lived trade names are evaluated for impairment annually during the third quarter of each year similarly to goodwill beginning with a qualitative assessment. The annual process for assessing the carrying value of indefinite-lived trade name begins with a qualitative assessment that is similar to the assessment performed for goodwill. When the Company determines it is appropriate, the quantitative impairment evaluation for the Company's indefinite-lived trade names involves comparing the estimated fair value of the assets to the carrying amounts, to determine if fair value is lower and a write-down required. If the carrying amount of a trade name exceeds its estimated fair value, an impairment charge is recognized in an amount equal to the excess. The fair value of these trade names is estimated using the relief from royalty method, which is a form of the income approach. Under this method, the value of the asset is calculated by selecting a royalty rate, which estimates the amount a company would be willing to pay for the use of the asset. This rate is applied to the reporting unit's projected revenue, tax affected and discounted to present value. Refer to Note 1: Summary of Significant Accounting Policies and Note 12:Trade Names andGoodwill of the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Report regarding the annual process for evaluating trade names and goodwill.
Retirement Benefit Plans
Pension Benefits
The Company records pension costs and the funded status of its defined benefit pension plans using the applicable accounting guidance for defined benefit pension and other post-retirement plans. This guidance requires that amounts recognized in the financial statements be determined on an actuarial basis. The measurement of the retirement obligations and costs of providing benefits under the Company's pension plans involves various factors, including several assumptions. The Company believes the most critical of these assumptions are the discount rate and the expected long-term rate of return on plan assets. The Company determines the discount rate primarily by reference to rates of high-quality, long-term corporate and government bonds that mature in a pattern similar to the expected payments to be made under the plans. The discount rate assumptions used to determine pension expense for the Company'sUnited States and foreign plans were as follows: Year Ended December 26, December 28, Discount Rate 2020 2019 United States Plans 3.3 % 4.3 % Foreign Plans 1.4 % 1.9 % 38
--------------------------------------------------------------------------------
Table of contents
The Company has established strategic asset allocation percentage targets for significant asset classes with the aim of achieving an appropriate balance between risk and return. The Company periodically revises asset allocations, where appropriate, in an effort to improve return and manage risk. The estimated rate of return is based on long-term expectations given current investment objectives and historical results. The expected rate of return assumptions used by the Company for itsUnited States and foreign plans were as follows: Year Ended December 26, December 28, Expected rate of return 2020 2019 United States Plans 7.0 % 7.0 % Foreign Plans 2.6 % 2.6 %
The following table highlights the potential impact on the Company's annual
pension expense due to changes in certain key assumptions with respect to the
Company's plans, based on assets and liabilities as of
(In millions) Increase Decrease Discount rate change by 50 basis points $
(1.3)
Post-retirement Benefits The Company accounts for its post-retirement benefit plan in accordance with applicable accounting guidance, which requires that amounts recognized in financial statements be determined on an actuarial basis. This determination requires the selection of various assumptions, including a discount rate, to value benefit obligations. The Company determines the discount rate primarily by reference to rates of return on high-quality, long-term corporate bonds that mature in a pattern similar to the expected payments to be made under the plan. The discount rate assumptions used by the Company to determine other post-retirement benefit expense were 3.3 percent for 2020, and 4.3 percent for 2019. A change in discount rate of 50 basis points would not materially change the annual expense associated with the plan.
Revenue Recognition
The Company defines a contract, for revenue recognition purposes, as the order received from the Company's customer who, in most cases, is one of the Company's independent distributors or a member of its independent sales force. Revenue is recognized when control of the product passes to the customer, which is upon shipment, and is recognized at the amount that reflects the consideration the Company expects to receive for the products sold, including various forms of discounts and net of expected returns which is estimated using historical return patterns and current expectation of future returns. The Company elected to account for shipping and handling activities that occur after the customer has obtained control of the product as an activity to fulfill the promise to transfer the product rather than as an additional promised service. Generally, payment is either received in advance or in a relatively short period of time following shipment. When revenue is recorded, estimates of returns are made and recorded as a reduction of revenue. Contracts with customers are evaluated to determine if there are separate performance obligations that are not yet met. These obligations generally relate to product awards to be subsequently fulfilled. When that is the case, revenue is deferred until each performance obligation is met. Incentive Compensation Plans Compensation expense for stock-based awards is recorded on a straight-line basis over the required service period, based on the fair value of the award. The fair value of the stock option grants is estimated using the Black-Scholes option-pricing model, which requires assumptions, including dividend yield, risk-free interest rate, the estimated length of time employees will retain their stock options before exercising them (expected term) and the estimated volatility of the Company's common stock price over the expected term. These assumptions are generally based on historical averages of the Company.
Impact of Inflation
Inflation, as measured by consumer price indices, has continued at a low level in most of the countries in which the Company operates, except inSouth America , particularly inArgentina andVenezuela . Refer to Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Report for a discussion of inflation. 39 -------------------------------------------------------------------------------- Table of contents New Pronouncements Refer to Note 1: Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Report for a discussion of new accounting pronouncements. 40
--------------------------------------------------------------------------------
Table of contents
© Edgar Online, source
