TUPPERWARE BRANDS CORP - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________________
FORM 10-Q
_________________________________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the 13 weeks ended September 24, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the Transition period from to
Commission file number 1-11657
_________________________________________________________________
TUPPERWARE BRANDS CORPORATION
(Exact name of registrant as specified in its charter)
—————————————————————————————————————————————————————————————————
| Delaware | 36-4062333 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 14901 South Orange Blossom Trail | ||||||||
| Orlando | Florida | 32837 | ||||||
(Address of principal executive offices) (Zip Code)
(407) 826-5050
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock, $0.01 par value | TUP | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | Non-accelerated Filer | ☐ | ||||||||||||||||||
| Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022, 44,478,026 shares of the common stock, $0.01 par value, of the registrant were outstanding.
TABLE OF CONTENTS
| Item | Page | ||||
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
TUPPERWARE BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars, except per share amounts) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Net sales | $ | 302.8 | $ | 376.9 | $ | 991.3 | $ | 1,207.4 | |||||||||||||||
| Cost of products sold | 106.2 | 129.0 | 352.0 | 380.0 | |||||||||||||||||||
| Gross profit | 196.6 | 247.9 | 639.3 | 827.4 | |||||||||||||||||||
| Selling, general and administrative expense | 175.6 | 190.7 | 565.9 | 620.5 | |||||||||||||||||||
| Re-engineering charges | 4.5 | 1.8 | 13.0 | 9.7 | |||||||||||||||||||
| Loss (gain) on disposal of assets | 0.7 | (1.7) | 2.3 | (8.9) | |||||||||||||||||||
| Operating income | 15.8 | 57.1 | 58.1 | 206.1 | |||||||||||||||||||
| Loss on debt extinguishment | — | — | — | 8.1 | |||||||||||||||||||
| Interest expense | 8.3 | 8.2 | 18.9 | 29.7 | |||||||||||||||||||
| Interest income | (1.3) | (0.3) | (3.2) | (0.9) | |||||||||||||||||||
| Other expense, net | 1.6 | 1.2 | 6.6 | 0.8 | |||||||||||||||||||
| Income from continuing operations before income taxes | 7.2 | 48.0 | 35.8 | 168.4 | |||||||||||||||||||
| Provision (benefit) for income taxes | 11.0 | (12.4) | 32.6 | 32.2 | |||||||||||||||||||
| (Loss) income from continuing operations | (3.8) | 60.4 | 3.2 | 136.2 | |||||||||||||||||||
| (Loss) income from operations of discontinued operations before income taxes | (0.7) | 4.3 | (6.2) | 8.1 | |||||||||||||||||||
| Gain (loss) on held for sale assets and dispositions | 22.6 | (148.1) | 21.4 | (147.1) | |||||||||||||||||||
| Provision for income taxes | 1.3 | 2.7 | 0.5 | 2.4 | |||||||||||||||||||
| Income (loss) on discontinued operations | 20.6 | (146.5) | 14.7 | (141.4) | |||||||||||||||||||
| Net income (loss) | $ | 16.8 | $ | (86.1) | $ | 17.9 | $ | (5.2) | |||||||||||||||
| Basic (loss) earnings from continuing operations - per share | $ | (0.09) | $ | 1.22 | $ | 0.07 | $ | 2.75 | |||||||||||||||
| Basic earnings (loss) from discontinued operations - per share | $ | 0.47 | $ | (2.97) | $ | 0.32 | $ | (2.85) | |||||||||||||||
| Basic earnings (loss) per share - Total | $ | 0.38 | $ | (1.75) | $ | 0.39 | $ | (0.10) | |||||||||||||||
| Diluted (loss) earnings from continuing operations - per share | $ | (0.09) | $ | 1.14 | $ | 0.07 | $ | 2.56 | |||||||||||||||
| Diluted earnings (loss) from discontinued operations - per share | $ | 0.47 | $ | (2.77) | $ | 0.30 | $ | (2.66) | |||||||||||||||
| Diluted earnings (loss) per share - Total | $ | 0.38 | $ | (1.63) | $ | 0.37 | $ | (0.10) | |||||||||||||||
| Basic weighted-average shares | 44.5 | 49.4 | 46.0 | 49.5 | |||||||||||||||||||
| Diluted weighted-average shares | 44.5 | 52.8 | 49.0 | 53.1 | |||||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
3
TUPPERWARE BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Net income (loss) | $ | 16.8 | $ | (86.1) | $ | 17.9 | $ | (5.2) | |||||||||||||||
| Other comprehensive (loss) income | |||||||||||||||||||||||
| Foreign currency translation adjustments | (32.9) | (2.9) | 85.1 | 4.4 | |||||||||||||||||||
| Deferred gain (loss) on cash flow hedges, net of tax | 0.1 | 0.2 | (0.1) | 0.3 | |||||||||||||||||||
| Pension and other post-retirement benefit, net of tax | 0.9 | 1.0 | 0.8 | 3.1 | |||||||||||||||||||
| Other comprehensive (loss) income | (31.9) | (1.7) | 85.8 | 7.8 | |||||||||||||||||||
| Total comprehensive (loss) income | $ | (15.1) | $ | (87.8) | $ | 103.7 | $ | 2.6 | |||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
4
TUPPERWARE BRANDS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| As of | |||||||||||
| (In millions of U.S. Dollars, except share amounts) | September 24, 2022 | December 25, 2021 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 102.9 | $ | 267.2 | |||||||
| Accounts receivable, net | 71.9 | 86.2 | |||||||||
| Inventory, net | 249.7 | 232.2 | |||||||||
| Non-trade accounts receivable, net | 25.6 | 31.9 | |||||||||
| Prepaid expenses and other current assets | 32.8 | 22.8 | |||||||||
| Current assets held for sale | — | 7.9 | |||||||||
| Total current assets | 482.9 | 648.2 | |||||||||
| Deferred tax assets, net | 194.1 | 194.9 | |||||||||
| Property, plant and equipment, net | 149.6 | 160.9 | |||||||||
| Operating lease assets | 70.2 | 74.7 | |||||||||
| Long-term receivables, net | 3.5 | 7.7 | |||||||||
| Trade names, net | 8.4 | 10.6 | |||||||||
| Goodwill | 38.6 | 42.7 | |||||||||
| Other assets, net | 106.3 | 97.2 | |||||||||
| Assets held for sale | — | 18.5 | |||||||||
| Total assets | $ | 1,053.6 | $ | 1,255.4 | |||||||
| Liabilities And Shareholders' Equity | |||||||||||
| Accounts payable | $ | 108.6 | $ | 123.3 | |||||||
| Current debt and finance lease obligations | 13.0 | 8.9 | |||||||||
| Accrued liabilities | 246.5 | 287.9 | |||||||||
| Current liabilities held for sale | 6.7 | 135.8 | |||||||||
| Total current liabilities | 374.8 | 555.9 | |||||||||
| Long-term debt and finance lease obligations | 687.8 | 700.5 | |||||||||
| Operating lease liabilities | 51.9 | 57.3 | |||||||||
| Other liabilities | 113.5 | 131.0 | |||||||||
| Liabilities held for sale | 1.0 | 17.8 | |||||||||
| Total liabilities | 1,229.0 | 1,462.5 | |||||||||
| Commitments and contingencies (Note 19) | |||||||||||
| Shareholders' equity (deficit): | |||||||||||
Preferred stock, $0.01 par value, 200,000,000 shares authorized; none issued | — | — | |||||||||
Common stock, $0.01 par value, 600,000,000 shares authorized; 63,607,090 shares issued | 0.6 | 0.6 | |||||||||
| Paid-in capital | 207.4 | 216.9 | |||||||||
| Retained earnings | 1,132.6 | 1,139.4 | |||||||||
Treasury stock, 19,119,875 and 14,726,849 shares, respectively, at cost | (913.9) | (876.1) | |||||||||
| Accumulated other comprehensive loss | (602.1) | (687.9) | |||||||||
| Total shareholders' equity (deficit) | (175.4) | (207.1) | |||||||||
| Total liabilities and shareholders' equity | $ | 1,053.6 | $ | 1,255.4 | |||||||
See accompanying notes to Condensed Consolidated Financial Statements.
5
TUPPERWARE BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
| Common Stock | Treasury Stock | Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders' Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars, except per share amounts) | Shares | Dollars | Shares | Dollars | |||||||||||||||||||||||||||||||||||||||||||
| December 25, 2021 | 63.6 | $ | 0.6 | 14.7 | $ | (876.1) | $ | 216.9 | $ | 1,139.4 | $ | (687.9) | $ | (207.1) | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (0.1) | — | (0.1) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 14.0 | 14.0 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | 3.4 | (56.2) | (18.8) | — | — | (75.0) | |||||||||||||||||||||||||||||||||||||||
| Stock and options issued for incentive plans | — | — | (0.2) | 16.8 | (0.7) | (14.0) | — | 2.1 | |||||||||||||||||||||||||||||||||||||||
| March 26, 2022 | 63.6 | $ | 0.6 | 17.9 | $ | (915.5) | $ | 197.4 | $ | 1,125.3 | $ | (673.9) | $ | (266.1) | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 1.2 | — | 1.2 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 103.7 | 103.7 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | 1.5 | (9.9) | 9.9 | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Stock and options issued for incentive plans | — | — | (0.3) | 10.6 | 1.4 | (9.9) | — | 2.1 | |||||||||||||||||||||||||||||||||||||||
| June 25, 2022 | 63.6 | $ | 0.6 | 19.1 | $ | (914.8) | $ | 208.7 | $ | 1,116.6 | $ | (570.2) | $ | (159.1) | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 16.8 | — | 16.8 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (31.9) | (31.9) | |||||||||||||||||||||||||||||||||||||||
| Stock and options issued for incentive plans | — | — | — | 0.9 | (1.3) | (0.8) | — | (1.2) | |||||||||||||||||||||||||||||||||||||||
| September 24, 2022 | 63.6 | 0.6 | 19.1 | (913.9) | 207.4 | 1,132.6 | (602.1) | (175.4) | |||||||||||||||||||||||||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
6
TUPPERWARE BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
| Accumulated Other Comprehensive Loss | Total Shareholders' Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Paid-In Capital | Retained Earnings | ||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars, except per share amounts) | Shares | Dollars | Shares | Dollars | |||||||||||||||||||||||||||||||||||||||||||
| December 26, 2020 | 63.6 | $ | 0.6 | 14.3 | $ | (896.5) | $ | 215.5 | $ | 1,161.6 | $ | (685.9) | $ | (204.7) | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 45.3 | — | 45.3 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 5.3 | 5.3 | |||||||||||||||||||||||||||||||||||||||
| Stock and options issued for incentive plans | — | — | (0.3) | 19.1 | (0.2) | (18.1) | — | 0.8 | |||||||||||||||||||||||||||||||||||||||
| March 27, 2021 | 63.6 | $ | 0.6 | 14.0 | $ | (877.4) | $ | 215.3 | $ | 1,188.8 | $ | (680.6) | $ | (153.3) | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 35.6 | — | 35.6 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 4.2 | 4.2 | |||||||||||||||||||||||||||||||||||||||
| Stock and options issued for incentive plans | — | — | (0.3) | 22.1 | 0.9 | (22.3) | — | 0.7 | |||||||||||||||||||||||||||||||||||||||
| June 26, 2021 | 63.6 | $ | 0.6 | 13.7 | $ | (855.3) | $ | 216.2 | $ | 1,202.1 | $ | (676.4) | $ | (112.8) | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (86.1) | — | (86.1) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (1.7) | (1.7) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | 1.0 | (25.0) | — | — | — | (25.0) | |||||||||||||||||||||||||||||||||||||||
| Stock and options issued for incentive plans | — | — | — | 0.2 | 2.3 | (0.2) | — | 2.3 | |||||||||||||||||||||||||||||||||||||||
| September 25, 2021 | 63.6 | $ | 0.6 | 14.7 | $ | (880.1) | $ | 218.5 | $ | 1,115.8 | $ | (678.1) | $ | (223.3) | |||||||||||||||||||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
7
TUPPERWARE BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| 39 weeks ended | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | |||||||||
| Operating Activities | |||||||||||
| Net income (loss) | $ | 17.9 | $ | (5.2) | |||||||
| Less: (income) loss from discontinued operations | (14.7) | 141.4 | |||||||||
| Income from continuing operations | $ | 3.2 | $ | 136.2 | |||||||
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 28.9 | 29.2 | |||||||||
| Unrealized foreign exchange loss | 0.8 | — | |||||||||
Stock-based compensation | 4.9 | 6.2 | |||||||||
Amortization of deferred debt issuance costs | 1.2 | 4.1 | |||||||||
| Loss (gain) on disposal of assets | 1.6 | (9.9) | |||||||||
Provision for credit losses | 6.5 | 3.8 | |||||||||
| Loss on debt extinguishment | — | 8.1 | |||||||||
| Write-down of inventories | 5.1 | 9.2 | |||||||||
Net change in deferred taxes | 0.1 | (37.5) | |||||||||
Net cash settlement from hedging activity | 0.8 | (4.2) | |||||||||
Other | (0.3) | (0.2) | |||||||||
| Changes in assets and liabilities: | |||||||||||
Accounts receivable | 5.7 | 1.3 | |||||||||
| Inventories | (31.5) | (70.1) | |||||||||
Non-trade accounts receivable | (0.6) | (13.7) | |||||||||
Prepaid expenses and other current assets | (11.4) | (4.2) | |||||||||
| Other assets | (8.1) | (0.9) | |||||||||
| Accounts payable and accrued liabilities | (53.1) | (39.0) | |||||||||
| Income taxes payable | (8.7) | (1.5) | |||||||||
| Other liabilities | (10.9) | (13.3) | |||||||||
| Net cash (used in) provided by operating activities | $ | (65.8) | $ | 3.6 | |||||||
| Investing Activities | |||||||||||
| Capital expenditures | (25.9) | (25.1) | |||||||||
Proceeds from disposal of assets | 4.1 | 14.1 | |||||||||
| Net cash used in in investing activities | $ | (21.8) | $ | (11.0) | |||||||
| Financing Activities | |||||||||||
| Term loan repayment | (7.1) | (101.2) | |||||||||
| Borrowings on revolver facility | 209.0 | — | |||||||||
| Repayment of revolver facility | (188.2) | — | |||||||||
| Net increase in short-term debt | 2.0 | 94.4 | |||||||||
| Debt issuance costs payment | (1.4) | (2.2) | |||||||||
| Finance lease repayments | (1.7) | (1.0) | |||||||||
| Common stock repurchase | (75.0) | (25.0) | |||||||||
| Cash payments of employee withholding tax for stock awards | (1.9) | (2.9) | |||||||||
| Proceeds from exercise of stock options | — | 0.5 | |||||||||
| Net cash used in financing activities | $ | (64.3) | $ | (37.4) | |||||||
8
| Discontinued Operations | |||||||||||
| Cash (used in) provided by operating activities | (4.8) | 2.7 | |||||||||
| Cash provided by investing activities | 6.9 | 30.5 | |||||||||
| Cash provided by discontinued operations | $ | 2.1 | $ | 33.2 | |||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (12.4) | (6.4) | |||||||||
| Net change in cash, cash equivalents and restricted cash | (162.2) | (18.0) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of year | 273.8 | 150.5 | |||||||||
Cash, cash equivalents and restricted cash at end of period (a) (b) | $ | 111.6 | $ | 132.5 | |||||||
(a) Includes $0.0 million and $0.7 million of cash on discontinued operations as of September 24, 2022 and September 25, 2021, respectively.
(b) Includes Restricted Cash of $2.8 million in Prepaid Expenses and Other Current Assets and $5.9 million in Other Assets, net as of September 24, 2022 and $1.8 million in Prepaid Expenses and Other Current Assets and $6.2 million in Other Assets, net as of September 25, 2021, respectively.
See accompanying notes to Condensed Consolidated Financial Statements.
9
TUPPERWARE BRANDS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Tupperware Brands Corporation and its subsidiaries, collectively the “Company” or “Tupperware”, with all intercompany transactions and balances having been eliminated. The Company prepared the unaudited Condensed Consolidated Financial Statements in accordance with United States generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and, in the Company's opinion, reflect all adjustments, including normal recurring items that are necessary for a fair statement of results of operations, comprehensive income, financial position, equity and cash flows for the periods presented.
Certain information and note disclosures normally included in the financial statements prepared in conformity with GAAP for complete financial statements have been condensed or omitted as permitted by such rules and regulations. As such, the accompanying unaudited Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited 2021 Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 25, 2021. Operating results of any interim period presented herein are not necessarily indicative of the results that may be expected for a full fiscal year.
Out-of-Period Misstatements
In the third quarter of 2022, the Company recorded an out-of-period adjustment to income tax expense which resulted in a $1.3 million decrease in income from continuing operations. This error resulted from intercompany costs which were allocated to an incorrect legal entity resulting in a net understatement of income tax expense for the entities. The Company has recorded an aggregate net $2.6 million decrease in income from continuing operations in the year-to-date period ended September 24, 2022, composed of the above-referenced adjustment and three other adjustments identified in the second quarter of 2022. Management has determined that these errors were not material to any of its previously issued financial statements individually or in the aggregate.
Discontinued Operations
Discontinued operations include certain key brands of the Company’s beauty business, including House of Fuller, Nutrimetics, Nuvo, and Avroy Shlain. Avroy Shlain was sold in the first quarter of 2021, House of Fuller Mexico was sold in the second quarter of 2022, and, as noted in Note 13: Held for Sale Assets and Discontinued Operations, Nutrimetics was sold on July 1, 2022. The Company is currently in discussions with a potential buyer for Nuvo with the intention of having a deal signed and completed in the fourth quarter of 2022.
In the third quarter of 2021, the Company determined that these dispositions represented a strategic shift that would have a major effect on its results of operations. As such, the results of the beauty business are reflected as discontinued operations including all comparative prior period information in these Condensed Consolidated Financial Statements. Certain costs previously allocated to the beauty business for segment reporting purposes do not qualify for classification within discontinued operations and have been reallocated to continuing operations. See Note 13: Held for Sale Assets and Discontinued Operations, for additional information.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Condensed Consolidated Financial Statements, as well as the reported amounts of net sales and expenses during the reporting period. Actual results could differ materially from these estimates.
10
Economic Uncertainties
For the third quarter ended September 24, 2022, the Company's business activities continued to be impacted by the Coronavirus pandemic (“COVID-19”), most notably in China, where lockdowns persist. In addition, the Company's business activities, particularly in Europe, continued to experience volatility and were impacted by lower consumer sentiment and increased cost of energy. Inflation has increased globally resulting in less disposable income for consumers and lower consumer sentiment. The U.S. dollar has strengthened against the Euro, Japanese Yen, and other currencies. This continues to be a headwind for the Company as its foreign denominated revenues are translated into USD at lower exchange rates negatively impacting results.As a result, many of the Company's estimates and assumptions require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, the Company's estimates may change materially in future periods.
11
Equity
On February 28, 2022, the Company entered into an Accelerated Share Repurchase (“ASR”) agreement with Wells Fargo Bank, National Association (“Wells Fargo”), under which the Company paid $75.0 million and received an initial share delivery of 3,438,264 shares of the Company's outstanding common stock, which were immediately retired. The initial number of shares received was calculated as 75% of the $75.0 million divided by the price of the Company's common stock on February 25, 2022 of $16.36. On May 27, 2022, pursuant to the terms of the ASR agreement, Wells Fargo elected to accelerate the settlement date of the ASR and the Company received the remaining settlement of 1,438,325 shares, which were immediately retired. The number of shares received was calculated by taking the initial $75.0 million divided by the price of the variable weighted average price (“VWAP”) of the Company's share price during the duration of the ASR of $15.38, less the number of shares received at the beginning of the ASR.
New Accounting Pronouncements
Standards Recently Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), an optional guidance for a limited period of time to ease the transition from the London interbank offered rate (“LIBOR”) to an alternative reference rate. The ASU intends to address certain concerns relating to accounting for contract modifications and hedge accounting. These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December 31, 2022. The amendments should be applied on a prospective basis. In addition, the FASB also issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”) to refine the scope of ASC 848, “Reference Rate Reform” (“ASC 848”) and ASU 2020-04 in response to Reference Rate Reform in January 2021. ASU 2021-01 adds guidance to clarify which optional expedients in ASC 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that will be discontinued, but are modified as a result of the discontinuing transition. This guidance was effective upon issuance through December 31, 2022. The Company adopted this guidance during the third quarter of 2022 and the adoption did not have any material impact on its Consolidated Financial Statements.
Note 2: Distribution Costs
The cost of products sold line item includes costs related to the purchase and manufacturing of goods sold by the Company. Among these costs are inbound freight charges, duties, purchasing and receiving costs, inspection costs, depreciation expense, internal transfer costs and warehousing costs of raw materials, work in process and packing materials. The warehousing and distribution costs of finished goods are included in the selling, general and administrative expense line item. Distribution costs are comprised of outbound freight and associated labor costs. Fees billed to customers associated with the distribution of products are classified as revenue.
Distribution costs were:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Distribution costs | $ | 26.7 | $ | 32.5 | $ | 91.3 | $ | 113.2 | |||||||||||||||
Note 3: 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. These activities are 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.
Programs are generally designed to recognize sales force members for achieving a primary objective. An example is holding a certain number of product demonstrations. In this situation, the Company offers a prize to sales force members who achieve the targeted number of product demonstrations over a specified period. The period runs from weeks to several months. The prizes are generally graded, in that meeting one level may result in receiving a piece of jewelry, with higher achievement resulting in more valuable prizes such as a television or a trip. Similar programs are designed to reward current sales force members who reach certain goals by promoting them to a higher level in the organization where their earning opportunity would be expanded, and they would take on additional responsibilities for adding new sales force members and providing training and motivation to new and existing sales force members. Other business drivers, such as scheduling product demonstrations, increasing the number of sales force members, holding product demonstrations, or increasing end consumer attendance at product demonstrations, may also be the focus of a program.
12
The Company also offers commissions for achieving targeted sales levels. These types of awards are generally based upon the sales achievement of at least a mid-level member of the sales force, and her or his down-line members. The down-line consists of those sales force members who have been directly added to the sales force by a given sales force member, as well as those added by her or his down-line member. In this manner, sales force members can build an extensive organization over time if they are committed to adding and developing their units. In addition to the commission, the positive performance of a unit may also entitle its leader to the use of a Company-provided vehicle and in some cases, the permanent awarding of a vehicle. Similar to the prize programs noted earlier, these programs generally offer varying levels of vehicles that are dependent upon performance.
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.
Promotional costs were:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Promotional costs | $ | 41.6 | $ | 51.9 | $ | 138.9 | $ | 184.6 | |||||||||||||||
Note 4: Incentive Compensation Plans
Stock Options
Stock option activity for 2022, under all of the Company's incentive plans, is summarized in the following table:
| Stock Options | Weighted Average Exercise Price Per Share | Aggregate Intrinsic Value (in millions) | |||||||||||||||
| Outstanding at December 25, 2021 | 3,233,672 | $ | 40.41 | $ | 12.6 | ||||||||||||
| Expired / Forfeited | (479,248) | 52.80 | |||||||||||||||
| Outstanding at September 24, 2022 | 2,754,424 | $ | 38.25 | $ | 5.0 | ||||||||||||
| Exercisable at September 24, 2022 | 1,754,424 | $ | 58.57 | $ | — | ||||||||||||
Market and Performance Awards, Restricted Stock and Restricted Stock Units
The Company also grants restricted stock, restricted stock units, performance-vested awards, and market-vested awards to employees and directors, which typically have initial vesting periods ranging from one year to three years. The activity for such awards in 2022 is summarized in the following table:
13
| Shares outstanding | Weighted average grant date fair value | ||||||||||
| Outstanding at December 25, 2021 | 4,500,211 | $ | 5.71 | ||||||||
| Time-vested shares granted | 1,209,268 | 11.49 | |||||||||
| Performance and market shares granted | 694,904 | 13.16 | |||||||||
| Performance share adjustments | (636,549) | 14.74 | |||||||||
| Vested | (502,767) | 9.89 | |||||||||
| Forfeited | (816,567) | 10.86 | |||||||||
| Outstanding at September 24, 2022 | 4,448,500 | $ | 5.77 | ||||||||
Stock-based compensation expense was:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Stock options | $ | 0.1 | $ | 0.1 | $ | 0.3 | $ | 0.4 | |||||||||||||||
| Time, performance, and market vested share awards | $ | (1.1) | $ | 2.2 | $ | 4.6 | $ | 5.8 | |||||||||||||||
Unrecognized stock-based compensation expense and the weighted average years to recognize the unrecognized stock-based compensation was as follows:
| As of | |||||
| (In millions of U.S. Dollars) | September 24, 2022 | ||||
| Unrecognized stock-based compensation expense | $ | 16.1 | |||
| Weighted average years to recognize the unrecognized stock-based compensation | 2.5 years | ||||
Under the Company's stock incentive programs, in certain jurisdictions, employees are allowed to use shares retained by the Company to satisfy minimum statutorily required withholding taxes.
Shares retained to fund withholding taxes and the value of shares retained to fund withholding taxes was as follows:
| 39 weeks ended | |||||||||||
| (In millions of U.S. Dollars, except share amounts) | September 24, 2022 | September 25, 2021 | |||||||||
| Shares retained to fund withholding taxes | 105,655 | 102,019 | |||||||||
| Value of shares retained to fund withholding taxes | $ | 1.9 | $ | 2.9 | |||||||
14
Note 5: Re-engineering Charges
Re-engineering charges are mainly related to the “Turnaround Plan” which was launched in mid-2020 under the new leadership. The key elements of the Turnaround Plan include: increasing the Company's right-sizing 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. Re-engineering charges are primarily related to severance costs, outside consulting services, and facility costs. The Company expects re-engineering expenses to continue this year and next year related to the Turnaround Plan. Total charges incurred to date related to the Turnaround Plan are approximately $56.0 million, including $48.7 million related to severance charges, and $7.3 million related to other charges, primarily consulting costs. The Company expects to incur $20.0 million to $30.0 million of Turnaround Plan charges in 2022. Turnaround Plan charges for 2023 have not yet been approved by Board of Directors.
Re-engineering charges were:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Turnaround plan | $ | 4.5 | $ | 1.6 | $ | 13.0 | $ | 8.2 | |||||||||||||||
| Other | — | 0.2 | — | 1.5 | |||||||||||||||||||
| Total re-engineering charges | $ | 4.5 | $ | 1.8 | $ | 13.0 | $ | 9.7 | |||||||||||||||
Total re-engineering charges by segments
Total re-engineering charges by segment were:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Asia Pacific | 0.4 | 0.5 | 0.7 | 2.1 | |||||||||||||||||||
| Europe | 0.7 | 1.1 | 5.2 | 4.0 | |||||||||||||||||||
| North America | — | 0.3 | — | 1.7 | |||||||||||||||||||
| South America | (0.1) | — | 0.2 | 0.2 | |||||||||||||||||||
| Corporate | 3.5 | (0.1) | 6.9 | 1.7 | |||||||||||||||||||
| Total re-engineering charges by segment | $ | 4.5 | $ | 1.8 | $ | 13.0 | $ | 9.7 | |||||||||||||||
The balance included in accrued liabilities related to the Turnaround Plan was:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Beginning balance | $ | 12.9 | $ | 18.7 | |||||||
| Provision | 13.0 | 14.8 | |||||||||
| Currency translation adjustment | (0.5) | (0.4) | |||||||||
| Cash expenditures: | |||||||||||
| Severance | (9.9) | (12.7) | |||||||||
| Other | (0.7) | (7.5) | |||||||||
| Ending balance | $ | 14.8 | $ | 12.9 | |||||||
15
Note 6: Income Taxes
The effective tax rate was:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | ||||||||||||||||||||
| Effective tax rate | 152.8 | % | (25.8) | % | 91.1 | % | 19.1 | % | |||||||||||||||
The change in the effective tax rate for the third quarter of 2022 as compared to the third quarter of 2021, was primarily due to:
•a non-recurring favorable impact from a tax policy change elected in the prior year related to a tax method change for certain direct and indirect costs of inventory and self-constructed assets under Internal Revenue Code (IRC) Section 263A,
•an unfavorable jurisdictional mix of earnings, significantly impacted by the marginal pre-tax earnings in the third quarter of 2022,
•negative impact of the Global Intangible Low Taxed Income (GILTI) regime, which results in a reduction of benefits on domestic losses,
•additional valuation allowance on disallowed interest expense due to the change in IRC Section 163(j) rules from EBITDA to EBIT. The Company maintains a full valuation allowance on deferred tax assets for interest carryforwards, and
•as described in Note 1: Summary of Significant Accounting Policies, the Company recorded an out-of-period adjustment to income tax expense during the third quarter of 2022 which resulted in a $1.3 million decrease in income from continuing operations. This error resulted from intercompany costs which were allocated to an incorrect legal entity resulting in a net understatement of income tax expense for the two entities.
On August 16, 2022, President Biden signed the Inflation Reduction Act (the “IRA) into law, which includes implementation of a new alternative minimum tax, a nondeductible excise tax on stock buybacks and significant tax incentives for energy and climate initiatives, among other provisions. The Company has evaluated the various provisions of the IRA and has determined there are no material impacts on its operations or reporting requirements.
There was no change in the third quarter of 2022 to the uncertain tax position reserves. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The Company is currently under examination or contesting proposed adjustments by various state and international tax authorities for fiscal years ranging from 2004 through 2020.
While the Company does not currently expect material changes, it is reasonably possible that the conclusion of, or new developments in, audits in foreign jurisdictions could impact the Company's assessment relative to the establishment of valuation allowances against certain existing deferred tax assets. An estimate of the range of possible changes cannot be made for remaining unrecognized tax benefits because of the significant number of jurisdictions in which the Company does business and the number of open tax periods.
Note 7: Earnings Per Share
Basic earnings (loss) per share - Total is calculated by dividing net income (loss) by the basic weighted-average shares. Diluted earnings (loss) per share - Total is calculated by also considering the impact of dilutive securities such as stock options, restricted shares, restricted stock units and performance share units on both net income (loss) and the basic weighted-average shares. In the third quarter of 2022, the dilutive impact of outstanding stock options, restrictive stock units, and performance and market based shares were excluded from dilutive shares as a result of the Company's (Loss) income from continuing operations as their inclusion would have been anti-dilutive.
16
The elements of the earnings per share computations were as follows:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars, except per share amounts) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| (Loss) income from continuing operations | $ | (3.8) | $ | 60.4 | $ | 3.2 | $ | 136.2 | |||||||||||||||
| Income (loss) on discontinued operations | $ | 20.6 | $ | (146.5) | $ | 14.7 | $ | (141.4) | |||||||||||||||
| Net income (loss) | $ | 16.8 | $ | (86.1) | $ | 17.9 | $ | (5.2) | |||||||||||||||
| Basic weighted-average shares | 44.5 | 49.4 | 46.0 | 49.5 | |||||||||||||||||||
| Effect of dilutive securities | — | 3.4 | 3.0 | 3.6 | |||||||||||||||||||
| Diluted weighted-average shares | 44.5 | 52.8 | 49.0 | 53.1 | |||||||||||||||||||
| Basic (loss) earnings from continuing operations - per share | $ | (0.09) | $ | 1.22 | $ | 0.07 | $ | 2.75 | |||||||||||||||
| Basic earnings (loss) from discontinued operations - per share | $ | 0.47 | $ | (2.97) | $ | 0.32 | $ | (2.85) | |||||||||||||||
| Basic earnings (loss) per share - Total | $ | 0.38 | $ | (1.75) | $ | 0.39 | $ | (0.10) | |||||||||||||||
| Diluted (loss) earnings from continuing operations - per share | $ | (0.09) | $ | 1.14 | $ | 0.07 | $ | 2.56 | |||||||||||||||
| Diluted earnings (loss) from discontinued operations - per share | $ | 0.47 | $ | (2.77) | $ | 0.30 | $ | (2.66) | |||||||||||||||
| Diluted earnings (loss) per share - Total | $ | 0.38 | $ | (1.63) | $ | 0.37 | $ | (0.10) | |||||||||||||||
| Excluded anti-dilutive shares | 2.5 | 2.4 | 2.6 | 2.6 | |||||||||||||||||||
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Note 8: Accumulated Other Comprehensive Loss
The change in accumulated other comprehensive loss was as follows:
| (In millions of U.S. Dollars, net of tax) | Foreign Currency Items (a), (d) | Cash Flow Hedges (b) | Pension and Other Post-retirement Items (c) | Total | |||||||||||||||||||
| Balance at December 25, 2021 | $ | (664.5) | $ | 0.2 | $ | (23.6) | $ | (687.9) | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (17.5) | 0.5 | 0.4 | (16.6) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 102.6 | (0.6) | 0.4 | 102.4 | |||||||||||||||||||
| Other comprehensive income (loss) | 85.1 | (0.1) | 0.8 | 85.8 | |||||||||||||||||||
| Balance at September 24, 2022 | $ | (579.4) | $ | 0.1 | $ | (22.8) | $ | (602.1) | |||||||||||||||
____________________
(a) Foreign currency amounts reclassified from accumulated other comprehensive loss impact the other expense, net, other than amounts related to the disposal of House of Fuller Mexico and Nutrimetics described in (d) below.
(b) Cash flow hedge amounts reclassified from accumulated other comprehensive loss impact the cost of products sold line item in the Condensed Consolidated Statements of Income. See additional information for cash flow hedges at Note 14: Derivative Financial Instruments and Hedging Activities.
(c) See additional information for pension and other post-retirement items at Note 17: Retirement Benefit Plans.
(d) Ending balance reflects $132.7 million of accumulated foreign currency losses that were reclassified out as a result of the disposal of the House of Fuller Mexico entity. The loss was fully reserved and recorded as a loss in discontinued operations in 2021. This is partially offset by $30.1 million of accumulated foreign currency gains that were reclassified as a result of the disposal of Nutrimetics. For more information see Note 13: Held for Sale Assets and Discontinued Operations.
| (In millions of U.S. Dollars, net of tax) | Foreign Currency Items (a) | Cash Flow Hedges (b) | Pension and Other Post-retirement Items (c) | Total | |||||||||||||||||||
| Balance at December 26, 2020 | $ | (648.4) | $ | 0.2 | $ | (37.7) | $ | (685.9) | |||||||||||||||
| Other comprehensive income before reclassifications | 4.4 | 0.5 | 0.4 | 5.3 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | (0.2) | 2.7 | 2.5 | |||||||||||||||||||
| Other comprehensive income | 4.4 | 0.3 | 3.1 | 7.8 | |||||||||||||||||||
| Balance at September 25, 2021 | $ | (644.0) | $ | 0.5 | $ | (34.6) | $ | (678.1) | |||||||||||||||
____________________
(a) Foreign currency amounts reclassified from accumulated other comprehensive income (loss) impact the other expense, net line item in the Condensed Consolidated Statements of Income.
(b) Cash flow hedge amounts reclassified from accumulated other comprehensive income (loss) impact the cost of products sold line item in the Condensed Consolidated Statements of Income (Loss). See additional information for cash flow hedges at Note 14: Derivative Financial Instruments and Hedging Activities.
(c) See additional information for pension and other post-retirement items at Note 17: Retirement Benefit Plans.
Amounts reclassified from accumulated other comprehensive loss that related to cash flow hedges consisted of:
| 39 weeks ended | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | |||||||||
| Cash flow hedge (gains) losses | $ | (0.8) | $ | 0.2 | |||||||
| Tax provision | 0.2 | — | |||||||||
| Amounts reclassified from accumulated other comprehensive loss for cash flow hedges | $ | (0.6) | $ | 0.2 | |||||||
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Amounts reclassified from accumulated other comprehensive loss related to pension and other post-retirement items consisted of:
| 39 weeks ended | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | |||||||||
| Prior service (benefit) costs | $ | (0.5) | $ | 0.4 | |||||||
| Settlements gains | — | (1.4) | |||||||||
| Actuarial losses (gains) | 1.2 | (2.6) | |||||||||
| Tax (benefit) provision | (0.3) | 0.9 | |||||||||
| Amounts reclassified from accumulated other comprehensive loss related to pension and other post-retirement items | $ | 0.4 | $ | (2.7) | |||||||
Note 9: Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents include time deposits, certificates of deposit, or similar instruments. Any funds that the Company is legally restricted to withdraw, including compensating balances, are classified as restricted cash. Restricted cash is recorded in prepaid expenses and other current assets and in the other assets, net line items in the Condensed Consolidated Balance Sheet. A reconciliation of the Company’s cash and cash equivalents in the Condensed Consolidated Balance Sheet to cash, cash equivalents, and restricted cash at end of period in the Condensed Consolidated Statement of Cash Flows is as follows:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Cash and cash equivalents | $ | 102.9 | $ | 267.2 | |||||||
| Restricted cash | 8.7 | 6.6 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 111.6 | $ | 273.8 | |||||||
Note 10: Accounts Receivable
The accounts receivable and allowance for credit losses balance was:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Accounts receivable | $ | 93.6 | $ | 117.3 | |||||||
| Allowance for credit losses | (21.7) | (31.1) | |||||||||
Accounts receivable, net | $ | 71.9 | $ | 86.2 | |||||||
Note 11: Inventories
Inventories balance net of any inventory allowance was:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Finished goods | $ | 183.2 | $ | 181.2 | |||||||
| Work in process | 35.8 | 28.4 | |||||||||
| Raw materials and supplies | 30.7 | 22.6 | |||||||||
| Inventory, net | $ | 249.7 | $ | 232.2 | |||||||
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Note 12: Long-Term Receivables
The long-term receivables and allowance for long-term receivables balance was as follows:
| As of | |||||
| (In millions of U.S. Dollars) | September 24, 2022 | ||||
| Long-term receivables, gross | $ | 27.7 | |||
| Beginning balance for allowance for long-term receivables | $ | (25.6) | |||
| Write-offs | — | ||||
| Recoveries | 0.1 | ||||
| Provision | (1.7) | ||||
| Currency translation adjustment | 3.0 | ||||
| Allowance for long-term receivables | $ | (24.2) | |||
| Long-term receivables, net | $ | 3.5 | |||
As of December 25, 2021, gross long-term receivables was $33.3 million and the associated allowance was $25.6 million.
Majority of long-term receivables from both active and inactive customers that are past due were reserved through the Company's allowance for credit losses. Long-term receivables, gross that were past due were:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Long-term receivables past due | $ | 24.1 | $ | 29.2 | |||||||
Note 13: Held for Sale Assets and Discontinued Operations
Discontinued operations include certain key brands of the Company’s beauty business including Avroy Shlain, House of Fuller, Nutrimetics, and Nuvo. Avroy Shlain was sold in the first quarter of 2021 and House of Fuller Mexico was sold on May 4, 2022. On July 1, 2022 the Company closed on the sale of its Nutrimetics beauty business. The Company is currently in discussions with a potential buyer for Nuvo with the intention of having a deal signed and completed in the fourth quarter of 2022.
In the third quarter of 2021, the Company had determined that these dispositions represented a strategic shift that would have a major effect on its results of operations. As such, reflected below are the results of the beauty business as discontinued operations including all comparative prior period information in these Condensed Consolidated Financial Statements. Certain costs previously allocated to the beauty business for segment reporting purposes do not qualify for classification within discontinued operations and have been reallocated to continuing operations. For the year ended December 25, 2021, the Company recognized a loss on the classification of held for sale assets of House Fuller, Nutrimetics, and Nuvo of $133.5 million based on total expected proceeds less costs to sell. The loss primarily related to currency translation losses of $140.9 million which was in accumulated other comprehensive income. In connection with the loss, the Company recorded a contra-asset and liability on the balance sheet. Approximately $133.0 million of currency translation losses and $30.1 million of currency translation gains in accumulated other comprehensive income and the equivalent amount of the contra-asset liability were derecognized and removed from the balance sheet in the second quarter of 2022 and third quarter of 2022 upon the completion of the sale of House of Fuller Mexico and Nutrimetics, respectively.
20
Financial Information of Discontinued Operations
The results of operations are presented as discontinued operations as summarized below:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Net sales | $ | 3.1 | $ | 45.2 | $ | 62.7 | $ | 139.7 | |||||||||||||||
| Cost of products sold | 1.3 | 16.9 | 24.4 | 51.6 | |||||||||||||||||||
| Gross profit | $ | 1.8 | $ | 28.3 | $ | 38.3 | $ | 88.1 | |||||||||||||||
| Selling and administrative expenses | 2.6 | 23.5 | 43.6 | 77.9 | |||||||||||||||||||
| Re-engineering charges | — | 0.1 | 0.4 | 0.1 | |||||||||||||||||||
| Other (income) expense ,net | (0.1) | 0.4 | 0.5 | 2.0 | |||||||||||||||||||
| (Loss) income from operations of discontinued operations before tax | $ | (0.7) | $ | 4.3 | $ | (6.2) | $ | 8.1 | |||||||||||||||
| Gain (loss) on disposal of assets | 22.6 | (148.1) | $ | 21.4 | $ | (147.1) | |||||||||||||||||
| Income (loss) from discontinued operations before income taxes | $ | 21.9 | $ | (143.8) | $ | 15.2 | $ | (139.0) | |||||||||||||||
| Provision for income taxes | 1.3 | 2.7 | 0.5 | 2.4 | |||||||||||||||||||
| Net Income (loss) from discontinued operations | $ | 20.6 | $ | (146.5) | $ | 14.7 | $ | (141.4) | |||||||||||||||
The carrying amount of major classes of assets and liabilities classified as held for sale that were included in discontinued operations at September 24, 2022 and December 25, 2021 are shown in the table below.
21
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | — | $ | 0.2 | |||||||
| Accounts receivable, net | 2.9 | 14.9 | |||||||||
| Inventory, net | 4.0 | 25.8 | |||||||||
| Non-trade accounts receivable, net | — | 2.2 | |||||||||
| Prepaid expenses and other current assets | 0.5 | 1.5 | |||||||||
| Accumulated translation adjustment losses, current | (7.4) | (36.7) | |||||||||
| Total assets of discontinued operations - current | $ | — | $ | 7.9 | |||||||
| Deferred tax assets, net | — | 6.2 | |||||||||
| Property, plant and equipment, net | 0.8 | 7.8 | |||||||||
| Operating lease assets | 1.8 | 11.1 | |||||||||
| Trade names, net | — | 6.7 | |||||||||
| Goodwill | 1.9 | 1.7 | |||||||||
| Other assets, net | — | 2.7 | |||||||||
| Accumulated translation adjustment losses | (4.5) | (17.7) | |||||||||
| Assets held for sale | $ | — | $ | 18.5 | |||||||
| Total assets of discontinued operations | $ | — | $ | 26.4 | |||||||
| Liabilities | |||||||||||
| Accounts payable | $ | 1.3 | $ | 17.0 | |||||||
| Accrued liabilities | 1.5 | 30.5 | |||||||||
| Accumulated translation adjustment losses, current | 3.9 | 88.3 | |||||||||
| Total liabilities of discontinued operations - current | $ | 6.7 | $ | 135.8 | |||||||
| Operating lease liabilities | 1.0 | 8.6 | |||||||||
| Other liabilities | — | 9.2 | |||||||||
| Liabilities held for sale | $ | 1.0 | $ | 17.8 | |||||||
| Total liabilities of discontinued operations | $ | 7.7 | $ | 153.6 | |||||||
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Note 14: Derivative Financial Instruments and Hedging Activities
The Company is exposed to fluctuations in foreign currency exchange rates on the earnings, cash flows, and financial position of its international operations. Although this currency risk is partially mitigated by the natural hedge arising from the Company’s local manufacturing in many markets, a strengthening United States Dollar generally has a negative impact on the Company's financial results. In response, the Company uses financial instruments to hedge certain of its exposures and to manage the foreign exchange impact to its financial statements. At its inception, a derivative financial instrument is designated as a fair value, cash flow, or net investment hedge.
Fair Value Hedges
Fair value hedges are entered into with financial instruments such as forward contracts, with the objective of limiting exposure to certain foreign exchange risks primarily associated with accounts payable and non-permanent intercompany transactions. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current earnings. The change in fair value of hedged items results in adjustments to their carrying amounts as follows:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| (Loss) income on fair value hedges | $ | (0.2) | $ | 1.8 | $ | (1.8) | $ | 4.1 | |||||||||||||||
Cash Flow Hedges
The Company also uses derivative financial instruments to hedge foreign currency exposures resulting from certain forecasted transactions or purchases and classifies these as cash flow hedges. The majority of cash flow hedge contracts that the Company enters into relate to inventory purchases or intercompany dividends. At initiation, the Company’s cash flow hedge contracts are generally for periods ranging from one month to fifteen months. The portion of the gain or loss included in the assessment of hedge effectiveness is recorded in other comprehensive (loss) income and is reclassified into earnings through the same line item as the transaction being hedged at the time the hedged transaction impacts earnings. As such, the balance at the end of the current reporting period in other comprehensive (loss) income, related to cash flow hedges, will generally be reclassified within the next twelve months. The associated asset or liability on the open hedges is recorded in other current assets or accrued liabilities, as applicable. Changes in fair value, net of tax recorded in, or reclassified into, other comprehensive (loss) income was as follows:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Pre-tax (loss) income recorded in other comprehensive (loss) income | $ | (0.5) | $ | 0.2 | $ | 1.1 | $ | 0.6 | |||||||||||||||
| Pre-tax (loss) income reclassified into income from other comprehensive (loss) income | $ | (0.7) | $ | — | $ | 0.9 | $ | — | |||||||||||||||
Net Investment Hedges
The Company uses derivative financial instruments, such as forward contracts and certain Euro denominated intercompany borrowings to hedge a portion of its net equity investment in international operations and designates these as net investment hedges. Changes in the value of these financial instruments are included in foreign currency translation adjustments within accumulated other comprehensive loss. Due to the permanent nature of the investments, the Company does not anticipate reclassifying any portion of these amounts to the income statement in the next twelve months. Changes in fair value, net of tax, recorded in other comprehensive (loss) income and the pre-tax income on forward points was as follows:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Pre-tax income (loss) recorded in other comprehensive (loss) income | $ | 11.7 | $ | (4.0) | $ | 23.2 | $ | (4.9) | |||||||||||||||
23
Notional Value
The Company considers the total notional value of its forward contracts as the best measure of the volume of derivative transactions. The notional value of forward contracts to purchase and sell currencies was:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Notional value of forward contracts to purchase currencies | $ | 171.0 | $ | 96.4 | |||||||
| Notional value of forward contracts to sell currencies | $ | 170.3 | $ | 99.2 | |||||||
The notional value of largest outstanding positions to purchase and sell currencies was:
| As of | |||||
| (In millions of U.S. Dollars) | September 24, 2022 | ||||
| Purchase Indonesian Rupiah | $ | 89.3 | |||
| Purchase Mexican Pesos | $ | 53.8 | |||
| Purchase Euros | $ | 11.4 | |||
| Sell Swiss Francs | $ | 57.3 | |||
| As of | |||||
| (In millions of U.S. Dollars) | December 25, 2021 | ||||
| Purchase Japanese Yen | $ | 14.3 | |||
| Purchase United States Dollars | $ | 63.1 | |||
| Sell Swiss Francs | $ | 32.6 | |||
| Sell Euros | $ | 35.7 | |||
Fair Value Measurement
Fair values of the Company's derivative positions were determined based on third party quotations (Level 2 fair value measurement). The following table summarizes the Company's derivative positions, which are the only assets and liabilities recorded at fair value on a recurring basis:
24
| As of | |||||||||||||||||
Derivatives designated as hedging instruments (in millions) | Balance sheet location | September 24, 2022 | December 25, 2021 | ||||||||||||||
| Derivative assets: | |||||||||||||||||
| Foreign exchange contracts | Non-trade accounts receivable, net | $ | 1.3 | $ | 8.5 | ||||||||||||
| Derivative liabilities: | |||||||||||||||||
| Foreign exchange contracts | Accrued liabilities | $ | (1.3) | $ | (7.3) | ||||||||||||
The Company's theoretical credit risk for each foreign exchange contract is its replacement cost, but management believes that the risk of incurring credit losses is remote and such losses, if any, would not be material. The Company is also exposed to market risk on its derivative instruments due to potential changes in foreign exchange rates; however, such market risk would be fully offset by changes in the valuation of the underlying items being hedged. For all outstanding derivative instruments, the net accrued gain or loss was recorded either in non-trade accounts receivable, net or accrued liabilities, depending upon the net position of the individual contracts. The gain or loss amounts change based upon the Company's outstanding exposure to fair value fluctuations. The Company has an accounting policy to present derivative assets and derivative liabilities on a gross basis. Including the effect of master netting arrangements that provide a right of offset upon default of the counterparty, the Company’s net derivative position amounts were:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Net derivative asset | $ | 0.1 | $ | 1.2 | |||||||
Note 15: Deferred Revenue
Deferred revenue is recorded in the accrued liabilities line item in the Condensed Consolidated Balance Sheets. Deferred revenue balance, which was primarily related to payments received in advance for orders not yet shipped, was as follows:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Deferred revenue | $ | 8.2 | $ | 4.5 | |||||||
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Note 16: Debt
The debt portfolio consisted of:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Term loan | $ | 369.2 | $ | 398.5 | |||||||
| Revolver facility | 332.8 | 312.0 | |||||||||
| Finance leases | — | 1.8 | |||||||||
| Line of credit | 2.0 | — | |||||||||
| Unamortized debt issuance costs | (3.2) | (2.9) | |||||||||
| Total debt | $ | 700.8 | $ | 709.4 | |||||||
| Current debt and finance lease obligations | $ | 13.0 | $ | 8.9 | |||||||
| Long-term debt and finance lease obligations | 687.8 | 700.5 | |||||||||
| Total debt | $ | 700.8 | $ | 709.4 | |||||||
Credit Agreement
On November 23, 2021, the Company and its wholly owned subsidiaries, Tupperware Products AG, Administradora Dart, S. de R.L. de C.V., and Tupperware Brands Asia Pacific Pte. Ltd. (the “Subsidiary Borrowers”), entered into a credit agreement (as amended from time to time, the “Credit Agreement”) with Wells Fargo Bank, N.A. as administrative agent (the “Administrative Agent”), swingline lender, and issuing bank; Wells Fargo Securities, LLC, BMO Capital Markets Corp., Fifth Third Bank, and Truist Securities Inc. as joint lead arrangers and joint bookrunners; and BMO Harris Bank, N.A, Fifth Third Bank, National Association, and Truist Bank, as syndication agents. The Credit Agreement provides for (i) a revolving credit facility (“Revolver Facility”) in an aggregate principal amount available to the Company and the Subsidiary Borrowers of up to $480.0 million, (ii) a term facility available to the Company in U.S. dollars in an aggregate principal amount of $200.0 million (“USD Term Loan”) and (iii) a term facility available to the Company or the Swiss subsidiary borrower in Euros in an aggregate principal amount of €176.0 million, (“Euro Term Loan”). The USD Term Loan and Euro Term Loan are collectively defined as the “Term Loan”.
The Revolver Facility is divided into (a) global tranche, Mexican tranche, and Singaporean tranche commitments, with the aggregate amount of borrowings under each tranche not to exceed $450.0 million, $15.0 million, and $15.0 million, respectively, (b) a global tranche letter of credit facility, available up to $50.0 million of the amount of the Revolver Facility, and (c) a global tranche swingline facility, available up to $100.0 million of the amount of the Revolver Facility. Each of such tranches is available to the Company and the applicable Subsidiary Borrowers, with extensions of credit to the Subsidiary Borrowers not to exceed $325.0 million in the aggregate at any time outstanding. The Company is permitted to increase, subject to certain conditions, the Revolver Facility, the USD Term Loan and/or the Euro Term Loan so long as (i) the Revolver Facility is increased by no more than $250.0 million (for a maximum aggregate Revolver Facility of $730.0 million) and (ii) all facilities are increased by no more than $250.0 million, plus certain repayments of the loans under the Credit Agreement with Wells Fargo Bank, N.A., and the other parties, plus an unlimited amount provided that the incurrence of such amount does not cause the Consolidated Net Leverage Ratio (as defined in the Credit Agreement and which shall be calculated net of up to $100.0 million of unrestricted cash and cash equivalents (“Cash Netting”)) for the four (4) consecutive fiscal quarters then most recently ended to exceed 3.00 to 1.00.
Each of the Revolver Facility, the USD Term Loan, and the Euro Term Loan will mature on November 23, 2026. The obligations under the Credit Agreement are (a) guaranteed by (i) with respect to the Subsidiary Borrowers, the Parent Borrower and (ii) with respect to both the Parent Borrower and the Subsidiary Borrowers, each existing and subsequently acquired or organized direct or indirect material wholly-owned U.S. subsidiary of the Parent Borrower (each a “Guarantor”) and (b) secured by substantially all tangible and intangible personal property of the Parent Borrower and each Guarantor and all products, profits and proceeds of the foregoing, in each case, subject to certain exceptions.
The Credit Agreement contains customary affirmative and negative covenants, including, among other things, Consolidated Net Leverage Ratio and Consolidated Interest Coverage Ratio requirements, 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 Credit Agreement also 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;
26
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. The Credit Agreement also includes an acceleration clause which permits the lenders to accelerate the maturity date under certain circumstances including material adverse effects on the Company's financial status.
The Company has prepayment options, as well as mandatory quarterly prepayments that started on March 31, 2022.
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. Consolidated Net Leverage Ratio is the ratio of (a) consolidated funded indebtedness minus up to $100.0 million of unrestricted cash and cash equivalents on the last day of each measurement period to (b) consolidated EBITDA for such measurement period, and Consolidated Interest Coverage Ratio is the ratio of (x) consolidated EBITDA on the last day of each measurement period to (y) the Consolidated Interest Charges for such measurement period.
Under the Credit Agreement, the Company shall not permit as of the last day of any fiscal quarter of the Company (a) the Consolidated Net Leverage Ratio for the four (4) consecutive fiscal quarters then most recently ended to be greater than or equal to 3.75 to 1.00 (subject to Cash Netting) which may be increased two times during the term of the Credit Agreement by 0.25 to 1.00 in connection with any acquisition permitted by the Credit Agreement having aggregate cash consideration in excess of $75 million or (b) the Consolidated Interest Coverage Ratio for the four (4) consecutive fiscal quarters then ended to be less than or equal to 3.00 to 1.00.
Considering the current global market volatility, inflationary cost pressures primarily in China and Europe, and a change in the Company’s liquidity year-to-date, effective August 1, 2022, the Company entered into an agreement (the “First Amendment to Credit Agreement”) to amend certain provisions and covenants to, among other things, (i) allow for a temporary higher maximum total Net Leverage Ratio of 4.5x in the third quarter of 2022, 4.25x in the fourth quarter of 2022 and first quarter of 2023, and 3.75x in the second quarter of 2023 and thereafter to allow for additional operating flexibility to execute fully on the Company’s Turnaround Plan; (ii) introduce two additional pricing levels for total Net Leverage Ratios of 3.0x to 3.5x, and for 3.5x and higher, with a provision to revert to pricing per the original agreement following achievement of a total Net Leverage Ratio of 2.75x or less for two consecutive quarters following the covenant modification period; (iii) replace LIBOR with Secured Overnight Financing Rate (“SOFR”) as the reference interest rate on the entire facility, with a 0% SOFR floor and credit spread adjustments across one-, three-, and six-month tenors.
As of September 24, 2022, the Company had a weighted average interest rate of 4.39% with a base rate spread of 275 basis points on SOFR-based borrowings under the Credit Agreement. Interest is payable in arrears and at maturity. As of September 24, 2022, the Company is in compliance with the financial covenants in the First Amendment to Credit Agreement, with a Consolidated Net Leverage Ratio of 4.17x and a Consolidated Interest Coverage Ratio of 5.93x. As of December 25, 2021, the Company had a Consolidated Net Leverage Ratio of 2.11x and a Consolidated Interest Coverage Ratio of 8.23x.
The Company has experienced volatility in earnings during the nine months ended September 24, 2022 as it executes the Turnaround Plan and responds to the unpredictability in the market related to recessionary concerns, inflation and COVID lockdowns. As of September 24, 2022, the Company was in compliance with its financial covenants in the First Amendment to the Credit Agreement. Due to the volatility in the Company’s earnings and progressive tightening of the financial covenants in the First Amendment to the Credit Agreement, it is probable that the Company will not be able to maintain compliance with the covenants in its Credit Agreement, including the existing Consolidated Net Leverage Ratio covenant, for the next twelve months. The Company is in negotiations with its lenders to amend the Credit Agreement; however, the Company’s ability to amend its covenants, obtain a waiver or otherwise refinance its debt, as well as the timing and terms of any such amendment or refinancing, are dependent upon a number of factors, and there can be no assurance that the Company will be successful in such efforts.
If the Company is unable to comply with its covenants, including the Consolidated Net Leverage Ratio covenant, then the Credit Agreement lenders could take action to cause amounts due under the Credit Agreement to become due and payable unless the Company is able to amend such covenants, obtain a waiver or otherwise refinance its debt. If the Company is unable to access future borrowings or is required to pay amounts due under its Credit Agreement prior to their normal maturity dates, this would have a material impact to its financial position. Accordingly, the Company believes that there is substantial doubt about its ability to continue as a going concern for the twelve-month period following the date of this filing.
The Company is undertaking expense reduction and cash savings initiatives as part of the Turnaround Plan to help continue to pay down its debt and reduce the Consolidated Net Leverage Ratio. The expense reduction and cash saving initiatives include streamlining facilities, managing working capital, reducing capital expenditures, and reducing overall selling, general and administrative expenses.
The Company routinely increases its Revolver Facility 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 on the value of its cash and debt during each quarter than would relate solely to the quarter end balances.
27
At September 24, 2022, the Company had $135.3 million of unused lines of credit, including $131.3 million under the committed, secured Credit Agreement, and $4.0 million available under various uncommitted lines around the world.
Note 17: Retirement Benefit Plans
Components of net periodic cost (benefit) for the third quarters ended September 24, 2022 and September 25, 2021 were as follows:
| Pension benefits | Post-retirement benefits | ||||||||||||||||||||||
| 13 weeks ended | 13 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Service cost | $ | 1.0 | $ | 1.7 | $ | — | $ | — | |||||||||||||||
| Interest cost | 0.6 | 1.3 | 0.1 | — | |||||||||||||||||||
| Return on plan assets | (0.5) | (0.8) | — | — | |||||||||||||||||||
| Settlement/curtailment | — | 0.2 | — | — | |||||||||||||||||||
| Net amortization | 0.5 | 0.9 | (0.2) | (0.1) | |||||||||||||||||||
| Net periodic cost (benefit) | $ | 1.6 | $ | 3.3 | $ | (0.1) | $ | (0.1) | |||||||||||||||
| Pension benefits | Post-retirement benefits | ||||||||||||||||||||||
| 39 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Service cost | $ | 3.3 | $ | 5.3 | $ | — | $ | 0.1 | |||||||||||||||
| Interest cost | 2.0 | 3.0 | 0.2 | 0.2 | |||||||||||||||||||
| Return on plan assets | (1.5) | (2.5) | — | — | |||||||||||||||||||
| Settlement/curtailment | — | 1.4 | — | — | |||||||||||||||||||
| Net amortization | 1.2 | 2.6 | (0.5) | (0.4) | |||||||||||||||||||
| Net periodic cost (benefit) | $ | 5.0 | $ | 9.8 | $ | (0.3) | $ | (0.1) | |||||||||||||||
During the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively, approximately $0.7 million and $3.6 million of pre-tax losses were reclassified from other comprehensive (loss) income to a component of net periodic (benefit) cost, respectively. As they relate to non-U.S. plans, the Company uses current exchange rates to make these reclassifications. The impact of exchange rate fluctuations is included on the net amortization line of the table above. The Company included $1.4 million and $4.3 million related to the components of net periodic (benefit) cost, excluding service cost, in other expense, net in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively.
Note 18: Commitments and Contingencies
The Company and certain subsidiaries are involved in litigation and various legal matters that are being defended and handled in the ordinary course of business. Included among these matters are environmental issues. The Company does not include estimated future legal costs in accruals recorded related to these matters. The Company believes that it is remote that the Company's contingencies will have a material adverse effect on its financial position, results of operations or cash flow.
Mondelez International, Inc., which was formerly affiliated with Premark International, Inc., the Company's former parent, has assumed any liabilities arising out of certain divested or discontinued businesses. The liabilities assumed include matters alleging product liability, environmental liability, and infringement of patents.
In February 2020, putative stockholder class actions were filed against the Company and certain current and former officers and directors in the United States District Court for the Central District of California and in the United States District Court for the Middle District of Florida. The actions were consolidated in the United States District Court for the Middle District of Florida, and a lead plaintiff was appointed. On July 31, 2020, the lead plaintiff filed a consolidated amended complaint, which alleges that statements in public filings between January 31, 2018 and February 24, 2020 (the “potential class period”) regarding the Company’s disclosure of controls and procedures, as well as the need for an amendment of its credit facility, violated Section 10(b) and 20(a) of the Securities
28
Act of 1934. The lead plaintiff seeks to represent a class of stockholders who purchased the Company’s stock during the potential class period and demand unspecified monetary damages. The Company's motion to dismiss the complaint was granted on January 25, 2021, but the court permitted the lead plaintiff to file an amended complaint, which the plaintiff filed on February 16, 2021. The Company filed a motion to dismiss the second amended complaint on April 2, 2021. The Court granted the Company’s motion to dismiss the second amended complaint on August 9, 2021, but again permitted the lead plaintiff to file an amended complaint, which the plaintiff filed on August 30, 2021. The Company filed a motion to dismiss the third amended complaint on October 14, 2021, and on February 4, 2022, the Court dismissed the third amended complaint with prejudice. The plaintiff filed an appeal on April 11, 2022, which was fully briefed with the 11th Circuit Court of Appeals as of June 1, 2022. The 11th Circuit Court of Appeals has scheduled oral argument for the appeal in December 2022. The Company is unable at this time to determine whether the outcome of these actions would have a material impact on its results of operations, financial condition or cash flows.
Additionally, several putative stockholders filed stockholder derivative complaints in the United States District Court for the Middle District of Florida against certain of the Company’s current and former officers and directors. The cases were consolidated, and plaintiffs filed a consolidated amended complaint on August 5, 2020. The consolidated amended complaint asserts claims against certain current and former officers and directors for breach of fiduciary duty, unjust enrichment, and contribution for violations of the securities laws based on allegations that the officers and directors allowed the Company to make false or misleading statements in violation of the securities laws. The Court stayed proceedings in this action pending resolution of the appeal of the third motion to dismiss in the putative stockholder class action. A similar stockholder derivative complaint was filed in the Ninth Judicial Circuit Court of Florida. The parties reached an agreement to stay this action pending the resolution of the appeal of the third motion to dismiss in the putative stockholder class action. The Company is unable at this time to determine whether the outcome of these actions would have a material impact on its results of operations, financial condition or cash flows.
In June 2022, a putative stockholder class action was filed against the Company and certain current and former officers in the United States District Court for the Southern District of New York. The complaint alleges that statements made in public filings between November 3, 2021 and May 3, 2022 (the “potential class period”) regarding the Company’s earnings and sales performance and full year 2022 guidance violated Sections 10(b) and 20(a) of the Securities Act of 1934. The plaintiff seeks to represent a class of stockholders who purchased the Company’s shares during the potential class period and demands unspecified monetary damages. The plaintiff intends to file an amended complaint in late November 2022. The Company is unable at this time to determine whether the outcome of this action would have a material impact on its results of operations, financial condition or cash flows.
In August 2022, a stockholder derivative complaint was filed in Florida state court against certain of the Company’s current and former officers and directors. The derivative complaint asserts claims against the former officers and directors for breach of fiduciary duty, unjust enrichment, and waste of corporate assets based on allegations that, among other things, the officers and directors allowed the Company to make false or misleading statements in violation of the securities laws. The Company is unable at this time to determine whether the outcome of these actions would have a material impact on its results of operations, financial condition or cash flows.
The SEC was conducting an inquiry into the Company’s accounting practices relating to its previously-owned Fuller Mexico business and its Tupperware Mexico business. On September 29, 2022, the SEC issued a final order approving the settlement of the inquiry. Under the terms of the order, the Company neither admits nor denies the SEC's findings and paid an immaterial civil penalty, which was fully accrued in the second quarter of 2022.
Leases
Leases, including the minimum rental commitments for 2023, primarily are for automobiles that generally have a lease term of 1 year to 4 years, with the remaining leases related to office, manufacturing and distribution space. It is common for lease agreements to contain various provisions for items such as step rent or other escalation clauses and lease concessions, which may offer a period of no rent payment. These types of items are considered by the Company, and are recorded into expense on a straight-line basis over the minimum lease terms for operating leases. There are no lease agreements containing material renewal options. Certain leases require the Company to pay property taxes, insurance and routine maintenance.
Note 19: Fair Value Measurements
The Company applies the applicable accounting guidance for fair value measurements. This guidance provides the definition of fair value, describes the method used to appropriately measure fair value in accordance with generally accepted accounting principles, and outlines fair value disclosure requirements.
29
The fair value hierarchy established under this guidance prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
•Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted prices, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
•Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value from the perspective of a market participant.
Due to their short maturities or their insignificance, the carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, net, accounts payable, accrued liabilities, lines of credit, and leased assets and liabilities approximated their fair values at September 24, 2022 and December 25, 2021.
The term loan and revolver facility are classified as Level 2 liabilities and are estimated using a market approach.
The fair value of the term loan and revolver facility were as follows:
| As of | As of | ||||||||||||||||||||||
| September 24, 2022 | December 25, 2021 | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Term loan | $ | 369.2 | $ | 347.2 | $ | 398.5 | $ | 398.5 | |||||||||||||||
| Revolver facility | 332.8 | 312.9 | 312.0 | 312.0 | |||||||||||||||||||
| Total | $ | 702.0 | $ | 660.1 | $ | 710.5 | $ | 710.5 | |||||||||||||||
The Company does not have any recurring Level 3 fair value measurements.
See Note 14: Derivative Financial Instruments and Hedging Activities for discussion of the Company’s derivative financial instruments and related fair value measurements.
30
Note 20: Segment Information
The Company manufactures and distributes a broad portfolio of products, primarily through the sales force. Certain operating segments have been aggregated based upon consistency of economic substance, geography, products, production process, class of customers, and distribution method. The Company's reportable segments primarily sell design-centric preparation, storage, and serving solutions for the kitchen and home under the Tupperware brand name.
Segment details were as follows:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Asia Pacific | $ | 85.4 | $ | 112.9 | $ | 273.9 | $ | 343.8 | |||||||||||||||
| Europe | 60.8 | 91.3 | 222.6 | 326.8 | |||||||||||||||||||
| North America | 86.3 | 103.1 | 292.4 | 343.0 | |||||||||||||||||||
| South America | 70.3 | 69.6 | 202.4 | 193.8 | |||||||||||||||||||
| Total net sales | $ | 302.8 | $ | 376.9 | $ | 991.3 | $ | 1,207.4 | |||||||||||||||
| Segment profit: | |||||||||||||||||||||||
| Asia Pacific | $ | 11.1 | $ | 25.7 | $ | 35.3 | $ | 81.9 | |||||||||||||||
| Europe | 2.0 | 14.7 | 14.3 | 66.5 | |||||||||||||||||||
| North America | 5.7 | 10.5 | 32.3 | 42.6 | |||||||||||||||||||
| South America | 14.3 | 13.5 | 38.9 | 46.8 | |||||||||||||||||||
| Total Segment Profit | 33.1 | 64.4 | 120.8 | 237.8 | |||||||||||||||||||
| Unallocated expenses | 12.1 | 7.2 | 47.4 | 30.9 | |||||||||||||||||||
Re-engineering charges (a) | 4.5 | 1.8 | 13.0 | 9.7 | |||||||||||||||||||
| Loss (gain) on disposal of assets | 0.7 | (1.7) | 2.3 | (8.9) | |||||||||||||||||||
| Loss on debt extinguishment | — | — | — | 8.1 | |||||||||||||||||||
| Interest expense | 8.3 | 8.2 | 18.9 | 29.7 | |||||||||||||||||||
| Interest income | (1.3) | (0.3) | (3.2) | (0.9) | |||||||||||||||||||
| Other expense, net | 1.6 | 1.2 | 6.6 | 0.8 | |||||||||||||||||||
| Income from continuing operations before income taxes | $ | 7.2 | $ | 48.0 | $ | 35.8 | $ | 168.4 | |||||||||||||||
____________________
(a) See Note 5: Re-engineering Charges for further discussion.
Total identifiable assets by segment were:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Identifiable assets | |||||||||||
| Asia Pacific | $ | 222.4 | $ | 248.3 | |||||||
| Europe | 188.9 | 215.3 | |||||||||
| North America | 199.5 | 194.1 | |||||||||
| South America | 111.0 | 94.9 | |||||||||
| Corporate | 331.8 | 502.8 | |||||||||
| Total identifiable assets | $ | 1,053.6 | $ | 1,255.4 | |||||||
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the results of continuing operations for the 39 weeks ended September 24, 2022, compared with the 39 weeks ended September 25, 2021, and changes in financial condition during the 39 weeks ended September 24, 2022. This information should be read in conjunction with the Condensed Consolidated Financial Statements in Item 1. Financial Statements.
Overview
Tupperware Brands Corporation is a leading global consumer products company that designs innovative, functional, and environmentally responsible products. Founded in 1946, the Company's signature container created the modern food storage category that revolutionized the way the world stores, serves, and prepares food. Today, this iconic brand has more than 8,500 functional design and utility patents for solution-oriented kitchen and home products. The Company distributes its products into more than 70 countries primarily through a network of independent sales force members around the world, with approximately 306 thousand active for the quarter ended September 24, 2022 for its continuing operations. Worldwide, the Company engages in the marketing, manufacturing, and sale of design-centric preparation, storage, and serving solutions for the kitchen and home through the Tupperware brand name. The Company primarily uses a direct selling business model to distribute and market products through personal connections, product demonstrations, and understanding of consumer needs. The Company has also engaged in expanding the reach of the brand through the enhancement of digital platforms to sell and market products as well as exploring business-to-business distribution channels. With a purpose to nurture a better future, the Company's products offer an alternative to single-use items and through the direct selling channel, the Company offers individuals an opportunity to build a business as a meaningful way to make money and impact women, families and communities around the world.
The Company is executing its Turnaround Plan leveraging the consumer acceptance of the iconic Tupperware brand. This strategy is rooted in growing and digitizing the direct selling business, entering new categories, increasing consumer access points, and expanding the Company’s distribution channels. The Company’s Turnaround Plan is intended to bring sustainable growth, and the Company has seen progress against this plan through efforts like cost savings initiatives, the divestiture of non-core assets including real estate, the enhancement of internal process and controls across the global business, and product innovations to address the needs of various consumer and socioeconomic segments.
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 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.
Estimates included herein are those of the Company’s management and are subject to the risks and uncertainties as described in the section titled Forward-Looking Statements in Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Recent Developments and Updates
The continued strengthening of the U.S. dollar is presenting challenges for global markets and companies which do business globally. The U.S. dollar has strengthened against the Euro, Japanese Yen, and other currencies. This continues to be a headwind for the Company as its foreign denominated revenues are translated into USD at lower exchange rates negatively impacting results. The Company estimates that the negative impact on revenues for the third quarter of 2022 was approximately 6% compared to the same period in prior year and 4% on a year-to-date basis as compared to prior year.
In the third quarter of 2022, there was lower sales force activity in all segments as compared to both prior year and prior quarter. The decrease is driven by both internal and external factors such as sales force adoption of business model and compensation plan adjustments, primarily in Asia Pacific and North America, as well as lower consumer sentiment, higher gas prices, primarily in Europe, and higher global inflation.
The negative impact of COVID-19 on net sales in the third quarter of 2022 was primarily the result of continued partial lockdowns resulting in limited mobility of consumers, restrictions to open stores, and logistics delays impacting product availability in the outlets, mainly in China.
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Results of Continuing Operations
| 13 weeks ended | Change | Foreign exchange impact | Change excluding the foreign exchange impact | ||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars, except per share amounts) | Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 302.8 | $ | 376.9 | $ | (74.1) | (20) | % | $ | (23.9) | $ | (50.2) | (14) | % | |||||||||||||||||||||||||||
| Gross margin as percent of sales | 64.9 | % | 65.8 | % | N/A | (0.9) pp | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
Selling, general and administrative expense as percent of net sales | 58.0 | % | 50.6 | % | N/A | 7.4 pp | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Operating income | $ | 15.8 | $ | 57.1 | $ | (41.3) | (72) | % | $ | (3.5) | $ | (37.8) | (71) | % | |||||||||||||||||||||||||||
| (Loss) income from continuing operations | $ | (3.8) | $ | 60.4 | $ | (64.2) | + | $ | (6.8) | $ | (57.4) | + | |||||||||||||||||||||||||||||
| Diluted (loss) earnings from continuing operations - per share | $ | (0.09) | $ | 1.14 | $ | (1.23) | + | $ | (0.13) | $ | (1.10) | + | |||||||||||||||||||||||||||||
| 39 weeks ended | Change | Foreign exchange impact | Change excluding the foreign exchange impact | ||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars, except per share amounts) | Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 991.3 | $ | 1,207.4 | $ | (216.1) | (18) | % | $ | (53.4) | $ | (162.7) | (14) | % | |||||||||||||||||||||||||||
| Gross margin as percent of sales | 64.5 | % | 68.5 | % | N/A | (4.0) pp | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Selling, general and administrative expense as percent of net sales | 57.1 | % | 51.4 | % | N/A | 5.7 pp | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||
| Operating Income | $ | 58.1 | $ | 206.1 | $ | (148.0) | (72) | % | $ | (12.3) | $ | (135.7) | (70) | % | |||||||||||||||||||||||||||
| Income from continuing operations | $ | 3.2 | $ | 136.2 | $ | (133.0) | (98) | % | $ | (13.0) | $ | (120.0) | (97) | % | |||||||||||||||||||||||||||
| Diluted earnings from continuing operations - per share | $ | 0.07 | $ | 2.56 | $ | (2.49) | (97) | % | $ | (0.24) | $ | (2.25) | (97) | % | |||||||||||||||||||||||||||
____________________
N/A - not applicable
pp - percentage points
+ - change greater than ±100%
33
Net Sales
Net sales were $302.8 million and $376.9 million in the third quarter of 2022 and 2021, respectively. Net Sales were down in Asia Pacific, Europe, and North America, and up in South America. Excluding foreign exchange impact, sales decreased $50.2 million or 14 percent, primarily due to:
•Asia Pacific, decreased $19.4 million, mainly related to lower recruiting and overall sales force activity, negatively impacted by: (1) China's continued COVID-19 lock-downs resulting in limited mobility of consumers, restrictions to open stores, and logistics delays impacting product availability in the outlets, (2) Indonesia’s underperformance driven by longer than anticipated sales force adoption of business model and compensation plan adjustments, and (3) Malaysia mainly related to lower sales force engagement and recruiting, lower consumer spending caused in part by removal of government subsidy on food essentials, and lower sales volume negatively impacted by price increases.
•Europe, decreased $19.0 million, driven by lower sales force activity across the segment, including from lower consumer spending as a result of continued deterioration of consumer sentiment, higher inflation, higher gas prices, and negative impact from price increases. In addition, the segment was negatively impacted by timing of business-to-business transactions, mainly in Germany.
•North America, decreased $16.3 million, primarily due to lower recruiting and overall sales force productivity in the segment, longer than anticipated adoption of compensation plan changes in the United States and Canada, and negative impact from price increases.
•South America, increased $4.5 million, driven by Argentina, primarily from a larger total and active sales force, including from higher retention, higher productivity, as well as higher prices due to inflation.
The negative impact to net sales in the third quarter of 2022 as a result of COVID-19 is estimated at 2 percent, driven by China. The average impact of higher prices was approximately 11 percent in the third quarter of 2022, while the negative impact from lower volumes was approximately 30 percent.
Net sales were $991.3 million and $1,207.4 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Net Sales were down in Asia Pacific, Europe, and North America, and up in South America compared to the year-to-date period ended September 25, 2021. Excluding foreign exchange impact, sales decreased $162.7 million or 14 percent, due to factors largely mirroring those noted above with respect to the explanation of changes in the third quarter of 2022 compared with 2021. Below is the net sales performance by segment for the year-to-date period ended September 24, 2022 compared to the year-to-date period ended September 25, 2021.
•Asia Pacific, decreased $55.1 million
•Europe, decreased $69.9 million
•North America, decreased $49.1 million
•South America, increased $11.4 million
A more detailed discussion of the sales results by segment is included in the segment results section in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. As discussed in Note 3: Promotional Costs to the Condensed Consolidated Financial Statements in Item 1. Financial Statements, 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 and Gross Profit
Gross profit was $196.6 million and $247.9 million in the third quarter of 2022 and 2021, respectively. Gross margin as a percentage of sales was 64.9 percent and 65.8 percent in the third quarter of 2022 and 2021, respectively. The decrease of 0.9 percentage points (“pp”) is primarily due to:
•4.1 pp from higher overall resin costs across all segments, particularly in Europe. Furthermore, resin prices have started to stabilize and have decreased as compared to the second quarter of 2022.
•1.7 pp from higher manufacturing costs across all segments, particularly in Europe, mainly from inefficiencies resulting from lower sales volume
•partially offset by a 4.6 pp benefit from an increase in prices across all segments
Gross profit was $639.3 million and $827.4 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Gross margin as a percentage of sales was 64.5 percent and 68.5 percent in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. The decrease of 4.0 pp is primarily due to:
34
•2.7 pp from higher manufacturing costs across all segments, mainly from inefficiencies resulting from lower sales volume
•2.7 pp from higher overall resin costs in all segments, particularly in Europe
•1.1 pp from product mix and other costs, primarily in Asia Pacific and Europe
•partially offset by a 2.5 pp benefit from increase in prices across all segments
As discussed in Note 2: Distribution Costs to the Condensed Consolidated Financial Statements in Item 1. Financial Statements, the Company includes distribution costs of its products in selling, general and administrative expense. As a result, the Company’s gross profit may not be comparable with other companies which include this expense in cost of products sold.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $175.6 million and $190.7 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact of $11.8 million, selling, general and administrative expense decreased by $3.3 million primarily due to lower sales volumes impacting the following:
•$3.2 million decrease in administration costs mainly related to stock compensation, partially offset by increases in incremental expense to support the omnichannel strategy and improve service
•$1.2 million decrease in distribution costs, inclusive of the negative impact from expenses related to the rationalization of warehouses in the United States and Canada
•partially offset by a $1.1 million increase in selling costs, mainly related to higher commission expenses in India and Indonesia
•promotional costs remained in line with prior year as the $2.9 million cost reduction from lower sales volume was offset by a $2.9 million re-investment in sales force in-person events and meetings
Selling, general and administrative expense as a percentage of sales was 58.0 percent and 50.6 percent in the third quarter of 2022 and 2021, respectively. The 7.4 pp increase in selling, general and administrative expense as compared to the third quarter of 2021 is primarily due to:
•2.0 pp increase due to promotional costs from re-investments in sales force in-person events and meetings
•2.0 pp increase due to higher selling related expenses mainly from business-to-business investments, primarily in the United States and Canada, and the new business model in India
•1.3 pp increase due to higher distribution costs, primarily due to the rationalization of warehouses in the United States and Canada
•1.2 pp increase from higher commission expenses in Indonesia, a reversal of a non-income tax reserve in the third quarter of 2021 in Brazil, and an increase in marketing expenses to support e-commerce volume, primarily in the United States and Canada
•0.7 pp increase in allowance for credit losses, primarily in France
•0.2 pp increase due to under absorption of administration expenses on lower sales and incremental investments to support the omnichannel strategy and improve service
Selling, general and administrative expenses were $565.9 million and $620.5 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact of $28.4 million selling, general and administrative expense decreased by $26.2 million primarily due to lower sales volumes impacting the following:
•$15.1 million decrease in selling costs, partially offset by higher commission expenses in Indonesia
•$14.2 million decrease in distribution costs, inclusive of cost inflation as well as expenses related to the rationalization of warehouses in the United States and Canada
•$9.5 million decrease in promotional costs, mainly in Europe, and sales and recruiting event savings in the United States and Canada
•partially offset by a $13.1 million increase due to a reversal of non-income tax reserves in Brazil in the second and third quarters of 2021 and an enterprise award from the local government in China which was received in the first quarter of 2021, both of which did not repeat in 2022, and higher investments in marketing, business expansion talent, and infrastructure needs, as well as investments in the optimization of the Company's global tax structure
Selling, general and administrative expense as a percentage of sales was 57.1 percent and 51.4 percent in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. The 5.7 pp increase in selling, general and administrative expense as compared to the year to date as of the third quarter of 2021 is primarily due to:
•1.6 pp increase from higher selling and marketing costs as a result of higher investments to support business to business, retail, and e-commerce strategies
35
•1.4 pp increase from higher administration costs and other expenses mainly due to reversals of non-income tax reserves in Brazil in the second and third quarters of 2021, and to an enterprise award from the local government in China which was received in the first quarter of 2021 and did not repeat in 2022, partially offset by lower management incentives
•1.1 pp increase due to under absorption of administration expenses on lower sales and incremental investments in commercial, business expansion, and infrastructure needs to support the omnichannel strategy
•0.8 pp from higher warehousing costs to improve service levels and due to inflation, primarily in the United States and Canada, as well as expenses related to the rationalization of warehouses in the United States and Canada
•0.7 pp higher investments in other accounts, including promotional costs due to re-investments in sales force in-person events and meetings, higher commission expenses in Indonesia, and higher allowance for credit losses in France
The Company segregates selling, general and administrative expenses into allocated and unallocated expenses based upon the estimated time spent managing segment operations. The allocated expenses are then apportioned on a local currency basis to each segment based primarily upon segment net sales. The unallocated expenses reflect amounts unrelated to segment operations. Selling, general and administrative expense to be allocated is determined at the beginning of the year based upon estimated expenditures.
Unallocated expenses were $12.1 million and $7.2 million in the third quarter of 2022 and 2021, respectively. The $4.9 million increase is primarily due to lower reversal of management incentives as compared to the third quarter of 2021 due to the reduction in 2022 happening throughout the first three quarters while the 2021 reduction started in the third quarter, increased information technology investments, and higher legal costs related to intellectual property, partially offset by lower stock compensation costs.
Unallocated expenses were $47.4 million and $30.9 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. The $16.5 million increase is primarily due to information technology investments, partially offset by lower management incentives and stock compensation costs.
Re-engineering Charges
Re-engineering charges were $4.5 million and $1.8 million in the third quarter of 2022 and 2021, respectively, and $13.0 million and $9.7 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. These re-engineering charges were mainly related to the “Turnaround Plan” which was launched in mid-2020 under the new leadership. Declines in revenue led the Company to evaluate its operating structure leading to actions designed to reduce costs, improve operating efficiency, and otherwise turn around its business. These actions often result in re-engineering charges related to headcount reductions and facility down-sizing and closures, as well as related asset write-downs. Other costs are costs that may be necessary in light of the revised operating landscape that include structural changes impacting how the Company's sales force operates. The Company may recognize gains or losses upon disposal of excess facilities or other activities directly related to its re-engineering efforts.
The re-engineering charges were:
| 13 weeks ended | 39 weeks ended | ||||||||||||||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | September 24, 2022 | September 25, 2021 | |||||||||||||||||||
| Turnaround plan | $ | 4.5 | $ | 1.6 | $ | 13.0 | $ | 8.2 | |||||||||||||||
| Other | — | 0.2 | — | 1.5 | |||||||||||||||||||
| Total re-engineering charges | $ | 4.5 | $ | 1.8 | $ | 13.0 | $ | 9.7 | |||||||||||||||
The key elements of the Turnaround Plan include: increasing the Company's right-sizing 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 types of charges included in the Turnaround Plan are primarily related to severance costs, facility closing costs, and outside consulting services. For more information related to 2022, please see Note 5: Re-engineering Charges. The Company expects to incur $20.0 million to $30.0 million of Turnaround Plan charges in 2022.
Refer to Note 5: Re-engineering Charges to the Condensed Consolidated Financial Statements in Item 1. Financial Statements for further information.
Loss (Gain) on Disposal of Assets
Loss (gain) on disposal of assets were a loss of $0.7 million and a gain of $1.7 million in the third quarter of 2022 and 2021, respectively. The loss in the third quarter of 2022 is primarily due to the write off of information technology assets due to business and strategy changes and the gain in the third quarter of 2021 is mainly related to the sale of an office building in the Netherlands. Loss
36
(gain) on disposal of assets were a loss of $2.3 million and a gain of $8.9 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. The year-to-date loss for the period ended September 24, 2022 is primarily due to the write off of information technology assets and the year-to-date gain for the period ended September 25, 2021 was largely due to the sale of a manufacturing plant in France and an office building in the Netherlands.
Loss on Extinguishment of Debt
The Company restructured its debt in the fourth quarter of 2021 and as such did not have any debt extinguishment activity in the third quarter of 2022. In the third quarter of 2021, the Company did not extinguish debt. The Company did not have any activity in the year-to-date period ended September 24, 2022, but had payments of $101.2 million to reduce its debt in the year-to-date period ended September 25, 2021 that resulted in a loss on debt extinguishment of $8.1 million.
Interest Expense
Interest expense was $8.3 million and $8.2 million in the third quarter of 2022 and 2021, respectively, and $18.9 million and $29.7 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Interest expense in the third quarter of 2022 is slightly higher as compared to the third quarter of 2021 due to the recent increases in interest rates. The year-to-date decrease in interest expense is a result of the debt restructuring in the fourth quarter of 2021, which resulted in a significant reduction in interest rates versus the prior debt outstanding under the previous credit agreement.
Interest Income
Interest income was $1.3 million and $0.3 million in the third quarter of 2022 and 2021, respectively, and $3.2 million and $0.9 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Interest income is related to the interest earned on the Company's cash balances. Interest income in the third quarter of 2022 and year-to-date period ended September 24, 2022 has increased as the Company invests its excess cash, primarily in Argentina.
Other Expense, Net
Other expense, net was expense of $1.6 million and $1.2 million in the third quarter of 2022 and 2021, respectively. The expense of $6.6 million and $0.8 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively, are primarily driven by foreign currency losses. The Company records foreign currency translation impacts and pension costs in this line item.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes was a provision of $11.0 million and a benefit of $12.4 million in the third quarter of 2022 and 2021, respectively, and a provision of $32.6 million and $32.2 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. The effective tax rate was 152.8 percent and (25.8) percent in the third quarter of 2022 and 2021, respectively. The change in the effective tax rate in the third quarter of 2022 as compared to the third quarter of 2021, was primarily due to:
•a non-recurring favorable impact from a tax policy change elected in the prior year related to a tax method change for certain direct and indirect costs of inventory and self-constructed assets under IRC Section 263A,
•an unfavorable jurisdictional mix of earnings, significantly impacted by the marginal pre-tax earnings in the third quarter of 2022,
•negative impact of the GILTI regime, which results in a reduction of benefits on domestic losses,
•additional valuation allowance on disallowed interest expense due to the change in IRC Section 163(j) rules from EBIDTA to EBIT. The Company maintains a full valuation allowance on deferred tax assets for interest carryforwards, and
•as described in Note 1: Summary of Significant Accounting Policies, the Company recorded an out-of-period adjustment to income tax expense during the third quarter of 2022, which resulted in a $1.3 million decrease in income from continuing operations. This error resulted from intercompany costs which were allocated to an incorrect legal entity resulting in net understatement of income tax expense for these entities.
Refer to Note 6: Income Taxes to the Condensed Consolidated Financial Statements in Item 1. Financial Statements for further information.
37
Net (Loss) Income from Continuing Operations
Net (loss) income from continuing operations was a loss of $3.8 million and income of $60.4 million in the third quarter of 2022 and 2021, respectively, and income of $3.2 million and $136.2 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. See above discussion for the main drivers of changes in net (loss) income from continuing operations. A more detailed discussion of the results by segment is included in the segment results section below.
38
Segment Results
International operations generated 89.3 percent and 90.4 percent of sales in the third quarter of 2022 and 2021, respectively, and 89.2 percent and 89.0 percent in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. These units generated 112.5 percent and 99.0 percent of segment profit in the third quarter of 2022 and 2021, respectively, and 102.8 percent and 99.1 percent in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively.
39
Asia Pacific
| Change excluding the foreign exchange impact | Percent of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars) | 13 weeks ended | Change | Foreign exchange impact | 13 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | Sep 24, 2022 | Sep 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 85.4 | $ | 112.9 | $ | (27.5) | (24) | % | $ | (8.1) | $ | (19.4) | (19) | % | 28 | % | 30 | % | |||||||||||||||||||||||||||||||||||
| Segment profit | $ | 11.1 | $ | 25.7 | $ | (14.6) | (57) | % | $ | (0.5) | $ | (14.1) | (56) | % | 34 | % | 40 | % | |||||||||||||||||||||||||||||||||||
| Segment profit as percent of net sales | 13.0 | % | 22.8 | % | N/A | (9.8) pp | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
| Change excluding the foreign exchange impact | Percent of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars) | 39 weeks ended | Change | Foreign exchange impact | 39 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | Sep 24, 2022 | Sep 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 273.9 | $ | 343.8 | $ | (69.9) | (20) | % | $ | (14.8) | $ | (55.1) | (17) | % | 28 | % | 29 | % | |||||||||||||||||||||||||||||||||||
| Segment profit | $ | 35.3 | $ | 81.9 | $ | (46.6) | (57) | % | $ | (3.5) | $ | (43.0) | (55) | % | 29 | % | 34 | % | |||||||||||||||||||||||||||||||||||
| Segment profit as percent of net sales | 12.9 | % | 23.8 | % | N/A | (10.9) pp | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
____________________
N/A - not applicable
pp - percentage points
+ - change greater than ±100%
Net sales were $85.4 million and $112.9 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact, sales decreased $19.4 million or 19 percent, primarily due to lower sales force activity in China, Indonesia, and Malaysia, including from lower recruiting in Indonesia and Malaysia. China’s sales declined mainly due to continued COVID-19 lockdowns resulting in limited mobility of consumers, restrictions to open stores, and logistics delays impacting product availability at the outlets. Indonesia's underperformance was driven by longer than anticipated sales force adoption of business model and compensation plan adjustments, while Malaysia’s performance was negatively impacted by lower sales force engagement and recruiting, lower consumer spending caused in part by removal of government subsidy on food essentials, and lower sales volume negatively impacted by price increases.
The COVID-19 impact is estimated at negative 8 percent in the third quarter of 2022, almost entirely driven by China. The average impact of higher prices was approximately 7 percent in the third quarter of 2022 compared with 2021. The negative impact to net sales from lower volume was approximately 31 percent.
Segment profit was $11.1 million and $25.7 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact, segment profit decreased $14.1 million, primarily due to impact of lower sales volume, driven by China, Indonesia, and Malaysia, higher product costs across the segment, including manufacturing inefficiencies. Cost rationalization actions continue to be implemented but trailed the sales decline in the quarter, mainly in China.
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Net sales were $273.9 million and $343.8 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact, sales decreased $55.1 million or 17 percent, due to factors largely mirroring those noted above with respect to the explanation of changes in the third quarter of 2022 compared with 2021.
Segment profit was $35.3 million and $81.9 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact, segment profit decreased $43.0 million, due to factors largely mirroring those noted above with respect to the explanation of changes in the third quarter of 2022 compared with 2021, in addition to the absence of an enterprise award of $3.1 million from the local China government in the first quarter of 2021.
The Chinese Renminbi had the most meaningful impact on the third quarter 2022 net sales and profit comparisons.
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Europe
| Change excluding the foreign exchange impact | Percent of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars) | 13 weeks ended | Change | Foreign exchange impact | 13 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | Sep 24, 2022 | Sep 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 60.8 | $ | 91.3 | $ | (30.5) | (33) | % | $ | (11.5) | $ | (19.0) | (24) | % | 20 | % | 24 | % | |||||||||||||||||||||||||||||||||||
| Segment profit | $ | 2.0 | $ | 14.7 | $ | (12.7) | (86) | % | $ | (1.8) | $ | (10.9) | (84) | % | 6 | % | 23 | % | |||||||||||||||||||||||||||||||||||
| Segment profit as percent of net sales | 3.3 | % | 16.1 | % | N/A | (12.8) pp | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
| Change excluding the foreign exchange impact | Percent of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars) | 39 weeks ended | Change | Foreign exchange impact | 39 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | Sep 24, 2022 | Sep 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 222.6 | $ | 326.8 | $ | (104.2) | (32) | % | $ | (34.3) | $ | (69.9) | (24) | % | 23 | % | 27 | % | |||||||||||||||||||||||||||||||||||
| Segment profit | $ | 14.3 | $ | 66.5 | $ | (52.2) | (78) | % | $ | (6.9) | $ | (45.3) | (76) | % | 12 | % | 28 | % | |||||||||||||||||||||||||||||||||||
| Segment profit as percent of net sales | 6.4 | % | 20.3 | % | N/A | (13.9) pp | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
____________________
N/A - not applicable
pp - percentage points
+ - change greater than ±100%
Net sales were $60.8 million and $91.3 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact, sales decreased $19.0 million or 24 percent, primarily due to a less active sales force, particularly in France, Germany, Iberia, and South Africa. Sales force activities across the segment were driven by lower consumer spending, as a result of continued deterioration in consumer sentiment impacted by geopolitical concerns, higher inflation, and higher gas prices. In addition, the segment was negatively impacted by lower business-to-business transactions, mainly in Germany.
The average impact of higher prices was approximately 10 percent in the third quarter of 2022 compared with 2021. The negative impact to net sales from lower volume was approximately 44 percent.
Segment profit was $2.0 million and $14.7 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact, segment profit decreased $10.9 million, primarily due to lower sales volume, including from timing of business-to-business sales, and to lower gross margin due to higher product costs across the segment, including from manufacturing inefficiencies. The Company continues to right-size the organization through reduction in fixed costs across all functional areas in the segment, nonetheless, these initiatives trailed the sales decline in the quarter.
Net sales were $222.6 million and $326.8 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact, sales decreased $69.9 million or 24 percent, due to factors largely mirroring those noted above with respect to the explanation of changes in the third quarter of 2022 compared with 2021.
Segment profit was $14.3 million and $66.5 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact, segment profit decreased $45.3 million, primarily due to profit impact from lower sales volume and higher product costs, partially offset by the implementation of right-sizing initiatives related to the Turnaround Plan.
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The Euro had the most meaningful impact on the third quarter 2022 net sales and profit comparisons.
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North America
| Change excluding the foreign exchange impact | Percent of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars) | 13 weeks ended | Change | Foreign exchange impact | 13 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | Sep 24, 2022 | Sep 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 86.3 | $ | 103.1 | $ | (16.8) | (16) | % | $ | (0.5) | $ | (16.3) | (16) | % | 29 | % | 27 | % | |||||||||||||||||||||||||||||||||||
| Segment profit | $ | 5.7 | $ | 10.5 | $ | (4.8) | (47) | % | $ | (0.1) | $ | (4.7) | (45) | % | 17 | % | 16 | % | |||||||||||||||||||||||||||||||||||
| Segment profit as percent of net sales | 6.6 | % | 10.2 | % | N/A | (3.6) pp | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
| Change excluding the foreign exchange impact | Percent of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars) | 39 weeks ended | Change | Foreign exchange impact | 39 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | Sep 24, 2022 | Sep 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 292.4 | $ | 343.0 | $ | (50.6) | (15) | % | $ | (1.4) | $ | (49.1) | (14) | % | 29 | % | 28 | % | |||||||||||||||||||||||||||||||||||
| Segment profit | $ | 32.3 | $ | 42.6 | $ | (10.3) | (24) | % | $ | (0.1) | $ | (10.2) | (24) | % | 27 | % | 18 | % | |||||||||||||||||||||||||||||||||||
| Segment profit as percent of net sales | 11.0 | % | 12.4 | % | N/A | (1.4) pp | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
____________________
N/A - not applicable
pp - percentage points
+ - change greater than ±100%
Net sales were $86.3 million and $103.1 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact, sales decreased $16.3 million or 16 percent, primarily due to lower recruiting and sales force activity, which were negatively impacted by price increases in Mexico and the United States and Canada. Mexico sales were further impacted by timing of business-to-business sales. The United States and Canada performance was also negatively impacted by lower sales force activity resulting from an increase in the targeted sales levels required for the sales force to achieve commissions.
The average impact of higher prices was approximately 10 percent in the third quarter of 2022 compared with 2021. The negative impact to net sales from lower volume was approximately 26 percent.
Segment profit was $5.7 million and $10.5 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact, segment profit decreased $4.7 million, primarily due to:
•lower sales volume in Mexico and the United States and Canada
•lower gross margin due to higher product costs across the segment, including from manufacturing inefficiencies
•higher distribution expenses related to the rationalization of warehouses, partially offset by lower outbound freight as a result of lower sales volume, in the United States and Canada
•higher promotional costs due to return to in-person conferences and meetings
•partially offset by lower sales force commissions in the United States and Canada related to an increase in the targeted sales levels required for the sales force to achieve commissions
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Net sales were $292.4 million and $343.0 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact, sales decreased $49.1 million or 14 percent, primarily due to lower recruiting and lower sales force activity, due to factors largely mirroring those noted above with respect to the explanation of changes in the third quarter of 2022 compared with 2021, as well as a backlog of products resulting from the oversell of key promotional offers at both Mexico and the United States and Canada in the first half of 2022, and to sales force system issues in the United States and Canada in the second quarter of 2022.
Segment profit was $32.3 million and $42.6 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact, segment profit decreased $10.2 million, primarily due to:
•lower sales volume, mainly in the United States and Canada
•lower gross margin due to higher product costs, including from manufacturing inefficiencies, in Mexico and the United States and Canada
•partially offset by (1) lower distribution expenses in the United States and Canada, from lower outbound freight, and (2) lower sales force commissions related to an increase in the targeted sales levels required for the sales force to achieve commissions in the United States and Canada
The Canadian Dollar had the most meaningful impact on the third quarter 2022 net sales and profit comparisons.
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South America
| Change excluding the foreign exchange impact | Percent of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars) | 13 weeks ended | Change | Foreign exchange impact | 13 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | Sep 24, 2022 | Sep 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 70.3 | $ | 69.6 | $ | 0.7 | 1 | % | $ | (3.8) | $ | 4.5 | 7 | % | 23 | % | 19 | % | |||||||||||||||||||||||||||||||||||
| Segment profit | $ | 14.3 | $ | 13.5 | $ | 0.8 | 6 | % | $ | (0.1) | $ | 0.9 | 7 | % | 43 | % | 21 | % | |||||||||||||||||||||||||||||||||||
| Segment profit as percent of net sales | 20.3 | % | 19.4 | % | N/A | 0.9 pp | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
| Change excluding the foreign exchange impact | Percent of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions of U.S. Dollars) | 39 weeks ended | Change | Foreign exchange impact | 39 weeks ended | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sep 24, 2022 | Sep 25, 2021 | Amount | Percent | Amount | Percent | Sep 24, 2022 | Sep 25, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 202.4 | $ | 193.8 | $ | 8.6 | 4 | % | $ | (2.8) | $ | 11.4 | 6 | % | 20 | % | 16 | % | |||||||||||||||||||||||||||||||||||
| Segment profit | $ | 38.9 | $ | 46.8 | $ | (7.9) | (17) | % | $ | (0.1) | $ | (7.8) | (17) | % | 32 | % | 20 | % | |||||||||||||||||||||||||||||||||||
| Segment profit as percent of net sales | 19.2 | % | 24.1 | % | N/A | (4.9) pp | N/A | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||||||||||||||
____________________
N/A - not applicable
pp - percentage points
+ - change greater than ±100%
Net sales were $70.3 million and $69.6 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact, sales increased $4.5 million or 7 percent, due to higher net sales in Argentina primarily from a larger total and active sales force, including from higher retention and productivity, as well as higher prices due to inflation, partially offset by a sales decline in Brazil from lower sales force activity driven by challenging macroeconomic conditions ahead of presidential and general elections.
The average impact of higher prices was approximately 18 percent in the third quarter of 2022 compared with 2021. The negative impact to net sales from lower volume was approximately 17 percent.
Segment profit was $14.3 million and $13.5 million in the third quarter of 2022 and 2021, respectively. Excluding foreign exchange impact, segment profit increased $0.9 million driven by higher profit in Argentina from higher sales volume, partially offset by Brazil due to the reversal of a non-income tax reserve in the third quarter of 2021.
Net sales were $202.4 million and $193.8 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact, sales increased $11.4 million or 6 percent, driven by Argentina and partially offset by Brazil, due to factors largely mirroring those noted above with respect to the explanation of changes in the third quarter of 2022 compared with 2021.
Segment profit was $38.9 million and $46.8 million in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively. Excluding foreign exchange impact, segment profit decreased $7.8 million, primarily due to the reversal of $10 million in non-income tax reserves in Brazil in the second and third quarters of 2021, and to higher overall costs due to inflation in Argentina and Brazil.
The Brazilian Real had the most meaningful impact on the third quarter 2022 net sales and profit comparisons.
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Financial Condition
Liquidity and Capital Resources
The Company's net working capital position decreased by $105.4 million compared with the end of 2021. Excluding foreign exchange impact, net working capital decreased $89.1 million, primarily reflecting:
•$151.9 million decrease in cash and cash equivalents used primarily to repurchase $75.0 million of shares as part of the ASR in the first quarter of 2022, $25.9 million in capital spending, and a decrease in income from continuing operations
•$24.6 million decrease in accounts receivable driven by lower sales volume including timing of business-to-business sales
•Partially offset by a $59.7 million decrease in accrued liabilities driven by timing of payments and lower business activity, a decrease in accrued compensation mainly from lower management incentives, and a decrease in other taxes payable, as well as a $27.2 million decrease in accounts payable driven by timing of payments
As a result of the refinancing of the Company's Credit Agreement on November 23, 2021, the debt held by the Company is considered private and as such does not have any public ratings.
Debt Summary
The debt portfolio consisted of:
| As of | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | December 25, 2021 | |||||||||
| Term loan | $ | 369.2 | $ | 398.5 | |||||||
| Revolver facility | 332.8 | 312.0 | |||||||||
| Finance leases | — | 1.8 | |||||||||
| Line of credit | 2.0 | — | |||||||||
| Unamortized debt issuance costs | (3.2) | (2.9) | |||||||||
| Total debt | $ | 700.8 | $ | 709.4 | |||||||
| Current debt and finance lease obligations | $ | 13.0 | $ | 8.9 | |||||||
| Long-term debt and finance lease obligations | 687.8 | 700.5 | |||||||||
| Total debt | $ | 700.8 | $ | 709.4 | |||||||
Credit Agreement
On November 23, 2021, the Company and its wholly owned subsidiaries, Tupperware Products AG, Administradora Dart, S. de R.L. de C.V., and Tupperware Brands Asia Pacific Pte. Ltd. (the “Subsidiary Borrowers”), entered into a credit agreement (as amended from time to time, the “Credit Agreement”) with Wells Fargo Bank, N.A. as administrative agent (the “Administrative Agent”), swingline lender, and issuing bank; Wells Fargo Securities, LLC, BMO Capital Markets Corp., Fifth Third Bank, and Truist Securities Inc. as joint lead arrangers and joint bookrunners; and BMO Harris Bank, N.A, Fifth Third Bank, National Association, and Truist Bank, as syndication agents. The Credit Agreement provides for (i) a revolving credit facility (“Revolver Facility”) in an aggregate principal amount available to the Company and the Subsidiary Borrowers of up to $480.0 million, (ii) a term facility available to the Company in U.S. dollars in an aggregate principal amount of $200.0 million (“USD Term Loan”) and (iii) a term facility available to the Company or the Swiss subsidiary borrower in Euros in an aggregate principal amount of €176.0 million, (“Euro Term Loan”). The USD Term Loan and Euro Term Loan are collectively defined as the “Term Loan”.
The Revolver Facility is divided into (a) global tranche, Mexican tranche, and Singaporean tranche commitments, with the aggregate amount of borrowings under each tranche not to exceed $450.0 million, $15.0 million, and $15.0 million, respectively, (b) a global tranche letter of credit facility, available up to $50.0 million of the amount of the Revolver Facility, and (c) a global tranche swingline facility, available up to $100.0 million of the amount of the Revolver Facility. Each of such tranches is available to the Company and the applicable Subsidiary Borrowers, with extensions of credit to the Subsidiary Borrowers not to exceed $325.0 million in the aggregate at any time outstanding. The Company is permitted to increase, subject to certain conditions, the Revolver Facility, the USD Term Loan and/or the Euro Term Loan so long as (i) the Revolver Facility is increased by no more than $250.0 million (for a
47
maximum aggregate Revolver Facility of $730.0 million) and (ii) all facilities are increased by no more than $250.0 million, plus certain repayments of the loans under the Credit Agreement with Wells Fargo Bank, N.A., and the other parties, plus an unlimited amount provided that the incurrence of such amount does not cause the Consolidated Net Leverage Ratio (as defined in the Credit Agreement and which shall be calculated net of up to $100.0 million of unrestricted cash and cash equivalents (“Cash Netting”)) for the four (4) consecutive fiscal quarters then most recently ended to exceed 3.00 to 1.00.
Each of the Revolver Facility, the USD Term Loan, and the Euro Term Loan will mature on November 23, 2026. The obligations under the Credit Agreement are (a) guaranteed by (i) with respect to the Subsidiary Borrowers, the Parent Borrower and (ii) with respect to both the Parent Borrower and the Subsidiary Borrowers, each existing and subsequently acquired or organized direct or indirect material wholly-owned U.S. subsidiary of the Parent Borrower (each a “Guarantor”) and (b) secured by substantially all tangible and intangible personal property of the Parent Borrower and each Guarantor and all products, profits and proceeds of the foregoing, in each case, subject to certain exceptions.
The Credit Agreement contains customary affirmative and negative covenants, including, among other things, Consolidated Net Leverage Ratio and Consolidated Interest Coverage Ratio requirements, 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 Credit Agreement also 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. The Credit Agreement also includes an acceleration clause which permits the lenders to accelerate the maturity date under certain circumstances including material adverse effects on the Company's financial status.
The Company has prepayment options, as well as mandatory quarterly prepayments that started on March 31, 2022.
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. Consolidated Net Leverage Ratio is the ratio of (a) consolidated funded indebtedness minus up to $100.0 million of unrestricted cash and cash equivalents on the last day of each measurement period to (b) consolidated EBITDA for such measurement period, and Consolidated Interest Coverage Ratio is the ratio of (x) consolidated EBITDA on the last day of each measurement period to (y) the Consolidated Interest Charges for such measurement period.
Under the Credit Agreement, the Company shall not permit as of the last day of any fiscal quarter of the Company (a) the Consolidated Net Leverage Ratio for the four (4) consecutive fiscal quarters then most recently ended to be greater than or equal to 3.75 to 1.00 (subject to Cash Netting) which may be increased two times during the term of the Credit Agreement by 0.25 to 1.00 in connection with any acquisition permitted by the Credit Agreement having aggregate cash consideration in excess of $75 million or (b) the Consolidated Interest Coverage Ratio for the four (4) consecutive fiscal quarters then ended to be less than or equal to 3.00 to 1.00.
Considering the current global market volatility, inflationary cost pressures primarily in China and Europe, and a change in the Company’s liquidity year-to-date, effective August 1, 2022, the Company entered into an agreement (the “First Amendment to Credit Agreement”) to amend certain provisions and covenants to, among other things, (i) allow for a temporary higher maximum total Net Leverage Ratio of 4.5x in the third quarter of 2022, 4.25x in the fourth quarter of 2022 and first quarter of 2023, and 3.75x in the second quarter of 2023 and thereafter to allow for additional operating flexibility to execute fully on the Company’s Turnaround Plan; (ii) introduce two additional pricing levels for total Net Leverage Ratios of 3.0x to 3.5x, and for 3.5x and higher, with a provision to revert to pricing per the original agreement following achievement of a total Net Leverage Ratio of 2.75x or less for two consecutive quarters following the covenant modification period; (iii) replace LIBOR with Secured Overnight Financing Rate (“SOFR”) as the reference interest rate on the entire facility, with a 0% SOFR floor and credit spread adjustments across one-, three-, and six-month tenors.
As of September 24, 2022, the Company had a weighted average interest rate of 4.39% with a base rate spread of 275 basis points on SOFR-based borrowings under the Credit Agreement. Interest is payable in arrears and at maturity. As of September 24, 2022, the Company is in compliance with the financial covenants in the First Amendment to Credit Agreement, with a Consolidated Net Leverage Ratio of 4.17x and a Consolidated Interest Coverage Ratio of 5.93x. As of December 25, 2021, the Company had a Consolidated Net Leverage Ratio of 2.11x and a Consolidated Interest Coverage Ratio of 8.23x.
The Company has experienced volatility in earnings during the nine months ended September 24, 2022 as it executes the Turnaround Plan and responds to the unpredictability in the market related to recessionary concerns, inflation and COVID lockdowns. As of September 24, 2022, the Company was in compliance with its financial covenants in the First Amendment to the Credit Agreement. Due to the volatility in the Company’s earnings and progressive tightening of the financial covenants in the First Amendment to the Credit Agreement, it is probable that the Company will not be able to maintain compliance with the covenants in its Credit Agreement, including the existing Consolidated Net Leverage Ratio covenant, for the next twelve months. The Company is in
48
negotiations with its lenders to amend the Credit Agreement; however, the Company’s ability to amend its covenants, obtain a waiver or otherwise refinance its debt, as well as the timing and terms of any such amendment or refinancing, are dependent upon a number of factors, and there can be no assurance that the Company will be successful in such efforts.
If the Company is unable to comply with its covenants, including the Consolidated Net Leverage Ratio covenant, then the Credit Agreement lenders could take action to cause amounts due under the Credit Agreement to become due and payable unless the Company is able to amend such covenants, obtain a waiver or otherwise refinance its debt. If the Company is unable to access future borrowings or is required to pay amounts due under its Credit Agreement prior to their normal maturity dates, this would have a material impact to its financial position. Accordingly, the Company believes that there is substantial doubt about its ability to continue as a going concern for the twelve-month period following the date of this filing.
The Company is undertaking expense reduction and cash savings initiatives as part of the Turnaround Plan to help continue to pay down its debt and reduce the Consolidated Net Leverage Ratio. The expense reduction and cash saving initiatives include streamlining facilities, managing working capital, reducing capital expenditures, and reducing overall selling, general and administrative expenses.
The Company routinely increases its Revolver Facility 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 on the value of its cash and debt during each quarter than would relate solely to the quarter end balances.
At September 24, 2022, the Company had $135.3 million of unused lines of credit, including $131.3 million under the committed, secured Credit Agreement, and $4.0 million available under various uncommitted lines around the world.
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 a cash and cash equivalents balance of $102.9 million as of September 24, 2022, 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 of September 24, 2022 includes $102.1 million held by foreign subsidiaries. Of the cash held outside the United States, less than 1 percent was deemed ineligible for repatriation. Other than a deferred tax liability of $8.1 million for the withholding tax liability for future distribution of unrepatriated foreign earnings, no United 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:
•Euro
•Indonesian Rupiah
•Mexican Peso
Business units in which the Company generated at least $100.0 million of sales in 2021 included:
•Brazil
•China
•Tupperware Mexico
•United States and Canada
The Company has experienced volatility in earnings during the nine months ended September 24, 2022 as it executes the Turnaround Plan including a downturn in the Company’s business in these units which adversely impacted its ability to generate operating cash flows. Operating cash flows have also been adversely impacted by significant difficulties in additions to and retention and activity of the Company’s independent sales force, the success of new products, promotional programs, and/or changes in sales force compensation programs. See also Item 1A. Risk Factors.
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Cash Flow Activity
| 39 weeks ended | |||||||||||
| (In millions of U.S. Dollars) | September 24, 2022 | September 25, 2021 | |||||||||
| Net cash (used in) provided by operating activities | $ | (65.8) | $ | 3.6 | |||||||
| Net cash used in in investing activities | $ | (21.8) | $ | (11.0) | |||||||
| Net cash used in financing activities | $ | (64.3) | $ | (37.4) | |||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | $ | (12.4) | $ | (6.4) | |||||||
| Net change in cash, cash equivalents and restricted cash | $ | (162.2) | $ | (18.0) | |||||||
Operating Activities
Net cash from operating activities was an outflow of $65.8 million and inflow of $3.6 million in the year-to-date period ended September 24, 2022 and September 25, 2021, respectively. The net unfavorable comparison was primarily due to:
•$133.0 million decrease in income from continuing operations
•$14.1 million decrease in accounts payable and accrued liabilities, driven by timing of payments and lower business activity, a decrease in accrued compensation mainly from lower management incentives, and a decrease in other taxes payable
•partially offset by $38.6 million lower inventory growth
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Investing Activities
During the year-to-date period ended September 24, 2022, the Company had $25.9 million of capital expenditures primarily consisting of:
•$10.2 million related to global information technology projects
•$9.3 million related to molds used in the manufacturing of products
•$4.1 million related to machinery and equipment
•$2.0 million related to buildings and improvement
During the year-to-date period ended September 24, 2022, the Company had $4.1 million proceeds from the sale of long-term assets.
During the year-to-date period ended September 25, 2021, the Company had $25.1 million of capital expenditures primarily consisting of:
•$14.8 million related to molds used in the manufacturing of products
•$7.4 million related to machinery and equipment
•$1.7 million related to global information technology projects
•$1.2 million related to buildings and improvements, including land development near the Company headquarters in Orlando, Florida
During the year-to-date period ended September 25, 2021, the Company had $14.1 million proceeds from the sale of long-term assets primarily consisting of:
•$9.4 million from the sale of a manufacturing plant in France
•$3.0 million from the sale of real estate in the Netherlands
Financing Activities
During the year-to-date period ended September 24, 2022, the Company had $64.3 million of outflow primarily consisting of:
•$188.2 million related to repayments on the Revolver Facility
•$75.0 million related to the ASR repurchase of its Common Stock outstanding
•partially offset by $209.0 million related to borrowings from the Revolver Facility
During the year-to-date period ended September 25, 2021, the Company had $37.4 million of outflow primarily consisting of:
•$101.2 million related to repayments for the previous Term Loan
•$25.0 million related to the repurchase of its Common Stock outstanding
•partially offset by $94.4 million related to short term debt
Dividends
The Company suspended its dividend beginning in the fourth quarter of 2019.
Stock Repurchases
Stock repurchases under the Company’s incentive plans are made when employees use shares to satisfy the minimum statutorily required withholding taxes. In the year-to-date period ended September 24, 2022 and September 25, 2021, 105,655 and 102,019 shares were retained to fund withholding taxes, totaling $1.9 million and $2.9 million, respectively.
New Pronouncements
Refer to Note 1: Summary of Significant Accounting Policies to the Condensed Consolidated Financial Statements in Item 1. Financial Statements for further information.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company may be impacted by interest rate changes on its borrowings. The Company accesses the short-term and long-term markets to obtain financing. Access to, and the availability of acceptable terms and conditions of such financing are impacted by many factors, including: credit ratings, liquidity and volatility of the overall capital markets and the current state of the economy. The Company has elected to manage this risk through the maturity structure of its borrowings and the currencies in which it borrows.
Interest Rate Risk
Loans taken under the Credit Agreement bear interest under a fixed basis spread on SOFR as its base rate. As of September 24, 2022, the Company had a weighted average interest rate of 4.39 percent with a base rate spread of 275 basis points on its United States Dollar and Euro denominated SOFR/EURIBOR-based borrowings under the Credit Agreement.
As of September 24, 2022, the Company had total borrowings of $702.0 million outstanding under its Credit Agreement, with €172.7 million denominated in Euro. If short-term interest rates varied by 10 percent, which in the Company’s case would mean short duration United States Dollar and EURIBOR, with all other variables remaining constant, the Company's annual interest expense would not be significantly impacted.
Foreign Exchange Rate Risk
A significant portion of the Company’s sales and profit come from its international operations. Although these operations are geographically dispersed, which partially mitigates the risks associated with operating in particular countries, the Company is subject to the usual risks associated with international operations. These risks include local political and economic environments and relations between foreign and United States governments.
Another economic risk of the Company is exposure to changes in foreign currency exchange rates on the earnings, cash flows and financial position of its international operations. The Company is not able to project, in any meaningful way, the effect of these possible fluctuations on translated amounts or future earnings. This is due to the Company’s constantly changing exposure to various currencies, the fact that all foreign currencies do not react in the same manner in relation to the United States Dollar and the large number of currencies involved, although the Company’s most significant income and cash flow exposures are to the Euro, Indonesian Rupiah, and Mexican Peso.
Although this currency risk is partially mitigated by the natural hedge arising from the Company’s local product sourcing in many countries, a strengthening United States Dollar generally has a negative impact on the Company. In response to this fact, the Company uses financial instruments, such as forward contracts, to hedge, with these instruments, certain other exposures to various currencies arising from amounts payable and receivable, non-permanent intercompany transactions and a portion of purchases forecasted for generally up to the following 15 months. The Company does not seek to hedge the impact of currency fluctuations on the translated value of the sales, profit or cash flow generated by its operations.
While the Company’s derivatives hedge a portion of the balance sheet risk to mitigate its exposure to foreign exchange gains or losses, they result in an impact to operating cash flows as they are settled. The net cash flow impact of these currency hedges was inflows of $0.8 million and an outflow of $4.2 million, in the year-to-date periods ended September 24, 2022 and September 25, 2021, respectively.
The United States Dollar equivalent of the Company’s most significant net open forward contracts as of September 24, 2022 were to purchase Indonesian Rupiah worth $89.3 million, Mexican Pesos worth $53.8 million and Euros worth $11.4 million and to sell Swiss Franc worth $57.3 million. In agreements to sell foreign currencies in exchange for United States Dollars, for example, an appreciating dollar versus the opposing currency would generate a cash inflow for the Company at settlement, with the opposite result in agreements to buy foreign currencies for United States Dollars. The notional amounts change based upon changes in the Company’s outstanding currency exposures. Based on rates existing as of September 24, 2022, the Company had a net derivative asset of $0.1 million related to its currency hedges under forward contracts. Currency fluctuations could have a significant impact on the Company’s cash flow upon the settlement of its forward contracts.
A precise calculation of the impact of currency fluctuations is not practical since some of the contracts are between non-United States Dollar currencies. The Company continuously monitors its foreign currency exposure and expects to enter into additional contracts to hedge exposure in the future. See further discussion regarding the Company’s hedging activities for foreign currency in Note 14: Derivative Financial Instruments and Hedging Activities to the Condensed Consolidated Financial Statements in Item 1. Financial Statements.
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The Company is subject to credit risks relating to the ability of counterparties of hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and non-performance have been considered in the determination of fair value for the Company’s foreign currency forward exchange contracts. The Company continues to closely monitor its counterparties and will take action, as appropriate and possible, to further manage its counterparty credit risk.
Commodity Price Risk
The Company is also exposed to rising material prices in its manufacturing operations and, in particular, the cost of oil and natural gas-based resins, including the fact that in some cases resin prices are actually in, or are based on, currencies other than that of the unit buying the resin, which introduces a currency exposure that is incremental to the exposure to changing market prices. Resins are the primary material used in production of most Company products, and the Company estimates that 2022 cost of sales will include approximately $94.2 million for the cost of resin in the Tupperware brand products it produces and has contract manufactured. The Company uses many different kinds of resins in its products. About three-fourths of the value of its resin purchases are “polyolefins” (simple chemical structure, easily refined from oil and natural gas). The remaining one-fourth of the value of its resin purchases is more highly engineered. With a comparable product mix and exchange rates, the Company estimates that a 10 percent fluctuation in the cost of resin would impact the Company’s annual cost of sales by approximately $9.4 million compared with the prior year. The amount the Company pays for its resins is impacted by the relative changes in supply and demand. The Company partially manages its risk associated with rising resin costs by utilizing a centralized procurement function that is able to take advantage of bulk discounts while maintaining multiple suppliers, and also enters into short-term pricing arrangements. It also manages its margin through cash flow hedges in some cases when it purchases resin in currencies, or effectively in currencies, other than that of the purchasing unit. This is done through the pricing of its products, with price increases over time on its product offerings generally in line with consumer inflation in each market, and its mix of sales through its promotional programs and promotionally priced offers. It also, on occasion, makes advance material purchases to take advantage of current favorable pricing.
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Forward-Looking Statements
Certain statements made or incorporated by reference in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not based on historical facts or information are forward-looking statements. Statements that include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans” and similar expressions or future tense or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts. Where, in any forward-looking statement, the Company expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations in light of information available at the time this report is filed with the SEC or, with respect to any documents or statements incorporated by reference, on the then current plans and expectations in light of information available at the time such document was filed with the SEC, or statement was made. Such forward-looking statements involve risks and uncertainties that may cause actual results or outcomes to differ materially from those projected in forward-looking statements. Except as required by law, and as outlined below the Company undertakes no obligation to update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise. Such risks and uncertainties, many of which are outside of our control, include, among others, the following:
•successful recruitment, retention, and productivity levels of the Company’s independent sales force and the Company's employees;
•the potential impact to the Company of management's determination regarding substantial doubt about the Company's ability to continue to operate as a going concern;
•the Company’s access to, and the costs of, financing and other sources of liquidity and the potential that banks with which the Company maintains lines of credit may be unable to fulfill their commitments; the costs and covenant restrictions associated with the Company’s current credit facility with Wells Fargo Bank, N.A. and the other lenders; the Company’s ability to comply with, or further amend, financial covenants under its credit agreement and its ability to repay or refinance the debt outstanding under its current credit facility and take other actions to address its capital structure, as well as potential downgrades to the Company’s credit ratings; the absence of foreign exchange lines of credit;
•disruptions caused by the introduction of new or revised distributor operating models or sales force compensation systems or allegations by equity analysts, former distributors or sales force members, government agencies or others as to the legality or viability of the Company’s business model, particularly in India;
•disruptions caused by restructuring activities, including facility closure, and the combination and exit of business units, including impacts on business models and the supply chain, as well as not fully realizing expected savings or benefits related to increasing sales from actions taken;
•success of new products and promotional programs;
•the ability to implement appropriate product mix and pricing strategies;
•whether the Company is successful in implementing its overall turnaround strategy, including, but not limited to, its capital allocation strategy and strategies around sales channels;
•the ongoing impact of the COVID-19 outbreak, including, but not limited to, lockdowns, restrictions on workplace requirements, the health, safety, and welfare of our employees, the impact on sales force, and supply chain impacts;
•governmental regulation of materials used in products coming into contact with food (e.g. polycarbonate and polyethersulfone), as well as beauty, personal care and nutritional products;
•governmental regulation and consumer tastes related to the use of plastic in products and/or packaging material;
•the ability to procure and pay for at reasonable economic cost, sufficient raw materials and/or finished goods to meet current and future consumer demands at reasonable suggested retail pricing levels in certain markets, particularly those with stringent government regulations and restrictions;
•the impact of changes in consumer spending patterns and preferences, particularly given the global nature of the Company’s business;
•the value of long-term assets, particularly indefinite and definite-lived intangibles and goodwill associated with acquisitions, and the realizability of the value of recognized tax assets;
•changes in plastic resin prices, other raw materials and packaging components, the cost of converting such items into finished goods and procured finished products and the cost of delivering products to customers;
•the introduction of Company operations in new markets outside the United States;
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•general social, economic, and political conditions in markets, such as in Argentina, Brazil, China, France, India, Mexico, Russia, and Turkey and other countries impacted by such events;
•the impact of the ongoing Russia/Ukraine conflict;
•issues arising out of the sovereign debt in the countries in which the Company operates, such as in Argentina and those in the Euro zone, resulting in potential economic and operational challenges for the Company's supply chains, heightened counterparty credit risk due to adverse effects on customers and suppliers, exchange controls (such as in Argentina and Egypt), and translation risks due to potential impairments of investments in affected markets;
•disruptions resulting from either internal or external labor strikes, work stoppages, or similar difficulties, particularly in Brazil, France, India, and South Africa;
•changes in cash flow resulting from changes in operating results, including from changes in foreign exchange rates, restructuring activities, working capital management, debt payments, share repurchases, and hedge settlements;
•the impact of currency fluctuations and currency translation impacts on the value of the Company’s operating results, assets, liabilities, and commitments of foreign operations generally, including their cash balances during and at the end of quarterly reporting periods, the results of those operations, the cost of sourcing products across geographies, and the success of foreign hedging and risk management strategies;
•the Company's ability to engage in hedging transactions (including, without limitation, forwards and swaps) with financial institutions to mitigate risks relating to foreign-currency fluctuations and/or interest rate fluctuations and the possibility that such hedging transactions, even if entered into, are unsuccessful;
•the impact of natural disasters, terrorist activities and epidemic or pandemic disease outbreaks;
•the ability to repatriate, or otherwise make available, cash in the United States and to do so at a favorable foreign exchange rate and with favorable tax ramifications, particularly from Brazil, China, India, Indonesia, Malaysia, Mexico, and South Africa;
•the ability to obtain all government approvals on, and to control the cost of infrastructure obligations associated with, property, plant and equipment;
•the ability to timely and effectively implement, transition, maintain, and protect necessary information technology systems and infrastructure;
•cyberattacks and ransomware demands that could cause the Company to not be able to operate its systems and/or access or control its data, including private data;
•the ability to attract and retain certain executive officers and key management personnel and the success of transitions or changes in leadership or key management personnel;
•integration of non-traditional product lines into Company operations;
•the effect of legal, regulatory and tax proceedings, inquiries, decisions, or other related matters, including any potential damages arising out of the litigation and other legal claims, including the ongoing securities class action lawsuits (and related derivative lawsuits) filed against the Company in 2020 and 2022, as well as restrictions imposed on the Company’s operations or Company sales force by foreign governments, including changes in interpretation of employment status of the sales force by government authorities, tax liabilities arising out of implementation and execution of the Company's global tax strategies, exposure to tax responsibilities imposed on the sales force and their potential impact on the sales force's value chain and resulting disruption to the business and actions taken by governments to set or restrict the freedom of the Company to set its own prices or its suggested retail prices for product sales by its sales force to end consumers and actions taken by governments to restrict the ability to convert local currency to other currencies in order to satisfy obligations outside the country generally, and in particular in Argentina and Egypt;
•the effect of competitive forces in the markets in which the Company operates, particularly where there are a greater number of competitors;
•the impact of inflation on the Company's business;
•the sale of the Company's Nuvo business;
•the impact of counterfeit and knocked-off products and programs in the markets in which the Company operates and the effect this can have on the confidence of, and competition for, the Company's sales force members;
•the impact of changes, changes in interpretation of or challenges to positions taken by the Company with respect to United States federal, state and foreign tax or other laws, including with respect to the Tax Act in the United States and non-income taxes issues in Brazil, India, Indonesia and Mexico;
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•the ability to ship product to customers on a timely basis, including because of delays caused by the Company's supply chain;
•the ability to sustain the same level of growth in sales and net income that the Company recorded in prior periods;
•other risks discussed in Part I, Item 1A, Risk Factors, of each of the Company’s 2021 Annual Report on Form 10-K, the Company's quarterly reports on Form 10-Q for the quarters ended March 26, 2022 and June 25, 2022, and this Form 10-Q, as well as the Company’s Condensed Consolidated Financial Statements, Notes to Condensed Consolidated Financial Statements, other financial information appearing elsewhere in this Report and the Company’s other filings with the SEC.
Further, many of these factors are, and may continue to be, amplified by the COVID-19 pandemic. Additional factors or events that could cause our actual results or outcomes to differ may also emerge from time to time, and it is not possible for us to predict all of them. In addition, historical, current and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. Other than updating for changes in foreign currency exchange rates through its monthly website updates, the Company does not intend to update forward-looking information, except through its quarterly earnings releases and SEC filings.
Investors should also be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, it should not be assumed that the Company agrees with any statement or report issued by any analyst irrespective of the content of the confirming financial forecasts or projections issued by others.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) that are designed to ensure that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company will be detected.
As of the end of the period covered by this report, management, under the supervision of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. As of September 24, 2022, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the third quarter of 2022 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
A number of ordinary-course legal and administrative proceedings against the Company or its subsidiaries are pending. In addition to such proceedings, there are certain proceedings that involve the discharge of materials into, or otherwise relating to the protection of, the environment. Certain of such proceedings involve federal environmental laws such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as well as state and local laws. The Company has established reserves with respect to certain of such proceedings. Because of the involvement of other parties and the uncertainty of potential environmental impacts, the eventual outcomes of such actions and the cost and timing of expenditures cannot be determined with certainty. It is not expected that the outcome of such proceedings, either individually or in the aggregate, will have a material adverse effect upon the Company.
As part of the 1986 reorganization involving the formation of Premark, Premark was spun-off by Dart & Kraft, Inc., and Kraft Foods, Inc. assumed any liabilities arising out of any legal proceedings in connection with certain divested or discontinued former businesses of Dart Industries Inc., a subsidiary of the Company, including matters alleging product and environmental liability. The assumption of liabilities by Kraft Foods, Inc. (now Mondelez International, Inc.) remains effective subsequent to the distribution of the equity of the Company to Premark shareholders in 1996.
In February 2020, putative stockholder class actions were filed against the Company and certain current and former officers and directors in the United States District Court for the Central District of California and in the United States District Court for the Middle District of Florida. The actions were consolidated in the United States District Court for the Middle District of Florida, and a lead plaintiff was appointed. On July 31, 2020, the lead plaintiff filed a consolidated amended complaint, which alleges that statements in public filings between January 31, 2018 and February 24, 2020 (the “potential class period”) regarding the Company’s disclosure of controls and procedures, as well as the need for an amendment of its credit facility, violated Section 10(b) and 20(a) of the Securities Act of 1934. The lead plaintiff seeks to represent a class of stockholders who purchased the Company’s stock during the potential class period and demand unspecified monetary damages. The Company's motion to dismiss the complaint was granted on January 25, 2021, but the court permitted the lead plaintiff to file an amended complaint, which the plaintiff filed on February 16, 2021. The Company filed a motion to dismiss the second amended complaint on April 2, 2021. The Court granted the Company’s motion to dismiss the second amended complaint on August 9, 2021, but again permitted the lead plaintiff to file an amended complaint, which the plaintiff filed on August 30, 2021. The Company filed a motion to dismiss the third amended complaint on October 14, 2021, and on February 4, 2022, the Court dismissed the third amended complaint with prejudice. The plaintiff filed an appeal on April 11, 2022, which was fully briefed with the 11th Circuit Court of Appeals as of June 1, 2022. The 11th Circuit Court of Appeals has scheduled oral argument for the appeal in December 2022. The Company is unable at this time to determine whether the outcome of these actions would have a material impact on its results of operations, financial condition or cash flows.
Additionally, several putative stockholders filed stockholder derivative complaints in the United States District Court for the Middle District of Florida against certain of the Company’s current and former officers and directors. The cases were consolidated, and plaintiffs filed a consolidated amended complaint on August 5, 2020. The consolidated amended complaint asserts claims against certain current and former officers and directors for breach of fiduciary duty, unjust enrichment, and contribution for violations of the securities laws based on allegations that the officers and directors allowed the Company to make false or misleading statements in violation of the securities laws. The Court stayed proceedings in this action pending resolution of the appeal of the third motion to dismiss in the putative stockholder class action. A similar stockholder derivative complaint was filed in the Ninth Judicial Circuit Court of Florida. The parties reached an agreement to stay this action pending the resolution of the appeal of the third motion to dismiss in the putative stockholder class action. The Company is unable at this time to determine whether the outcome of these actions would have a material impact on its results of operations, financial condition or cash flows.
In June 2022, a putative stockholder class action was filed against the Company and certain current and former officers in the United States District Court for the Southern District of New York. The complaint alleges that statements made in public filings between November 3, 2021 and May 3, 2022 (the “potential class period”) regarding the Company’s earnings and sales performance and full year 2022 guidance violated Sections 10(b) and 20(a) of the Securities Act of 1934. The plaintiff seeks to represent a class of stockholders who purchased the Company’s shares during the potential class period and demands unspecified monetary damages. The plaintiff intends to file an amended complaint in late November 2022. The Company is unable at this time to determine whether the outcome of this action would have a material impact on its results of operations, financial condition or cash flows.
In August 2022, a stockholder derivative complaint was filed in Florida state court against certain of the Company’s current and former officers and directors. The derivative complaint asserts claims against the former officers and directors for breach of fiduciary duty, unjust enrichment, and waste of corporate assets based on allegations that, among other things, the officers and directors allowed the Company to make false or misleading statements in violation of the securities laws. The Company is unable at this time to
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determine whether the outcome of these actions would have a material impact on its results of operations, financial condition or cash flows.
The SEC was conducting an inquiry into the Company’s accounting practices relating to its previously-owned Fuller Mexico business and its Tupperware Mexico business. On September 29, 2022, the SEC issued a final order approving the settlement of the inquiry. Under the terms of the order, the Company neither admits nor denies the SEC's findings and paid an immaterial civil penalty, which was fully accrued in the second quarter of 2022.
Item 1A. Risk Factors
Reference is made to Part I, Item 1A, Risk Factors in the Company's 2021 Annual Report on Form 10-K for information concerning risk factors. The Company is adding the following risk factors as set forth below.
The following risk factors should be read in conjunction with, and supplement, the risk factors set forth in Part I, Item 1A, Risk Factors of each of the Company's 2021 Annual Report on Form 10-K and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 26, 2022 and June 25, 2022. Before making an investment in the Company’s securities, investors should carefully consider the risk discussed below, together with the other information in this Report, including the sections entitled “Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other reports and materials filed by the Company with the SEC. Additional risks and uncertainties not presently known by the Company or that are currently deemed immaterial may also impair the Company’s business operations. If any of these risks actually occur, the Company’s business, financial condition and results of operations could be materially affected.
There is substantial doubt about the Company's ability to continue as a going concern, and this may adversely affect the Company's stock price and the Company's ability to raise capital.
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. Based on the definitions in the relevant accounting standards, management has determined that while it is currently in compliance with the covenants under its Credit Agreement, due to the volatility in the Company’s earnings and progressive tightening of the financial covenants in the First Amendment to the Credit Agreement, it is probable that the Company will not be able to maintain compliance with the covenants in its Credit Agreement, including the existing Consolidated Net Leverage Ratio covenant, for the next twelve months, which raises substantial doubt about the Company’s ability to continue as a going concern. As such, the Company’s consolidated financial statements as of September 24, 2022 have been prepared on a going concern basis. Although the Company has taken, and plans to continue to take, proactive measures to enhance its liquidity position and provide additional financial flexibility, including discussions with the lenders under the Company's Credit Agreement to amend the covenants under the Credit Agreement, there can be no assurance that these measures, including the timing and terms thereof, will be successful or sufficient. An amendment to the Credit Agreement may also lead to increased costs, increased interest rates, additional financial covenants and other lender protections. The substantial doubt about the Company's ability to continue as a going concern may affect the price of the Company's common stock and the grade of its credit rating, may negatively impact relationships with third parties with whom the Company does business, including customers, vendors and lenders, may impact the Company's ability to raise additional capital or implement its business plan and may impact its ability to comply going forward with covenants in the Credit Agreement.
Whether the Company will be able to successfully negotiate additional flexibility under its Credit Agreement or enter into further amendments to the Credit Agreement for additional flexibility needed in the future will depend on market conditions, the negotiations with those lenders, and the Company’s financial performance. Any failure to obtain additional flexibility under the Company’s Credit Agreement could result in the Company being in default under its Credit Agreement, the pursuit, by the lenders, of certain remedies relating to the collateral securing the Credit Agreement, and the pursuit of additional remedies, all of which could have a material adverse effect on the Company.
Current and future indebtedness could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions.
The Company must meet certain financial covenants as defined in the applicable agreements to borrow under its credit facilities. Under the Credit Agreement (as defined below), among other covenants, the Company is not permitted as of the last day of any fiscal quarter of the Company (a) for the Consolidated Net Leverage Ratio (as defined in the Credit Agreement) for the four (4) consecutive fiscal quarters then most recently ended to be greater than or equal to 3.75 to 1.00 (subject to Cash Netting) which may be increased two times during the term of the Credit Agreement by 0.25 to 1.00 in connection with any acquisition permitted by the Credit Agreement having aggregate cash consideration in excess of $75 million or (b) the Consolidated Interest Coverage Ratio (as defined in
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the Credit Agreement) for the four (4) consecutive fiscal quarters then ended to be less than or equal to 3.00 to 1.00. Effective August 1, 2022, the Company entered into an agreement to amend certain provisions and covenants to, among other things, allow for a temporary higher maximum total Net Leverage Ratio of 4.5x in the third quarter of 2022, 4.25x in the fourth quarter of 2022 and first quarter of 2023, and 3.75x in the second quarter of 2023 and thereafter to allow for additional operating flexibility to execute fully on the Company’s Turnaround Plan and to introduce two additional pricing levels for total Net Leverage Ratios of 3.0x to 3.5x, and for 3.5x and higher, with a provision to revert to pricing per the original agreement following achievement of a total Net Leverage Ratio of 2.75x or less for two consecutive quarters following the covenant modification period. As of September 24, 2022, the Company had a weighted average interest rate of 4.39% with a base rate spread of 275 basis points on SOFR-based borrowings under the Credit Agreement. Interest is payable in arrears and at maturity. As of September 24, 2022, the Company is in compliance with the financial covenants in the First Amendment to Credit Agreement, with a Consolidated Net Leverage Ratio of 4.17x and a Consolidated Interest Coverage Ratio of 5.93x. In the event the Company fails to comply with any of the covenants or to meet its payment obligations, it could lead to an event of default which, if not cured or waived, could result in the acceleration of outstanding debt obligations. The Company may not have sufficient working capital or liquidity to satisfy its debt obligations in the event of an acceleration of all or a portion of its outstanding obligations. If the Company’s cash flows and capital resources are insufficient to fund its debt service obligations, it may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance its indebtedness. The Company’s ability to restructure or refinance its debt in the future will depend on market conditions and the Company’s financial performance at such time. Any refinancing, if at all, of the Company’s debt could be at higher interest rates and may require the Company to comply with more covenants, which could further restrict its business operations. The terms of existing or future debt instruments may restrict the Company from adopting some of these alternatives.
During the fourth quarter of 2021, the Company and certain of its subsidiaries entered into a new credit agreement (as amended from time to time, the “Credit Agreement”) with Wells Fargo Bank, N.A., as administrative agent, and the other lenders party to such credit agreement. The new credit agreement provides for (i) a revolving credit facility in an aggregate principal amount available to the Company and the subsidiary borrowers of up to $480 million, (ii) a term facility available to the Company in U.S. dollars in an aggregate principal amount of $200 million and (iii) a term facility available to the Company and the or the Swiss subsidiary borrower in Euros in an aggregate principal amount of €176 million. The revolving facility is divided into (a) global tranche, Mexican tranche, and Singaporean tranche commitments, with the aggregate amount of borrowings under each tranche not to exceed $450 million, $15 million, and $15 million, respectively, (b) a global tranche letter of credit facility, available up to $50 million of the amount of the revolving facility, and (c) a global tranche swingline facility, available up to $100 million of the amount of the revolving facility. Each of such tranches is available to the Company and the applicable subsidiary borrowers, with extensions of credit to the subsidiary borrowers not to exceed $325 million in the aggregate at any time outstanding. The Company is permitted to increase, subject to certain conditions, the revolving facility, the U.S. term facility and/or the Euro term facility so long as (i) the revolving facility is increased by no more than $250 million (for a maximum aggregate revolving facility of $730 million) and (ii) all facilities are increased by no more than $250 million, plus certain repayments of the loans under the credit agreement with Wells Fargo Bank, N.A., and the other parties, plus an unlimited amount provided that the incurrence of such amount does not cause the Consolidated Secured Net Leverage Ratio (as defined in the Credit Agreement and which shall be calculated net of up to $100 million of unrestricted cash and cash equivalents ("Cash Netting")) for the four (4) consecutive fiscal quarters then most recently ended to exceed 3.00 to 1.00. As of December 25, 2021, the Company had a Consolidated Net Leverage Ratio of 2.11x and a Consolidated Interest Coverage Ratio of 8.23x. Each of the Revolving Facility, the U.S. Term Facility, and the Euro Term Facility will mature on November 23, 2026. As the Company's debt approaches maturity, if the Company is unable to refinance its new credit facility, or if the Company refinances its indebtedness on terms that are less favorable than those currently contained in the credit facility, the Company’s liquidity, results of operations, and financial condition could be materially adversely impacted.
The Company’s Tupperware® trademark is collateral under the new credit facility. The Company’s iconic Tupperware® brand has worldwide recognition, and the Company’s continuing success, including the value of its collateral under the new credit facility, depends on its ability to maintain and enhance its brand protection, image, and reputation. Maintaining, promoting, and growing the Tupperware brand will depend on design and marketing efforts, sales force and consumer promotions and campaigns, product innovation, and product quality. The Company’s commitment to product innovation and quality and its continuing investment in design and brand awareness may not have the desired impact on its brand image and reputation. In addition, the Company’s success in maintaining, extending, and expanding its brand image depends on its ability to adapt to a rapidly changing social media environment and digital dissemination of branding campaigns. The Company could be adversely impacted if it fails to achieve any of these objectives.
We are subject to financial risks as a result of our international operations, including exposure to foreign currency fluctuations, the impact of foreign currency restrictions, and the impact of international sanctions.
The Company is subject to risks of doing business internationally. The Company has derived, for a number of years, most of its net sales from operations outside the United States. As a result, we face exposure to adverse movements in currency exchange rates as the financial results of our international operations are translated from local currency into U.S. dollars.
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Movement in exchange rates has had and may continue to have a significant impact on the Company’s earnings, cash flows, and financial position. The Company’s most significant exposures are to the Brazilian Real, Chinese Renminbi, Argentine Peso, Euro, Indonesian Rupiah, Malaysian Ringgit, Mexican Peso, and South African Rand. Although the Company’s currency risk is partially mitigated by the natural hedge arising from its local product sourcing in many markets, a strengthening United States Dollar generally has a negative impact on the Company. In response to this fact, the Company continues to implement foreign currency hedging and risk management strategies to reduce the exposure to fluctuations in earnings associated with changes in foreign currency exchange rates. The Company generally does not seek to hedge the impact of currency fluctuations on the translated value of the sales, profit, or cash flow generated by its operations. Some of the hedging strategies implemented have a positive or negative impact on cash flows as foreign currencies fluctuate versus the United States Dollar. In past periods the movement of foreign currency exchange rates has had a material effect on our results of operations. There can be no assurance that our hedging strategies will be successful and foreign currency fluctuations and related hedging activities may not have a material adverse impact on the Company’s results of operations, cash flows, and/or financial condition.
Furthermore, foreign governments may impose restrictions on currency remittances. Due to the possibility of government restrictions (or existing restrictions) on transfers of cash out of countries and control of exchange rates and currency convertibility, the Company may not be able to immediately access its cash at the exchange rate used to translate its financial statements.
In addition, the United States government may impose material sanctions and restrictions on doing business with certain countries, businesses, and individuals, including, as an example, the sanctions against countries such as Russia or within specific regions of Ukraine. Such events could have a material adverse effect on the Company's business and financial performance, including through increased costs of compliance, reduced net sales as a result of restrictions on the Company's ability to sell into specific regions of the world, higher volatility in foreign currency exchange rates, and increased input costs (such as energy).
The conflict in Ukraine could impact business and financial performance in Europe and our results of operations on a consolidated basis. We are closely monitoring the political and economic situation and have taken several measures, including cash repatriation and ruble hedging, to proactively manage the risk. In addition, sanctions imposed on Russia could impact the fulfillment of existing orders, any future revenue streams from impacted customers, and the recoverability of certain financial assets. As there is uncertainty surrounding the status of physical assets in the Ukraine area, the Company has fully reserved for its accounts receivables and inventories, and fully impaired the operating lease of its office building, in Ukraine. The reserve and impairment was approximately $0.4 million. We will continue to assess our mitigation activities in light of the evolving situation and the related risks, but there can be no assurances that the conflict will not have a material adverse impact on the Company’s results of operations, cash flows, and/or financial condition.
A decrease in operating cash flows, any inability to access financing sources or other constraints on liquidity could adversely affect our business.
Our business, including our ability to fund operating activities, capital projects and interest and debt repayments as well as to execute on the Turnaround Plan, depends upon our generation of strong operating cash flow and available financing sources. As of September 24, 2022, we had cash and cash equivalents of $102.9 million and $135.3 million of availability under our revolving credit facilities and available lines of credit. However, in the first, second, and third quarters of fiscal 2022 we generated negative operating cash flow and, based on our current business plan, including the Turnaround Plan, we expect to continue to spend substantial amounts in future periods, which may result in further periods of negative operating cash flow. Our business and operations may also consume resources faster than we anticipate. Therefore, in order for us to meet our capital requirements and successfully execute our business plan, we may require additional capital through various sources of financing that may include the issuance of new equity securities, debt or a combination of both. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay any dividends on our common stock. Further, additional financing, whether debt or equity, may not be available on favorable terms, or at all. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings or the impact thereof on the price of our common stock. Further, during periods of economic, political and social turmoil such as the present, the financial industry and the credit and capital markets may be materially and adversely affected, increasing the cost of and reducing access to capital. We could also be required to seek funds through asset sales or collaborations, licensing agreements or other strategic alliances that we would not choose to execute solely for operational or strategic reasons. Our ability to obtain additional capital through these or other means will depend on our results of operations and a number of factors, some of which are outside of our control, including the risks described in Item 1A, Risk Factors in the Company's 2021 Annual Report on Form 10-K and in the Company's Quarterly Reports on Form 10-Q for the quarters ended March 26, 2022 and June 25, 2022. The inability to generate sufficient cash flows to support our business, failure to maintain covenant compliance, or the lack of available financing in adequate amounts and on appropriate terms when needed could adversely affect our business, financial condition and results of operations could be materially affected.
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The outcome of pending and future claims and litigation could have a material adverse impact on our business, financial condition, and results of operations and damage our reputation.
We are a party to claims and litigation in the normal course of business. Furthermore, the Company may face material litigation outside the ordinary course of business that could materially adversely impact the Company’s results of operations, financial condition, or cash flows. In February 2020, putative stockholder class actions were filed against the Company and certain current and former officers and directors in the United States District Court for the Central District of California and in the United States District Court for the Middle District of Florida. The actions were consolidated in the United States District Court for the Middle District of Florida, and a lead plaintiff was appointed. On July 31, 2020, the lead plaintiff filed a consolidated amended complaint, which alleges that statements in public filings between January 31, 2018 and February 24, 2020 (the “potential class period”) regarding the Company’s disclosure of controls and procedures, as well as the need for an amendment of its credit facility, violated Section 10(b) and 20(a) of the Securities Act of 1934. The lead plaintiff seeks to represent a class of stockholders who purchased the Company’s stock during the potential class period and demand unspecified monetary damages. The Company's motion to dismiss the complaint was granted on January 25, 2021, but the court permitted the lead plaintiff to file an amended complaint, which the plaintiff filed on February 16, 2021. The Company filed a motion to dismiss the second amended complaint on April 2, 2021. The Court granted the Company’s motion to dismiss the second amended complaint on August 9, 2021, but again permitted the lead plaintiff to file an amended complaint, which the plaintiff filed on August 30, 2021. The Company filed a motion to dismiss the third amended complaint on October 14, 2021, and on February 4, 2022, the Court dismissed the third amended complaint with prejudice. The plaintiff filed an appeal on April 11, 2022, which was fully briefed as of June 1, 2022. The 11th Circuit Court of Appeals has scheduled oral argument for the appeal in December 2022. The Company is unable at this time to determine whether the outcome of these actions would have a material impact on its results of operations, financial condition or cash flows.
Additionally, several putative stockholders filed stockholder derivative complaints in the United States District Court for the Middle District of Florida against certain of the Company’s current and former officers and directors. The cases were consolidated, and plaintiffs filed a consolidated amended complaint on August 5, 2020. The consolidated amended complaint asserts claims against certain current and former officers and directors for breach of fiduciary duty, unjust enrichment, and contribution for violations of the securities laws based on allegations that the officers and directors allowed the Company to make false or misleading statements in violation of the securities laws. The Court stayed proceedings in this action pending resolution of the appeal of the dismissal of the third motion to dismiss in the putative stockholder class action. A similar stockholder derivative complaint was filed in the Ninth Judicial Circuit Court of Florida. The parties reached an agreement to stay this action pending the resolution of the appeal of the dismissal of the third motion to dismiss in the putative stockholder class action. The Company is unable at this time to determine whether the outcome of these actions would have a material impact on its results of operations, financial condition, or cash flows.
In June 2022, a putative stockholder class action was filed against the Company and certain current and former officers in the United States District Court for the Southern District of New York. The complaint alleges that statements made in public filings between November 3, 2021 and May 3, 2022 (the “potential class period”) regarding the Company’s earnings and sales performance and full year 2022 guidance violated Sections 10(b) and 20(a) of the Securities Act of 1934. The plaintiff seeks to represent a class of stockholders who purchased the Company’s shares during the potential class period and demands unspecified monetary damages. The plaintiff intends to file an amended complaint in late November 2022. The Company is unable at this time to determine whether the outcome of this action would have a material impact on its results of operations, financial condition or cash flows.
In August 2022, a stockholder derivative complaint was filed in Florida state court against certain of the Company’s current and former officers and directors. The derivative complaint asserts claims against the former officers and directors for breach of fiduciary duty, unjust enrichment, and waste of corporate assets based on allegations that, among other things, the officers and directors allowed the Company to make false or misleading statements in violation of the securities laws. The Company is unable at this time to determine whether the outcome of these actions would have a material impact on its results of operations, financial condition or cash flows.
Legal proceedings in general, and securities and class action litigation and regulatory investigations in particular, can be expensive and disruptive. Our insurance may not cover all claims that may be asserted against us, and we are unable to predict how long the legal proceedings to which we are currently subject will continue. An unfavorable outcome of any legal proceeding may have an adverse impact on our business, financial condition and results of operations, or our stock price. Any proceeding could negatively impact our reputation among our customers or our shareholders. Furthermore, publicity surrounding ongoing legal proceedings, even if resolved favorably for us, could result in additional legal proceedings against us, as well as damage our brand image.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
(a) Exhibits
| 3.1 | |||||
| 3.2 | |||||
| 10.1 | |||||
| 10.2 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 24, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Income (Loss), (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Shareholders' Equity, (v) Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags* | ||||
| 104 | Cover Page Interactive Data File (embedded as Inline XBRL and contained in Exhibit 101)* | ||||
* Filed herewith. | |||||
** Furnished herewith. | |||||
| # | Certain portions of this exhibit are confidential and have been omitted pursuant to Item 601(b)(10) of Regulation S-K. The Company agrees to supplementally furnish to the Securities and Exchange Commission a copy of such omissions upon request. | ||||
| + | Management contract or compensatory plan or arrangement. | ||||
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| TUPPERWARE BRANDS CORPORATION | ||||||||
| By: | /s/ Mariela Matute | |||||||
| Mariela Matute | ||||||||
| Chief Financial Officer (Principal Financial Officer) | ||||||||
| By: | /s/ Madeline Otero | |||||||
| Madeline Otero | ||||||||
Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) | ||||||||
Orlando, Florida
November 2, 2022
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