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| TUP > SEC Filings for TUP > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-2009
Quarterly Report
The following is a discussion of the results of operations for the 13 and 39 weeks ended September 26, 2009 compared with the 13 and 39 weeks ended September 27, 2008 and changes in financial condition during the 39 weeks ended September 26, 2009.
The Company's primary means of distributing its product is through independent sales organizations and individuals, which are also its customers in many cases. The majority of the Company's products are in turn sold to end customers who are not members of the sales forces. The Company is largely dependent upon these independent sales organizations and individuals to reach end consumers and any significant disruption of this distribution network would have a negative financial impact on the Company and its ability to generate sales, earnings and operating cash flows. The Company's primary business drivers are the size, activity and productivity of its independent sales organizations.
Overview
Change
excluding
the impact Foreign
of foreign exchange
Dollars in millions, except per share amounts 13 weeks ended Change exchange (a) impact
September 26, September 27,
2009 2008
Net sales $ 514.0 $ 513.1 - % 9 % $ (42.3 )
Gross margin as a percent of sales 66.5 % 63.7 % 2.8 pp na na
DS&A as percent of sales 55.4 % 55.5 % (0.1 ) pp na na
Operating income $ 54.8 $ 43.2 27 % 58 % $ (8.4 )
Net income 32.3 27.5 17 57 (7.1 )
Net income per diluted share 0.50 0.43 16 56 (0.11 )
Change
excluding
the impact Foreign
of foreign exchange
Dollars in millions, except per share amounts 39 weeks ended Change exchange (a) impact
September 26, September 27,
2009 2008
Net sales $ 1,501.5 $ 1,640.1 (8 )% 5 % $ (205.2 )
Gross margin as a percent of sales 66.1 % 64.6 % 1.5 pp na na
DS&A as percent of sales 54.4 % 54.8 % (0.4 ) pp na na
Operating income $ 151.2 $ 147.4 3 % 39 % $ (38.8 )
Net income 90.9 95.6 (5 ) 41 (31.3 )
Net income per diluted share 1.44 1.50 (4 ) 41 (0.48 )
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a 2009 actual compared with 2008 translated at 2009 exchange rates.
na not applicable
pp percentage points
Total local currency net sales increased 9 percent in the third quarter of 2009 compared with the same period of 2008. This increase came mainly from Tupperware Brazil, France, Indonesia, Japan, Malaysia/Singapore, Mexico, Russia, South Africa,Venezuela and Fuller Mexico, primarily reflecting higher active sales forces from strong recruiting, successful promotional programs and increases in average orders. Partially offsetting the increases in sales in these markets was a double digit decrease at BeautiControl and a single digit decrease in China, reflecting lower and less productive sales forces, in part, due to low recruiting in BeautiControl and a negative external environment in China. On a local currency basis, operating income and net income increased in the third quarter of 2009 compared with the same period of 2008. The increase in operating and net income reflected improvements in all of the Company's segments, except Beauty North America, and lower interest expense partially offset by a $4.9 million pre-tax foreign currency transaction exchange loss in Venezuela and a higher tax rate.
Local currency sales for the year-to-date period of 2009 increased 5 percent compared with the same period of 2008. The markets and factors impacting the year-to-date sales, operating and net income comparisons were similar to those impacting the third quarter comparisons. In addition to these factors, the year-to-date comparison was also impacted by a gain of $10.1 million from insurance recoveries associated with the 2007 fire in South Carolina and a higher impairment charge related to the Company's tradenames and goodwill recorded in the second quarter of 2009 than in the second quarter of 2008.
A more detailed discussion of the specific segment results is included in the Segment Results section that follows.
The Company's balance sheet remained strong with an increase of $36.0 million in working capital as compared with the end of 2008. There was a higher level of accounts receivable due to higher sales, along with a reduction in income taxes and accounts payable, reflecting the payout of amounts due at year end 2008. The Company closed the third quarter of 2009 with a debt to total capital ratio of 45 percent as compared with 55 percent at the end of 2008 and at the end of 2008's third quarter. Total capital is defined as total debt plus shareholders' equity.
Net cash flow from operating activities was $128.6 million in the year-to-date period of 2009 compared with $7.3 million in 2008. The increase primarily reflected higher net income after considering the inclusion in 2009 of the higher amount of non-cash impairment charges, a $58.1 million lower increase in inventory versus the prior year end, and a $16.9 million cash inflow from the settlement of foreign currency hedge contracts in 2009 compared to a $24.8 million outflow in 2008.
Net Sales
Third quarter sales were 9 percent higher in local currency compared with last year. Sales in the Company's emerging markets accounted for a significant amount of the growth in the third quarter of 2009, along with a small increase from the established markets. The emerging markets, those with a "low" or "medium" GDP per capita as reported by the World Bank, accounted for 56 percent of reported sales in the third quarter of 2009 and 2008, respectively. Third quarter reported sales in the emerging markets were about even with the prior year including a negative $38.8 million impact on the comparison from changes in foreign currency exchange rates. Excluding the impact of foreign currency these markets grew 15 percent. The substantial increase was led by Tupperware Brazil, Indonesia, Korea, Malaysia/Singapore, Russia, South Africa, Venezuela and Fuller Mexico. The Company's established market businesses were also about even in the third quarter of 2009 compared to the same period of 2008, although sales were 2 percent higher when excluding the impact of weaker foreign currencies on the comparison. The increase largely reflected higher sales in Tupperware France, Japan and United States and Canada partially offset by lower sales by BeautiControl.
The year-to-date fluctuations largely followed the same pattern as those of the quarter with local currency sales growth in all the segments, except Beauty North America, led primarily by the emerging markets. On a year-to-date basis, emerging markets accounted for 52 percent and 51 percent of total reported Company sales in 2009 and 2008, respectively. Total sales on a reported basis in the emerging markets decreased $64.6 million, or 8 percent for the year-to-date period of 2009 compared with 2008. This reflected a negative impact of changes in foreign currency exchange rates of $147.0 million. Excluding the impact of foreign currency, sales increased in these markets by 12 percent. The Company's established market businesses decreased 9 percent on a reported basis for the year-to-date period of 2009 compared with last year, although sales were only down slightly excluding the impact of weaker foreign currencies on the comparison.
As discussed in Note 3 to the Consolidated Financial Statements, the Company includes promotional costs in delivery, sales and administrative expense. As a result, the Company's net sales may not be comparable with other companies that treat these costs as a reduction of revenue.
Re-engineering and Impairment Expenses
Refer to Note 7 to the Consolidated Financial Statements for a discussion of re-engineering activities and related accruals.
The Company recorded $2.4 million and $6.5 million in re-engineering and impairment charges during the third quarter and year-to-date period of 2009, respectively, primarily related to severance costs incurred in the Company's Argentina, Australia, BeautiControl and Mexico operations, mainly due to implementing changes in the businesses' management structures. Also included was $2.0 million related to the impairment of software and property, plant and equipment.
The Company recorded $1.2 million and $6.9 million in re-engineering charges during the third quarter and year-to-date period of 2008, respectively, primarily related to severance costs incurred to reduce headcount in the Company's BeautiControl, France, Germany, Netherlands, Italy, Malaysia, Mexico and Philippines operations. The bulk of the remaining cost was an impairment charge related to software the Company no longer expected to utilize. Additionally, the Company recorded $1.8 million to write off inventory in South America as a result of a decision to sell beauty products in Brazil through the Tupperware sales force and streamline the product line offered. The write off of inventory was included in the cost of products sold line item in the Consolidated Statements of Income.
In the fourth quarter of 2009, the Company expects to incur approximately $2.3 million of costs related to small scale headcount reductions in several of its operations.
The Company's goodwill and intangible assets relate primarily to the December 2005 acquisition of the direct selling businesses of Sara Lee Corporation and the October 2000 acquisition of BeautiControl. The Company conducts an annual impairment test of goodwill and intangible assets in the third quarter of each year, other than for BeautiControl where the annual valuation is performed in the second quarter, and in other quarters in the event of a change in circumstances that would lead the Company to believe that a triggering event for impairment may have occurred. The impairment assessment is completed by estimating the fair value of the reporting units and intangible assets and comparing these estimates with their carrying values.
In prior years, the Company recorded impairments related to its Nutrimetics and NaturCare businesses, in part due to the fact that current and forecasted future results of operations were below its prior projections. This resulted from benefits related to strategies implemented since the acquisition of these businesses in 2005 not occurring as quickly or significantly as had been projected. Also contributing to the previous impairments was an overall increase to the assumed discount rates used in the valuations. Although some improvements have been made in these businesses, the rates of growth of sales, profit and cash flow of the Nutrimetics and NaturCare businesses in the second quarter of 2009 were below the Company's projections used in its previous valuations, as was the forecast for growth in future periods. In the second quarter of 2009, the Company also noted that financial results of the South African beauty business were not meeting the projections used in the 2008 valuation. Given the sensitivity of the valuations to changes in cash flows for these reporting units, the Company performed interim impairment tests of tradenames and reporting units, reflecting reduced future forecasts in these markets, including the impact of the external environment. The result of the interim impairment tests was to record tradename impairments of $10.1 million for Nutrimetics, $4.2 million for NaturCare and $2.0 million for Avroy Shlain in the second quarter of 2009. In addition to the impairment of tradenames, the Company also recognized impairments of goodwill of $8.6 million and $3.2 million relating to the Nutrimetics and South African beauty reporting units, respectively. In the third quarter of 2009, the Company completed annual impairment tests for all of the reporting units, other than BeautiControl which was completed in the second quarter, noting no further impairment. Refer to Note 8 to the Consolidated Financial Statements for further discussion of goodwill and tradename valuations and impairments.
Gross Margin
Gross margin as a percentage of sales was 66.5 percent in the third quarter of 2009 and 63.7 percent in the third quarter of 2008. For the year-to-date periods, gross margin as a percentage of sales was 66.1 percent in 2009 compared with 64.6 percent in 2008. The increase was due mainly to sales of a more favorable product mix in most of the segments and the benefit of lower resin prices and freight costs. There was also a $1.8 million cost in the third quarter of 2008, which did not recur in 2009, to write down inventory in the Brazil beauty business as previously noted. Partially offsetting these improvements in margin was a negative impact from the Company's non-euro markets in Europe as most of these currencies have devalued significantly versus the euro and most of the products for these markets are produced in the Company's manufacturing units that incur costs in euro.
As discussed in Note 2 to the Consolidated Financial Statements, the Company includes costs related to the distribution of its products in delivery, sales and administrative expense. As a result, the Company's gross margin may not be comparable with other companies that include these costs in costs of products sold.
Costs and Expenses
Delivery, sales and administrative expense (DS&A) declined as a percentage of sales to 55.4 percent in the third quarter of 2009, compared with 55.5 percent in 2008. For the year-to-date periods, DS&A as a percentage of sales was 54.4 percent in 2009 compared with 54.8 percent in 2008. Contributing to the improvements in DS&A in the third quarter of 2009 was a decrease in distribution costs due to lower fuel costs compared with the same period last year and the benefits of expense savings action plans. As previously noted, the Company began selling beauty products in Brazil through its Tupperware sales force rather than through a separate beauty business it had been operating resulting in more favorable 2009 DS&A ratios. Partially offsetting the items favorably impacting the DS&A ratios were slightly higher promotional and marketing expenses as the Company worked to continue to motivate its sales forces in its Beauty North America segment, as well as investments in brand building activities in certain markets particularly in Asia Pacific. The factors impacting the year-to-date comparison were similar to those impacting the quarter, although, for the year-to-date period promotional spending was lower compared to the same period of 2008 resulting from improved structures in promotional offers.
Also contributing to this decrease was less amortization expense related to definite-lived intangible assets acquired with the direct selling businesses of Sara Lee Corporation in December 2005. These intangible assets are primarily the value of independent sales forces. The amortization is recorded to reflect the estimated turnover rates of the sales forces and was $1.3 million in the third quarter of 2009 as compared with $2.4 million in the same period of 2008. For the full year of 2009, the amortization is expected to be $5.1 million versus $9.0 million in 2008.
Net Interest Expense
Net interest expense was $7.6 million for the third quarter of 2009 compared with $9.0 million for the same period of 2008. For the year-date-period of 2009 net interest expense was $21.2 million compared with $25.3 million for the same period of 2008. The decreases were mainly related to a lower average debt level and lower U.S. interest rates in 2009 compared with 2008.
Tax Rate
The effective tax rate for the third quarter was 23.9 percent compared with 15.4 percent for the comparable 2008 period. The change is related to recognizing a greater net benefit in the third quarter of 2008 for various foreign tax adjustments and the expiration of statutes of limitations. The effective tax rate for the year-to-date period of 2009 was 26.5 percent compared with 19.2 percent for the comparable 2008 period. The increase was mainly due to the negative impact of not having a tax benefit associated with certain intangible impairment charges recorded in the second quarter of 2009 and a shift in the mix of income to jurisdictions with higher tax rates. The effective tax rates are below the U.S. statutory rate reflecting the availability of foreign tax credits as well as lower foreign effective tax rates.
As discussed in Note 15 to the Consolidated Financial Statements, the accounting guidance for uncertain tax positions could result in the potential for volatility surrounding the recognition and derecognition of uncertain tax positions, including the timing of those adjustments. At this time, the Company is unable to estimate what impact this may have on any individual quarter. As such, it is reasonably possible that the effective tax rates in any individual quarter will vary from the full year expectation.
Net Income
Net income in the third quarter of 2009 increased by 17 percent compared to the same period of 2008; however, this was negatively impacted by weaker foreign currencies. Excluding the impact of these currencies, net income increased 57 percent in the third quarter compared with last year. The increase in net income this quarter was from higher profitability in the Company's operating segments, other than Beauty North America, reflecting higher sales levels, and the improved gross profit and DS&A percentages as outlined above. This was partially offset by a $4.9 million foreign exchange transaction loss in 2009 to convert Venezuelan bolivars to US dollars at a rate worse than that used to translate the balance sheet and a higher tax rate.
Net income for the year-to-date period of 2009 was also negatively impacted by weaker foreign currencies resulting in lower net income of 5 percent. Excluding the impact of these currencies, net income increased 41 percent for the year-to-date period of 2009. The factors impacting the year-to-date net income comparisons were similar to those impacting the third quarter comparisons. Also impacting the year-to-date comparison was the pre-tax gain of $10.1 million from insurance recoveries associated with the 2007 fire in South Carolina and a higher impairment charge related to the Company's tradenames and goodwill in the second quarter of 2009 than in the second quarter of 2008.
International operations in the third quarter generated 86 percent and 85 percent of sales, respectively, in 2009 and 2008, and accounted for 95 percent and 93 percent of net segment profit. For the year-to-date periods, international operations generated 86 percent of sales and 94 percent of net segment profit in both 2009 and 2008.
The Company generated 30 percent of its third quarter and year-to-date 2009 sales from beauty products, as compared with 35 percent in the third quarter of 2008 and 34 percent for the year-to-date period of 2008.
Segment Results
Europe
Change
excluding
the impact Foreign
of foreign exchange
2009 2008 Change exchange (a) impact (a) Percent of total
dollars in millions 2009 2008
Third Quarter
Net sales $ 157.6 $ 159.2 (1 )% 6 % $ (10.7 ) 31 31
Segment profit 19.3 13.5 45 67 (1.8 ) 30 27
Segment profit as percentage of sales 12.2 % 8.5 % 3.7pp na na na na
Change
excluding
the impact Foreign
of foreign exchange
2009 2008 Change exchange (a) impact (a) Percent of total
dollars in millions 2009 2008
Year-to-Date
Net sales $ 514.8 $ 582.7 (12 )% 2 % $ (80.1 ) 34 36
Segment profit 80.7 81.5 (1 ) 21 (14.6 ) 39 44
Segment profit as percentage of sales 15.7 % 14.0 % 1.7pp na na na na
|
a 2009 actual compared with 2008 translated at 2009 exchange rates.
na not applicable
pp percentage points
Local currency sales in Europe showed a modest increase in the third quarter of 2009 compared with the same period of 2008. The segment continues to achieve growth through its emerging markets with a significant increase in Tupperware South Africa, Turkey and Russia. Emerging markets, those with a "low" or "medium" GDP per capita as reported by the World Bank, accounted for 42 percent of reported net sales in this segment for both the third quarter of 2009 and 2008. The overall improvement in sales in these markets was due to strong promotions and the continued growth in the total sales force, achieved through successful recruiting of new sellers. Partially offsetting the growth in these emerging markets was a local currency sales decline in Hungary due to lower sales force levels resulting from a drop in recruiting and lower local currency sales in the beauty businesses in South Africa resulting from a less productive sales force due, in part, to a change in credit terms for the sales force.
The segment's reported sales in the third quarter of 2009 in the established markets were about even compared with the same period of 2008, although in local currency sales were up 4 percent. The performance in the established markets was driven by significant improvements in France and Austria, resulting from higher and more productive sales forces. Local currency sales in Germany were about even in the third quarter of 2009 compared with the same period last year which was an improvement compared to the first half of 2009 as this market continues to focus on improving recruiting and activity. Although the German sales force was lower during the third quarter compared to 2008, it was more productive due to successful incentive programs. On a year-to-date basis, local currency sales were down by a single digit percentage in Germany, from a lower and less productive sales force in the first half of the year. In Germany, the Company has implemented some of the approaches that have worked successfully in France and has put in place a program designed to increase the number of sales force leaders developed.
The year-to-date sales variances were similar to those of the quarter.
Segment profit was up significantly during the third quarter of 2009, despite the negative impact on the comparison of exchange rate fluctuations. The local currency increase in segment profit was mainly driven by higher margins from lower resin prices and a better mix of products sold. On a year-to-date basis segment profit decreased $0.8 million as reported, which was negatively impacted by changes in foreign currencies. Excluding the impact of exchange rates on the year-to-date period, segment profit increased 21 percent compared with the same period of 2008. The reasons for the improvement in segment profit were similar to those of the quarter as well as lower promotional spending resulting from improved program structures.
The euro and Russian ruble were the main currencies that led to the negative impact from exchange rates on the quarter and year-over-year sales and segment profit comparisons.
Asia Pacific
Change
excluding
the impact Foreign
of foreign exchange
2009 2008 Change exchange (a) impact (a) Percent of total
dollars in millions 2009 2008
Third Quarter
Net sales $ 103.0 $ 88.3 17 % 18 % $ (1.2 ) 20 17
Segment profit 22.9 18.0 27 36 (1.2 ) 36 36
Segment profit as percentage of sales 22.2 % 20.4 % 1.8 pp na na na na
Change
excluding
the impact Foreign
of foreign exchange
. . .
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