| | | | | |
| Item 1. | Financial Statements (unaudited) |
Primo Water Corporation
Consolidated Statements of Operations
(in millions of U.S. dollars, except share and per share amounts)
Unaudited
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | |
| | April 2, 2022 | | April 3, 2021 | | | | |
| Revenue, net | $ | 526.1 | | | $ | 478.4 | | | | | |
| Cost of sales | 226.5 | | | 213.9 | | | | | |
| Gross profit | 299.6 | | | 264.5 | | | | | |
| Selling, general and administrative expenses | 278.3 | | | 248.0 | | | | | |
| Loss on disposal of property, plant and equipment, net | 1.7 | | | 2.1 | | | | | |
| Acquisition and integration expenses | 4.3 | | | 1.3 | | | | | |
| | | | | | | |
| Operating income | 15.3 | | | 13.1 | | | | | |
| Other expense (income), net | 2.7 | | | (0.4) | | | | | |
| Interest expense, net | 16.9 | | | 19.0 | | | | | |
| Loss before income taxes | (4.3) | | | (5.5) | | | | | |
| Income tax expense | 2.4 | | | 4.7 | | | | | |
| Net loss | $ | (6.7) | | | $ | (10.2) | | | | | |
| | | | | | | |
| Net loss per common share | | | | | | | |
| Basic | $ | (0.04) | | | $ | (0.06) | | | | | |
| Diluted | $ | (0.04) | | | $ | (0.06) | | | | | |
| Weighted average common shares outstanding (in thousands) | | | | | | | |
| Basic | 160,928 | | | 160,634 | | | | | |
| Diluted | 160,928 | | | 160,634 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Primo Water Corporation
Condensed Consolidated Statements of Comprehensive Loss
(in millions of U.S. dollars)
Unaudited
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | |
| | April 2, 2022 | | April 3, 2021 | | | | |
| Net loss | $ | (6.7) | | | $ | (10.2) | | | | | |
| Other comprehensive (loss) income: | | | | | | | |
| Currency translation adjustment | (0.1) | | | 6.5 | | | | | |
| | | | | | | |
| | | | | | | |
| Comprehensive loss | $ | (6.8) | | | $ | (3.7) | | | | | |
______________________
The accompanying notes are an integral part of these consolidated financial statements.
Primo Water Corporation
Consolidated Balance Sheets
(in millions of U.S. dollars, except share amounts)
Unaudited
| | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
| ASSETS | | | |
| Current assets | | | |
| Cash and cash equivalents | $ | 98.0 | | | $ | 128.4 | |
Accounts receivable, net of allowance of $21.4 ($20.8 as of January 1, 2022) | 270.5 | | | 261.6 | |
| Inventories | 105.2 | | | 94.6 | |
| Prepaid expenses and other current assets | 31.3 | | | 25.2 | |
| Total current assets | 505.0 | | | 509.8 | |
| Property, plant and equipment, net | 710.6 | | | 718.1 | |
| Operating lease right-of-use-assets | 173.0 | | | 177.4 | |
| Goodwill | 1,317.7 | | | 1,321.4 | |
| Intangible assets, net | 944.1 | | | 969.8 | |
| | | |
| Other long-term assets, net | 29.4 | | | 26.9 | |
| Total assets | $ | 3,679.8 | | | $ | 3,723.4 | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities | | | |
| Short-term borrowings | $ | 225.8 | | | $ | 222.1 | |
| Current maturities of long-term debt | 17.1 | | | 17.7 | |
| Accounts payable and accrued liabilities | 424.7 | | | 437.7 | |
| Current operating lease obligations | 33.6 | | | 32.3 | |
| Total current liabilities | 701.2 | | | 709.8 | |
| Long-term debt | 1,307.4 | | | 1,321.1 | |
| Operating lease obligations | 142.8 | | | 148.7 | |
| Deferred tax liabilities | 159.3 | | | 158.8 | |
| Other long-term liabilities | 64.6 | | | 64.9 | |
| Total liabilities | 2,375.3 | | | 2,403.3 | |
| Shareholders' Equity | | | |
Common shares, no par value - 161,075,550 (January 1, 2022 - 160,732,552) shares issued | 1,291.6 | | | 1,286.9 | |
| Additional paid-in-capital | 83.9 | | | 85.9 | |
| (Accumulated deficit) retained earnings | (1.8) | | | 16.4 | |
| Accumulated other comprehensive loss | (69.2) | | | (69.1) | |
| Total shareholders' equity | 1,304.5 | | | 1,320.1 | |
| Total liabilities and shareholders' equity | $ | 3,679.8 | | | $ | 3,723.4 | |
The accompanying notes are an integral part of these consolidated financial statements.
Primo Water Corporation
Consolidated Statements of Cash Flows
(in millions of U.S. dollars)
Unaudited
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | |
| | April 2, 2022 | | April 3, 2021 | | | | |
| Cash flows from operating activities: | | | | | | | |
| Net loss | $ | (6.7) | | | $ | (10.2) | | | | | |
| | | | | | | |
| Adjustments to reconcile net loss to cash flows from operating activities of continuing operations: | | | | | | | |
| Depreciation and amortization | 61.2 | | | 53.1 | | | | | |
| Amortization of financing fees | 0.9 | | | 0.8 | | | | | |
| Share-based compensation expense | 3.3 | | | 2.4 | | | | | |
| Provision for deferred income taxes | 1.6 | | | 3.6 | | | | | |
| | | | | | | |
| Gain on sale of business | (0.4) | | | — | | | | | |
| | | | | | | |
| Loss on disposal of property, plant and equipment, net | 1.7 | | | 2.1 | | | | | |
| Other non-cash items | 2.1 | | | 0.2 | | | | | |
| Change in operating assets and liabilities, net of acquisitions: | | | | | | | |
| Accounts receivable | (11.9) | | | (9.7) | | | | | |
| Inventories | (11.1) | | | 3.2 | | | | | |
| Prepaid expenses and other current assets | (6.2) | | | (2.2) | | | | | |
| Other assets | (0.7) | | | 0.1 | | | | | |
| Accounts payable and accrued liabilities and other liabilities | (10.2) | | | (14.7) | | | | | |
| Net cash provided by operating activities from continuing operations | 23.6 | | | 28.7 | | | | | |
| Cash flows from investing activities of continuing operations: | | | | | | | |
| Acquisitions, net of cash received | (0.3) | | | — | | | | | |
| Additions to property, plant and equipment | (38.6) | | | (27.0) | | | | | |
| Additions to intangible assets | (2.5) | | | (2.3) | | | | | |
| Proceeds from sale of property, plant and equipment | 0.4 | | | 0.1 | | | | | |
| | | | | | | |
| | | | | | | |
| Other investing activities | 0.5 | | | — | | | | | |
| Net cash used in investing activities from continuing operations | (40.5) | | | (29.2) | | | | | |
| | | | | | | | | | | | | | | |
| Cash flows from financing activities of continuing operations: | | | | | | | |
| Payments of long-term debt | (4.5) | | | (3.4) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Issuance of common shares | 1.2 | | | 1.0 | | | | | |
| Common shares repurchased and canceled | (1.8) | | | (3.1) | | | | | |
| Financing fees | — | | | (0.7) | | | | | |
| Dividends paid to common shareholders | (11.3) | | | (9.7) | | | | | |
| Payment of deferred consideration for acquisitions | (0.1) | | | (1.7) | | | | | |
| Other financing activities | 3.9 | | | 5.2 | | | | | |
| Net cash used in financing activities from continuing operations | (12.6) | | | (12.4) | | | | | |
| Cash flows from discontinued operations: | | | | | | | |
| Operating activities of discontinued operations | — | | | 0.8 | | | | | |
| Investing activities of discontinued operations | — | | | — | | | | | |
| Financing activities of discontinued operations | — | | | — | | | | | |
| Net cash provided by discontinued operations | — | | | 0.8 | | | | | |
| Effect of exchange rate changes on cash | (0.9) | | | (0.8) | | | | | |
| Net decrease in cash, cash equivalents and restricted cash | (30.4) | | | (12.9) | | | | | |
| Cash and cash equivalents and restricted cash, beginning of period | 128.4 | | | 115.1 | | | | | |
| Cash and cash equivalents and restricted cash, end of period | $ | 98.0 | | | $ | 102.2 | | | | | |
| Supplemental Non-cash Investing and Financing Activities: | | | | | | | |
| Accrued deferred financing fees | $ | — | | | $ | 0.1 | | | | | |
| Dividends payable issued through accounts payable and accrued liabilities | 0.2 | | | 0.1 | | | | | |
| Additions to property, plant and equipment through accounts payable and accrued liabilities and other liabilities | 24.2 | | | 17.9 | | | | | |
| Financing lease right-of-use assets obtained in exchange for lease obligations | 2.7 | | | 2.6 | | | | | |
| Operating lease right-of-use assets obtained in exchange for lease obligations | 5.5 | | | 6.7 | | | | | |
| Supplemental Disclosures of Cash Flow Information: | | | | | | | |
| Cash paid for interest | $ | 3.5 | | | $ | 23.3 | | | | | |
| Cash paid for income taxes, net | 1.0 | | | 1.9 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Primo Water Corporation
Consolidated Statements of Equity
(in millions of U.S. dollars, except share and per share amounts)
Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Common Shares (In thousands) | | Common Shares | | Additional Paid-in-Capital | | Retained
Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
| Balance at January 2, 2021 | 160,406 | | | $ | 1,268.0 | | | $ | 84.5 | | | $ | 81.1 | | | $ | (86.7) | | | $ | 1,346.9 | |
| | | | | | | | | | | |
| Net loss | — | | | — | | | — | | | (10.2) | | | — | | | (10.2) | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 6.5 | | | 6.5 | |
Common shares dividends ($0.06 per common share) | — | | | — | | | — | | | (9.8) | | | — | | | (9.8) | |
| Share-based compensation | — | | | — | | | 2.4 | | | — | | | — | | | 2.4 | |
| Common shares repurchased and canceled | (179) | | | (3.1) | | | — | | | — | | | — | | | (3.1) | |
| Common shares issued - Equity Incentive Plan | 565 | | | 8.9 | | | (5.3) | | | — | | | — | | | 3.6 | |
| | | | | | | | | | | |
| Common shares issued - Employee Stock Purchase Plan | 26 | | | 0.4 | | | — | | | — | | | — | | | 0.4 | |
| Balance at April 3, 2021 | 160,818 | | | $ | 1,274.2 | | | $ | 81.6 | | | $ | 61.1 | | | $ | (80.2) | | | $ | 1,336.7 | |
| | | | | | | | | | | |
| Number of
Common
Shares
(In thousands) | | Common Shares | | Additional Paid-in-Capital | | (Accumulated Deficit) Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Shareholders' Equity |
| Balance at January 1, 2022 | 160,732 | | | $ | 1,286.9 | | | $ | 85.9 | | | $ | 16.4 | | | $ | (69.1) | | | $ | 1,320.1 | |
| Net loss | — | | | — | | | — | | | (6.7) | | | — | | | (6.7) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (0.1) | | | (0.1) | |
Common shares dividends ($0.07 per common share) | — | | | — | | | — | | | (11.5) | | | — | | | (11.5) | |
| Share-based compensation | — | | | — | | | 3.3 | | | — | | | — | | | 3.3 | |
| Common shares repurchased and canceled | (114) | | | (1.8) | | | — | | | — | | | — | | | (1.8) | |
| Common shares issued - Equity Incentive Plan | 432 | | | 6.1 | | | (5.3) | | | — | | | — | | | 0.8 | |
| | | | | | | | | | | |
| Common shares issued - Employee Stock Purchase Plan | 25 | | | 0.4 | | | — | | | — | | | — | | | 0.4 | |
| Balance at April 2, 2022 | 161,075 | | | $ | 1,291.6 | | | $ | 83.9 | | | $ | (1.8) | | | $ | (69.2) | | | $ | 1,304.5 | |
The accompanying notes are an integral part of these consolidated financial statements.
Primo Water Corporation
Notes to the Consolidated Financial Statements
Unaudited
Note 1—Business and Recent Accounting Pronouncements
Description of Business
As used herein, “Primo,” “the Company,” “our Company,” “Primo Water Corporation,” “we,” “us,” or “our” refers to Primo Water Corporation, together with its consolidated subsidiaries. Primo is a leading provider of sustainable drinking water solutions in North America and Europe. Primo operates largely under a recurring razor/razorblade revenue model. The razor in Primo’s revenue model is its industry leading line-up of sleek and innovative water dispensers, which are sold through retailers and online at various price points. The dispensers help increase household penetration, which drives recurring purchases of Primo’s razorblade offering. Primo’s razorblade offering is comprised of Water Direct, Water Exchange, and Water Refill. Through its Water Direct business, Primo delivers sustainable hydration solutions across its 22-country footprint direct to the customer’s door, whether at home or to businesses. Through its Water Exchange and Water Refill businesses, Primo offers pre-filled and reusable containers at over 13,000 locations and water refill units at approximately 23,000 locations, respectively. Primo also offers water filtration units across its 22-country footprint.
Primo’s water solutions expand consumer access to purified, spring and mineral water to promote a healthier, more sustainable lifestyle while simultaneously reducing plastic waste and pollution. Primo is committed to its water stewardship standards and is proud to partner with the International Bottled Water Association in North America as well as with Watercoolers Europe, which ensure strict adherence to safety, quality, sanitation and regulatory standards for the benefit of consumer protection. During 2020, our U.S. operations achieved a carbon neutral certification under the CarbonNeutral Protocol, an international standard administered by Natural Capital Partners. This certification is in addition to the certifications in our European operations where we have maintained carbon neutrality for the past ten consecutive years in many of our markets. In 2021, the Company achieved carbon neutrality on a global basis. In late 2021, Primo announced its planned exit from the North American small-format retail water business. This business is relatively small and uses predominantly single-use plastic bottles. The exit from this category is estimated to reduce production of plastic water bottles by more than 400 million, annually, while also improving overall margins. The exit is anticipated to be completed by the middle of 2022.
Basis of Presentation
The accompanying interim unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of our results of operations for the interim periods reported and of our financial condition as of the date of the interim balance sheet have been included. The Consolidated Balance Sheet as of January 1, 2022 included herein was derived from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (our “2021 Annual Report”). This Quarterly Report on Form 10-Q should be read in conjunction with the annual audited Consolidated Financial Statements and accompanying notes in our 2021 Annual Report. The accounting policies used in these interim Consolidated Financial Statements are consistent with those used in the annual Consolidated Financial Statements.
The presentation of these interim Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.
COVID-19 Pandemic
In response to the novel coronavirus (“COVID-19”) pandemic, certain government authorities have enacted programs which provide various economic stimulus measures, including several tax provisions. Among the business tax provisions is the deferral of certain payroll and other tax remittances to future years and wage subsidies as reimbursement for a portion of certain furloughed employees’ salaries. During the three months ended April 2, 2022 and April 3, 2021, we received wage subsidies under these programs totaling $0.3 million and $1.4 million, respectively. We review our eligibility for these programs for each qualifying period and account for such wage subsidies on an accrual basis when the conditions for eligibility are met. We have adopted an accounting policy to present wage subsidies as a reduction of selling, general and administrative (“SG&A”) expenses. In addition, deferred payroll and other taxes totaling $7.5 million was included in accounts payable and accrued liabilities on our Consolidated Balance Sheets as of April 2, 2022 and January 1, 2022.
Significant Accounting Policies
Included in Note 1 of our 2021 Annual Report is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the financial results of the Company.
Cost of sales
We record costs associated with the manufacturing of our products in cost of sales. Shipping and handling costs incurred to store, prepare and move products between production facilities or from production facilities to branch locations or storage facilities are recorded in cost of sales. Shipping and handling costs incurred to deliver products from our North America and Rest of World reporting segment branch locations to the end-user consumer of those products are recorded in SG&A expenses. All other costs incurred in the shipment of products from our production facilities to customer locations are reflected in cost of sales. Shipping and handling costs included in SG&A expenses were $127.3 million and $110.1 million for the three months ended April 2, 2022 and April 3, 2021, respectively. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production.
Recently adopted accounting pronouncements
Update ASU 2021-10- Government Assistance (Topic 832)
In November 2021, the Financial Accounting Standards Board ("FASB") issued guidance which requires business entities to disclose information about certain government assistance they receive. The amendments in this Update are effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. Early application of the amendments is permitted. An entity should apply the amendments in this Update either (1) prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or (2) retrospectively to those transactions. Adoption of the new standard did not result in additional disclosures within our unaudited Consolidated Financial Statements.
Recently issued accounting pronouncements
Update ASU 2020-04 – Reference Rate Reform (Topic 848)
In March 2020, the FASB issued guidance which provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or any other reference rates expected to be discontinued because of reference rate reform. This guidance is effective as of March 12, 2020 through December 31, 2022 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and do not expect a material impact at this time. We elected to apply the debt agreement expedient and therefore will account for debt agreement amendments as if the modification was not substantial and thus a continuation of the existing contract. Additional elections of expedients and exceptions provided under the ASU will be made when contract modifications in response to reference rate reform commence.
Update ASU 2021-08- Business Combinations (Topic 805)
In October 2021, the FASB issued guidance that requires entities to use principles in ASC 606 to recognize and measure contract assets and liabilities in revenue contracts acquired in a business combination rather than fair value. For public entities, this guidance is effective after December 15, 2022 for annual and interim periods. Early adoption is permitted, including adoption in an interim period. If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Note 2—Revenue
Our principal sources of revenue are from bottled water delivery direct to consumers primarily in North America and Europe and from providing multi-gallon purified bottled water, self-service refill drinking water and water dispensers through retailers in North America. Revenue is recognized, net of sales returns, when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based on the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a contractual promise to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when the customer receives the benefit of the performance obligation. Customers typically receive the benefit of our services as they are performed. Substantially all our customer contracts require that we be compensated for services performed to date. This may be upon shipment of goods or upon delivery to the customer, depending on contractual terms. Shipping and handling costs paid by the customer to us are included in revenue and costs incurred by us for shipping and handling activities that are performed after a customer obtains control of the product are accounted for as fulfillment costs. In addition, we exclude from net revenue and cost of sales taxes assessed by governmental authorities on revenue-producing transactions. Although we occasionally accept returns of products from our customers, historically returns have not been material.
Contract Estimates
The nature of certain of our contracts give rise to variable consideration including cash discounts, volume-based rebates, point of sale promotions, and other promotional discounts to certain customers. For all promotional programs and discounts, we estimate the rebate or discount that will be granted to the customer and record an accrual upon invoicing. These estimated rebates or discounts are included in the transaction price of our contracts with customers as a reduction to net revenues and are included as accrued sales incentives in accounts payable and accrued liabilities in the Consolidated Balance Sheets. Accrued sales incentives were $7.5 million and $8.0 million on April 2, 2022 and January 1, 2022, respectively.
We do not disclose the value of unsatisfied performance obligations for contracts (i) with an original expected length of one year or less or (ii) for which we recognize revenue at the amount in which it has the right to invoice as the product is delivered.
Contract Balances
Contract liabilities relate primarily to advances received from our customers before revenue is recognized. These amounts are recorded as deferred revenue and are included in accounts payable and accrued liabilities in the Consolidated Balance Sheets. The advances are expected to be earned as revenue within one year of receipt. Deferred revenues at April 2, 2022 and January 1, 2022 were $15.9 million and $12.6 million, respectively. The amount of revenue recognized in the three months ended April 2, 2022 that was included in the January 1, 2022 deferred revenue balance was $8.6 million.
The Company does not have any material contract assets as of April 2, 2022 and January 1, 2022.
Disaggregated Revenue
In general, our business segmentation is aligned according to the nature and economic characteristics of our products and customer relationships and provides meaningful disaggregation of each business segment’s results of operations.
Further disaggregation of net revenue to external customers by geographic area based on customer location is as follows:
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | |
| (in millions of U.S. dollars) | April 2, 2022 | | April 3, 2021 | | | | |
| United States | $ | 381.8 | | | $ | 349.9 | | | | | |
| United Kingdom | 41.4 | | | 36.7 | | | | | |
| Canada | 15.4 | | | 15.9 | | | | | |
| All other countries | 87.5 | | | 75.9 | | | | | |
| Total | $ | 526.1 | | | $ | 478.4 | | | | | |
Note 3—Acquisitions
SipWell Acquisition
On December 30, 2021, Eden Springs Netherlands B.V., a wholly owned subsidiary of the Company ("Eden"), completed the acquisition of Sip-Well NV, the leading distributor of water solutions in Belgium (the "SipWell Acquisition"). The total cash consideration paid by Eden in the SipWell Acquisition was $53.1 million, subject to adjustments for any non-permitted leakage since a locked box date. The SipWell Acquisition was funded through a combination of incremental borrowings under the Company’s Revolving Credit Facility and cash on hand.
The SipWell Acquisition strengthens the Company's presence in Western and Central Europe. The Company has accounted for this transaction as a business combination which requires that assets acquired and liabilities assumed be measured at their acquisition date fair values.
A preliminary allocation of the total cash consideration paid of $53.1 million has been made to the major categories of assets acquired and liabilities assumed based on management's estimates of their fair values as of the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill.
The table below presents the preliminary total cash consideration allocation of the estimated acquisition date fair values of the assets acquired and liabilities assumed:
| | | | | | | | | | | | | | | | | |
| (in millions of U.S. dollars) | Originally Reported | | Measurement Period Adjustments | | Acquired Value |
| Cash and cash equivalents | $ | 6.8 | | | $ | — | | | $ | 6.8 | |
| Accounts receivable | 1.3 | | | 0.4 | | | 1.7 | |
| Inventory | 0.1 | | | — | | | 0.1 | |
| Prepaid expenses and other current assets | 0.2 | | | — | | | 0.2 | |
| Property, plant and equipment | 21.7 | | | (3.0) | | | 18.7 | |
| Operating lease right-of-use-assets | 0.4 | | | 1.1 | | | 1.5 | |
| Goodwill | 38.1 | | | (0.4) | | | 37.7 | |
| Intangible assets | 20.0 | | | — | | | 20.0 | |
| Current maturities of long-term debt | (1.6) | | | 0.8 | | | (0.8) | |
| Accounts payable and accrued liabilities | (9.9) | | | — | | | (9.9) | |
| Current operating lease obligations | (0.4) | | | (0.3) | | | (0.7) | |
| Long-term debt | (17.7) | | | 2.2 | | | (15.5) | |
| Operating lease obligations | — | | | (0.8) | | | (0.8) | |
| Deferred tax liabilities | (5.9) | | | — | | | (5.9) | |
| Total | $ | 53.1 | | | $ | — | | | $ | 53.1 | |
Measurement period adjustments recorded during the three months ended April 2, 2022 include an adjustment to accounts receivable based on a review of the fair value and adjustments to operating and financing lease right-of-use assets and obligations based on a review of acquired leases. The measurement period adjustments did not have a material effect on our results of operations in prior periods.
The assets and liabilities acquired with the SipWell Acquisition are recorded at their estimated fair values per preliminary valuations and management estimates and are subject to change when formal valuations and other studies are finalized. Estimated fair values for deferred tax balances are preliminary and are also subject to change based on the final valuation results. In addition, consideration for potential loss contingencies are still under review.
Note 4—Income Taxes
Income tax expense was $2.4 million on pre-tax loss of $4.3 million for the three months ended April 2, 2022, as compared to income tax expense of $4.7 million on pre-tax loss of $5.5 million in the comparable prior year period. The effective income tax rate for the three months ended April 2, 2022 was (55.8)%, compared to (85.5)% in the comparable prior year period.
The effective tax rate for the three months ended April 2, 2022 varied from the effective tax rate in the comparable prior year period due primarily to decreased earnings in taxable jurisdictions.
The effective tax rate for the three months ended April 2, 2022 varied from the statutory tax rate primarily due to losses in tax jurisdictions for which no tax benefit is recognized due to existing valuation allowances, as well as income in tax jurisdictions with tax rates lower than the Canadian statutory tax rate.
Note 5—Common Shares and Net Loss per Common Share
Common Shares
On May 4, 2021, our Board of Directors approved a new share repurchase program for up to $50.0 million of our outstanding common shares over a 12-month period commencing on May 10, 2021. We did not repurchase any outstanding common shares under the plan during the first quarter of 2022. There can be no assurance as to the precise number of common shares, if any, that will be repurchased under the Repurchase Plan in the future, or the aggregate dollar amount of common shares to be purchased in future periods. We may discontinue purchases at any time, subject to compliance with applicable regulatory requirements.
Net Loss per Common Share
Basic net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding during the periods presented. Diluted net loss per common share is calculated by dividing net loss by the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, of the exercise of in-the-money stock options, performance-based RSUs, and time-based RSUs during the periods presented. The components of weighted average basic and diluted shares outstanding are below:
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| | For the Three Months Ended | | |
| | April 2, 2022 | | April 3, 2021 | | | | |
| Weighted average common shares outstanding - basic | 160,928 | | | 160,634 | | | | | |
| Dilutive effect of Stock Options | — | | | — | | | | | |
| Dilutive effect of Performance-based RSUs | — | | | — | | | | | |
| Dilutive effect of Time-based RSUs | — | | | — | | | | | |
| Weighted average common shares outstanding - diluted | 160,928 | | | 160,634 | | | | | |
The following table summarizes anti-dilutive securities excluded from the computation of diluted net loss per common share for the periods indicated:
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| | For the Three Months Ended | | |
| (in thousands) | April 2, 2022 | | April 3, 2021 | | | | |
| Stock Options | 4,715 | | | 7,206 | | | | | |
Performance-based RSUs 1 | 1,201 | | | 838 | | | | | |
Time-based RSUs 2 | 887 | | | 485 | | | | | |
______________________
1 Performance-based RSUs represent the number of shares expected to be issued based primarily on the estimated achievement of performance targets for these awards.
2 Time-based RSUs represent the number of shares expected to be issued based on known employee retention information.
Note 6—Segment Reporting
Our broad portfolio of products includes bottled water, water dispensers, self-service refill drinking water, premium spring, sparkling and flavored water, mineral water, filtration equipment, and coffee.
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| (in millions of U.S. dollars) | North America | | Rest of World | | All Other | | Total |
| For the Three Months Ended April 2, 2022 | | | | | | | |
| Revenue, net | $ | 397.1 | | | $ | 129.0 | | | $ | — | | | $ | 526.1 | |
| Depreciation and amortization | 45.3 | | | 15.5 | | | 0.4 | | | 61.2 | |
| Operating income (loss) | 28.3 | | | (3.2) | | | (9.8) | | | 15.3 | |
| Additions to property, plant and equipment | 26.6 | | | 11.7 | | | 0.3 | | | 38.6 | |
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| (in millions of U.S. dollars) | North America | | Rest of World | | All Other | | Total |
| For the Three Months Ended April 3, 2021 | | | | | | | |
| Revenue, net | $ | 365.5 | | | $ | 112.9 | | | $ | — | | | $ | 478.4 | |
| Depreciation and amortization | 37.8 | | | 14.9 | | | 0.4 | | | 53.1 | |
Operating income (loss) | 26.1 | | | (3.6) | | | (9.4) | | | 13.1 | |
| Additions to property, plant and equipment | 20.2 | | | 6.7 | | | 0.1 | | | 27.0 | |
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Revenues by channel by reporting segment were as follows:
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| | For the Three Months Ended April 2, 2022 |
| (in millions of U.S. dollars) | North America | | Rest of World | | All Other | | Total |
| Revenue, net | | | | | | | |
| Water Direct/Water Exchange | $ | 278.3 | | | $ | 59.0 | | | $ | — | | | $ | 337.3 | |
| Water Refill/Water Filtration | 42.2 | | | 8.7 | | | — | | | 50.9 | |
| Other Water | 34.0 | | | 16.4 | | | — | | | 50.4 | |
| Water Dispensers | 14.2 | | | — | | | — | | | 14.2 | |
| Other | 28.4 | | | 44.9 | | | — | | | 73.3 | |
| Total | $ | 397.1 | | | $ | 129.0 | | | $ | — | | | $ | 526.1 | |
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| For the Three Months Ended April 3, 2021 |
| (in millions of U.S. dollars) | North America | | Rest of World | | All Other | | Total |
| Revenue, net | | | | | | | |
| Water Direct/Water Exchange | $ | 238.8 | | | $ | 48.8 | | | $ | — | | | $ | 287.6 | |
| Water Refill/Water Filtration | 45.1 | | | 7.9 | | | — | | | 53.0 | |
| Other Water | 40.9 | | | 15.4 | | | — | | | 56.3 | |
| Water Dispensers | 15.0 | | | — | | | — | | | 15.0 | |
| Other | 25.7 | | | 40.8 | | | — | | | 66.5 | |
| Total | $ | 365.5 | | | $ | 112.9 | | | $ | — | | | $ | 478.4 | |
Note 7—Inventories
The following table summarizes inventories as of April 2, 2022 and January 1, 2022:
| | | | | | | | | | | |
| (in millions of U.S. dollars) | April 2, 2022 | | January 1, 2022 |
| Raw materials | $ | 63.1 | | | $ | 56.7 | |
| Finished goods | 30.2 | | | 27.0 | |
| Resale items | 10.1 | | | 9.1 | |
| Other | 1.8 | | | 1.8 | |
| Total | $ | 105.2 | | | $ | 94.6 | |
Note 8—Accumulated Other Comprehensive (Loss) Income
Changes in accumulated other comprehensive (loss) income (“AOCI”) by component for the three months ended April 2, 2022 and April 3, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) 1 | Gains and Losses
on Derivative
Instruments | | Pension
Benefit
Plan Items | | Currency
Translation
Adjustment Items | | Total |
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| Beginning balance January 2, 2021 | $ | — | | | $ | (1.1) | | | $ | (85.6) | | | $ | (86.7) | |
| OCI before reclassifications | — | | | — | | | 6.5 | | | 6.5 | |
| Amounts reclassified from AOCI | — | | | — | | | — | | | — | |
| Net current-period OCI | — | | | — | | | 6.5 | | | 6.5 | |
| Ending balance April 3, 2021 | $ | — | | | $ | (1.1) | | | $ | (79.1) | | | $ | (80.2) | |
| | | | | | | |
| Beginning balance January 1, 2022 | $ | — | | | $ | (1.7) | | | $ | (67.4) | | | $ | (69.1) | |
| OCI before reclassifications | — | | | — | | | (0.1) | | | (0.1) | |
| Amounts reclassified from AOCI | | | — | | | — | | | — | |
| Net current-period OCI | — | | | — | | | (0.1) | | | (0.1) | |
| Ending balance April 2, 2022 | $ | — | | | $ | (1.7) | | | $ | (67.5) | | | $ | (69.2) | |
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______________________
1 All amounts are net of tax. Amounts in parentheses indicate debits.
There were no amounts reclassified from AOCI for the three months ended April 2, 2022 and April 3, 2021, respectively.
Note 9—Commitments and Contingencies
We are subject to various claims and legal proceedings with respect to matters such as governmental regulations and other actions arising out of the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect on our financial position, results of operations, or cash flow.
We had $59.4 million in standby letters of credit outstanding as of April 2, 2022 ($59.4 million as of January 1, 2022).
Guarantees
After the sale of our legacy carbonated soft drink and juice business in January 2018, we have continued to provide contractual payment guarantees to two third-party lessors of certain real property used in these businesses. The leases were conveyed to the buyer as part of the sale, but our guarantee was not released by the landlord. The two lease agreements mature in 2027 and 2028. The maximum potential amount of undiscounted future payments under the guarantee is approximately $15.7 million as of April 2, 2022, which was calculated based on the minimum lease payments of the leases over the remaining term of the agreements. The sale documents require the buyer to pay all post-closing obligations under these conveyed leases, and to reimburse us if the landlord calls on a guarantee. The buyer has also agreed to a covenant to negotiate with the landlords for a release of our guarantees. We currently do not believe it is probable we would be required to perform under any of these guarantees or any of the underlying obligations.
Note 10—Fair Value Measurements
FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Fair Value of Financial Instruments
The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, receivables, payables, short-term borrowings, and long-term debt approximate their respective fair values, except as otherwise indicated. The carrying values and estimated fair values of our significant outstanding debt as of April 2, 2022 and January 1, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | April 2, 2022 | | January 1, 2022 |
| (in millions of U.S. dollars) | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
3.875% senior notes due in 2028 1, 2 | $ | 493.6 | | | $ | 461.4 | | | $ | 502.7 | | | $ | 516.2 | |
4.375% senior notes due in 2029 1,2 | 740.4 | | | 671.8 | | | 740.0 | | | 735.8 | |
| Total | $ | 1,234.0 | | | $ | 1,133.2 | | | $ | 1,242.7 | | | $ | 1,252.0 | |
______________________
1 The fair values were based on the trading levels and bid/offer prices observed by a market participant and are considered Level 2 financial instruments.
2 Carrying value of our significant outstanding debt is net of unamortized debt issuance costs as of April 2, 2022 and January 1, 2022.
Note 11—Subsequent Events
On May 10, 2022, our Board of Directors declared a dividend of $0.07 per share on common shares, payable in cash on June 22, 2022, to shareowners of record at the close of business on June 10, 2022.
On May 10, 2022, our Board of Directors approved the exit from our business in Russia. Primo has a small presence in Russia, with 2021 revenues of approximately $13.6 million, representing less than 1% of 2021 consolidated revenues. We are currently assessing the impact of the exit of this business on our Consolidated Financial Statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to further the reader’s understanding of the consolidated financial condition and results of operations of our Company. It should be read in conjunction with the financial statements included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (our “2021 Annual Report”). These historical financial statements may not be indicative of our future performance. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks referred to under “Risk Factors” in Part I, Item 1A in our 2021 Annual Report. As used herein, “Primo,” “the Company,” “Primo Water Corporation,” “we,” “us,” or “our” refers to Primo Water Corporation, together with its consolidated subsidiaries.
Overview
Primo is a leading provider of sustainable drinking water solutions in North America and Europe. Primo operates largely under a recurring razor/razorblade revenue model. The razor in Primo’s revenue model is its industry leading line-up of sleek and innovative water dispensers, which are sold through retailers and online at various price points. The dispensers help increase household penetration, which drives recurring purchases of Primo’s razorblade offering. Primo’s razorblade offering is comprised of Water Direct, Water Exchange, and Water Refill. Through its Water Direct business, Primo delivers sustainable hydration solutions across its 22-country footprint direct to the customer’s door, whether at home or to businesses. Through its Water Exchange and Water Refill businesses, Primo offers pre-filled and reusable containers at over 13,000 locations and water refill units at approximately 23,000 locations, respectively. Primo also offers water filtration units across its 22-country footprint.
Primo’s water solutions expand consumer access to purified, spring and mineral water to promote a healthier, more sustainable lifestyle while simultaneously reducing plastic waste and pollution. Primo is committed to its water stewardship standards and is proud to partner with the International Bottled Water Association in North America as well as with Watercoolers Europe, which ensure strict adherence to safety, quality, sanitation and regulatory standards for the benefit of consumer protection. During 2020, our U.S. operations achieved a carbon neutral certification under the CarbonNeutral Protocol, an international standard administered by Natural Capital Partners. This certification is in addition to the certifications in our European operations where we have maintained carbon neutrality for the past ten consecutive years in many of our markets. In 2021, the Company achieved carbon neutrality on a global basis. In late 2021, we announced our planned exit from the North American small-format retail water business. This business is relatively small and uses predominantly single-use plastic bottles. The exit from this category is estimated to reduce production of plastic water bottles by more than 400 million, annually, while also improving overall margins. The exit is anticipated to be completed by the middle of 2022.
The market in which we operate is subject to some seasonal variations. Our water delivery sales are generally higher during the warmer months. Our purchases of raw materials and related accounts payable fluctuate based upon the demand for our products. The seasonality of our sales volume causes our working capital needs to fluctuate throughout the year.
We conduct operations in countries involving transactions denominated in a variety of currencies. We are subject to currency exchange risks to the extent that our costs are denominated in currencies other than those in which we earn revenues. As our financial statements are denominated in U.S. dollars, fluctuations in currency exchange rates between the U.S. dollar and other currencies have had and will continue to have an impact on our results of operations.
Impact of the COVID-19 Pandemic
Our global operations expose us to risks associated with the coronavirus (“COVID-19”) pandemic, which has resulted in challenging operating environments. COVID-19 has spread across the globe to all of the countries in which we operate. The measures taken by authorities in many jurisdictions, including travel restrictions, quarantines, shelter in place orders, and business shutdowns have impacted and will further impact us, our customers, employees, distributors, suppliers and other third parties with whom we do business. These measures, and any future measures, may result in further changes in demand for our services and products, further increases in operating costs (whether as a result of changes to our supply chain, increases in employee costs, general economy-wide inflation or otherwise), and further impacts on our supply chain, each or all of which can impact our ability to make, manufacture, distribute and sell our products. In addition, measures that impact our ability to access our offices, plants, warehouses, distribution centers or other facilities, or that impact the ability of our customers, employees, distributors, suppliers and other third parties to do the same, may impact the availability of our and their employees, many of whom are not able to perform their job functions remotely.
For our associates, we have implemented safety protocols, including implementing social distancing guidelines, staggering employee shifts, providing our associates with personal protective equipment, and continuing to allow members of our team to work from home where possible. We have been working and will continue to work closely with our business partners on contingency planning in an effort to maintain supply. To date, we have not experienced a material disruption to our operations or supply chain.
While we continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols and have taken other operational actions in an effort to try to mitigate the negative impact of COVID-19 to our employees and our business, the extent of the impact of the pandemic on our business and financial results will depend on numerous evolving factors that we are not able to accurately predict and that all will vary by market, including the duration and scope of the pandemic, the emergence of new variants of the virus and the efficacy of vaccines against such variants, global economic conditions during and after the pandemic, including disruptions in the global supply chain, inflation and labor shortages, governmental actions that have been taken, or may be taken in the future, in response to the pandemic, and changes in customer behavior in response to the pandemic, some of which may be more than just temporary.
As we deliver bottled water to residential and business customers across a 22-country footprint and provide multi-gallon bottled water, self-service refill drinking water and water dispensers to customers through major retailers in North America, the profile of the services we provide and the products we sell, and the amount of revenue attributable to such services and products, varies by jurisdiction. Changes in demand as a result of COVID-19 will vary in scope and timing across these markets. Any continued economic uncertainty can adversely affect our customers’ financial condition, resulting in an inability to pay for our services or products, reduced or canceled orders of our services or products, or our suppliers’ inability to supply us with the items necessary for us to make, manufacture, distribute or sell our products. Such adverse changes in our customers’ or suppliers’ financial condition may also result in our recording impairment charges for our inability to recover or collect any accounts receivable. In addition, economic uncertainty associated with COVID-19 pandemic has resulted in volatility in the global capital and credit markets, which can impair our ability to access these markets on terms commercially acceptable to us, or at all. The full extent of the COVID-19 pandemic and its impact on the markets served by the Company's operations continues to be highly uncertain as conditions continue to fluctuate around the world, with vaccine administration rising in certain regions and spikes in infections (including the spread of variants) also being experienced.
In response to COVID-19, certain government authorities have enacted programs which provide various economic stimulus measures, including several tax provisions. Among the business tax provisions is the deferral of certain payroll and other tax remittances to future years and wage subsidies as reimbursement for a portion of certain furloughed employees’ salaries. During the three months ended April 2, 2022 and April 3, 2021, we received wage subsidies under these programs totaling $0.3 million and $1.4 million, respectively. We review our eligibility for these programs for each qualifying period and account for such wage subsidies on an accrual basis when the conditions for eligibility are met. The Company has adopted an accounting policy to present wage subsidies as a reduction of selling, general and administrative (“SG&A”) expenses. In addition, deferred payroll and other taxes totaling $7.5 million was included in accounts payable and accrued liabilities on our Consolidated Balance Sheet as of April 2, 2022, and January 1, 2022.
Divestiture, Acquisition and Financing Transactions
On November 4, 2021, as part of our overall strategy to increase profitability and further reduce our environmental footprint, we announced a plan to exit the North America single-use retail bottled water category, which consists primarily of 1-gallon, 2.5 gallon and case-pack water. The plan does not affect our large format exchange, refill, and dispenser business nor our Mountain Valley brand, which sells products primarily in glass bottles. On an annualized basis, these products have accounted for revenue of approximately $140 million. Unwinding of this business is expected to be completed by the middle of 2022 and we do not expect the costs incurred to exit this business to have a material impact on our operating results.
On December 30, 2021, Eden Springs Netherlands B.V., a wholly owned subsidiary of the Company ("Eden"), completed the acquisition of Sip-Well NV, the leading distributor of water solutions in Belgium (the "SipWell Acquisition"). The total cash consideration paid by Eden in the SipWell Acquisition was $53.1 million, subject to adjustments for any non-permitted leakage since a locked box date. The SipWell Acquisition was funded through a combination of incremental borrowings under the Company’s Revolving Credit Facility and cash on hand.
On April 30, 2021, we issued $750.0 million of 4.375% senior notes due April 30, 2029 (“2029 Notes”) to qualified purchasers in a private placement offering under the Securities Act, and outside the United States to non-U.S. purchasers pursuant to Regulation S under the Securities Act and other applicable laws. The 2029 Notes were issued by our wholly-owned subsidiary Primo Water Holdings Inc. The 2029 Notes are guaranteed by the Company and certain subsidiaries that are currently obligors under the Revolving Credit Facility and the €450.0 million of 3.875% senior notes due October 31, 2028. The 2029 Notes will mature on April 30, 2029 and interest is payable semi-annually on April 30th and October 31st of each year commencing on October 31, 2021. The proceeds of the 2029 Notes, along with available cash on hand, were used to redeem in full the $750.0 million of 5.500% senior notes due April 1, 2025 (“2025 Notes”) and pay related premiums, fees and expenses.
We incurred approximately $11.2 million of financing fees for the issuance of the 2029 Notes. The financing fees are being amortized using the effective interest method over an eight-year period, which represents the term to maturity of the 2029 Notes.
The redemption of the 2025 Notes included $20.6 million in premium payments, accrued interest of $3.6 million, and the write-off of $6.6 million in deferred financing fees.
Forward-Looking Statements
In addition to historical information, this report, and any documents incorporated in this report by reference, may contain statements relating to future events and future results. These statements are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation and involve known and unknown risks, uncertainties, future expectations and other factors that may cause actual results, performance or achievements of Primo Water Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such statements include, but are not limited to, statements that relate to projections of sales, cash flows, capital expenditures or other financial items, statements regarding our intentions to pay regular quarterly dividends on our common shares, and discussions of estimated future revenue enhancements and cost savings. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. Generally, words such as “anticipate,” “believe,” “continue,” “could,” “endeavor,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “predict,” “project,” “should” and similar terms and phrases are used to identify forward-looking statements in this report and any documents incorporated in this report by reference. These forward-looking statements reflect current expectations regarding future events and operating performance and are made only as of the date of this report.
The forward-looking statements are not guarantees of future performance or events and, by their nature, are based on certain estimates and assumptions regarding interest and foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective income tax rates, which are subject to inherent risks and uncertainties. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in forward-looking statements may include, but are not limited to, assumptions regarding management’s current plans and estimates. Although we believe the assumptions underlying these forward-looking statements are reasonable, any of these assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions could prove to be incorrect. Our operations involve risks and uncertainties, many of which are outside of our control, and any one or any combination of these risks and uncertainties could also affect whether the forward-looking statements ultimately prove to be correct. These risks and uncertainties include, but are not limited to, those described in Part I, Item 1A “Risk Factors” in our 2021 Annual Report and those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (“SEC”) and Canadian securities regulatory authorities.
The following are some of the factors that could affect our financial performance, including but not limited to, sales, earnings and cash flows, or could cause actual results to differ materially from estimates contained in or underlying the forward-looking statements:
•our ability to compete successfully in the markets in which we operate;
•fluctuations in commodity prices and our ability to pass on increased costs to our customers or hedge against such rising costs, and the impact of those increased prices on our volumes;
•our ability to manage our operations successfully;
•our ability to protect our intellectual property;
•the seasonal nature of our business and the effect of adverse weather conditions;
•the impact of national, regional and global events, including those of a political, economic, business and competitive nature;
•our ability to fully realize the potential benefit of transactions or other strategic opportunities that we pursue;
•our ability to realize revenue and cost synergies of our acquisitions due to integration difficulties and other challenges;
•our exposure to intangible asset risk;
•the impact of the spread of COVID-19, related government actions and the Company's strategy in response thereto on our business, financial condition and results of operations;
•currency fluctuations that adversely affect the exchange between the U.S. dollar and the British pound sterling, the exchange between the Euro, the Canadian dollar and other currencies and the exchange between the British pound sterling and the Euro;
•our ability to maintain favorable arrangements and relationships with our suppliers;
•our ability to meet our obligations under our debt agreements, and risks of further increases to our indebtedness;
•our ability to maintain compliance with the covenants and conditions under our debt agreements;
•fluctuations in interest rates, which could increase our borrowing costs;
•our ability to recruit, retain and integrate new management;
•the impact of increased labor costs on our business;
•our ability to renew our collective bargaining agreements on satisfactory terms;
•the impact on our financial results from uncertainty in the financial markets and other adverse changes in general economic conditions;
•any disruption to production at our manufacturing facilities;
•our ability to maintain access to our water sources;
•compliance with product health and safety standards;
•liability for injury or illness caused by the consumption of contaminated products;
•liability and damage to our reputation as a result of litigation or legal proceedings;
•changes in the legal and regulatory environment in which we operate;
•our ability to adequately address the challenges and risks associated with our international operations and address difficulties in complying with laws and regulations including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010;
•our ability to utilize tax attributes to offset future taxable income;
•the impact on our tax obligations and effective tax rate arising from changes in local tax laws or countries adopting more aggressive interpretations of tax laws;
•disruptions in our information systems;
•our ability to securely maintain our customers’ confidential or credit card information, or other private data relating to our employees or our company;
•our ability to maintain our quarterly dividend; or
•credit rating changes.
We undertake no obligation to update any information contained in this report or to publicly release the results of any revisions to forward-looking statements to reflect events or circumstances of which we may become aware of after the date of this report. Undue reliance should not be placed on forward-looking statements, and all future written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing.
Non-GAAP Measures
In this report, we supplement our reporting of financial measures determined in accordance with U.S. generally accepted accounting principles (“GAAP”) by utilizing certain non-GAAP financial measures that exclude certain items to make period-over-period comparisons for our underlying operations before material changes. We exclude these items to better understand trends in the business. We exclude the impact of foreign exchange to separate the impact of currency exchange rate changes from our results of operations.
We also utilize earnings (loss) before interest expense, taxes, depreciation and amortization (“EBITDA”), which is GAAP net income (loss) before interest expense, net, expense (benefit) for income taxes and depreciation, and amortization. We consider EBITDA to be an indicator of operating performance. We also use EBITDA, as do analysts, lenders, investors, and others, because it excludes certain items that can vary widely across different industries or among companies within the same industry. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. We also utilize adjusted EBITDA, which is EBITDA excluding acquisition and integration costs, share-based compensation costs, COVID-19 costs, goodwill and intangible asset impairment charges, foreign exchange and other (gains) losses, net, loss on disposal of property, plant and equipment, net, loss on extinguishment of long-term debt, gain on sale of business and other adjustments, net, as the case may be (“Adjusted EBITDA”). We consider Adjusted EBITDA to be an indicator of our operating performance that enhances comparability between periods.
Because we use these adjusted financial results in the management of our business and to understand underlying business performance, we believe this supplemental information is useful to investors for their independent evaluation and understanding of our business performance and the performance of our management. The non-GAAP financial measures described above are in addition to, and not meant to be considered superior to, or a substitute for, our financial statements prepared in accordance with GAAP. In addition, the non-GAAP financial measures included in this report reflect our judgment of particular items, and may be different from, and therefore may not be comparable to, similarly titled measures reported by other companies.
Summary Financial Results
Net loss for the three months ended April 2, 2022 (the “first quarter”) was $6.7 million or $(0.04) per diluted common share, compared with $10.2 million or $(0.06) per diluted common share for the three months ended April 3, 2021.
The following items of significance affected our financial results for the first three months of 2022:
•Net revenue increased $47.7 million or 10.0%, from the prior year period due primarily to customer growth, increased demand across our customer base, pricing initiatives, and benefit from tuck-in acquisitions, partially offset by the planned exit from the single-use retail bottled water business in North America and the impact of unfavorable foreign exchange rates;
•Gross profit increased to $299.6 million from $264.5 million in the prior year period due primarily to pricing initiatives, increased Water Direct volume, and the exit from the single-use retail bottled water business in North America, partially offset by the impact of unfavorable foreign exchange rates. Gross profit as a percentage of net revenue was 56.9% compared to 55.3% in the prior year period;
•SG&A expenses increased to $278.3 million from $248.0 million in the prior year period due primarily to higher selling and operating costs that supported volume and revenue growth as well as inflationary cost increases. SG&A expenses as a percentage of net revenue was 52.9% compared to 51.8% in the prior year period;
•Acquisition and integration expenses increased to $4.3 million from $1.3 million in the prior year period due primarily to integration costs incurred in connection with the acquisition of Primo Water Corporation ("Legacy Primo" and such transaction, the "Legacy Primo Acquisition") and increased tuck-in activity compared to the prior year period;
•Other expense, net was $2.7 million compared to other income, net of $0.4 million in the prior year period due primarily to an increase in foreign exchange losses in the current year period as compared to the prior year period.
•Income tax expense was $2.4 million on pre-tax loss of $4.3 million compared to income tax expense of $4.7 million on pre-tax loss of $5.5 million in the prior year period due primarily to decreased earnings in taxable jurisdictions;
•Adjusted EBITDA increased to $87.9 million compared to $76.2 million in the prior year period due to the items listed above; and
•Cash flows provided by operating activities from continuing operations was $23.6 million compared to $28.7 million in the prior year period. The $5.1 million decrease was due primarily to an increase in inventory relative to the prior year period.
Results of Operations
The following table summarizes our Consolidated Statements of Operations as a percentage of revenue for the three months ended April 2, 2022 and April 3, 2021:
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| | For the Three Months Ended | | |
| | April 2, 2022 | | April 3, 2021 | | | | |
| (in millions of U.S. dollars) | $ | | % | | $ | | % | | | | | | | | |
| Revenue, net | 526.1 | | | 100.0 | | | 478.4 | | | 100.0 | | | | | | | | | |
| Cost of sales | 226.5 | | | 43.1 | | | 213.9 | | | 44.7 | | | | | | | | | |
| Gross profit | 299.6 | | | 56.9 | | | 264.5 | | | 55.3 | | | | | | | | | |
| Selling, general and administrative expenses | 278.3 | | | 52.9 | | | 248.0 | | | 51.8 | | | | | | | | | |
| Loss on disposal of property, plant and equipment, net | 1.7 | | | 0.3 | | | 2.1 | | | 0.4 | | | | | | | | | |
| Acquisition and integration expenses | 4.3 | | | 0.8 | | | 1.3 | | | 0.3 | | | | | | | | | |
| Operating income | 15.3 | | | 2.9 | | | 13.1 | | | 2.7 | | | | | | | | | |
| Other expense (income), net | 2.7 | | | 0.5 | | | (0.4) | | | (0.1) | | | | | | | | | |
| Interest expense, net | 16.9 | | | 3.2 | | | 19.0 | | | 4.0 | | | | | | | | | |
| Loss before income taxes | (4.3) | | | (0.8) | | | (5.5) | | | (1.1) | | | | | | | | | |
| Income tax expense | 2.4 | | | 0.5 | | | 4.7 | | | 1.0 | | | | | | | | | |
| Net loss | (6.7) | | | (1.3) | | | (10.2) | | | (2.1) | | | | | | | | | |
| Depreciation & amortization | 61.2 | | | 11.6 | | | 53.1 | | | 11.1 | | | | | | | | | |
The following tables summarize the change in revenue by reporting segment for the three months ended April 2, 2022:
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| | For the Three Months Ended April 2, 2022 |
| (in millions of U.S. dollars, except percentage amounts) | North America | | Rest of World | | All Other | | Total |
| Change in revenue | $ | 31.6 | | | $ | 16.1 | | | $ | — | | | $ | 47.7 | |
Impact of foreign exchange 1 | — | | | 4.6 | | | — | | | 4.6 | |
| Change excluding foreign exchange | $ | 31.6 | | | $ | 20.7 | | | $ | — | | | $ | 52.3 | |
| Percentage change in revenue | 8.6 | % | | 14.3 | % | | — | % | | 10.0 | % |
| Percentage change in revenue excluding foreign exchange | 8.6 | % | | 18.3 | % | | — | % | | 10.9 | % |
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1 Impact of foreign exchange is the difference between the current period revenue translated utilizing the current period average foreign exchange rates less the current period revenue translated utilizing the prior period average foreign exchange rates.
The following tables summarize the change in gross profit by reporting segment for the three months ended April 2, 2022:
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| | For the Three Months Ended April 2, 2022 |
| (in millions of U.S. dollars, except percentage amounts) | North America | | Rest of World | | All Other | | Total |
| Change in gross profit | $ | 27.5 | | | $ | 7.6 | | | $ | — | | | $ | 35.1 | |
Impact of foreign exchange 1 | — | | | 2.8 | | | — | | | 2.8 | |
| Change excluding foreign exchange | $ | 27.5 | | | $ | 10.4 | | | $ | — | | | $ | 37.9 | |
| Percentage change in gross profit | 13.4 | % | | 12.7 | % | | — | % | | 13.3 | % |
| Percentage change in gross profit excluding foreign exchange | 13.4 | % | | 17.3 | % | | — | % | | 14.3 | % |
______________________
1 Impact of foreign exchange is the difference between the current period gross profit translated utilizing the current period average foreign exchange rates less the current period gross profit translated utilizing the prior period average foreign exchange rates.
Our corporate oversight function is not treated as a segment; it includes certain general and administrative costs that are disclosed in the All Other category.
The following table summarizes our net revenue, gross profit, SG&A expenses and operating income (loss) by reporting segment for the three months ended April 2, 2022 and April 3, 2021:
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| | For the Three Months Ended | | |
| (in millions of U.S. dollars) | April 2, 2022 | | April 3, 2021 | | | | |
| Revenue, net | | | | | | | |
| North America | $ | 397.1 | | | $ | 365.5 | | | | | |
| Rest of World | 129.0 | | | 112.9 | | | | | |
| All Other | — | | | — | | | | | |
| Total | $ | 526.1 | | | $ | 478.4 | | | | | |
| Gross profit | | | | | | | |
| North America | $ | 232.0 | | | $ | 204.5 | | | | | |
| Rest of World | 67.6 | | | 60.0 | | | | | |
| All Other | — | | | — | | | | | |
| Total | $ | 299.6 | | | $ | 264.5 | | | | | |
| Selling, general and administrative expenses | | | | | | | |
| North America | $ | 199.7 | | | $ | 175.8 | | | | | |
| Rest of World | 69.4 | | | 63.3 | | | | | |
| All Other | 9.2 | | | 8.9 | | | | | |
| Total | $ | 278.3 | | | $ | 248.0 | | | | | |
| Operating income (loss) | | | | | | | |
| North America | $ | 28.3 | | | $ | 26.1 | | | | | |
| Rest of World | (3.2) | | | (3.6) | | | | | |
| All Other | (9.8) | | | (9.4) | | | | | |
| Total | $ | 15.3 | | | $ | 13.1 | | | | | |
The following tables summarize net revenue by channel for the three months ended April 2, 2022 and April 3, 2021:
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| For the Three Months Ended April 2, 2022 |
| (in millions of U.S. dollars) | North America | | Rest of World | | All Other | | Total |
| Revenue, net | | | | | | | |
| Water Direct/Water Exchange | $ | 278.3 | | | $ | 59.0 | | | $ | — | | | $ | 337.3 | |
| Water Refill/Water Filtration | 42.2 | | | 8.7 | | | — | | | 50.9 | |
| Other Water | 34.0 | | | 16.4 | | | — | | | 50.4 | |
| Water Dispensers | 14.2 | | | — | | | — | | | 14.2 | |
| Other | 28.4 | | | 44.9 | | | — | | | 73.3 | |
| Total | $ | 397.1 | | | $ | 129.0 | | | $ | — | | | $ | 526.1 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended April 3, 2021 |
| (in millions of U.S. dollars) | North America | | Rest of World | | All Other | | Total |
| Revenue, net | | | | | | | |
| Water Direct/Water Exchange | $ | 238.8 | | | $ | 48.8 | | | $ | — | | | $ | 287.6 | |
| Water Refill/Water Filtration | 45.1 | | | 7.9 | | | — | | | 53.0 | |
| Other Water | 40.9 | | | 15.4 | | | — | | | 56.3 | |
| Water Dispensers | 15.0 | | | — | | | — | | | 15.0 | |
| Other | 25.7 | | | 40.8 | | | — | | | 66.5 | |
| Total | $ | 365.5 | | | $ | 112.9 | | | $ | — | | | $ | 478.4 | |
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| | | | | | | |
The following table summarizes our EBITDA and Adjusted EBITDA for the three months ended April 2, 2022 and April 3, 2021:
| | | | | | | | | | | | | | | |
| For the Three Months Ended | | |
| (in millions of U.S. dollars) | April 2, 2022 | | April 3, 2021 | | | | |
| Net loss | $ | (6.7) | | | $ | (10.2) | | | | | |
| Interest expense, net | 16.9 | | | 19.0 | | | | | |
| Income tax expense | 2.4 | | | 4.7 | | | | | |
| Depreciation and amortization | 61.2 | | | 53.1 | | | | | |
| EBITDA | $ | 73.8 | | | $ | 66.6 | | | | | |
| Acquisition and integration costs | 4.3 | | | 1.3 | | | | | |
| Share-based compensation costs | 3.3 | | | 2.4 | | | | | |
| COVID-19 costs | — | | | 0.7 | | | | | |
| Foreign exchange and other losses (gains), net | 3.9 | | | (0.1) | | | | | |
| Loss on disposal of property, plant and equipment, net | 1.7 | | | 2.1 | | | | | |
| Other adjustments, net | 0.9 | | | 3.2 | | | | | |
| Adjusted EBITDA | $ | 87.9 | | | $ | 76.2 | | | | | |
Three Months Ended April 2, 2022 Compared to Three Months Ended April 3, 2021
Revenue, Net
Net revenue increased $47.7 million, or 10.0%, in the first quarter from the comparable prior year period.
North America net revenue increased $31.6 million, or 8.6%, in the first quarter from the comparable prior year period due primarily to customer growth, pricing initiatives, and increased demand for products and services from residential and business-to-business customers, partially offset by the planned exit from the single-use retail bottled water business and lower revenue from water refill and water dispenser sales.
Rest of World net revenue increased $16.1 million, or 14.3%, in the first quarter from the comparable prior year period due primarily to increased demand for our products and services from residential and business-to-business customers and tuck-in acquisitions, partially offset by the unfavorable impact of foreign exchange rates.
Gross Profit
Gross profit increased to $299.6 million in the first quarter from $264.5 million in the comparable prior year period. Gross profit as a percentage of revenue was 56.9% in the first quarter compared to 55.3% in the comparable prior year period.
North America gross profit increased to $232.0 million in the first quarter from $204.5 million in the comparable prior year period due primarily to increased demand for products and services from residential and business-to-business customers, pricing initiatives, and the exit from the single-use retail bottled water business in North America.
Rest of World gross profit increased to $67.6 million in the first quarter from $60.0 million in the comparable prior year period due primarily to increased demand for products and services from residential and business-to-business customers, partially offset by the unfavorable impact of foreign exchange rates.
Selling, General and Administrative Expenses
SG&A expenses increased to $278.3 million in the first quarter from $248.0 million in the comparable prior year period. SG&A expenses as a percentage of revenue was 52.9% in the first quarter compared to 51.8% in the comparable prior year period.
North America SG&A expenses increased to $199.7 million in the first quarter from $175.8 million in the comparable prior year period due primarily to higher selling and operating costs that supported volume and revenue growth as well as inflationary cost increases.
Rest of World SG&A expenses increased to $69.4 million in the first quarter from $63.3 million in the comparable prior year period due primarily to higher selling and operating costs that supported volume and revenue growth as well as inflationary cost increases, partially offset by the favorable impact of foreign exchange rates.
All Other SG&A expenses increased to $9.2 million in the first quarter from $8.9 million in the comparable prior year period.
Acquisition and Integration Expenses
Acquisition and integration expenses increased to $4.3 million in the first quarter from $1.3 million in the comparable prior year period. Acquisition and integration expenses as a percentage of revenue was 0.8% in the first quarter compared to 0.3% in the comparable prior year period.
North America acquisition and integration expenses increased to $2.5 million in the first quarter from $0.7 million in the comparable prior year period due primarily to integration costs incurred in connection with the acquisition of Legacy Primo.
Rest of World acquisition and integration expenses increased to $1.2 million in the first quarter from $0.1 million in the comparable prior year period due primarily to costs associated with tuck-in acquisitions.
All Other acquisition and integration expenses increased to $0.6 million in the first quarter from $0.5 million in the comparable prior year period.
Operating Income
Operating income increased to $15.3 million in the first quarter from operating income of $13.1 million in the comparable prior year period.
North America operating income increased to $28.3 million in the first quarter from $26.1 million in the comparable prior year period due to the items discussed above.
Rest of World operating loss decreased to $3.2 million in the first quarter from $3.6 million in the comparable prior year period due to the items discussed above.
All Other operating loss increased to $9.8 million in the first quarter from $9.4 million in the comparable prior year period due to the items discussed above.
Other Expense (Income), Net
Other expense, net was $2.7 million for the first quarter compared to other income, net of $0.4 million in the comparable prior year period due primarily to an increase in foreign exchange losses in the current year period as compared to the prior year period.
Income Taxes
Income tax expense was $2.4 million in the first quarter compared to income tax expense of $4.7 million in the comparable prior year period. The effective tax rate for the first quarter was (55.8)% compared to (85.5)% in the comparable prior year period.
The effective tax rate for the first quarter varied from the effective tax rate from the comparable prior year period due primarily to decreased earnings in taxable jurisdictions.
Liquidity and Capital Resources
As of April 2, 2022, we had total debt of $1,550.3 million and $98.0 million of cash and cash equivalents compared to $1,560.9 million of debt and $128.4 million of cash and cash equivalents as of January 1, 2022.
The COVID-19 pandemic has continued to disrupt our business. The extent and duration of the impact of the COVID-19 pandemic on our business and financial results will depend on numerous evolving factors that we are not able to accurately predict and that all will vary by market. These factors include the duration and scope of the pandemic, the emergence of new variants of the virus and the efficacy of vaccines against such variants, global economic conditions during and after the pandemic, including disruptions in the global supply chain, inflation and labor shortage governmental actions that have been taken, or may be taken in the future, in response to the pandemic, and changes in customer behavior in response to the pandemic, some of which may be more than just temporary.
We believe that our level of resources, which includes cash on hand, borrowings under our Revolving Credit Facility and funds provided by our operations, will be adequate to fund cash outflows that have both a short- and long-term component. These cash flows will support our growth platform and include our expenses, capital expenditures, anticipated dividend payments, and debt service obligations. The Company regularly assesses its cash requirements and the available resources to fund these needs. Our ability to generate cash to meet our current expenses and debt service obligations will depend on our future performance. If we do not have enough cash to pay our debt service obligations, or if the Revolving Credit Facility or our outstanding notes were to become currently due, either at maturity or as a result of a breach, we may be required to take actions such as amending our Credit Agreement or the indentures governing our outstanding notes, refinancing all or part of our existing debt, selling assets, incurring additional indebtedness or raising equity. If we need to seek additional financing, there is no assurance that this additional financing will be available on favorable terms or at all.
As of April 2, 2022, our outstanding borrowings under the Revolving Credit Facility were $211.0 million and outstanding letters of credit totaled $59.4 million resulting in total utilization under the Revolving Credit Facility of $270.4 million. Accordingly, unused availability under the Revolving Credit Facility as of April 2, 2022 amounted to $79.6 million.
We earn substantially all of our consolidated operating income in subsidiaries located outside of Canada. We have not provided for federal, state, and foreign deferred income taxes on the undistributed earnings of our non-Canadian subsidiaries. We expect that these earnings will be permanently reinvested by such subsidiaries except in certain instances where repatriation attributable to current earnings results in minimal or no tax consequences.
We expect our existing cash and cash equivalents, cash flows and the issuance of debt to continue to be sufficient to fund our operating, investing, and financing activities. In addition, we expect our existing cash and cash equivalents and cash flows outside of Canada to continue to be sufficient to fund the operating activities of our subsidiaries.
A future change to our assertion that foreign earnings will be permanently reinvested could result in additional income taxes and/or withholding taxes payable, where applicable. Therefore, a higher effective tax rate could occur during the period of repatriation.
We may, from time to time, depending on market conditions, including without limitation whether our outstanding notes are then trading at a discount to their face amount, repurchase our outstanding notes for cash and/or in exchange for our common shares, warrants, preferred shares, debt, or other consideration, in each case in open market purchases and/or privately negotiated transactions. The amounts involved in any such transactions, individually or in the aggregate, may be material. However, the covenants in our Revolving Credit Facility subject such purchases to certain limitations and conditions.
A dividend of $0.07 per common share was declared during the first quarter of 2022 for an aggregate dividend payment of approximately $11.5 million.
The following table summarizes our cash flows for the three months ended April 2, 2022 and April 3, 2021, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements: