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,” “us,” or “our” refers to Primo Water Corporation, together with its consolidated subsidiaries.
Primo is a leading North America-focused pure-play water solutions provider that operates largely under a recurring revenue model in the large format water category (defined as 3 gallons or greater). This business strategy is commonly referred to as “razor-razorblade” because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. The razor in Primo’s revenue model is its industry leading line-up of innovative water dispensers, which are sold through approximately 11,350 retail locations and online at various price points. The dispensers help increase household and business penetration which drives recurring purchases of Primo’s razorblade offering or water solutions. Primo’s razorblade offering is comprised of Water Direct, Water Exchange, and Water Refill. Through its Water Direct business, Primo delivers sustainable hydration solutions direct to customers, whether at home or to businesses. Through its Water Exchange business, customers visit retail locations and purchase a pre-filled bottle of water. Once consumed, empty bottles are exchanged at our recycling center displays, which provide a ticket that offers a discount toward the purchase of a new bottle. Water Exchange is available in approximately 17,950 retail locations. Through its Water Refill business, customers refill empty bottles at approximately 23,500 self-service refill drinking water stations. Primo also offers water filtration units across North America.
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 which ensures strict adherence to safety, quality, sanitation and regulatory standards for the benefit of consumer protection. Environmental stewardship is a part of who we are, and we have worked to progressively achieve carbon neutrality throughout our organization. Our U.S. operations achieved carbon neutral certification in 2020 under the Carbon Neutral Protocol, an international standard administered by Climate Impact Partners.
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 December 30, 2023 included herein was derived from the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023 (the “2023 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 the 2023 Annual Report. The accounting policies used in these interim unaudited Consolidated Financial Statements are consistent with those used in the annual Consolidated Financial Statements.
The presentation of these interim unaudited 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.
Pending Transaction with BlueTriton Brands
On June 16, 2024, Primo Water entered into an Arrangement Agreement and Plan of Merger (the “Arrangement Agreement”) by and among Primo Water, Triton Water Parent, Inc., a corporation incorporated under the laws of Delaware (“BlueTriton Brands”), Triton US HoldCo, Inc., a corporation incorporated under the laws of Delaware and a wholly-owned subsidiary of BlueTriton Brands (“NewCo”), Triton Merger Sub 1, Inc., a corporation incorporated under the laws of Delaware and direct, wholly‑owned subsidiary of NewCo (“Merger Sub”) and 1000922661 Ontario Inc., a corporation organized under the laws of the Province of Ontario and a direct, wholly‑owned subsidiary of NewCo (“Amalgamation Sub”).
The Arrangement Agreement provides that, subject to the terms and conditions set forth therein, (i) Amalgamation Sub will acquire all of the issued and outstanding shares of Primo Water in a court-approved plan of arrangement (the “Plan of Arrangement”) in exchange for shares of NewCo, followed immediately by an amalgamation of the Company and Amalgamation Sub, with Primo Water surviving as a wholly-owned subsidiary of NewCo (collectively, the “Arrangement”), (ii) immediately following the Arrangement, Merger Sub will be merged with and into BlueTriton Brands (the “Merger”), with
BlueTriton Brands surviving as a wholly-owned subsidiary of NewCo and (iii) immediately following the Merger, and as part of one integrated transaction with the Merger, BlueTriton Brands, as the surviving company in the Merger, will be merged with and into NewCo (the “Subsequent Merger” and, together with the Merger, the “Mergers” and, collectively with the Arrangement, the “BlueTriton Transaction”), with NewCo being the surviving corporation and (iv) as a result of the BlueTriton Transaction, the Company and Triton Water Intermediate, Inc., a wholly-owned subsidiary of BlueTriton Brands, will be wholly-owned subsidiaries of NewCo. The BlueTriton Transaction is expected to close in the first half of 2025, subject to various conditions as noted in the Arrangement Agreement. The final corporate name and branding of NewCo is expected to be announced in the future. See Part II. Item 1A. Risk Factors in this Quarterly Report on Form 10-Q for information about certain risks and uncertainties related to the BlueTriton Transaction.
Discontinued Operations
On November 2, 2023, Primo entered into a Share Purchase Agreement (the “Purchase Agreement”) with a subsidiary of the Culligan Group providing for the sale of Carbon Luxembourg S.à.r.l. and certain of its subsidiaries (the "European Business"). On December 29, 2023, Primo completed the sale of the European Business for aggregate deal consideration of $575.0 million, adjusted for customary purchase price adjustments resulting in total cash consideration of $565.9 million (the “European Divestiture”). The European Divestiture did not include Primo's interests in Aimia Foods Limited (“Aimia”), Decantae Mineral Water Limited (“Decantae”), Fonthill Waters Ltd (“Fonthill”), John Farrer & Company Limited (“Farrers”), and the portions of the Eden Springs Netherlands B.V. business located in the United Kingdom, Israel, and Portugal (collectively the "Other International Businesses"). On June 7, 2024, Primo sold its interest in the Aimia and Farrers businesses, and on July 3, 2024, Primo sold the Portugal business. The European Business and the Other International Businesses are collectively the "International Businesses." These deals are a part of several transactions occurring in 2024 as part of a Board-approved plan to sell all of our international businesses, representing a strategic shift in our operations. Accordingly, the International Businesses are presented herein as discontinued operations.
For all periods presented, the operating results associated with the International Businesses have been reclassified into Net income from discontinued operations, net of income taxes in the Consolidated Statements of Operations and the assets and liabilities associated with this business have been reflected as current and long-term assets and liabilities of discontinued operations in the Consolidated Balance Sheets. Cash flows from the Company’s discontinued operations are presented in the Consolidated Statements of Cash Flows for all periods presented. The Notes to Consolidated Financial Statements are presented on a continuing operations basis unless otherwise noted. See Note 2 to the Consolidated Financial Statements for additional information on discontinued operations.
Changes in Presentation
Prior to the European Divestiture, our business operated through two reporting segments: (i) North America, which included our DS Services of America, Inc. (“DSS”), Aquaterra Corporation (“Aquaterra”), Mountain Valley Spring Company (“Mountain Valley”) businesses, and (ii) Europe, which included the European business of Eden Springs Netherlands B.V. (“Eden Europe”), and our Decantae and Fonthill businesses. The Other category included the Israel business of Eden ("Eden Israel"), and our Aimia and Farrers businesses sold during the quarter, as well as our corporate oversight function and other miscellaneous expenses.
During the fourth quarter of 2023, we reviewed and realigned our reporting segments to exclude the businesses within discontinued operations which reflects how the business will be managed and results will be evaluated by the Chief Executive Officer, who is the Company’s chief operating decision maker. Following such review, our one reporting segment is North America, which includes our DSS, Aquaterra, and Mountain Valley businesses. The Other category includes our corporate oversight function and other miscellaneous expenses. Segment reporting results have been recast to reflect these changes for all periods presented.
Significant Accounting Policies
Included in Note 1 of the 2023 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 in the Consolidated Statements of Operations. Shipping and handling costs incurred to deliver products from our branch locations to the end-user consumer of those products are recorded in Selling, general and administrative ("SG&A") expenses in the Consolidated Statements of Operations. All other costs incurred in the shipment of products from our production facilities to customer locations are reflected in Cost of sales in the Consolidated Statements of Operations. Shipping and handling costs included in SG&A expenses were $124.6 million and $245.7 million for the three and six months ended June 29, 2024, respectively, and $114.4 million and $227.7 million for the three and six months ended July 1, 2023, respectively. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production.
Derivative Financial Instruments
We use foreign exchange forward contracts ("foreign exchange contracts") to manage the foreign exchange risk associated with the principal balance of our €450.0 million 3.875% senior notes due October 31, 2028 (the "2028 Notes"). Foreign exchange forward contracts are agreements to buy or sell a quantity of a currency at a predetermined future date, and at a predetermined rate or price. All derivative instruments are recorded at fair value in the Consolidated Balance Sheets. We exclude forward points from our assessment of hedge effectiveness and amortize them on a straight-line basis over the life of the derivative financial instruments in Other expense, net in the Consolidated Statements of Operations. The difference between fair value changes of the excluded component and the amount amortized to Other expense, net is recorded in Accumulated other comprehensive loss ("AOCI") on the Consolidated Balance Sheets. We do not use derivative financial instruments for trading or speculative purposes. We manage credit risk related to the derivative financial instruments by requiring high credit standards for our counterparties. Refer to Note 12 to the Consolidated Financial Statements for further information on our derivative financial instruments.
Concentration of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. As of June 29, 2024 and December 30, 2023, cash and cash equivalents were maintained at major financial institutions in the United States, and current deposits are in excess of insured limits. The Company believes these institutions have sufficient assets and liquidity to conduct their operations in the ordinary course of business with little or no credit risk to the Company. The Company has not experienced any losses in such accounts.
Recently Adopted Accounting Pronouncements
The Company did not adopt any new accounting pronouncements during the three and six months ended June 29, 2024.
Recently Issued Accounting Pronouncements Not Yet Adopted
Update ASU 2023-06 – Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative
In October 2023, the FASB issued guidance to modify the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations. This guidance is effective for the Company no later than June 30, 2027. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Update ASU 2023-07 – Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued guidance to improve the disclosures about a public entity’s reportable segments and provide for the disclosure of additional and more detailed information about a reportable segment’s expenses. This guidance is effective for the Company for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The amendments in this update should be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Update ASU 2023-09 – Income Taxes (Topic 740) - Improvements to Income Tax Disclosures
In December 2023, the FASB issued guidance to enhance the transparency and decision usefulness of income tax disclosures through improvements to disclosures primarily related to the rate reconciliation and income taxes paid information. This guidance is effective for the Company for annual periods beginning after December 15, 2024. Early adoption is permitted. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Note 2 - Discontinued Operations
International Businesses
On December 29, 2023, the Company completed the European Divestiture for aggregate deal consideration of $575.0 million, adjusted for customary purchase price adjustments resulting in total cash consideration of $565.9 million (see Note 1 to the Consolidated Financial Statements). The European Divestiture excluded the Other International Businesses. This deal is the first of several transactions that will occur in 2024 as part of a Board-approved plan to sell all of our international businesses representing a strategic shift in our operations. Accordingly, the International Businesses are presented herein as discontinued operations for all periods presented.
In connection with the European Divestiture, the Company and the purchaser entered into a transition services agreement pursuant to which the purchaser will provide certain information technology and shared service center services to the Company for various periods. For the three and six months ended June 29, 2024, these services were not material.
On June 7, 2024, the Company completed the sale of its Aimia and Farrers businesses for aggregate deal consideration of $75.5 million, resulting in a loss on sale in the amount of $2.0 million which was recorded in Net income from discontinued operations, net of income taxes on the Consolidated Statements of Operations during the three and six months ended June 29, 2024.
The major components of Net income from discontinued operations, net of income taxes in the accompanying Consolidated Statement of Operations include the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| (in millions of U.S. dollars) | June 29, 2024 | | July 1, 2023 | | June 29, 2024 | | July 1, 2023 |
| Revenue, net | $ | 74.1 | | | $ | 142.7 | | | $ | 153.2 | | | $ | 276.7 | |
| Cost of sales | 39.1 | | | 65.2 | | | 85.4 | | | 129.9 | |
| Gross profit | 35.0 | | | 77.5 | | | 67.8 | | | 146.8 | |
| Selling, general and administrative expenses | 26.1 | | | 71.1 | | | 49.8 | | | 140.0 | |
| Loss on disposal of property, plant and equipment, net | 0.9 | | | 0.3 | | | 1.0 | | | 0.3 | |
| Acquisition and integration expenses | — | | | (0.1) | | | — | | | 0.2 | |
| Operating income from discontinued operations | 8.0 | | | 6.2 | | | 17.0 | | | 6.3 | |
| Other expense (income), net | 0.1 | | | (5.1) | | | 0.1 | | | (11.1) | |
| Loss on sale of discontinued operations | 2.0 | | | — | | | 2.5 | | | — | |
| Interest expense, net | 0.5 | | | 1.0 | | | 1.1 | | | 1.6 | |
| Income from discontinued operations, before income taxes | $ | 5.4 | | | $ | 10.3 | | | $ | 13.3 | | | $ | 15.8 | |
| Income tax expense | 2.7 | | | 2.6 | | | 4.3 | | | 5.5 | |
| Net income from discontinued operations, net of income taxes | $ | 2.7 | | | $ | 7.7 | | | $ | 9.0 | | | $ | 10.3 | |
| | | | | | | |
Assets and liabilities of discontinued operations presented in the accompanying Consolidated Balance Sheets as of June 29, 2024 and December 30, 2023 include the following:
| | | | | | | | | | | |
| (in millions of U.S. dollars) | June 29, 2024 | | December 30, 2023 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 12.2 | | | $ | 22.6 | |
Accounts receivable, net of allowance of $4.9 ($3.4 as of December 30, 2023) | 53.4 | | | 67.4 | |
| Inventories | 13.8 | | | 31.9 | |
| Prepaid expenses and other current assets | 2.5 | | | 6.8 | |
| Current assets of discontinued operations | $ | 81.9 | | | $ | 128.7 | |
| Property, plant and equipment, net | 82.0 | | | 83.7 | |
| Operating lease right-of-use-assets | 28.7 | | | 37.9 | |
| Goodwill | 26.5 | | | 48.5 | |
| Intangible assets, net | 28.1 | | | 61.5 | |
Other long-term assets, net 1 | (6.9) | | | (6.0) | |
| Long-term assets of discontinued operations | $ | 158.4 | | | $ | 225.6 | |
| LIABILITIES | | | |
| Short-term borrowings | $ | 20.4 | | | $ | 18.4 | |
| Current maturities of long-term debt | 3.2 | | | 3.5 | |
| Accounts payable and accrued liabilities | 62.0 | | | 83.4 | |
| Current operating lease obligations | 3.7 | | | 4.6 | |
| Current liabilities of discontinued operations | $ | 89.3 | | | $ | 109.9 | |
| Long-term debt | 8.9 | | | 9.2 | |
| Operating lease obligations | 22.7 | | | 33.6 | |
| Deferred tax liabilities | — | | | 7.0 | |
| Other long-term liabilities | 2.2 | | | 2.4 | |
| Long-term liabilities of discontinued operations | $ | 33.8 | | | $ | 52.2 | |
________________________________
1 Includes the impairment recorded to reduce the carrying value of the Other International Businesses to the fair value less costs to sell.
Note 3 - Revenue
Our principal sources of revenue are from bottled water delivery direct to consumers primarily in North America 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. This methodology is consistent with the manner in which we historically estimated and recorded promotional programs and discounts. Accrued sales incentives were $10.9 million and $7.7 million as of June 29, 2024 and December 30, 2023, 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 we have the right to invoice as the product is delivered.
Contract Balances
The Company does not have any material contract assets or liabilities as of June 29, 2024 and December 30, 2023.
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 | | For the Six Months Ended |
| (in millions of U.S. dollars) | June 29, 2024 | | July 1, 2023 | | June 29, 2024 | | July 1, 2023 |
| United States | $ | 467.2 | | | $ | 433.3 | | | $ | 903.0 | | | $ | 830.1 | |
| Canada | 17.8 | | | 17.3 | | | 33.7 | | | 33.0 | |
| All other countries | — | | | — | | | 0.3 | | | — | |
| Total | $ | 485.0 | | | $ | 450.6 | | | $ | 937.0 | | | $ | 863.1 | |
Note 4 - Share-based Compensation
During the three and six months ended June 29, 2024, we granted 46,991 common shares with an aggregate grant date fair value of approximately $1.2 million to the non-management members of our Board of Directors under the Amended and Restated Primo Water Corporation Equity Incentive Plan. The common shares were issued in consideration of the directors’ annual board retainer fee and are fully vested upon issuance.
Note 5 - Interest Expense, Net
The following table summarizes Interest expense, net for the three and six months ended June 29, 2024 and July 1, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| (in millions of U.S. dollars) | June 29, 2024 | | July 1, 2023 | | June 29, 2024 | | July 1, 2023 |
| Interest on short-term debt | $ | 0.9 | | | $ | 4.3 | | | $ | 1.1 | | | $ | 8.0 | |
| Interest on long-term debt | 12.9 | | | 13.0 | | | 25.8 | | | 25.9 | |
| Other interest expense | 1.6 | | | 1.5 | | | 3.2 | | | 3.1 | |
| Interest income | (6.2) | | | — | | | (10.9) | | | — | |
| Total | $ | 9.2 | | | $ | 18.8 | | | $ | 19.2 | | | $ | 37.0 | |
Note 6 - Income Taxes
Income tax expense was $14.0 million on pre-tax income of $27.3 million for the three months ended June 29, 2024, as compared to income tax expense of $8.4 million on pre-tax income of $22.0 million in the comparable prior year period. Income tax expense was $23.5 million on pre-tax income of $55.5 million for the six months ended June 29, 2024, as compared to income tax expense of $8.7 million on pre-tax income of $25.5 million in the comparable prior year period. The effective income tax rate for the three and six months ended June 29, 2024 was 51.3% and 42.3%, respectively, compared to 38.2% and 34.1%, respectively, in the comparable prior year period.
The effective tax rate for the three and six months ended June 29, 2024 varied from the effective tax rate in the comparable prior year period due primarily to increased non-deductible expenses in the US.
The effective tax rate for the three and six months ended June 29, 2024 varied from applicable statutory tax rates due primarily to losses in tax jurisdictions for which no tax benefit was recognized due to existing valuation allowances and income in tax jurisdictions with tax rates lower than the Canadian statutory tax rate.
Note 7 - Common Shares and Net Income per Common Share
Common Shares
On August 9, 2023, our Board of Directors approved a share repurchase program for up to $50.0 million of our outstanding common shares. Upon the closing of the European Divestiture on December 29, 2023, an incremental $25.0 million share repurchase was authorized, revising the total share repurchase authorization to $75.0 million. For the three and six months ended June 29, 2024, we repurchased 349,952 and 932,896 common shares for approximately $6.8 million and $15.9 million, respectively, through open market transactions under this repurchase plan.
On August 9, 2022, our Board of Directors approved a share repurchase program for up to $100.0 million of our outstanding common shares over a 12-month period that expired on August 14, 2023. For the three and six months ended July 1, 2023, we repurchased 160,098 and 1,272,612 common shares for approximately $2.4 million and $19.0 million, respectively, through open market transactions under this repurchase plan.
Shares purchased under these repurchase plans were subsequently canceled.
We have currently paused our share repurchase program in light of Primo Water's pending transaction with BlueTriton Brands.
Net Income per Common Share
Basic net income per common share is calculated by dividing net income by the weighted-average number of common shares outstanding during the periods presented. Diluted net income per common share is calculated by dividing net income 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| (in thousands) | June 29, 2024 | | July 1, 2023 | | June 29, 2024 | | July 1, 2023 |
| Weighted-average common shares outstanding - basic | 160,112 | | | 159,196 | | | 159,843 | | | 159,465 | |
| Dilutive effect of Stock Options | 480 | | | 192 | | | 421 | | | 266 | |
| Dilutive effect of Performance based RSUs | 294 | | | — | | | 355 | | | 103 | |
| Dilutive effect of Time-based RSUs | 498 | | | 512 | | | 422 | | | 498 | |
| Weighted-average common shares outstanding - diluted | 161,384 | | | 159,900 | | | 161,041 | | | 160,332 | |
The following table summarizes anti-dilutive securities excluded from the computation of diluted net income per common share for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| (in thousands) | June 29, 2024 | | July 1, 2023 | | June 29, 2024 | | July 1, 2023 |
| Stock Options | — | | | 2,219 | | | — | | | 1,984 | |
Performance-based RSUs 1 | 1,453 | | | 1,175 | | | 1,453 | | | 1,175 | |
Time-based RSUs 2 | — | | | — | | | — | | | — | |
______________________
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 8 - Segment Reporting
Our broad portfolio of products includes bottled water, water dispensers, purified bottled water, self-service refill drinking water, filtration units, premium spring, sparkling and flavored essence water, mineral water, and coffee.
During the fourth quarter of 2023, we reviewed and realigned our reporting segments to exclude the businesses within discontinued operations. Our sole reporting segment is North America, which includes DSS, Aquaterra, and Mountain Valley Spring businesses. The Other category includes our corporate oversight function and other miscellaneous expenses.
Segment reporting results have been recast to reflect these changes for all periods presented.
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 29, 2024 |
| (in millions of U.S. dollars) | North America | | Other | | Total |
| Revenue, net | $ | 484.8 | | | $ | 0.2 | | | $ | 485.0 | |
| Depreciation and amortization | 49.2 | | | 0.5 | | | 49.7 | |
| Operating income (loss) | 72.9 | | | (33.7) | | | 39.2 | |
| Additions to property, plant and equipment | 37.2 | | | 0.1 | | | 37.3 | |
| | | | | |
| For the Six Months Ended June 29, 2024 |
| (in millions of U.S. dollars) | North America | | Other | | Total |
| Revenue, net | $ | 936.4 | | | $ | 0.6 | | | $ | 937.0 | |
| Depreciation and amortization | 97.0 | | | 0.9 | | | 97.9 | |
| Operating income (loss) | 124.3 | | | (49.5) | | | 74.8 | |
| Additions to property, plant and equipment | 74.1 | | | 0.8 | | | 74.9 | |
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended July 1, 2023 |
| (in millions of U.S. dollars) | North America | | Other | | Total |
| Revenue, net | $ | 450.5 | | | $ | 0.1 | | | $ | 450.6 | |
| Depreciation and amortization | 46.8 | | | 0.4 | | | 47.2 | |
Operating income (loss) | 57.3 | | | (15.9) | | | 41.4 | |
| Additions to property, plant and equipment | 26.6 | | | 0.4 | | | 27.0 | |
| | | | | |
| For the Six Months Ended July 1, 2023 |
| (in millions of U.S. dollars) | North America | | Other | | Total |
| Revenue, net | $ | 862.8 | | | $ | 0.3 | | | $ | 863.1 | |
| Depreciation and amortization | 93.6 | | | 0.7 | | | 94.3 | |
| Operating income (loss) | 92.0 | | | (29.2) | | | 62.8 | |
| Additions to property, plant and equipment | 68.7 | | | 0.5 | | | 69.2 | |
Revenues by channel by reporting segment were as follows:
| | | | | | | | | | | | | | | | | |
| | For the Three Months Ended June 29, 2024 |
| (in millions of U.S. dollars) | North America | | Other | | Total |
| Revenue, net | | | | | |
| Water Direct/Water Exchange | $ | 368.2 | | | $ | — | | | $ | 368.2 | |
| Water Refill/Water Filtration | 61.8 | | | — | | | 61.8 | |
Other Water 1 | 22.2 | | | — | | | 22.2 | |
| Water Dispensers | 13.2 | | | — | | | 13.2 | |
| Other | 19.4 | | | 0.2 | | | 19.6 | |
| Total | $ | 484.8 | | | $ | 0.2 | | | $ | 485.0 | |
| | | | | |
| For the Six Months Ended June 29, 2024 |
| (in millions of U.S. dollars) | North America | | Other | | Total |
| Revenue, net | | | | | |
| Water Direct/Water Exchange | $ | 707.6 | | | $ | — | | | $ | 707.6 | |
| Water Refill/Water Filtration | 119.8 | | | — | | | 119.8 | |
Other Water 1 | 39.9 | | | — | | | 39.9 | |
| Water Dispensers | 30.0 | | | — | | | 30.0 | |
| Other | 39.1 | | | 0.6 | | | 39.7 | |
| Total | $ | 936.4 | | | $ | 0.6 | | | $ | 937.0 | |
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended July 1, 2023 |
| (in millions of U.S. dollars) | North America | | Other | | Total |
| Revenue, net | | | | | |
| Water Direct/Water Exchange | $ | 342.9 | | | $ | — | | | $ | 342.9 | |
| Water Refill/Water Filtration | 55.4 | | | — | | | 55.4 | |
Other Water 1 | 11.9 | | | — | | | 11.9 | |
| Water Dispensers | 16.7 | | | — | | | 16.7 | |
| Other | 23.6 | | | 0.1 | | | 23.7 | |
| Total | $ | 450.5 | | | $ | 0.1 | | | $ | 450.6 | |
| | | | | |
| For the Six Months Ended July 1, 2023 |
| (in millions of U.S. dollars) | North America | | Other | | Total |
| Revenue, net | | | | | |
| Water Direct/Water Exchange | $ | 655.3 | | | $ | — | | | $ | 655.3 | |
| Water Refill/Water Filtration | 107.6 | | | — | | | 107.6 | |
Other Water 1 | 23.2 | | | — | | | 23.2 | |
| Water Dispensers | 29.4 | | | — | | | 29.4 | |
| Other | 47.3 | | | 0.3 | | | 47.6 | |
| Total | $ | 862.8 | | | $ | 0.3 | | | $ | 863.1 | |
______________________
1Primarily Mountain Valley retail and on-premise revenue.
Note 9 - Inventories
The following table summarizes inventories as of June 29, 2024 and December 30, 2023:
| | | | | | | | | | | |
| (in millions of U.S. dollars) | June 29, 2024 | | December 30, 2023 |
| Raw materials | $ | 27.6 | | | $ | 30.4 | |
| Finished goods | 9.8 | | | 6.8 | |
| Resale items | 9.9 | | | 10.1 | |
| Total | $ | 47.3 | | | $ | 47.3 | |
Note 10 - Accumulated Other Comprehensive (Loss) Income
Changes in AOCI by component for the three and six months ended June 29, 2024 and July 1, 2023 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 |
| Balance as of March 30, 2024 | $ | (0.7) | | | $ | (0.8) | | | $ | (109.8) | | | $ | (111.3) | |
| OCI before reclassifications | (0.2) | | | — | | | (1.8) | | | (2.0) | |
| Amounts reclassified from AOCI | 1.7 | | | — | | | (1.4) | | | 0.3 | |
| Net current-period OCI | 1.5 | | | — | | | (3.2) | | | (1.7) | |
| Balance as of June 29, 2024 | $ | 0.8 | | | $ | (0.8) | | | $ | (113.0) | | | $ | (113.0) | |
| | | | | | | |
| Balance as of December 30, 2023 | $ | — | | | $ | (0.8) | | | $ | (104.3) | | | $ | (105.1) | |
| OCI before reclassifications | (2.5) | | | — | | | (7.3) | | | (9.8) | |
| Amounts reclassified from AOCI | 3.3 | | | — | | | (1.4) | | | 1.9 | |
| Net current-period OCI | 0.8 | | | — | | | (8.7) | | | (7.9) | |
| Balance as of June 29, 2024 | $ | 0.8 | | | $ | (0.8) | | | $ | (113.0) | | | $ | (113.0) | |
| | | | | | | |
| Balance as of April 1, 2023 | $ | — | | | $ | 1.2 | | | $ | (90.0) | | | $ | (88.8) | |
| OCI before reclassifications | — | | | — | | | (0.6) | | | (0.6) | |
| Amounts reclassified from AOCI | — | | | 0.6 | | | — | | | 0.6 | |
| Net current-period OCI | — | | | 0.6 | | | (0.6) | | | — | |
| Balance as of July 1, 2023 | $ | — | | | $ | 1.8 | | | $ | (90.6) | | | $ | (88.8) | |
| | | | | | | |
| Balance as of December 31, 2022 | $ | — | | | $ | 1.2 | | | $ | (83.4) | | | $ | (82.2) | |
| OCI before reclassifications | — | | | — | | | (7.2) | | | (7.2) | |
| Amounts reclassified from AOCI | — | | | 0.6 | | | — | | | 0.6 | |
| Net current-period OCI | — | | | 0.6 | | | (7.2) | | | (6.6) | |
| Balance as of July 1, 2023 | $ | — | | | $ | 1.8 | | | $ | (90.6) | | | $ | (88.8) | |
| | | | | | | |
______________________
1All amounts are net of tax. Amounts in parentheses indicate debits.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions of U.S. dollars) | For the Three Months Ended | | For the Six Months Ended | Affected Line Item in the Statement Where Net Income Is Presented |
| Details of AOCI Components | June 29, 2024 | | July 1, 2023 | | June 29, 2024 | | July 1, 2023 |
| Gains and losses on derivative instruments | | | | | | | | |
Foreign exchange contracts 1 | $ | (1.7) | | | $ | — | | | $ | (3.3) | | | $ | — | | Other expense, net |
| $ | (1.7) | | | $ | — | | | $ | (3.3) | | | $ | — | | Net of tax |
| Amortization of pension benefit plan items | | | | | | | | |
Recognized actuarial losses 2 | $ | — | | | $ | (0.6) | | | $ | — | | | $ | (0.6) | | Other expense, net |
| $ | — | | | $ | (0.6) | | | $ | — | | | $ | (0.6) | | Net of tax |
Foreign currency translation adjustments 3 | $ | 1.4 | | | $ | — | | | $ | 1.4 | | | $ | — | | Loss on sale of discontinued operations |
| Total reclassifications for the period | $ | (0.3) | | | $ | (0.6) | | | $ | (1.9) | | | $ | (0.6) | | Net of tax |
1During the three and six months ended June 29, 2024, $2.3 million and $4.5 million of losses, respectively, were reclassified from AOCI related to the amounts excluded from the effectiveness testing recognized in earnings for the foreign exchange forward contracts. The effect of the loss was included in Other expense, net on the Consolidated Statements of Operations. The tax impact of the losses of $0.6 million and $1.2 million, respectively, was recorded within Income tax expense on the Consolidated Statements of Operations.
2During the three and six months ended July 1, 2023, $0.6 million was reclassified from AOCI due to the recognition of unrealized losses resulting from the distribution of the assets of the U.S. defined benefit plan. The effect of the loss was included in Other expense, net on the Consolidated Statements of Operations during the second quarter. The settlement did not have a material impact on the financial statements.
3During the three and six months ended June 29, 2024, the amount relates to the foreign currency translation balances recognized in earnings in connection with the sale of the Aimia and Farrers businesses included in Net income from discontinued operations, net of income taxes on the Consolidated Statement of Operations.
Note 11 - 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.
As of June 29, 2024 and December 30, 2023, we had $65.9 million and $66.7 million, respectively, in standby letters of credit outstanding.
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 $9.3 million as of June 29, 2024, 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 12 - Hedging Transactions and Derivative Financial Instruments
We are directly and indirectly affected by changes in foreign currency market conditions. These changes in market conditions may adversely impact our financial performance and are referred to as market risks. When deemed appropriate by management, we use derivatives as a risk management tool to mitigate the potential impact of foreign currency market risks.
We use foreign exchange forward contracts to manage the foreign exchange risk associated with the principal balance of our 2028 Notes. Forward contracts are agreements to buy or sell a quantity of a currency at a predetermined future date, and at a predetermined rate or price and are traded over-the-counter.
All derivatives are carried at fair value in the Consolidated Balance Sheets in the line item Other long-term assets, net or Other long-term liabilities. The carrying values of the derivatives reflect the impact of legally enforceable agreements with the same counterparties. These agreements allow us to net settle positive and negative positions (assets and liabilities) arising from different transactions with the same counterparty.
The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the types of hedging relationships. Derivatives can be designated as fair value hedges, cash flow hedges or hedges of net investments in foreign operations. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded in the same line item in our Consolidated Statements of Operations as the changes in the fair value of the hedged items attributable to the risk being hedged. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in fair values of derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized into earnings. We classify cash inflows and outflows related to derivative and hedging instruments within the appropriate cash flows section associated with the item being hedged.
For derivatives that will be accounted for as hedging instruments, we formally designate and document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, we formally assess both at the inception and at least quarterly thereafter, whether the financial instruments used in hedging transactions are highly effective at offsetting changes in either the fair values or cash flows of the related underlying exposures.
We estimate the fair values of our derivatives based on quoted market prices or pricing models using current market rates. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or other financial indices. We do not view the fair values of our derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying hedged transactions. All of our derivatives are over-the-counter instruments with liquid markets.
Credit Risk Associated with Derivatives
We have established strict counterparty credit guidelines and enter into transactions only with financial institutions of investment grade or better. We monitor counterparty exposures regularly and review promptly any downgrade in counterparty credit rating. We mitigate pre-settlement risk by being permitted to net settle for transactions with the same counterparty. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.
Fair Value Hedging Strategy
On January 2, 2024, we entered into foreign exchange contracts with a notional amount of €450.0 million ($481.5 million at exchange rates in effect on June 29, 2024) and a maturity date of October 31, 2025. We are utilizing the derivative financial instruments to hedge foreign exchange risk associated with our 2028 Notes.
We designated the foreign exchange contracts as fair value hedges. The foreign exchange contracts are recognized in the Consolidated Balance Sheets at fair value and changes in the fair value of the foreign exchange contracts are recorded in the same line as the hedged item, which is Other expense, net in the Consolidated Statements of Operations. We exclude forward points from our assessment of hedge effectiveness and amortize them on a straight-line basis over the life of the hedging instruments in Other expense, net in the Consolidated Statements of Operations. The difference between fair value changes of the excluded component and the amount amortized to Other expense, net is recorded in AOCI on the Consolidated Balance Sheets.
The following amount was recorded on the Consolidated Balance Sheets related to hedged item as of June 29, 2024:
| | | | | | | |
| (in millions of U.S. dollars) | June 29, 2024 |
| Line Item in Consolidated Balance Sheets in Which the Hedged Item Is Included | Carrying Amount of the Hedged Liability | | |
Long-term debt 1 | $ | (481.5) | | | |
______________________
1Carrying amount is gross of unamortized debt issuance costs as of June 29, 2024.
The fair value of our derivative liabilities included in Other long-term liabilities as of June 29, 2024 was as follows:
| | | | | | | | | | | |
| (in millions of U.S. dollars) | June 29, 2024 |
| Derivative Contract | Assets | | Liabilities |
| Foreign exchange contracts | $ | — | | | $ | (16.2) | |
The amount of gains or (losses) recognized in Other expense, net in the Consolidated Statements of Operations for fair value hedging relationships, presented on a pre-tax basis, for the three and six months ended June 29, 2024 is shown in the table below:
| | | | | | | | | | | |
| (in millions of U.S. dollars) | For the Three Months Ended June 29, 2024 | | For the Six Months Ended June 29, 2024 |
| Foreign exchange contracts | | | |
| Hedged Item | $ | 4.5 | | | $ | 17.9 | |
| Derivative designated as hedging instrument | $ | (4.5) | | | $ | (12.8) | |
| Amount reclassed from AOCI to expense (amortized) | $ | (2.3) | | | $ | (4.5) | |
| | | |
The amount of gains or (losses), net of tax, recognized in our Condensed Consolidated Statements of Comprehensive Income (Loss) for fair value hedging relationships for the three and six months ended June 29, 2024 is shown in the table below:
| | | | | | | | | | | |
| (in millions of U.S. dollars) | For the Three Months Ended June 29, 2024 | | For the Six Months Ended June 29, 2024 |
| Foreign exchange contracts | | | |
Amount excluded from the assessment of effectiveness 1 | $ | (0.2) | | | $ | (2.5) | |
______________________
1Amount is net of tax impact of $0.1 million and $0.9 million for the three and six months ended June 29, 2024, respectively.
There were no settlements of our derivative instruments during the three and six months ended June 29, 2024.
Note 13 - 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.
Our derivative assets and liabilities represent Level 2 instruments. Level 2 instruments are valued based on observable inputs for quoted prices for similar assets and liabilities in active markets. The fair value for the net derivative liabilities as of June 29, 2024 was $16.2 million. We had no derivative assets as of June 29, 2024.
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 June 29, 2024 and December 30, 2023 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 29, 2024 | | December 30, 2023 |
| (in millions of U.S. dollars) | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
3.875% senior notes due in 2028 1,2 | $ | 477.3 | | | $ | 451.3 | | | $ | 494.6 | | | $ | 477.5 | |
4.375% senior notes due in 2029 1,2 | 743.4 | | | 689.4 | | | 742.8 | | | 683.1 | |
| Total | $ | 1,220.7 | | | $ | 1,140.7 | | | $ | 1,237.4 | | | $ | 1,160.6 | |
______________________1The fair values were based on the trading levels and bid/offer prices observed by a market participant and are considered Level 2 financial instruments.
2Carrying value of our significant outstanding debt is net of unamortized debt issuance costs as of June 29, 2024 and December 30, 2023.
Note 14 - Subsequent Events
On August 6, 2024, our Board of Directors declared a dividend of $0.09 per share on common shares, payable in cash on September 5, 2024, to shareowners of record at the close of business on August 22, 2024.
On July 11, 2024, the Company entered into the third amendment to the credit agreement governing our senior secured revolving credit facility. The amendment extends the maturity date to September 30, 2026 with no change to the initial aggregate availability of $350.0 million. We are currently assessing the impact on our Consolidated Financial Statements.
On July 3, 2024, the Company completed the sale of our Portugal business, resulting in total cash consideration to the Company of $19.2 million. We are currently assessing the impact on our Consolidated Financial Statements.