Notes to the Consolidated Financial Statements
Unaudited
Note 1—Business and Recent Accounting Pronouncements
Description of Business
On March 2, 2020, Cott Corporation completed the acquisition of Primo Water Corporation (“Legacy Primo” and such transaction, the “Legacy Primo Acquisition”). In connection with the closing of the Legacy Primo Acquisition, Cott Corporation changed its corporate name to Primo Water Corporation and its ticker symbol on the New York Stock Exchange and Toronto Stock Exchange to “PRMW”. The Legacy Primo Acquisition is consistent with our strategy of transitioning to a pure-play water solutions provider.
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 pure-play water solutions provider in North America, Europe and Israel. 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 major retailers and online at various price points or leased to customers. 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 market leading Water Direct business, Primo delivers sustainable hydration solutions across its 21-country footprint direct to the customer’s door, whether at home or to commercial businesses. Through its market leading Water Exchange and Water Refill businesses, Primo offers pre-filled and reusable containers at over 13,000 locations and water refill units at approximately 22,000 locations, respectively. Primo also offers water filtration units across its 21-country footprint representing a top five position.
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.
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 28, 2019 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 28, 2019 (our “2019 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 2019 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.
Changes in Presentation
On February 28, 2020, we completed the sale of our coffee, tea and extract solutions business, S. & D. Coffee, Inc. (“S&D”) for $405.0 million in cash, subject to customary post-closing adjustments. As a result of this transaction representing a strategic shift in our operations, the Company has reclassified the financial results of our discontinued operations to net income from discontinued operations, net of income taxes in the Consolidated Statement of Operations for the three months ended March 30, 2019. The assets and liabilities associated with S&D have been reflected as current and long-term assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of December 28, 2019. Cash flows from our discontinued operations are presented in the Consolidated Statement of Cash Flows for the three months ended March 30, 2019. 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.
On March 2, 2020, we completed the Legacy Primo Acquisition. This business was added to our existing Route Based Services reporting segment, which was renamed “Water Solutions” to reflect our strategy of transitioning to a pure-play water solutions provider. Other than the change in name, there was no impact on prior period results for this reporting segment.
Significant Accounting Policies
Included in Note 1 of our 2019 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 Water Solutions reporting segment branch locations to the end-user consumer of those products are recorded in selling, general and administrative (“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 $120.0 million and $115.0 million for the three months ended March 28, 2020 and March 30, 2019, respectively. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production.
Allowance for Credit Losses
We estimate an allowance for credit losses based on historical loss experience, adverse situations that may affect a customer's ability to pay, current conditions, reasonable and supportable forecasts and current economic outlook. Customer demographic, such as large commercial customers as compared to small businesses or individual customers, and the customer’s geographic market are also considered when estimating credit losses. Historical loss experience was based on actual loss rates over a one year period. Additionally, we evaluate current conditions and review third-party economic forecasts on a quarterly basis to determine the impact on the allowance for credit losses. The assumptions used in determining an estimate of credit losses are inherently subjective and actual results may differ significantly from estimated reserves.
Recently adopted accounting pronouncements
Update ASU 2016-13 – Financial Instruments—Credit Losses (Topic 326), Update ASU 2019-05 – Financial Instruments—Credit Losses—Targeted Transition Relief (Topic 326) and Update ASU 2019-11 – Codification Improvements to Financial Instruments—Credit Losses (Topic 326)
In June 2016, the Financial Accounting Standards Board (“FASB”) amended its guidance to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The amended guidance also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. In May 2019, the FASB amended the original guidance by providing an option to irrevocably elect the fair value option for certain financial instruments previously measured at amortized cost basis. In November 2019, the FASB provided additional guidance around how to report expected recoveries. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.
Effective December 29, 2019, we adopted the guidance in this amendment using the modified retrospective transition method. The adoption of this new standard, with the impact being the increase in allowance for doubtful accounts related to our trade accounts receivable, resulted in a cumulative-effect adjustment of $4.3 million recognized to the opening balance of retained earnings. The Company will continue to actively monitor the impact of the recent coronavirus (“COVID-19”) pandemic on expected credit losses.
Update ASU 2018-13 – Fair Value Measurement (Topic 820)
In August 2018, the FASB amended its guidance on disclosure requirements for fair value measurement. The update amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this update while delaying adoption of the additional disclosures until their effective date. We adopted the guidance in this amendment effective December 29, 2019 prospectively. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.
Update ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)
In August 2018, the FASB amended its guidance on a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We adopted the guidance in this amendment effective December 29, 2019. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.
Update ASU 2019-04 – Codification Improvements to Topic 326—Financial Instruments—Credit Losses, Topic 815—Derivative and Hedging, and Topic 825—Financial Instruments
In April 2019, the FASB amended its guidance to clarify and provide narrow-scope amendments for these three recent standards related to financial instruments accounting. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted the guidance in this amendment effective December 29, 2019. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.
Update ASU 2019-12 – Income Taxes—Simplifying the Accounting for Income Taxes (Topic 740)
In December 2019, the FASB amended its guidance to remove certain exceptions to the general principles in Topic 740 and improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We adopted the guidance in this amendment effective December 29, 2019. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.
Update ASU 2020-03 – Codification Improvements to Financial Instruments
In March 2020, the FASB amended its guidance to clarify or improve the financial instrument topics in the existing guidance. These amendments make the guidance easier to understand and apply by eliminating inconsistencies and providing clarifications. Certain amendments in this update are effective upon issuance of this update. The remaining amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We adopted the guidance in this amendment effective December 29, 2019. Adoption of the new standard did not have a material impact on our Consolidated Financial Statements.
Recently issued accounting pronouncements
Update ASU 2018-14 – Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)
In August 2018, the FASB amended its guidance on disclosure requirements for defined benefit plans. The update amends existing annual disclosure requirements applicable to all employers that sponsor defined benefit pension and other postretirement plans by adding, removing, and clarifying certain disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and are to be applied on a retrospective basis to all periods presented. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
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. The Company has not adopted any of the optional expedients or exceptions through March 28, 2020, but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.
Note 2—Discontinued Operations
On February 28, 2020, the Company completed the sale of S&D to Westrock Coffee Company, LLC, a Delaware limited liability company (“Westrock”), pursuant to which Westrock acquired all of the issued and outstanding equity of S&D from the Company (“S&D Divestiture”). The aggregate deal consideration was $405.0 million, paid at closing in cash, subject to adjustment for indebtedness, working capital and other customary post-closing adjustments.
The Company used the proceeds of the S&D Divestiture to finance a portion of the Legacy Primo Acquisition. See Note 5 to the Consolidated Financial Statements for additional information on the Legacy Primo Acquisition.
The major components of net income from discontinued operations, net of income taxes in the accompanying Consolidated Statements of Operations include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
(in millions of U.S. dollars)
|
March 28, 2020
|
|
March 30, 2019
|
|
Revenue, net 1
|
$
|
97.1
|
|
|
$
|
148.0
|
|
|
Cost of sales
|
71.1
|
|
|
108.2
|
|
|
Operating (loss) income from discontinued operations
|
(0.5)
|
|
|
3.4
|
|
|
Gain on sale of discontinued operations
|
60.5
|
|
|
—
|
|
|
Net income from discontinued operations, before income taxes
|
59.8
|
|
|
3.4
|
|
|
Income tax expense 2
|
28.9
|
|
|
0.4
|
|
|
Net income from discontinued operations, net of income taxes
|
$
|
30.9
|
|
|
$
|
3.0
|
|
______________________
1 Includes $1.0 million and $1.6 million of related party sales to continuing operations for the three months ended March 28, 2020 and March 30, 2019, respectively.
2 The S&D Divestiture resulted in tax expense on the gain on sale of $28.5 million and will utilize a significant portion of the existing U.S. net operating loss carry forwards.
Note 3—Leases
We have operating and finance leases for manufacturing and production facilities, branch distribution and warehouse facilities, vehicles and machinery and equipment. The remaining terms on our finance leases range from 1 year to 8 years while our operating leases range from 1 year to 22 years, some of which may include options to extend the leases generally between 1 year and 10 years, and some of which may include options to terminate the leases within 1 year.
The components of lease expense for the three months ended March 28, 2020 and March 30, 2019, respectively, is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
(in millions of U.S. dollars)
|
March 28, 2020
|
|
March 30, 2019
|
|
Operating lease cost
|
$
|
12.5
|
|
|
$
|
11.6
|
|
|
Short-term lease cost
|
2.3
|
|
|
0.9
|
|
|
Finance lease cost
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
1.7
|
|
|
$
|
0.7
|
|
|
Interest on lease liabilities
|
1.0
|
|
|
0.2
|
|
|
Total finance lease cost
|
$
|
2.7
|
|
|
$
|
0.9
|
|
|
Sublease income
|
$
|
0.2
|
|
|
$
|
0.3
|
|
Supplemental cash flow information related to leases for the three months ended March 28, 2020 and March 30, 2019, respectively, is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
(in millions of U.S. dollars)
|
March 28, 2020
|
|
March 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
12.6
|
|
|
$
|
12.9
|
|
|
Operating cash flows from finance leases
|
0.9
|
|
|
0.1
|
|
|
Financing cash flows from finance leases
|
1.4
|
|
|
0.7
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
$
|
7.3
|
|
|
$
|
1.3
|
|
|
Finance leases
|
21.7
|
|
|
9.2
|
|
Supplemental balance sheet information related to leases as of March 28, 2020 and December 28, 2019, respectively, is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars, except lease term and discount rate)
|
March 28, 2020
|
|
December 28, 2019
|
|
Operating leases
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
181.7
|
|
|
$
|
185.7
|
|
|
Current operating lease obligations
|
37.5
|
|
|
36.5
|
|
|
Operating lease obligations
|
150.2
|
|
|
155.2
|
|
|
Total operating lease obligations
|
$
|
187.7
|
|
|
$
|
191.7
|
|
|
|
|
|
|
|
Financing leases
|
|
|
|
|
Property, plant and equipment, net
|
$
|
50.1
|
|
|
$
|
30.4
|
|
|
Current maturities of long-term debt
|
9.0
|
|
|
5.7
|
|
|
Long-term debt
|
40.5
|
|
|
23.7
|
|
|
Total finance lease obligations
|
$
|
49.5
|
|
|
$
|
29.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Remaining Lease Term
|
March 28, 2020
|
|
December 28, 2019
|
|
Operating leases
|
8.5
|
|
8.7
|
|
Finance leases
|
5.8
|
|
5.6
|
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
6.7
|
%
|
|
6.2
|
%
|
|
Finance leases
|
5.6
|
%
|
|
6.3
|
%
|
Maturities of operating lease obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
March 28, 2020
|
|
December 28, 2019
|
|
Remainder of 2020
|
|
$
|
37.7
|
|
|
$
|
47.8
|
|
|
2021
|
|
39.5
|
|
|
38.4
|
|
|
2022
|
|
30.6
|
|
|
29.6
|
|
|
2023
|
|
26.2
|
|
|
25.3
|
|
|
2024
|
|
21.1
|
|
|
20.6
|
|
|
Thereafter
|
93.9
|
|
|
93.5
|
|
|
Total lease payments
|
249.0
|
|
|
255.2
|
|
|
Less imputed interest
|
(61.3)
|
|
|
(63.5)
|
|
|
Present value of lease obligations
|
$
|
187.7
|
|
|
$
|
191.7
|
|
Maturities of finance lease obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
March 28, 2020
|
|
December 28, 2019
|
|
Remainder of 2020
|
$
|
9.5
|
|
|
$
|
6.8
|
|
|
2021
|
10.8
|
|
|
6.1
|
|
|
2022
|
9.8
|
|
|
5.7
|
|
|
2023
|
8.9
|
|
|
5.4
|
|
|
2024
|
7.3
|
|
|
4.6
|
|
|
Thereafter
|
11.5
|
|
|
6.4
|
|
|
Total lease payments
|
57.8
|
|
|
35.0
|
|
|
Less imputed interest
|
(8.3)
|
|
|
(5.6)
|
|
|
Present value of lease obligations
|
$
|
49.5
|
|
|
$
|
29.4
|
|
Note 4—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 major 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 client arrangement, and revenue is recognized when the performance obligations in the client 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. Clients typically receive the benefit of our services as they are performed. Substantially all our client 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 $6.2 million and $7.0 million at March 28, 2020 and December 28, 2019, 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 March 28, 2020 and December 28, 2019 were $21.8 million and $23.6 million, respectively. The amount of revenue recognized in the three months ended March 28, 2020 that was included in the December 28, 2019 deferred revenue balance was $11.1 million.
We do not have any material contract assets as of March 28, 2020.
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)
|
March 28, 2020
|
|
March 30, 2019
|
|
United States
|
$
|
334.6
|
|
|
$
|
289.6
|
|
|
United Kingdom
|
42.5
|
|
|
46.1
|
|
|
Canada
|
16.1
|
|
|
15.8
|
|
|
All other countries
|
81.0
|
|
|
76.2
|
|
|
Total
|
$
|
474.2
|
|
|
$
|
427.7
|
|
Note 5—Acquisitions
Legacy Primo Acquisition
On March 2, 2020, the Company completed the Legacy Primo Acquisition, adding North America’s leading single source provider of multi-gallon purified bottled water, self-service refill drinking water and water dispensers sold through major retailers to the Company’s catalog of home and office bottled water delivery businesses in North America and Europe. Primo is a familiar name in sustainable water solutions that will help drive the visibility of our water businesses, moving us towards a pure-play water solutions company. The Legacy Primo Acquisition broadens our capabilities and our portfolio, creating new cross-selling opportunities and vertical integration across home and office delivery, retail, filtration, refill and exchange services. Integrating Legacy Primo with our DS Services of America, Inc. business will enable us to combine the expertise and innovation of these two growing companies with complementary business models. The integration gives us the ability to expand Legacy Primo’s products and services across our 21-country footprint.
The Legacy Primo Acquisition was structured as an exchange offer to purchase all of the outstanding shares of common stock of Legacy Primo, in exchange, per Legacy Primo share for (i) $14.00 in cash, (ii) 1.0229 Cott Corporation common shares plus cash in lieu of any fractional Cott Corporation common share, or (iii) $5.04 in cash and 0.6549 Cott Corporation common shares, at the election of Legacy Primo’s stockholders, subject to the proration procedures set forth in the merger agreement. Immediately following the consummation of the exchange offer, Cott Corporation indirectly acquired the remaining Legacy Primo shares through a merger between Legacy Primo and a wholly-owned subsidiary of Cott Corporation.
The total cash and stock consideration paid by us in the Legacy Primo Acquisition is summarized below:
|
|
|
|
|
|
|
|
(in millions of U.S. dollars, except share and per share amounts)
|
|
|
Fair value of common shares issued to holders of Legacy Primo common stock (26,497,015 shares issued at $14.25 per share)
|
$
|
377.6
|
|
|
Cash to holders of Legacy Primo common stock 1
|
216.1
|
|
|
Cash paid to retire outstanding indebtedness on behalf of Legacy Primo
|
196.9
|
|
|
Settlement of pre-existing relationship
|
4.7
|
|
|
Fair value of replacement common share options and restricted stock units for Legacy Primo awards
|
2.9
|
|
|
Total consideration
|
$
|
798.2
|
|
______________________
1 Cash to holders of Legacy Primo common stock includes $11.5 million of cash consideration that was paid on March 30, 2020 and is accrued in accounts payable and accrued liabilities on the Consolidated Balance Sheet as of March 28, 2020.
The table below presents the preliminary purchase price allocation of the estimated acquisition date fair values of the assets acquired and the liabilities assumed:
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Acquired Value
|
|
Cash and cash equivalents
|
$
|
1.3
|
|
|
Accounts receivable
|
21.9
|
|
|
Inventory
|
12.7
|
|
|
Prepaid expenses and other current assets
|
4.3
|
|
|
Property, plant and equipment
|
119.0
|
|
|
Operating lease right-of-use-assets
|
4.9
|
|
|
Goodwill
|
337.4
|
|
|
Intangible assets
|
361.3
|
|
|
Other assets
|
3.9
|
|
|
Current maturities of long-term debt
|
(2.2)
|
|
|
Accounts payable and accrued liabilities
|
(41.6)
|
|
|
Current operating lease obligations
|
(1.8)
|
|
|
Long-term debt
|
(5.8)
|
|
|
Operating lease obligations
|
(3.1)
|
|
|
Deferred tax liabilities
|
(11.7)
|
|
|
Other long-term liabilities
|
(2.3)
|
|
|
Total
|
$
|
798.2
|
|
The assets and liabilities acquired in the Legacy Primo 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.
The amount of revenues and net loss related to the Legacy Primo Acquisition included in the Company’s Consolidated Statement of Operations for the period from the Legacy Primo Acquisition date through March 28, 2020 were $32.1 million and $0.6 million, respectively. The Company incurred $18.8 million of acquisition-related costs associated with the Legacy Primo Acquisition, which are included in acquisition and integration expenses in the Consolidated Statement of Operations for the three months ended March 28, 2020.
Intangible Assets
In our determination of the fair value of intangible assets, we consider, among other factors, the best use of acquired assets, analysis of historical financial performance and estimates of future performance of the acquired business’ products. The estimated fair values of identified intangible assets are calculated considering both market participant expectations, using an income approach, as well as estimates and assumptions provided by Primo management and management of the acquired business. Assumptions include, but are not limited to, expected revenue growth, weighted-average terminal growth rates, risk adjusted discount rate and fair value royalty rate.
The estimated fair value of customer relationships represents future after-tax discounted cash flows that will be derived from sales to existing customers of the acquired business as of the date of acquisition.
The estimated fair value of trademarks and trade names represents the future projected cost savings associated with the premium and brand image obtained as a result of owning the trademark or trade name as opposed to obtaining the benefit of the trademark or trade name through a royalty or rental fee.
The following table sets forth the components of identified intangible assets associated with the Legacy Primo Acquisition and their estimated weighted average useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. Dollars)
|
Estimated Fair Market Value
|
|
Estimated Useful Life
|
|
Customer relationships
|
220.0
|
|
20 years
|
|
Trade names
|
140.0
|
|
Indefinite
|
|
Software
|
1.3
|
|
3 years
|
|
Total
|
361.3
|
|
|
Goodwill
The principal factor that resulted in recognition of goodwill was the basis of the purchase price for the Legacy Primo Acquisition, in part, on cash flow projections assuming the reduction of administration costs and the integration of acquired customers and products into our operations, which is of greater value than on a standalone basis. The goodwill recognized as part of the Legacy Primo Acquisition was allocated to the Water Solutions reporting segment, a portion of which is expected to be tax deductible.
Supplemental Pro Forma Data (unaudited)
The following unaudited pro forma financial information for the three months ended March 28, 2020 and March 30, 2019, respectively, represent the combined results of our operations as if the Legacy Primo Acquisition had occurred on December 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
(in millions of U.S. dollars, except per share amounts)
|
March 28, 2020
|
|
March 30, 2019
|
|
Revenue
|
$
|
514.7
|
|
|
$
|
486.9
|
|
|
Net loss from continuing operations
|
$
|
(13.0)
|
|
|
$
|
(36.9)
|
|
|
Net income (loss)
|
$
|
17.9
|
|
|
$
|
(33.9)
|
|
|
Net loss per common share from continuing operations, diluted
|
$
|
(0.09)
|
|
|
$
|
(0.23)
|
|
|
Net income (loss) per common share, diluted
|
$
|
0.13
|
|
|
$
|
(0.21)
|
|
Note 6—Income Taxes
Income tax benefit was $3.3 million and $1.4 million on pre-tax loss from continuing operations of $30.7 million and $24.1 million for the three months ended March 28, 2020 and March 30, 2019, respectively. The effective income tax rates were 10.7% and 5.8% for the three months ended March 28, 2020 and March 30, 2019, respectively.
The effective tax rate for the three months ended March 28, 2020 varied from the effective tax rate for the three months ended March 30, 2019 due primarily to a release of uncertain tax positions in the first quarter of 2020.
The Tax Cuts and Jobs Act enacted new Section 163(j) interest expense limitation rules on December 22, 2017. On November 26, 2018, the U.S. Department of the Treasury released proposed regulations to provide interpretative guidance for the new Section 163(j) rules, with early adoption permitted, but such regulations have not been finalized. We have not adopted the proposed regulations. If the proposed regulations are finalized as currently written, they could have a material impact to our Consolidated Financial Statements in the year in which they are finalized.
Note 7—Common Shares and Net Income (Loss) per Common Share
Common Shares
On December 11, 2019, our Board of Directors approved a share repurchase program for up to $50.0 million of our outstanding common shares over a 12-month period commencing on December 16, 2019 (the “Repurchase Plan”). For the three months ended March 28, 2020, we repurchased 2,316,835 common shares for $25.0 million through open market transactions under the Repurchase Plan. Shares purchased under the Repurchase Plan were subsequently canceled. There can be no assurance as to the precise number of shares, if any, that will be repurchased under the Repurchase Plan in the future, or the aggregate dollar amount of shares to be purchased in future periods. We may discontinue purchases at any time, subject to compliance with applicable regulatory requirements.
On March 2, 2020, the Company completed the Legacy Primo Acquisition, with the fair value of the 26,497,015 common shares issued at $14.25 per share to holders of Legacy Primo (see Note 5 to the Consolidated Financial Statements).
Net Income (Loss) per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to Primo Water Corporation by the weighted average number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to Primo Water Corporation 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. Set forth below is a reconciliation of the numerator and denominator for the diluted net income (loss) per common share computations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Numerator (in millions of U.S. dollars):
|
|
|
|
|
Net loss from continuing operations
|
$
|
(27.4)
|
|
|
$
|
(22.7)
|
|
|
Net income from discontinued operations
|
30.9
|
|
|
3.0
|
|
|
Net income (loss)
|
3.5
|
|
|
(19.7)
|
|
|
Basic Earnings Per Share
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
Weighted average common shares outstanding - basic
|
141,139
|
|
|
135,948
|
|
|
Basic Earnings Per Share:
|
|
|
|
|
Continuing operations
|
(0.19)
|
|
|
(0.17)
|
|
|
Discontinued operations
|
0.22
|
|
|
0.03
|
|
|
Net income (loss)
|
0.02
|
|
|
(0.14)
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
Weighted average common shares outstanding - basic
|
141,139
|
|
|
135,948
|
|
|
Dilutive effect of Stock Options
|
—
|
|
|
—
|
|
|
Dilutive effect of Performance-based RSUs
|
—
|
|
|
—
|
|
|
Dilutive effect of Time-based RSUs
|
—
|
|
|
—
|
|
|
Weighted average common shares outstanding - diluted
|
141,139
|
|
|
135,948
|
|
|
Diluted Earnings Per Share:
|
|
|
|
|
Continuing operations
|
(0.19)
|
|
|
(0.17)
|
|
|
Discontinued operations
|
0.22
|
|
|
0.03
|
|
|
Net income (loss)
|
0.02
|
|
|
(0.14)
|
|
The following table summarizes anti-dilutive securities excluded from the computation of diluted net income (loss) per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
(in thousands)
|
March 28, 2020
|
|
March 30, 2019
|
|
Stock Options
|
6,477
|
|
|
5,378
|
|
|
Performance-based RSUs 1
|
750
|
|
|
1,252
|
|
|
Time-based RSUs
|
557
|
|
|
374
|
|
______________________
1 Performance-based RSUs represent the number of shares expected to be issued based primarily on the estimated achievement of cumulative pre-tax income targets for these awards.
Note 8—Segment Reporting
Our broad portfolio of products includes bottled water, water dispensers, purified bottled water, self-service refill drinking water, premium spring, sparkling and flavored water, mineral water, filtration equipment, coffee, hot chocolate, soups, malt drinks, creamers/whiteners and cereals.
During the first quarter of 2020, we completed the Legacy Primo Acquisition. This business was added to our existing Route Based Services reporting segment, which was renamed “Water Solutions” to reflect our strategy of transitioning to a pure-play water solutions provider. Other than the change in name, there was no impact on prior period results for this reporting segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Water Solutions
|
|
All Other
|
|
Total
|
|
For the Three Months Ended March 28, 2020
|
|
|
|
|
|
|
Revenue, net
|
$
|
474.2
|
|
|
$
|
—
|
|
|
$
|
474.2
|
|
|
Depreciation and amortization
|
44.9
|
|
|
0.1
|
|
|
$
|
45.0
|
|
|
Operating income (loss)
|
21.5
|
|
|
(25.5)
|
|
|
$
|
(4.0)
|
|
|
Additions to property, plant and equipment
|
34.9
|
|
|
—
|
|
|
$
|
34.9
|
|
|
As of March 28, 2020
|
|
|
|
|
|
|
Total assets 1
|
$
|
3,663.4
|
|
|
|
$
|
55.7
|
|
|
|
$
|
3,719.1
|
|
______________________
1 Excludes intersegment receivables, investments and notes receivable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Water Solutions
|
|
All Other
|
|
Total
|
|
For the Three Months Ended March 30, 2019
|
|
|
|
|
|
|
Revenue, net
|
$
|
420.5
|
|
|
$
|
7.2
|
|
|
$
|
427.7
|
|
|
Depreciation and amortization
|
39.6
|
|
|
0.1
|
|
|
39.7
|
|
|
Operating income (loss)
|
14.0
|
|
|
(13.3)
|
|
|
0.7
|
|
|
Additions to property, plant and equipment
|
21.9
|
|
|
0.1
|
|
|
22.0
|
|
|
As of December 28, 2019
|
|
|
|
|
|
|
Total assets 1
|
$
|
2,816.1
|
|
|
$
|
48.3
|
|
|
$
|
2,864.4
|
|
______________________
1 Excludes intersegment receivables, investments and notes receivable.
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
December 28, 2019
|
|
Segment assets 1
|
$
|
2,864.4
|
|
|
Assets of discontinued operations 1
|
526.5
|
|
|
Total assets
|
$
|
3,390.9
|
|
______________________
1 Excludes intersegment receivables, investments and notes receivable.
Credit risk arises from the potential default of a customer in meeting its financial obligations to us. Concentrations of credit exposure may arise with a group of customers that have similar economic characteristics or that are located in the same geographic region. The ability of such customers to meet obligations would be similarly affected by changing economic, political or other conditions.
The impact of the COVID-19 pandemic may impact the ability of such customers to meet obligations to us. The full extent to which the COVID-19 pandemic will negatively affect our results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in the markets in which we operate and other third parties in response to the pandemic.
Revenues by channel by reporting segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 28, 2020
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Water Solutions
|
|
All Other
|
|
Total
|
|
Revenue, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Direct/Water Exchange
|
|
$
|
295.2
|
|
|
|
$
|
—
|
|
|
|
$
|
295.2
|
|
|
Water Refill/Water Filtration
|
|
30.8
|
|
|
|
—
|
|
|
|
30.8
|
|
|
Water Retail
|
|
55.4
|
|
|
|
—
|
|
|
|
55.4
|
|
|
Water Dispensers
|
|
5.9
|
|
|
—
|
|
|
5.9
|
|
|
Other
|
|
86.9
|
|
|
|
—
|
|
|
|
86.9
|
|
|
Total
|
|
$
|
474.2
|
|
|
|
$
|
—
|
|
|
|
$
|
474.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the For the Three Months Ended March 30, 2019
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Water Solutions 1
|
|
All Other
|
|
Total
|
|
Revenue, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Direct/Water Exchange
|
|
$
|
264.2
|
|
|
|
$
|
—
|
|
|
|
$
|
264.2
|
|
|
Water Refill/Water Filtration
|
|
15.3
|
|
|
|
—
|
|
|
|
15.3
|
|
|
Water Retail
|
|
50.8
|
|
|
|
—
|
|
|
|
50.8
|
|
|
Water Dispensers
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
90.2
|
|
|
|
7.2
|
|
|
|
97.4
|
|
|
Total
|
|
$
|
420.5
|
|
|
|
$
|
7.2
|
|
|
|
$
|
427.7
|
|
______________________
1 Revenues by channel of our Water Solutions reporting segment for the three months ended March 30, 2019 had $15.3 million of revenues reclassified from “other” to “water refill/water filtration” and $5.6 million of revenues reclassified from “other” to “water direct/water exchange” in order to better align the activities after the Legacy Primo Acquisition. In addition, we reclassified $48.6 million of revenues from “coffee and tea services” and $20.1 million of revenues from “retail” into “other” in order to better align with our strategy of transitioning to a pure-play water solutions provider.
Note 9—Inventories
The following table summarizes inventories as of March 28, 2020 and December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
March 28, 2020
|
|
December 28, 2019
|
|
Raw materials
|
$
|
25.8
|
|
|
$
|
23.8
|
|
|
Finished goods
|
33.0
|
|
|
24.2
|
|
|
Resale items
|
15.5
|
|
|
14.0
|
|
|
Other
|
1.0
|
|
|
0.9
|
|
|
Total
|
$
|
75.3
|
|
|
$
|
62.9
|
|
Note 10—Property, Plant and Equipment, Net
The following table summarizes property, plant and equipment, net as of March 28, 2020 and December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
|
|
|
|
December 28, 2019
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Estimated Useful Life in Years
|
Cost
|
|
Accumulated Depreciation
|
|
Net
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net
|
|
Land
|
n/a
|
$
|
95.3
|
|
|
|
$
|
—
|
|
|
|
$
|
95.3
|
|
|
|
$
|
95.3
|
|
|
|
$
|
—
|
|
|
|
$
|
95.3
|
|
|
Buildings
|
10-40
|
89.9
|
|
|
|
27.9
|
|
|
|
62.0
|
|
|
|
88.9
|
|
|
|
26.9
|
|
|
|
62.0
|
|
|
Machinery and equipment
|
5-15
|
255.5
|
|
|
|
68.6
|
|
|
|
186.9
|
|
|
|
146.8
|
|
|
|
66.0
|
|
|
|
80.8
|
|
|
Plates, films and molds
|
1-10
|
1.6
|
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
1.5
|
|
|
|
0.6
|
|
|
|
0.9
|
|
|
Vehicles and transportation equipment
|
3-15
|
90.2
|
|
|
|
60.7
|
|
|
|
29.5
|
|
|
|
90.3
|
|
|
|
59.5
|
|
|
|
30.8
|
|
|
Leasehold improvements 1
|
|
18.6
|
|
|
|
11.3
|
|
|
|
7.3
|
|
|
|
19.8
|
|
|
|
10.7
|
|
|
|
9.1
|
|
|
IT Systems
|
3-7
|
17.1
|
|
|
|
10.3
|
|
|
|
6.8
|
|
|
|
15.6
|
|
|
|
9.9
|
|
|
|
5.7
|
|
|
Furniture and fixtures
|
3-10
|
11.4
|
|
|
|
8.5
|
|
|
|
2.9
|
|
|
|
12.0
|
|
|
|
8.6
|
|
|
|
3.4
|
|
|
Customer equipment 2
|
3-7
|
352.6
|
|
|
|
153.2
|
|
|
|
199.4
|
|
|
|
339.7
|
|
|
|
144.9
|
|
|
|
194.8
|
|
|
Returnable bottles 3
|
3-5
|
83.9
|
|
|
|
36.4
|
|
|
|
47.5
|
|
|
|
82.0
|
|
|
|
37.1
|
|
|
|
44.9
|
|
|
Finance leases 4
|
|
59.1
|
|
|
|
9.0
|
|
|
|
50.1
|
|
|
|
37.6
|
|
|
|
7.2
|
|
|
|
30.4
|
|
|
Total
|
|
$
|
1,075.2
|
|
|
|
$
|
386.5
|
|
|
|
$
|
688.7
|
|
|
|
$
|
929.5
|
|
|
|
$
|
371.4
|
|
|
|
$
|
558.1
|
|
______________________
1 Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life.
2 Customer equipment consists of coolers, brewers, refrigerators, water purification devices and storage racks held on site at customer locations.
3 Returnable bottles are those bottles on site at our Water Solutions customer locations.
4 Our recorded assets under finance leases relate to IT systems, customer equipment and vehicles and transportation equipment.
The amounts above include construction-in-progress of $9.2 million and $2.4 million as of March 28, 2020 and December 28, 2019, respectively.
Depreciation expense, which includes depreciation recorded for assets under finance leases, for the three months ended March 28, 2020 and March 30, 2019 was $30.6 million and $26.4 million, respectively.
Note 11—Intangible Assets, Net
The following table summarizes intangible assets, net as of March 28, 2020 and December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
|
|
|
|
December 28, 2019
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
423.9
|
|
|
$
|
—
|
|
|
$
|
423.9
|
|
|
$
|
287.1
|
|
|
$
|
—
|
|
|
$
|
287.1
|
|
|
Total intangible assets not subject to amortization
|
423.9
|
|
|
—
|
|
|
423.9
|
|
|
287.1
|
|
|
—
|
|
|
287.1
|
|
|
Subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
752.2
|
|
|
276.3
|
|
|
475.9
|
|
|
534.9
|
|
|
267.4
|
|
|
267.5
|
|
|
Patents
|
19.0
|
|
|
4.4
|
|
|
14.6
|
|
|
15.2
|
|
|
4.0
|
|
|
11.2
|
|
|
Software
|
54.0
|
|
|
29.8
|
|
|
24.2
|
|
|
49.3
|
|
|
28.0
|
|
|
21.3
|
|
|
Other
|
13.9
|
|
|
5.0
|
|
|
8.9
|
|
|
14.9
|
|
|
5.0
|
|
|
9.9
|
|
|
Total intangible assets subject to amortization
|
839.1
|
|
|
315.5
|
|
|
523.6
|
|
|
614.3
|
|
|
304.4
|
|
|
309.9
|
|
|
Total intangible assets
|
$
|
1,263.0
|
|
|
$
|
315.5
|
|
|
$
|
947.5
|
|
|
$
|
901.4
|
|
|
$
|
304.4
|
|
|
$
|
597.0
|
|
Amortization expense of intangible assets was $14.4 million and $13.3 million for the three months ended March 28, 2020 and March 30, 2019, respectively.
The estimated amortization expense for intangible assets over the next five years and thereafter is:
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
|
|
Remainder of 2020
|
$
|
49.3
|
|
|
2021
|
58.1
|
|
|
2022
|
51.8
|
|
|
2023
|
43.5
|
|
|
2024
|
36.6
|
|
|
Thereafter
|
284.3
|
|
|
Total
|
$
|
523.6
|
|
Note 12—Debt
Revolving Credit Facility and Liquidity
On March 6, 2020 (the “Closing Date”), the Company entered into a credit agreement (the “Credit Agreement”) among the Company, as parent borrower, Cott Holdings Inc. and Eden Springs Nederland B.V. (“Eden”), each as subsidiary borrowers, certain other subsidiaries of the Company from time to time designated as subsidiary borrowers, Bank of America, N.A., as administrative agent and collateral agent, and the lenders from time to time party thereto.
The Credit Agreement provides for a senior secured revolving credit facility in an initial aggregate committed amount of $350.0 million (the “Revolving Credit Facility”), which may be increased by incremental credit extensions from time to time in the form of term loans or additional revolving credit commitments. The Revolving Credit Facility will mature five years from the Closing Date and includes letter of credit and swing line loan subfacilities.
Borrowings under the Revolving Credit Facility were used on the Closing Date to refinance in full and terminate our previously existing asset-based lending credit facility, governed by the Second Amended and Restated Credit Agreement, dated January 30, 2019, by and among the Company, the other loan parties party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent and as collateral agent, and the lenders from time to time party thereto (as amended, the “ABL Credit Agreement”). Certain letters of credit outstanding under the ABL Credit Agreement were rolled over under the Revolving Credit Facility on the Closing Date. We incurred approximately $3.4 million of financing fees in connection with the Revolving Credit Facility. The Revolving Credit Facility was considered to be a modification of the ABL Credit Agreement under GAAP. These new financing fees along with $1.8 million of unamortized deferred costs of the ABL Credit Agreement are being amortized using the straight-line method over the duration of the Revolving Credit Facility.
As of March 28, 2020, the outstanding borrowings under the Revolving Credit Facility were $118.0 million and was recorded in short-term borrowings on the Consolidated Balance Sheet. Outstanding letters of credit totaled $43.3 million resulting in total utilization under the Revolving Credit Facility of $161.3 million. Accordingly, unused availability under the Revolving Credit Facility as of March 28, 2020 amounted to $188.7 million.
Borrowings under the Credit Agreement will bear interest at a rate per annum equal to either: (a) a eurocurrency rate as determined under the Credit Agreement, plus the applicable margin, or (b) a base rate equal to the highest of (i) Bank of America’s prime rate, (ii) 0.5% per annum above the federal funds rate, and (iii) the eurocurrency rate, as determined under the Credit Agreement, for a one month interest period, plus 1.0%, plus the applicable margin. Prior to delivery of financial statements and a compliance certificate for the full fiscal quarter following the Closing Date, the applicable margin for eurocurrency rate loans will be 150 basis points and the applicable margin for base rate loans will be 50 basis points. Thereafter, the applicable margin for eurocurrency rate loans ranges from 137.5 to 200 basis points and the applicable margin for base rate loans ranges from 37.5 to 100 basis points, in each case depending on our consolidated total leverage ratio. Unutilized commitments under the Credit Agreement are subject to a commitment fee ranging from 20 to 30 basis points per annum depending on our consolidated total leverage ratio, payable on a quarterly basis.
Affirmative Covenants and Ratios
The Credit Agreement has two financial covenants, a consolidated secured leverage ratio and an interest coverage ratio. The consolidated secured leverage ratio must not be more than 3.50 to 1.00, with an allowable temporary increase to 4.00 to 1.00 for the quarter in which the Company consummates a material acquisition with a price not less than $125.0 million, for three quarters. The interest coverage ratio must not be less than 3.00 to 1.00. Per the Credit Agreement, the Company is required to calculate these two financial covenants commencing with the initial test period ending June 27, 2020.
In addition, the Credit Agreement has certain non-financial covenants, such as covenants regarding indebtedness, investments, and asset dispositions. The Company was in compliance with all covenants as of March 28, 2020.
Note 13—Accumulated Other Comprehensive (Loss) Income
Changes in accumulated other comprehensive (loss) income (“AOCI”) by component for the three months ended March 28, 2020 and March 30, 2019 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
|
|
Beginning balance December 29, 2018
|
$
|
(9.7)
|
|
|
|
$
|
0.3
|
|
|
|
$
|
(92.3)
|
|
|
|
$
|
(101.7)
|
|
|
OCI before reclassifications
|
(8.1)
|
|
|
|
—
|
|
|
|
10.6
|
|
|
|
2.5
|
|
|
Amounts reclassified from AOCI
|
2.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.6
|
|
|
Net current-period OCI
|
(5.5)
|
|
|
|
—
|
|
|
|
10.6
|
|
|
|
5.1
|
|
|
Ending balance March 30, 2019
|
$
|
(15.2)
|
|
|
|
$
|
0.3
|
|
|
|
$
|
(81.7)
|
|
|
|
$
|
(96.6)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance December 28, 2019
|
$
|
11.2
|
|
|
|
$
|
(1.0)
|
|
|
|
$
|
(78.7)
|
|
|
|
$
|
(68.5)
|
|
|
OCI before reclassifications
|
(8.7)
|
|
|
|
—
|
|
|
|
(18.7)
|
|
|
|
(27.4)
|
|
|
Amounts reclassified from AOCI
|
(2.5)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2.5)
|
|
|
Net current-period OCI
|
(11.2)
|
|
|
|
—
|
|
|
|
(18.7)
|
|
|
|
(29.9)
|
|
|
Ending Balance March 28, 2020
|
$
|
—
|
|
|
|
$
|
(1.0)
|
|
|
|
$
|
(97.4)
|
|
|
|
$
|
(98.4)
|
|
______________________
1 All amounts are net of tax. Amounts in parentheses indicate debits.
The following table summarizes the amounts reclassified from AOCI for the three months ended March 28, 2020 and March 30, 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
For the Three Months Ended
|
|
|
|
Affected Line Item in the Statement Where Net Income Is Presented
|
|
Details About AOCI Components 1
|
March 28, 2020
|
|
March 30, 2019
|
|
|
|
Gains and losses on derivative instruments
|
|
|
|
|
|
|
Foreign currency and commodity hedges
|
$
|
0.1
|
|
|
$
|
(2.6)
|
|
|
Cost of sales
|
|
Commodity hedges 2
|
2.4
|
|
|
—
|
|
|
Gain on sale of discontinued operations
|
|
|
2.5
|
|
|
(2.6)
|
|
|
Total before taxes
|
|
|
—
|
|
|
—
|
|
|
Tax expense or (benefit)
|
|
|
$
|
2.5
|
|
|
$
|
(2.6)
|
|
|
Net of tax
|
|
Amortization of pension benefit plan items
|
|
|
|
|
|
|
Actuarial (losses)/gains 3
|
—
|
|
|
—
|
|
|
|
|
Prior service costs 3
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
Total before taxes
|
|
|
—
|
|
|
—
|
|
|
Tax expense or (benefit)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Net of tax
|
|
Total reclassifications for the period
|
$
|
2.5
|
|
|
$
|
(2.6)
|
|
|
Net of tax
|
______________________
1 Amounts in parentheses indicate debits.
2 Net of $1.3 million of associated tax impact that resulted in a decrease to the gain on the sale of discontinued operations for the three months ended March 28, 2020.
3 These AOCI components are included in the computation of net periodic pension cost.
Note 14—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.
In April 2020, the Company agreed to a settlement of $27.2 million related to a personal injury matter. The loss contingency of $27.2 million was accrued in accounts payable and accrued liabilities in the Consolidated Balance Sheet as of March 28, 2020. The Company has also recorded a receivable of $27.0 million for proceeds we will receive from our insurance providers in connection with the claim. The receivable is recorded in accounts receivable, net in the Consolidated Balance Sheet as of March 28, 2020.
Also, the Israeli Ministry of Environmental Protection (the “Ministry”) has alleged that a non-profit recycling corporation, which collects and recycles bottles sold by manufacturers, including Eden, failed to meet recycling quotas in 2016, in violation of Israeli law. The law imposes liability directly on manufacturers, and the Ministry has asserted that the manufacturers involved with the corporation owe a fine. Eden received a notice from the Ministry on June 21, 2018. Eden has since undertaken an administrative appeal process and intends to proceed to litigation. Although we cannot predict the outcome of any potential proceedings at this early stage, Eden may be subject to a fine in excess of $0.1 million. Management believes, however, that the resolution of this matter will not be material to our financial position, results of operations, or cash flows.
We had $43.3 million in standby letters of credit outstanding as of March 28, 2020 ($47.4 million as of December 28, 2019).
Guarantees
After the sale of our North America, United Kingdom and Mexico business units (including the Canadian business) and our RCI finished goods export business in January 2018, we have continued to provide contractual payment guarantees to three third-party lessors of certain real property used in these businesses. The leases were conveyed to Refresco as part of the sale, but our guarantee was not released by the landlord. The three lease agreements mature in 2027, 2028 and 2029. The maximum potential amount of undiscounted future payments under the guarantee of approximately $27.7 million as of March 28, 2020 ($29.4 million—December 28, 2019) was calculated based on the minimum lease payments of the leases over the remaining term of the agreements. The sale documents require Refresco to pay all post-closing obligations under these conveyed leases, and to reimburse us if the landlord calls on a guarantee. Refresco has also agreed to a covenant to negotiate with the landlords for a release of our guarantees. Discussions with the landlords are ongoing. 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 15—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 March 28, 2020 and December 28, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
|
|
December 28, 2019
|
|
|
|
(in millions of U.S. dollars)
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
5.500% senior notes due in 2024 1, 2
|
488.1
|
|
|
484.4
|
|
|
493.5
|
|
|
514.5
|
|
|
5.500% senior notes due in 2025 1, 2
|
742.1
|
|
|
695.7
|
|
|
741.8
|
|
|
775.3
|
|
|
Total
|
$
|
1,230.2
|
|
|
$
|
1,180.1
|
|
|
$
|
1,235.3
|
|
|
$
|
1,289.8
|
|
______________________
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 March 28, 2020 and December 28, 2019.
Note 16—Subsequent Events
On April 3, 2020, the Company borrowed approximately $170.0 million (the “Borrowings”) under the Revolving Credit Facility. After giving effect to the Borrowings, the current balance of loans under the Revolving Credit Facility is $306.0 million, along with $43.3 million being utilized for letters of credit. The Borrowings are scheduled to mature five years from the Closing Date and may be repaid at any time without penalty. We have elected to draw down on our Revolving Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering current uncertainty in the global markets resulting from the COVID-19 pandemic.
On May 5, 2020, our Board of Directors declared a dividend of $0.06 per share on common shares, payable in cash on June 17, 2020 to shareowners of record at the close of business on June 5, 2020.