Notes to Consolidated Financial Statements
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 (“Primo”) 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 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 10,900 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 17,500 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. In 2021, Primo announced its planned exit from the North American small-format retail water business. This business was relatively small and used predominantly single-use plastic bottles. The exit from this category reduced single-use retail water bottles from our production environment by more than 400 million, annually, while also improving overall margins. The exit was completed during the second quarter of 2022.
Note 1—Summary of Significant Accounting Policies
Basis of Presentation
These Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) using the U.S. dollar as the reporting currency, as the majority of our business and the majority of our shareholders are in the United States.
Our fiscal year is based on either a 52- or 53-week period ending on the Saturday closest to December 31. For the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, we had 52 weeks of activity.
Basis of Consolidation
The Consolidated Financial Statements include our accounts, our wholly-owned and majority-owned subsidiaries that we control. All intercompany transactions and accounts have been eliminated in consolidation.
Discontinued Operations
On November 2, 2023, Primo and Osmosis Buyer Limited, a company incorporated in England and a subsidiary of the Culligan Group (“Purchaser”), entered into a Share Purchase Agreement (the “Purchase Agreement”) 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”), the portions of the Eden Springs Netherlands B.V. business located in the United Kingdom, Israel, and Portugal (collectively the "Remaining International Businesses"). The European Business and the Remaining International Businesses are collectively the "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, the operating results associated with the International Businesses have been reclassified into net income (loss) 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
At the beginning of 2023, 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”) and the businesses associated with the acquisition of Primo Water Corporation ("Legacy Primo"), 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, 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, Mountain Valley and Legacy Primo businesses. The Other category includes our corporate oversight function and other miscellaneous expenses and the results of our business in Russia prior to the exit of the business during the third quarter of 2022. Segment reporting results have been recast to reflect these changes for all periods presented.
Estimates
The preparation of these Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amount of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Consolidated Financial Statements include estimates and assumptions that, in the opinion of management, were significant to the underlying amounts representing the future valuation of intangible assets, long-lived assets and goodwill, insurance reserves, realization of deferred income tax assets, and the resolution of tax contingencies.
Revenue Recognition
We recognize revenue, net of sales returns, when ownership passes to customers for products manufactured in our own plants and/or by third-parties on our behalf, and when prices to our customers are fixed or determinable and collection is reasonably assured. 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. Although we occasionally accept returns of products from our customers, historically returns have not been material.
We also recognize rental income on filtration, brewers and dispensing equipment at customer locations based on the terms of the related rental agreements, which are generally measured based on 28-day periods. Amounts billed to customers for rental in future periods are deferred and included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets.
Sales Incentives
We participate in various incentive programs with our customers, including volume-based incentives, contractual rebates and promotional allowances. Volume incentives are based on our customers achieving volume targets for a period of time. Volume incentives and contractual rebates are deducted from revenue and accrued as the incentives are earned and are based on management’s estimate of the total the customer is expected to earn and claim. Promotional allowances are accrued at the time of revenue recognition and are deducted from revenue based on either the volume shipped or the volume sold at the retailer location, depending on the terms of the allowance. We regularly review customer sales forecasts to ensure volume targets will be met and adjust incentive accruals and revenues accordingly.
Cost of Sales
We record costs associated with the manufacturing of our products in Cost of sales in the Consolidated Statements of Operations. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production.
Shipping and handling costs incurred to store, prepare and move products between production facilities or from production facilities to branch locations or storage facilities are recorded in cost of sales. Shipping and handling costs incurred to deliver products from our North America reporting segment 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. Shipping and handling costs included in SG&A were $456.5 million, $426.1 million, and $366.3 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
Other costs incurred in shipment of products from our production facilities to customer locations are reflected in Cost of sales in the Consolidated Statements of Operations.
Selling, General and Administrative Expenses
We record all other expenses not charged to production as SG&A expenses.
Advertising costs are expensed at the commencement of an advertising campaign and are recognized as a component of SG&A expenses in the Consolidated Statements of Operations. Advertising costs expensed were approximately $15.8 million, $15.6 million, and $14.1 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
Share-Based Compensation
We have in effect equity incentive plans under which Time-based RSUs, Performance-based RSUs, non-qualified stock options and director share awards have been granted (as such terms are defined in Note 8 of the Consolidated Financial Statements). Share-based compensation expense for all share-based compensation awards is based on the grant-date fair value. We recognize these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the vesting term of two to three years, and account for forfeitures when they occur.
The fair value of the Company’s Time-based RSUs, certain Performance-based RSUs and director share awards are based on the closing market price of its common shares on the date of grant as stated on the NYSE. We estimate the fair value of non-qualified options as of the date of grant using the Black-Scholes option pricing model. This model considers, among other factors, the expected life of the award, the expected volatility of the Company’s share price, and expected dividends. We estimate the fair value of certain Performance-based RSUs that vest, in part, based on the achievement of our total shareholder return (”TSR”) relative to the TSR attained by companies within our defined peer group (“Relative TSR”) as of grant using the Monte Carlo Simulation model. This model considers, among other factors, the expected life of the award, the expected volatility of the Company’s share price, a risk-free interest rate and expected dividends.
The Company records share-based compensation expense in SG&A expenses in the Consolidated Statements of Operations.
All excess tax benefits and tax deficiencies related to share-based compensation are recognized in results of operations at settlement or expiration of the award. The excess tax benefit or deficiency is calculated as the difference between the grant date price and the price of our common shares on the vesting or exercise date.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with original maturities not exceeding three months at the time of purchase. The fair values of our cash and cash equivalents approximate the amounts shown on our Consolidated Balance Sheets due to their short-term nature.
Accounts Receivable, Net of Allowance for Credit Losses
All trade accounts receivable are uncollected amounts owed to us from transactions with our customers. Trade accounts receivable represent amounts billed to customers and not yet collected, and are presented net of 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.
Inventories
Inventories are stated at the lower of cost, determined on the first-in, first-out method, or net realizable value. Finished goods and work-in-process include the inventory costs of raw materials, direct labor and manufacturing overhead costs. As a result, we use an inventory reserve to adjust our inventory costs down to a net realizable value and to reserve for estimated obsolescence of both raw materials and finished goods.
Customer Deposits
The Company generally collects deposits on multi-gallon bottles used by our water delivery customers. Such deposits are refunded only after customers return such bottles in satisfactory condition. The associated bottle deposit liability is estimated based on the number of water customers, average consumption and return rates and bottle deposit market rates. The Company analyzes these assumptions quarterly and adjusts the bottle deposit liability as necessary.
Property, Plant and Equipment, Net
Property, plant and equipment, net are stated at cost less accumulated depreciation. Depreciation is allocated between Cost of sales and SG&A expenses in the Consolidated Statement of Operations and is determined using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized using the straight-line method over the remaining life of the lease or useful life of the asset, whichever is shorter. Maintenance and repairs are charged to operating expense when incurred.
Leases
We have operating and finance leases for manufacturing and production facilities, branch distribution and warehouse facilities, vehicles and machinery and equipment. At inception, we determine whether an agreement represents a lease and, at commencement, we evaluate each lease agreement to determine whether the lease constitutes an operating or financing lease. Some of our lease agreements have renewal options, tenant improvement allowances, rent holidays and rent escalation clauses.
Right-of-use lease assets represent our right to use the underlying asset for the lease term, and the operating lease obligation represents our commitment to make the lease payments arising from the lease. We have elected not to recognize on the balance sheet leases with terms of one-year or less. We have also elected not to separate lease components from non-lease components for all fixed payments. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received. The lease term may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectations regarding the terms.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair value of the net assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually.
Prior period amounts have been recast to reflect the changes disclosed in the "Changes in Presentation" section of Note 1 to the Consolidated Financial Statements above.
The following table summarizes goodwill as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) | North America | | Other | | Total |
Goodwill as of January 1, 2022 | $ | 994.1 | | | $ | — | | | $ | 994.1 | |
Goodwill acquired during the year | 4.4 | | | — | | | 4.4 | |
Measurement period adjustments | 1.1 | | | — | | | 1.1 | |
| | | | | |
| | | | | |
Foreign exchange | (2.4) | | | — | | | (2.4) | |
Goodwill as of December 31, 2022 | $ | 997.2 | | | $ | — | | | $ | 997.2 | |
Goodwill acquired during the year | 4.3 | | | 2.1 | | | 6.4 | |
Measurement period adjustments | (0.1) | | | — | | | (0.1) | |
| | | | | |
| | | | | |
Foreign exchange | 1.0 | | | 0.1 | | | 1.1 | |
Goodwill as of December 30, 2023 | $ | 1,002.4 | | | $ | 2.2 | | | $ | 1,004.6 | |
The Company operates through its North America operating segment, which is also its sole reportable segment.
We test goodwill for impairment at least annually on the first day of the fourth quarter, based on our reporting unit carrying values, calculated as total assets less non-interest bearing liabilities, as of the end of the third quarter, or more frequently if we determine a triggering event has occurred during the year.
We evaluate goodwill for impairment on a reporting unit basis, which is an operating segment or a level below an operating segment, referred to as a component. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and management regularly reviews the operating results of that component. However, two or more components of an operating segment can be aggregated and deemed a single reporting unit if the components have similar economic characteristics. Our North America operating segment was determined to have three components: DSS, Aquaterra, and Mountain Valley. We have determined that DSS and Aquaterra have similar economic characteristics and have aggregated them as a single reporting unit for the purpose of testing goodwill for impairment (“DSSAqua”). Therefore, for the purpose of testing goodwill for impairment for the fiscal year ended December 30, 2023, we have determined our reporting units are DSSAqua and Mountain Valley.
We had goodwill of $1,004.6 million on our Consolidated Balance Sheet as of December 30, 2023, which represents amounts for the DSSAqua and Mountain Valley reporting units, as well as goodwill within our Other category.
For purposes of the annual test for the fiscal year ended December 30, 2023, we elected to perform a qualitative assessment for all reporting units to assess whether it was more likely than not that the fair value of these reporting units exceeded their respective carrying values. In performing these assessments, management relied on a number of factors including, but not limited to, macroeconomic conditions, industry and market considerations, cost factors that would have a negative effect on earnings and cash flows, overall financial performance compared with forecasted projections in prior periods, and other relevant reporting unit events, the impact of which are all significant judgments and estimates. Based on these factors, management concluded that it was more likely than not that the fair values of our reporting units were greater than their respective carrying amounts, including goodwill, indicating no impairment during the fiscal year ended December 30, 2023. As of December 30, 2023, goodwill allocated to the DSSAqua and Mountain Valley reporting units was $986.4 million and $16.0 million, respectively.
Each year during the fourth quarter, we re-evaluate the assumptions used in our assessments, such as revenue growth rates, SG&A expenses, capital expenditures and discount rates, to reflect any significant changes in the business environment that could materially affect the fair value of our reporting units. Based on the evaluations performed in 2023, we determined that the fair value of each of our reporting units exceeded their carrying amounts.
There are inherent uncertainties related to each of the above listed assumptions, and our judgment in applying them. Changes in the assumptions used in our qualitative assessment could result in impairment charges that could be material to our Consolidated Financial Statements in any given period.
Refer to Note 2 to the Consolidated Financial Statements for discussion regarding goodwill for the discontinued operations entities.
Intangible Assets, Net
As of December 30, 2023, our intangible assets subject to amortization, net of accumulated amortization, were $333.0 million, consisting principally of $310.7 million of customer relationships that arose from acquisitions, $13.8 million of software, and $5.9 million of patents. Customer relationships are typically amortized over the period for which we expect to receive the economic benefits. The customer relationship intangible assets acquired in our acquisitions are amortized over the expected remaining useful life of those relationships on a basis that reflects the pattern of realization of the estimated undiscounted after-tax cash flows. We review the estimated useful life of these intangible assets annually, unless a review is required more frequently due to a triggering event, such as a loss of a significant customer. Our review of the estimated useful life takes into consideration the specific net cash flows related to the intangible asset. The permanent loss of, or significant decline in sales to customers included in the intangible asset would result in either an impairment in the value of the intangible asset or an accelerated amortization of any remaining value and could lead to an impairment of the fixed assets that were used to service that customer. We did not record impairment charges for our intangible assets subject to amortization in the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022.
Our intangible assets with indefinite lives relate primarily to trademarks acquired in the acquisition of Legacy Primo, trademarks acquired in the acquisition of DSS, one of the trademarks acquired in the acquisition of Aquaterra, trademarks acquired in the acquisition of Mountain Valley, and trademarks acquired in the acquisition of Crystal Rock (collectively, the "Trademarks"). These assets have an aggregate net book value of $379.7 million as of December 30, 2023. There are no legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life of these intangible assets.
The lives of the Trademarks are considered to be indefinite and therefore these intangible assets are not amortized. Rather, they are tested for impairment at least annually or more frequently if we determine a triggering event has occurred
during the year. We compare the carrying amount of the intangible asset to its fair value and when the carrying amount is greater than the fair value, we recognize an impairment loss.
We assessed qualitative factors to determine whether the existence of events or circumstances indicated that it was more likely than not that the fair value of the Trademarks were less than their respective carrying value. The qualitative factors we assessed included macroeconomic conditions, industry and market considerations, cost factors that would have a negative effect on earnings and cash flows, overall financial performance compared with forecasted projections in prior periods, and other relevant events, the impact of which are all significant judgments and estimates. During the fourth quarter of 2023, we concluded that it was more likely than not that the fair value of the Trademarks were more than their carrying value and therefore we were not required to perform any additional testing.
There are inherent uncertainties related to each of the above listed assumptions, and our judgment in applying them. Changes in the assumptions used in our qualitative assessment could result in impairment charges that could be material to our Consolidated Financial Statements in any given period.
Refer to Note 2 to the Consolidated Financial Statements for discussion regarding intangible assets for the discontinued operations entities.
Impairment and Disposal of Long-Lived Assets
When adverse events occur, we compare the carrying amount of long-lived assets to the estimated undiscounted future cash flows at the lowest level of independent cash flows for the group of long-lived assets and recognize any impairment loss based on discounted cash flows in the Consolidated Statements of Operations, taking into consideration the timing of testing and the asset’s remaining useful life. The expected life and value of these long-lived assets is based on an evaluation of the competitive environment, history and future prospects as appropriate. We did not record impairments of long-lived assets during the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022.
As part of normal business operations, we identify long-lived assets that are no longer productive and dispose of them. We recognized losses on disposals of property, plant and equipment, net of $9.1 million, $7.4 million, and $9.1 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively. Losses on disposals of assets are presented separately as part of operating income in the Consolidated Statements of Operations.
During the second quarter of 2022, our Board of Directors approved the exit from our business in Russia. Accordingly, we recorded an impairment charge of $11.2 million during the second quarter to reduce the carrying value of the assets to the estimated fair value less costs to sell. The impairment charge of $11.2 million to reduce the carrying value of the Russia business to its estimated fair value less costs to sell is included within impairment charges on the Consolidated Statements of Operations for the twelve months ended December 31, 2022 and is included within the Other category. The exit of our business in Russia was completed during the third quarter of 2022.
Insurance Reserves
We maintain insurance retention programs under our general liability, auto liability, and workers' compensation insurance programs. We also carry excess coverage to mitigate catastrophic losses. We use an independent third-party actuary to assist in determining our insurance reserves. Insurance reserves are accrued on an undiscounted basis based on known claims and estimated incurred but not reported claims not otherwise covered by insurance. The estimates are developed utilizing standard actuarial methods and are based on historical claims experience and actuarial assumptions, including loss development factors and expected ultimate loss selections. The inherent uncertainty of future loss projections could cause actual claims to differ from our estimates. The Company recorded insurance reserves of $67.0 million and $58.7 million as of December 30, 2023 and December 31, 2022, respectively, within Accounts payable and accrued liabilities and Other long-term liabilities in the Consolidated Balance Sheets, of which $8.8 million and $12.3 million, respectively, was covered by insurance and included as a component of Accounts receivable, net of allowance and Other long-term assets in the Consolidated Balance Sheets.
Foreign Currency Translation
The assets and liabilities of non-U.S. active operations, all of which are self-sustaining, are translated to U.S. dollars at the exchange rates in effect at the balance sheet dates. Revenues and expenses are translated using average monthly exchange rates prevailing during the period. The resulting gains or losses are recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets.
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amount of assets and liabilities and their respective tax bases, using currently enacted income tax rates. A valuation allowance is established to reduce deferred income tax assets if, on the basis of available evidence, it is not more likely than not that all or a portion of any deferred tax assets will be realized. The consideration of available evidence requires significant management judgment including an assessment of the future periods in which the deferred tax assets and liabilities are expected to be realized and projections of future taxable income.
The ultimate realization of the deferred tax assets, including net operating losses, is dependent upon the generation of future taxable income during the periods prior to their expiration. If our estimates and assumptions about future taxable income are not appropriate, the value of our deferred tax assets may not be recoverable, which may result in an increase to our valuation allowance that will impact current earnings.
We account for uncertain tax positions using a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, based on the technical merits. The second step requires management to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
We recognize interest and penalties related to unrecognized tax benefits within the Income tax expense (benefit) line in the Consolidated Statements of Operations, and we include accrued interest and penalties within the Other long-term liabilities line in the Consolidated Balance Sheets.
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 December 30, 2023 and December 31, 2022, 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
Update ASU 2020-04 – Reference Rate Reform (Topic 848)
In March 2020, the FASB issued guidance which provides 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 (updated to December 31, 2024 by the December 2022 issuance of Accounting Standards Update ("ASU") 2022-06) and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2024. We elected to apply the debt agreement expedient and therefore will account for debt agreement amendments as if the modification was not substantial and thus a continuation of the existing contract. Effective January 13, 2023, we entered into the Second LIBOR Transition Amendment to the Credit Agreement, which transitioned the credit agreement from LIBOR to the Secured Overnight Financing Rate ("SOFR"). The amendment did not have a material impact on our Consolidated Financial Statements.
Update ASU 2021-08 – Business Combinations (Topic 805)
In October 2021, the FASB issued guidance that requires entities to use principles in ASC 606 to recognize and measure contract assets and liabilities in revenue contracts acquired in a business combination rather than fair value. For public entities, this guidance is effective for fiscal years beginning after December 15, 2022 for annual and interim periods. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
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 effective 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 proceeds from the European Divestiture were included in Investing activities of discontinued operations in the Consolidated Statements of Cash Flows for the fiscal year ended December 30, 2023. The European Divestiture excluded the Remaining 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 year ended December 30, 2023, these services were not material.
The major components of Net income (loss) from discontinued operations, net of income taxes in the accompanying Consolidated Statements of Operations include the following:
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Revenue, net | $ | 575.0 | | | $ | 521.9 | | | $ | 496.9 | |
Cost of sales | 267.7 | | | 247.7 | | | 230.5 | |
Gross profit | 307.3 | | | 274.2 | | | 266.4 | |
Selling, general and administrative expenses | 271.2 | | | 267.6 | | | 264.5 | |
Loss on disposal of property, plant and equipment, net | 0.7 | | | 1.1 | | | 0.2 | |
Acquisition and integration expenses | 0.9 | | | 3.2 | | | 1.7 | |
Impairment charges | 82.4 | | | 17.9 | | | — | |
Operating loss from discontinued operations | (47.9) | | | (15.6) | | | — | |
Other (income) expense, net | (19.4) | | | 11.3 | | | 5.8 | |
Interest expense, net | 3.1 | | | 2.0 | | | 0.5 | |
Gain on sale of discontinued operations | (214.7) | | | — | | | — | |
Income (loss) from discontinued operations, before income taxes | $ | 183.1 | | | $ | (28.9) | | | $ | (6.3) | |
Income tax expense | 8.8 | | | 0.2 | | | 1.8 | |
Net income (loss) from discontinued operations, net of income taxes | $ | 174.3 | | | $ | (29.1) | | | $ | (8.1) | |
Assets and liabilities of discontinued operations presented in the accompanying Consolidated Balance Sheets as of December 30, 2023 and December 31, 2022 include the following:
| | | | | | | | | | | |
| December 30, 2023 | | December 31, 2022 |
ASSETS | | | |
Cash and cash equivalents | $ | 22.6 | | | $ | 43.8 | |
Accounts receivable, net of allowance of $3.4 ($8.5 as of December 31, 2022) | 67.4 | | | 87.9 | |
Inventories | 31.9 | | | 46.8 | |
Prepaid expenses and other current assets | 6.8 | | | 8.8 | |
Current assets of discontinued operations | $ | 128.7 | | | $ | 187.3 | |
Property, plant and equipment, net | 83.7 | | | 164.9 | |
Operating lease right-of-use-assets | 37.9 | | | 55.4 | |
Goodwill | 48.5 | | | 295.8 | |
Intangible assets, net | 61.5 | | | 170.9 | |
Other long-term assets, net 1 | (6.0) | | | 2.4 | |
Long-term assets of discontinued operations | $ | 225.6 | | | $ | 689.4 | |
LIABILITIES | | | |
Short-term borrowings | $ | 18.4 | | | $ | 6.5 | |
Current maturities of long-term debt | 3.5 | | | 6.6 | |
Accounts payable and accrued liabilities | 83.4 | | | 142.5 | |
Current operating lease obligations | 4.6 | | | 9.1 | |
Current liabilities of discontinued operations | $ | 109.9 | | | $ | 164.7 | |
Long-term debt | 9.2 | | | 31.5 | |
Operating lease obligations | 33.6 | | | 46.9 | |
Deferred tax liabilities | 7.0 | | | 27.5 | |
Other long-term liabilities | 2.4 | | | 9.8 | |
Long-term liabilities of discontinued operations | $ | 52.2 | | | $ | 115.7 | |
__________________________________________
1 Includes the impairment recorded to reduce the carrying value of the Remaining International Businesses to the fair value less costs to sell.
In connection with the European Divestiture, the Company performed a goodwill impairment test on the Remaining International Businesses resulting in a goodwill impairment charge of $71.1 million and an intangible asset impairment charge of $4.3 million. This impairment was due to macroeconomic trends and the related impact on long-term forecasts. Upon the classification of the Remaining International Businesses as held for sale, the Company recorded an additional impairment loss of $7.0 million to reduce the carrying value of the International Businesses to fair value less costs to sell, resulting in a total impairment charge of $82.4 million that was recorded within Net income (loss) from discontinued operations, net of income tax on the Consolidated Statements of Operations for the fiscal year ended December 30, 2023. There was $3.0 million tax benefit recorded related to this charge for the fiscal year ended December 30, 2023.
During the second quarter of 2022, the decision to exit our business in Russia and the realignment of segments resulted in a triggering event for goodwill and intangible assets with indefinite lives requiring quantitative assessments for the combined Eden business (which, prior to realignment, included the Eden Europe and Eden Israel businesses) immediately before the realignment of segments and for the Eden Europe and Israel businesses upon realignment of segments. As a result of these assessments, the Company recorded a goodwill impairment charge of $11.2 million due to a decrease in cash flows associated with the exit from our business in Russia and a trademark impairment charge of $6.7 million due primarily to a decrease in the royalty rate used in the quantitative analysis. The total impairment charge of $17.9 million was recorded in the results of discontinued operations for the fiscal year ended December 31, 2022.
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 one year to 8 years, while our operating leases range from one year to 17 years, some of which may include options to extend the leases generally between one year and 10 years, and some of which may include options to terminate the leases within one year.
The components of lease expense were as follows:
| | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 |
Operating lease cost | $ | 39.9 | | | $ | 37.4 | |
Short-term lease cost | 3.8 | | | $ | 2.8 | |
Finance lease cost | | | |
Amortization of right-of-use assets | $ | 11.7 | | | $ | 12.4 | |
Interest on lease liabilities | 2.2 | | | 2.7 | |
Total finance lease cost | $ | 13.9 | | | $ | 15.1 | |
Sublease income | $ | 1.7 | | | $ | 1.4 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 39.1 | | | $ | 35.7 | |
Operating cash flows from finance leases | $ | 2.2 | | | $ | 2.6 | |
Financing cash flows from finance leases | $ | 11.5 | | | $ | 12.0 | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 28.8 | | | $ | 42.4 | |
Finance leases | $ | 10.9 | | | $ | 3.3 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | |
(in millions of U.S. dollars, except lease term and discount rate) | December 30, 2023 | December 31, 2022 |
Operating leases | | |
Operating lease right-of-use assets | $ | 136.0 | | $ | 143.2 | |
Current operating lease obligations | 25.6 | | 26.6 | |
Operating lease obligations | 124.0 | | 127.6 | |
Total operating lease obligations | $ | 149.6 | | $ | 154.2 | |
| | |
Financing leases | | |
Property, plant and equipment, net | $ | 45.0 | | $ | 45.7 | |
Current maturities of long-term debt | 14.2 | | 10.9 | |
Long-term debt | 33.4 | | 37.4 | |
Total finance lease obligations | $ | 47.6 | | $ | 48.3 | |
| | | | | | | | | | | |
Weighted-Average Remaining Lease Term | December 30, 2023 | | December 31, 2022 |
Operating leases | 7.3 years | | 7.8 years |
Finance leases | 3.4 years | | 4.4 years |
| | | |
Weighted-Average Discount Rate | | | |
Operating leases | 6.6 | % | | 6.5 | % |
Finance leases | 5.5 | % | | 5.1 | % |
Maturities of operating lease obligations were as follows:
| | | | | |
(in millions of U.S. dollars) | December 30, 2023 |
2024 | $ | 35.9 | |
2025 | 34.1 | |
2026 | 25.8 | |
2027 | 21.8 | |
2028 | 12.7 | |
Thereafter | 63.8 | |
Total lease payments | 194.1 | |
Less imputed interest | (44.5) | |
Present value of lease obligations | $ | 149.6 | |
Maturities of finance lease obligations were as follows:
| | | | | |
(in millions of U.S. dollars) | December 30, 2023 |
2024 | $ | 16.7 | |
2025 | 16.2 | |
2026 | 13.1 | |
2027 | 4.6 | |
2028 | 2.0 | |
Thereafter | 0.3 | |
Total lease payments | 52.9 | |
Less imputed interest | (5.3) | |
Present value of lease obligations | $ | 47.6 | |
Note 4—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 for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022.
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 the Company’s 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, the Company estimates the rebate or discount that will be granted to the customer and records an accrual upon invoicing. These estimated rebates or discounts are included in the transaction price of the Company’s 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 the Company historically estimated and recorded promotional programs and discounts. Accrued sales incentives were $7.7 million and $6.2 million as of December 30, 2023 and December 31, 2022, respectively.
We do not disclose the value of unsatisfied performance obligations for contracts (i) with an original expected length of one year or less or (ii) for which the Company recognizes 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 the Company’s 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 as of December 30, 2023 and December 31, 2022 were $5.2 million and $5.2 million, respectively. The amount of revenue recognized for the year ended December 30, 2023 that was included in the deferred revenue balance as of December 31, 2022 was $5.2 million.
The Company does not have any material contract assets as of December 30, 2023 and December 31, 2022.
Disaggregated Revenue
In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of its 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 Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
United States | $ | 1,706.2 | | | $ | 1,620.0 | | | $ | 1,493.0 | |
Canada | 65.6 | | | 65.8 | | | 69.9 | |
All other countries | — | | | 7.4 | | | 13.5 | |
Total | $ | 1,771.8 | | | $ | 1,693.2 | | | $ | 1,576.4 | |
Note 5—Other Expense (Income), Net
The following table summarizes other expense (income), net for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022:
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Foreign exchange losses (gains), net | $ | 5.7 | | | $ | 0.9 | | | $ | (0.5) | |
Tariff refunds | (3.1) | | | — | | | — | |
Gain on sale of business | — | | | (0.7) | | | — | |
Loss on extinguishment of long-term debt | — | | | — | | | 27.2 | |
Other gains, net | (1.4) | | | (2.7) | | | (4.6) | |
Total | $ | 1.2 | | | $ | (2.5) | | | $ | 22.1 | |
Note 6—Interest Expense, Net
The following table summarizes interest expense, net for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022:
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Interest on long-term debt | $ | 51.7 | | | $ | 50.8 | | | $ | 56.3 | |
Interest on short-term debt | 14.1 | | | 9.3 | | | 4.1 | |
Other interest expense, net | 5.6 | | | 7.7 | | | 7.9 | |
Total | $ | 71.4 | | | $ | 67.8 | | | $ | 68.3 | |
Note 7—Income Taxes
Provision (Benefit) for Income Taxes
Income (loss) from continuing operations, before income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Canada | $ | (54.9) | | | $ | (1.3) | | | $ | (30.1) | |
Outside Canada | 145.7 | | | 79.5 | | | 42.7 | |
Income (loss) from continuing operations, before income taxes | $ | 90.8 | | | $ | 78.2 | | | $ | 12.6 | |
Income tax expense consisted of the following:
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Current | | | | | |
Canada | $ | — | | | $ | — | | | $ | — | |
Outside Canada | 25.5 | | | 2.2 | | | 3.3 | |
| $ | 25.5 | | | $ | 2.2 | | | $ | 3.3 | |
Deferred | | | | | |
Canada | $ | — | | | $ | — | | | $ | — | |
Outside Canada | 1.5 | | | 17.3 | | | 4.4 | |
| $ | 1.5 | | | $ | 17.3 | | | $ | 4.4 | |
Income tax expense | $ | 27.0 | | | $ | 19.5 | | | $ | 7.7 | |
The following table reconciles income taxes calculated at the basic Canadian corporate rates with the income tax provision: | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Income tax expense (benefit) based on Canadian statutory rates | $ | 24.1 | | | $ | 20.7 | | | $ | 3.3 | |
Foreign tax rate differential | (13.4) | | | (9.0) | | | (7.1) | |
Local taxes | 8.9 | | | 4.0 | | | 1.6 | |
Nontaxable interest income | (3.4) | | | (3.4) | | | (3.9) | |
Impairment expense | — | | | 0.9 | | | — | |
Impact of intercompany transactions and dividends | (0.5) | | | (2.3) | | | 0.2 | |
Income tax credits | (1.8) | | | (0.2) | | | (0.3) | |
Change in enacted tax rates | (1.3) | | | 0.5 | | | (0.4) | |
Change in valuation allowance | 16.8 | | | 7.0 | | | 8.6 | |
Change in uncertain tax positions | (5.5) | | | 0.6 | | | 1.5 | |
Equity compensation | 1.4 | | | 1.4 | | | 2.2 | |
Permanent differences | 1.0 | | | 0.6 | | | 0.8 | |
Adjustments to prior year taxes | 0.1 | | | (1.8) | | | 1.2 | |
Other items | 0.6 | | | 0.5 | | | — | |
Income tax expense | $ | 27.0 | | | $ | 19.5 | | | $ | 7.7 | |
Deferred Tax Assets and Liabilities
Deferred income tax assets and liabilities were recognized on temporary differences between the financial and tax bases of existing assets and liabilities as follows:
| | | | | | | | | | | |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 |
Deferred tax assets | | | |
Net operating loss carryforwards | $ | 108.0 | | | $ | 116.1 | |
Capital loss carryforwards | 17.8 | | | 15.2 | |
Liabilities and reserves | 28.6 | | | 23.3 | |
Stock options | 9.3 | | | 10.4 | |
Inventories | 2.2 | | | 2.2 | |
Interest expense | 26.6 | | | 25.5 | |
| | | |
Right of use lease obligations | 41.3 | | | 43.8 | |
| | | |
| 233.8 | | | 236.5 | |
Deferred tax liabilities | | | |
Property, plant and equipment | (54.0) | | | (66.1) | |
Intangible assets | (151.1) | | | (154.0) | |
Right of use assets | (37.4) | | | (40.6) | |
| | | |
Other | (3.7) | | | (2.5) | |
| (246.2) | | | (263.2) | |
Valuation allowance | (131.6) | | | (115.5) | |
Net deferred tax liability | $ | (144.0) | | | $ | (142.2) | |
As of December 30, 2023, we have outside tax basis differences, including undistributed earnings, in our foreign subsidiaries. For 2023, deferred taxes have not been recorded on the undistributed earnings because our foreign subsidiaries have the ability to repatriate funds to their respective parent company tax-efficiently or the undistributed earnings are indefinitely reinvested under the accounting guidance. In order to arrive at this conclusion, we considered factors including, but not limited to, past experience, domestic cash requirements, cash requirements to satisfy the ongoing operations, capital expenditures and other financial obligations of our subsidiaries. It is not practicable to determine the excess book basis over
outside tax basis in the shares or the amount of incremental taxes that might arise if these earnings were to be remitted. The amount of tax payable could be significantly impacted by the jurisdiction in which a distribution was made, the amount of the distribution, foreign withholding taxes under applicable tax laws when distributed, relevant tax treaties and foreign tax credits. We repatriated earnings of $87.3 million and $17.0 million to Canada during the fiscal years ended December 30, 2023 and December 31, 2022, respectively, incurring no tax expense.
As of December 30, 2023, we have operating loss carryforwards totaling $411.5 million, capital loss carryforwards totaling $67.0 million, and tax credit carryforwards totaling nil. The operating loss carryforward amount was attributable to Canadian operating loss carryforwards of $302.3 million that will expire from 2024 to 2043; U.S. federal and state operating loss carryforwards of $63.6 million and $8.5 million, respectively, that will predominantly expire from 2024 to 2036; U.S. federal operating loss carryforwards of $36.4 million that have indefinite lives; and United Kingdom operating loss carryforwards of $0.7 million that have indefinite lives.
The capital loss carryforward is attributable primarily to Canadian capital losses of $67.0 million, all with indefinite lives.
In general, under Section 382 and 383 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), a U.S. corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”) or tax credits to offset future taxable income. Therefore, current or future changes in our Canadian stock ownership, many of which are outside of our control, could result in a U.S. ownership change under Section 382 and 383 of the Code. If we undergo a U.S. ownership change, our ability to utilize U.S. federal or state NOLs or tax credits could be limited. We monitor changes in our ownership on an ongoing basis and do not believe we had a change of control limitation as of December 30, 2023.
We establish a valuation allowance to reduce deferred tax assets if, based on the weight of the available evidence, both positive and negative, for each respective tax jurisdiction, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Due to recent cumulative losses, it was determined that it is more likely than not we will not realize the benefit of net operating loss carryforwards and other net deferred assets in Canada. The balance of the valuation allowance was $131.6 million and $115.5 million for the fiscal years ended December 30, 2023 and December 31, 2022, respectively. The valuation allowance increase in 2023 was related primarily to losses generated in tax jurisdictions with existing valuation allowances.
Additionally, we have determined that it is more likely than not that the benefit from our capital losses in Canada will not be realized in the future due to the uncertainty regarding potential future capital gains in the jurisdiction. In recognition of this risk, we have provided a valuation allowance of $17.8 million on our capital losses.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of our unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Unrecognized tax benefits at beginning of year | $ | 15.9 | | | $ | 16.4 | | | $ | 13.8 | |
Additions based on tax positions taken during a prior period | 1.0 | | | — | | | 1.1 | |
| | | | | |
| | | | | |
| | | | | |
Additions related to acquired entities | — | | | — | | | 1.7 | |
Lapse in statute of limitations | (9.7) | | | (1.8) | | | (1.9) | |
Additions based on tax positions taken during the current period | 1.9 | | | 1.8 | | | 1.7 | |
| | | | | |
Foreign exchange | 0.3 | | | (0.5) | | | — | |
Unrecognized tax benefits at end of year | $ | 9.4 | | | $ | 15.9 | | | $ | 16.4 | |
As of December 30, 2023, we had $9.4 million of unrecognized tax benefits, a net decrease of $6.5 million from $15.9 million as of December 31, 2022. If we recognized our tax positions, approximately $3.1 million would favorably impact the effective tax rate. We believe it is reasonably possible that our unrecognized tax benefits will decrease or be recognized in the next twelve months by up to $2.0 million due to the settlement of certain tax positions and lapses in statutes of limitation in various tax jurisdictions.
We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. There were net interest and penalties of $1.0 million, nil and nil recovered during the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively. The amount of interest and penalties recognized on the Consolidated Balance Sheets as of December 30, 2023 and December 31, 2022 were a liability of $0.7 million and $1.7 million, respectively.
We are subject to taxation in Canada, the United States, and other foreign jurisdictions. With few exceptions, we are no longer subject to income tax examination for years prior to 2020. To the extent that income tax attributes such as net operating losses and tax credits have been carried forward from years prior to 2020, those attributes can still be audited when utilized on returns subject to audit. We are currently under audit in Canada by the Canada Revenue Agency (“CRA”) for tax years 2016, 2017, 2019 and 2021.
Note 8—Share-Based Compensation
Our shareowners approved our Amended and Restated Primo Water Corporation Equity Incentive Plan (the “Amended and Restated Equity Plan”) in May 2016, and approved the Primo Water Corporation 2018 Equity Incentive Plan (“2018 Equity Plan” and together with the Amended and Restated Equity Plan, the “Equity Plans”) in May 2018. Awards under the Equity Plans may be in the form of incentive stock options, non-qualified stock options, restricted shares, restricted share units, performance shares, performance units, stock appreciation rights, and stock payments to employees, directors and outside consultants. The Equity Plans are administered by the Human Resources and Compensation Committee (“HRCC”) of the Board of Directors or any other Board committee as may be designated by the Board of Directors from time to time. Under the Amended and Restated Equity Plan, 20,000,000 shares are reserved for future issuance, and under the 2018 Equity Plan, 8,000,000 shares are reserved for future issuance, subject to adjustment upon a share split, share dividend, recapitalization, and other similar transactions and events. Shares that are issued under the Equity Plans are applied to reduce the maximum number of shares remaining available for issuance under the Equity Plans; provided that the total number of shares available for issuance under the Equity Plans are reduced two shares for each share issued pursuant to a “full-value” award (i.e., an award other than a stock option or stock appreciation right).
Shares to be issued pursuant to Time-based RSUs, Performance-based RSUs, or stock options that are forfeited, expired, or are canceled or settled without the issuance of shares return to the pool of shares available for issuance under the Equity Plans. As of December 30, 2023, there were approximately 819,000 shares available for future issuance under the Amended and Restated Equity Plan, and approximately 1,406,000 shares available for future issuance under the 2018 Equity Plan.
The table below summarizes the share-based compensation expense for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022. Share-based compensation expense is recorded in SG&A expenses in the Consolidated Statements of Operations. As referenced below: (i) “Performance-based RSUs” represent restricted share units with performance-based vesting, (ii) “Time-based RSUs” represent restricted share units with time-based vesting, (iii) “Stock options” represent non-qualified stock options, (iv) “Director share awards” represent common shares issued in consideration of the annual Board retainer fee to non-management members of our Board, and (v) the “ESPP” represents the Primo Water Corporation Employee Share Purchase Plan, under which common shares are issued to eligible employees at a discount through payroll deductions.
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Stock options | $ | 0.2 | | | $ | 0.8 | | | $ | 3.0 | |
Performance-based RSUs | 9.3 | | | 6.5 | | | 7.4 | |
Time-based RSUs | 3.9 | | | 8.4 | | | 5.5 | |
Director share awards | 1.3 | | | 1.2 | | | 1.3 | |
| | | | | |
ESPP | 0.2 | | | 0.3 | | | 0.3 | |
Total 1 | $ | 14.9 | | | $ | 17.2 | | | $ | 17.5 | |
______________________
1 Includes $0.8 million, $0.8 million, and $2.0 million of share-based compensation expense from our discontinued operations, which is included in Net income (loss) from discontinued operations, net of income taxes on the Consolidated Statements of Operations for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively.
The tax benefit recognized related to share-based compensation expense for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022 was $3.0 million, $3.4 million, and $2.2 million, respectively.
As of December 30, 2023, the unrecognized share-based compensation expense and the weighted-average number of years over which we expect it to be recognized were as follows: | | | | | | | | | | | |
(in millions of U.S. dollars, except years) | Unrecognized share-based compensation expense as of December 30, 2023 | | Weighted-average years expected to recognize compensation |
| | | |
Performance-based RSUs | $ | 11.9 | | | 2.4 years |
Time-based RSUs | 4.3 | | | 2.0 years |
Total | $ | 16.2 | | | |
Stock Options
During the fiscal years ended December 30, 2023 and December 31, 2022, no stock options were granted to employees. During the fiscal year ended January 1, 2022, approximately 18,000 stock options were granted to certain employees under the Equity Plans at a weighted-average exercise price of $17.79 per share. The weighted-average grant date fair value of the stock options granted during the year ended January 1, 2022 was estimated to be $5.47 per share using the Black-Scholes option pricing model. The contractual term of a stock option granted is fixed by the Amended and Restated Equity Plan and cannot exceed ten years from the grant date.
The grant date fair value of stock options granted during the fiscal year ended January 1, 2022 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
| | | | | | | |
| | | For the Fiscal Year Ended |
| | | January 1, 2022 |
Risk-free interest rate | | | 1.2 | % |
Average expected life (years) | | | 6.0 |
Expected volatility | | | 35.9 | % |
Expected dividend yield | | | 1.4 | % |
The following table summarizes the activity for stock options:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Stock options (in thousands) | | Weighted-average exercise price | | Weighted-average contractual term (years) | | Aggregate intrinsic value (in thousands) |
Outstanding as of January 2, 2021 | 7,270 | | | $ | 13.07 | | | 6.5 | | $ | 20,659.3 | |
Granted | 18 | | | 17.79 | | | | | |
Exercised | (2,382) | | | 10.32 | | | | | 17,439.4 | |
Forfeited or expired | (51) | | | 13.62 | | | | | |
Outstanding as of January 1, 2022 | 4,855 | | | $ | 14.42 | | | 6.0 | | $ | 15,588.1 | |
| | | | | | | |
Exercised | (126) | | | 10.65 | | | | | 729.9 | |
Forfeited or expired | (205) | | | 14.51 | | | | | |
Outstanding as of December 31, 2022 | 4,524 | | | $ | 14.52 | | | 5.2 | | $ | 6,482.0 | |
| | | | | | | |
Exercised | (364) | | | 13.48 | | | | | 771.5 | |
Forfeited or expired | (479) | | | 16.89 | | | | | |
Outstanding as of December 30, 2023 | 3,681 | | | $ | 14.31 | | | 4.5 | | $ | 4,502.4 | |
Exercisable as of December 30, 2023 | 3,677 | | | $ | 14.31 | | | 4.5 | | $ | 4,502.4 | |
Vested or expected to vest as of December 30, 2023 | 3,681 | | | $ | 14.31 | | | 4.5 | | $ | 4,502.4 | |
The aggregate intrinsic value amounts in the table above represent the difference between the closing price of our common shares on the New York Stock Exchange on December 29, 2023, December 30, 2022, and December 31, 2021 which was $15.05, $15.54, and $17.63, respectively, and the exercise price, multiplied by the number of in-the-money stock options as of the same date.
The total amount of cash received from the exercise of stock options during the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022 was $4.6 million, $0.8 million, and $23.8 million, respectively, with an associated tax benefit of $0.1 million, nil, and $1.3 million, respectively.
The total fair value of options that vested during the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022 was $4.2 million, $8.3 million, and $16.7 million, respectively.
Other Awards
During the year ended December 30, 2023, we granted 76,024 common shares to the non-management members of our Board of Directors under the Equity Plans with a grant date fair value of approximately $1.3 million. The common shares were issued in consideration of the directors’ annual Board retainer fee and were vested upon issuance.
During the year ended December 30, 2023, we granted 28,000 Performance-based RSUs subject to the prior year vesting schedule and objectives. We also granted 412,000 Performance-based RSUs, which vest at the end of a three-year performance period beginning on the first day of our 2024 fiscal year and ending on the last day of our 2026 fiscal year ("2024 Performance Awards"). The number of shares ultimately awarded will be based upon the performance payout rate, which can range from 0% to 200% of the awards granted. During 2023, the HRCC determined that the 2024 Performance Awards will vest based on the Company’s achievement of average annual return on invested capital ("ROIC") and Relative TSR for the applicable performance period (the “Performance Objectives”). The number of Performance-based RSUs that may vest, and the related unrecognized compensation cost is subject to change based on the Performance Objectives achieved during the vesting period. Additionally, we granted 231,000 Time-based RSUs, which vest over two to three years in equal annual installments on the first, second and third anniversaries of the date of grant and include a service condition.
The grant date fair value of the 2024 Performance Awards was estimated at the grant date using the Monte-Carlo simulation model with the following weighted-average assumptions: | | | | | |
| For the Fiscal Year Ended |
| December 30, 2023 |
Risk-free interest rate | 4.3 | % |
Average expected life (years) | 3.07 |
Expected volatility | 28.5 | % |
Beginning TSR price | $ | 14.67 |
The risk-free rate is based on the U.S. Treasury yield in effect at the grant date with a term equal to the simulation period used in the Monte-Carlo simulation model. The simulation period is equal to the performance periods associated with the performance shares. Volatility is based on the Company's historical data. Beginning TSR price is equal to the average closing price for the last eight trading days immediately prior to the grant date.
The following table summarizes the activity for the Company's other awards:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Performance-based RSUs (in thousands) | | Weighted-average grant date fair value | | Number of Time-based RSUs (in thousands) | | Weighted-average grant date fair value |
Balance as of January 2, 2021 | 1,185 | | | $ | 15.27 | | | 548 | | | $ | 14.75 | |
Awarded | 484 | | | 17.06 | | | 665 | | | 16.50 | |
Awarded in connection with modification | 119 | | | 17.46 | | | — | | | — | |
Issued | (467) | | | 17.46 | | | (266) | | | 14.59 | |
Forfeited | (75) | | | 15.02 | | | (62) | | | 14.88 | |
Balance as of January 1, 2022 | 1,246 | | | $ | 15.65 | | | 885 | | | $ | 16.10 | |
Awarded | 529 | | | 15.20 | | | 413 | | | 15.10 | |
Awarded in connection with modification | 44 | | | 14.61 | | | — | | | — | |
Issued | (319) | | | 14.61 | | | (420) | | | 15.74 | |
Forfeited | (49) | | | 16.10 | | | (29) | | | 16.42 | |
Outstanding as of December 31, 2022 | 1,451 | | | $ | 15.65 | | | 849 | | | $ | 15.78 | |
Awarded | 440 | | | 18.46 | | | 231 | | | 14.72 | |
Awarded in connection with modification | 228 | | | 13.88 | | | — | | | — | |
Issued | (515) | | | 13.88 | | | (460) | | | 15.54 | |
Forfeited | (101) | | | 16.26 | | | (76) | | | 15.52 | |
Outstanding as of December 30, 2023 | 1,503 | | | $ | 16.61 | | | 544 | | | $ | 15.29 | |
Vested or expected to vest as of December 30, 2023 | 1,865 | | | $ | 16.55 | | | 544 | | | $ | 15.29 | |
The total fair value of Performance-based RSUs vested and issued during the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022 was $7.1 million, $4.7 million and $8.1 million, respectively.
The total fair value of Time-based RSUs vested and issued during the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022 was $7.1 million, $6.6 million, and $3.9 million, respectively.
Employee Share Purchase Plan
The Company has maintained the Primo Water Corporation Employee Share Purchase Plan (the “ESPP”) since 2015. The ESPP qualifies as an “employee share purchase plan” under Section 423 of the Internal Revenue Code of 1986 (“IRC”), as amended. Substantially all employees are eligible to participate in the ESPP and may elect to participate at the beginning of any quarterly offering period. The ESPP authorizes the issuance, and the purchase by eligible employees, of up to 3,000,000 shares of Primo common shares through payroll deductions. As of December 30, 2023, 2,091,606 shares remained available for issuance under the ESPP. Eligible employees who choose to participate may purchase Primo common shares at 90% of market value on the first or last day of the quarterly offering period, whichever is lower. The minimum contribution which an eligible employee may make under the ESPP is 1% of the employee’s eligible compensation, with the maximum contribution limited to 15% of the employee’s eligible compensation. At the end of each quarterly offering period for which the employee participates, the total amount of each employee’s payroll deduction for that offering period will be used to purchase Primo common shares. The Company recognized $0.2 million, $0.3 million and $0.3 million of share-based compensation expense in SG&A expenses in the Consolidated Statements of Operations for the years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
Note 9—Common Shares and Net Income (Loss) per Common Share
Common Shares
On August 9, 2023, the 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. During the fiscal year ended December 30, 2023, we repurchased 131,409 common shares for $1.9 million through open market transactions under this repurchase plan.
On August 9, 2022, the 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. During the fiscal year ended December
30, 2023, we repurchased 1,272,612 common shares for $19.0 million through open market transactions under this repurchase plan. During the fiscal year ended December 31, 2022, we repurchased 1,753,479 common shares for $23.8 million through open market transactions under this repurchase plan.
On May 4, 2021, the Board of Directors approved a share repurchase program for up to $50.0 million of our outstanding common shares over a 12-month period that expired on May 10, 2022. We repurchased 2,646,831 common shares for $43.5 million through open market transactions under this repurchase plan, all in the fiscal year ended January 1, 2022.
Shares purchased under these repurchase plans were subsequently canceled.
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing diluted net income (loss) by the weighted-average number of common shares outstanding adjusted to include the effect, if dilutive, of the exercise of in-the-money stock options, Performance-based RSUs, and Time-based RSUs during the periods presented.
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 Fiscal Year Ended |
| December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Numerator (in millions): | | | | | |
Continuing operations | $ | 63.8 | | | $ | 58.7 | | | $ | 4.9 | |
Discontinued operations | 174.3 | | | (29.1) | | | (8.1) | |
Net income (loss) | $ | 238.1 | | | $ | 29.6 | | | $ | (3.2) | |
Basic Earnings Per Share | | | | | |
Denominator (in thousands): | | | | | |
Weighted-average common shares outstanding - basic | 159,452 | | | 160,763 | | | 160,778 | |
Basic Earnings Per Share: | | | | | |
Continuing operations | $ | 0.40 | | | $ | 0.36 | | | $ | 0.03 | |
Discontinued operations | $ | 1.09 | | | $ | (0.18) | | | $ | (0.05) | |
Net income (loss) | $ | 1.49 | | | $ | 0.18 | | | $ | (0.02) | |
Diluted Earnings Per Share | | | | | |
Denominator (in thousands): | | | | | |
Weighted-average common shares outstanding - basic | 159,452 | | | 160,763 | | | 160,778 | |
Dilutive effect of Stock options | 238 | | | 261 | | | — | |
Dilutive effect of Performance-based RSUs | 467 | | | 445 | | | — | |
Dilutive effect of Time-based RSUs | 462 | | | 416 | | | — | |
Weighted-average common shares outstanding - diluted | 160,619 | | | 161,885 | | | 160,778 | |
Diluted Earnings Per Share: | | | | | |
Continued operations | $ | 0.40 | | | $ | 0.36 | | | $ | 0.03 | |
Discontinued operations | $ | 1.08 | | | $ | (0.18) | | | $ | (0.05) | |
Net income (loss) | $ | 1.48 | | | $ | 0.18 | | | $ | (0.02) | |
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 Fiscal Year Ended |
(in thousands) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
Stock options | 2,138 | | | 2,838 | | | 4,855 | |
Performance-based RSUs 1 | 1,469 | | | 979 | | | 1,524 | |
Time-based RSUs 2 | — | | | — | | | 885 | |
______________________
1 Performance-based RSUs represent the number of shares expected to be issued based on the estimated achievement of the performance metric for these awards.
2 Time-based RSUs represent the number of shares expected to be issued based on known employee retention information.
Note 10—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 our DSS, Aquaterra, Mountain Valley, and Legacy Primo businesses. The Other category includes our corporate oversight function, other miscellaneous expenses, and the results of our business in Russia prior to the exit of the business during the third quarter of 2022.
Segment reporting results have been recast to reflect these changes for all periods presented.
| | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended December 30, 2023 |
(in millions of U.S. dollars) | North America | | | | Other | | | | Total |
Revenue, net | $ | 1,771.2 | | | | | $ | 0.6 | | | | | $ | 1,771.8 | |
Depreciation and amortization | 191.9 | | | | | 1.4 | | | | | 193.3 | |
Operating income (loss) | 222.2 | | | | | (58.8) | | | | | 163.4 | |
Property, plant and equipment, net | 551.6 | | | | | 4.9 | | | | | 556.5 | |
Goodwill | 1,002.4 | | | | | 2.2 | | | | | 1,004.6 | |
Intangible assets, net | 711.3 | | | | | 2.9 | | | | | 714.2 | |
Total segment assets1 | 2,704.1 | | | | | 464.6 | | | | | 3,168.7 | |
Additions to property, plant and equipment | 137.0 | | | | | 2.2 | | | | | 139.2 | |
______________________1 Excludes intersegment receivables, investments and notes receivable.
| | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended December 31, 2022 |
(in millions of U.S. dollars) | North America | | | | Other | | | | Total |
Revenue, net | $ | 1,685.6 | | | | | $ | 7.6 | | | | | $ | 1,693.2 | |
Depreciation and amortization | 179.6 | | | | | 2.4 | | | | | 182.0 | |
Operating income (loss) | 203.7 | | | | | (60.2) | | | | | 143.5 | |
Property, plant and equipment, net | 547.8 | | | | | 1.7 | | | | | 549.5 | |
Goodwill | 997.2 | | | | | — | | | | | 997.2 | |
Intangible assets, net | 720.0 | | | | | 3.8 | | | | | 723.8 | |
Total segment assets1 | 2,746.1 | | | | | 44.2 | | | | | 2,790.3 | |
Additions to property, plant and equipment | 160.0 | | | | | 2.1 | | | | | 162.1 | |
______________________1 Excludes intersegment receivables, investments and notes receivable.
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended January 1, 2022 |
(in millions of U.S. dollars) | North America | | Other | | Total |
Revenue, net | $ | 1,562.9 | | | $ | 13.5 | | | $ | 1,576.4 | |
Depreciation and amortization | 156.9 | | | 3.3 | | | 160.2 | |
Operating income (loss) | 146.0 | | | (43.0) | | | 103.0 | |
Additions to property, plant and equipment | 113.5 | | | 1.7 | | | 115.2 | |
| | | | | | | | | | | |
Reconciliation of Segment Assets to Total Assets (in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 |
Segment assets | $ | 3,168.7 | | | $ | 2,790.3 | |
Assets of discontinued operations | 354.3 | | | 876.7 | |
Total assets | $ | 3,523.0 | | | $ | 3,667.0 | |
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. We are not currently aware of any facts that would create a material credit risk.
We have limited customer concentration as no customer accounts for more than 10% of our net revenues.
Revenues are attributed to countries based on the location of the customer. Revenues generated from sales to external customers by geographic area were as follows:
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
United States | $ | 1,706.2 | | | $ | 1,620.0 | | | $ | 1,493.0 | |
| | | | | |
Canada | 65.6 | | | 65.8 | | | 69.9 | |
All other countries | — | | | 7.4 | | | 13.5 | |
Total | $ | 1,771.8 | | | $ | 1,693.2 | | | $ | 1,576.4 | |
Revenues by channel by reporting segment were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended December 30, 2023 |
(in millions of U.S. dollars) | North America | | | | Other | | | | Total |
Revenue, net | | | | | | | | | |
Water Direct/Water Exchange | $ | 1,345.3 | | | | | $ | — | | | | | $ | 1,345.3 | |
Water Refill/Water Filtration | 226.9 | | | | | — | | | | | 226.9 | |
Other Water | 51.9 | | | | | — | | | | | 51.9 | |
Water Dispensers | 57.5 | | | | | — | | | | | 57.5 | |
Other | 89.6 | | | | | 0.6 | | | | | 90.2 | |
Total | $ | 1,771.2 | | | | | $ | 0.6 | | | | | $ | 1,771.8 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended December 31, 2022 |
(in millions of U.S. dollars) | North America | | | | Other | | | | Total |
Revenue, net | | | | | | | | | |
Water Direct/Water Exchange | $ | 1,242.8 | | | | | $ | 7.4 | | | | | $ | 1,250.2 | |
Water Refill/Water Filtration | 192.0 | | | | | — | | | | | 192.0 | |
Other Water | 73.8 | | | | | — | | | | | 73.8 | |
Water Dispensers | 70.5 | | | | | — | | | | | 70.5 | |
Other | 106.5 | | | | | 0.2 | | | | | 106.7 | |
Total | $ | 1,685.6 | | | | | $ | 7.6 | | | | | $ | 1,693.2 | |
| | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended January 1, 2022 |
(in millions of U.S. dollars) | North America | | | | Other | | | | Total |
Revenue, net | | | | | | | | | |
Water Direct/Water Exchange | $ | 1,051.0 | | | | | $ | 13.5 | | | | | $ | 1,064.5 | |
Water Refill/Water Filtration | 180.5 | | | | | — | | | | | 180.5 | |
Other Water | 162.6 | | | | | — | | | | | 162.6 | |
Water Dispensers | 65.4 | | | | | — | | | | | 65.4 | |
Other | 103.4 | | | | | — | | | | | 103.4 | |
Total | $ | 1,562.9 | | | | | $ | 13.5 | | | | | $ | 1,576.4 | |
Property, plant and equipment, net by geographic area as of December 30, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | |
United States | $ | 535.5 | | | $ | 526.4 | | | |
Canada | 20.4 | | | 23.0 | | | |
All other countries | 0.6 | | | 0.1 | | | |
Total | $ | 556.5 | | | $ | 549.5 | | | |
Note 11—Accounts Receivable, Net
The following table summarizes accounts receivable, net as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 |
Trade receivables | $ | 159.1 | | | $ | 168.7 | |
Allowance for doubtful accounts | (12.7) | | | (12.1) | |
Other | 9.6 | | | 14.1 | |
Total | $ | 156.0 | | | $ | 170.7 | |
Note 12—Inventories
The following table summarizes inventories as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 |
Raw materials | $ | 30.4 | | | $ | 46.9 | |
Finished goods | 6.8 | | | 7.3 | |
Resale items | 10.1 | | | 11.1 | |
| | | |
Total | $ | 47.3 | | | $ | 65.3 | |
Note 13—Property, Plant and Equipment, Net
The following table summarizes property, plant and equipment, net as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2023 | | December 31, 2022 |
(in millions of U.S. dollars) | Estimated Useful Life in Years | | Cost | | Accumulated Depreciation | | Net | | Cost | | Accumulated Depreciation | | Net |
Land | n/a | | $ | 79.5 | | | $ | — | | | $ | 79.5 | | | $ | 76.7 | | | $ | — | | | $ | 76.7 | |
Buildings | 10 - 40 | | 79.5 | | | 38.4 | | | 41.1 | | | 77.0 | | | 35.2 | | | 41.8 | |
Machinery and equipment | 5 - 15 | | 120.4 | | | 64.0 | | | 56.4 | | | 104.5 | | | 59.5 | | | 45.0 | |
Plates, films and molds | 1 - 10 | | 0.8 | | | 0.4 | | | 0.4 | | | 0.8 | | | 0.4 | | | 0.4 | |
Vehicles and transportation equipment | 3 - 15 | | 128.8 | | | 88.0 | | | 40.8 | | | 112.0 | | | 79.1 | | | 32.9 | |
Leasehold improvements 1 | | | 16.8 | | | 11.1 | | | 5.7 | | | 14.6 | | | 10.3 | | | 4.3 | |
IT systems | 3 - 7 | | 22.7 | | | 16.9 | | | 5.8 | | | 20.2 | | | 14.8 | | | 5.4 | |
Furniture and fixtures | 3 - 10 | | 6.4 | | | 5.7 | | | 0.7 | | | 6.3 | | | 5.4 | | | 0.9 | |
Customer equipment 2 | 2 - 15 | | 456.2 | | | 221.2 | | | 235.0 | | | 449.4 | | | 197.8 | | | 251.6 | |
Returnable bottles 3 | 1.5 - 5 | | 125.1 | | | 79.0 | | | 46.1 | | | 100.6 | | | 55.8 | | | 44.8 | |
Finance leases 4 | | | 91.2 | | | 46.2 | | | 45.0 | | | 80.3 | | | 34.6 | | | 45.7 | |
Total | | | $ | 1,127.4 | | | $ | 570.9 | | | $ | 556.5 | | | $ | 1,042.4 | | | $ | 492.9 | | | $ | 549.5 | |
______________________
1Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life.
2Customer equipment consists of coolers, refill equipment, brewers, refrigerators, water purification devices and storage racks held on site at customer locations.
3Returnable bottles are those bottles on site at customer locations.
4Our recorded assets under finance leases relate to machinery and equipment, customer equipment, IT systems and vehicles and transportation equipment.
The amounts above include construction-in-progress of $4.6 million and $1.4 million as of December 30, 2023, December 31, 2022, respectively.
Depreciation expense, which includes depreciation recorded for assets under finance leases, was $152.7 million, $140.0 million, and $120.7 million for the years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
Property Sales
For the year ended December 30, 2023, the Company completed the sale of five owned real properties for an aggregate sales price, net of closing costs, of $31.0 million, resulting in a gain of $21.0 million included within gain on sale of property on the Consolidated Statements of Operations.
During the second quarter of 2022, we classified four of our owned real properties as held for sale. On December 29, 2022, the Company completed the sale of two of the properties for an aggregate sales price, net of closing costs, of $50.1 million. As of December 31, 2022, $4.6 million of the proceeds were being held in escrow for the future purchase of property which was completed during 2023. These funds were included in cash and cash equivalents on the Consolidated Balance Sheet as of December 31, 2022. The transactions qualified for sale recognition under the sale-leaseback accounting requirements and the Company recorded a gain of $38.8 million included within gain on sale of property on the Consolidated Statements of Operations.
As part of the transactions, we entered into a leaseback of each of the properties (for a term of three years and five years, respectively). The leases are classified as operating leases and the Company recorded aggregate right-of-use assets and liabilities of $11.6 million. The Company entered into a sublease for one of the properties which resulted in an impairment of the right-of-use asset of $5.2 million recorded within selling, general and administrative expenses on the Consolidated Statements of Operations.
As of December 30, 2023 and December 31, 2022, we had $3.2 million and $10.3 million, respectively, related to properties held for sale which is included within prepaid expenses and other current assets on the Consolidated Balance Sheets.
Note 14—Intangible Assets, Net
The following table summarizes intangible assets, net as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2023 | | December 31, 2022 |
(in millions of U.S. dollars) | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
Intangible Assets | | | | | | | | | | | |
Not subject to amortization | | | | | | | | | | | |
Trademarks | $ | 379.7 | | | $ | — | | | $ | 379.7 | | | $ | 379.7 | | | $ | — | | | $ | 379.7 | |
Intellectual Property | 1.5 | | | — | | | 1.5 | | | 1.4 | | | — | | | 1.4 | |
Total intangible assets not subject to amortization | $ | 381.2 | | | $ | — | | | $ | 381.2 | | | $ | 381.1 | | | $ | — | | | $ | 381.1 | |
Subject to amortization | | | | | | | | | | | |
Customer relationships | $ | 603.8 | | | $ | 293.1 | | | $ | 310.7 | | | $ | 583.4 | | | $ | 265.0 | | | $ | 318.4 | |
Patents | 19.2 | | | 13.3 | | | 5.9 | | | 19.2 | | | 11.0 | | | 8.2 | |
Software | 54.7 | | | 40.9 | | | 13.8 | | | 46.3 | | | 33.3 | | | 13.0 | |
Other | 8.4 | | | 5.8 | | | 2.6 | | | 7.8 | | | 4.7 | | | 3.1 | |
Total intangible assets subject to amortization | $ | 686.1 | | | $ | 353.1 | | | $ | 333.0 | | | $ | 656.7 | | | $ | 314.0 | | | $ | 342.7 | |
Total intangible assets | $ | 1,067.3 | | | $ | 353.1 | | | $ | 714.2 | | | $ | 1,037.8 | | | $ | 314.0 | | | $ | 723.8 | |
Amortization expense of intangible assets was $40.6 million, $42.0 million, and $39.5 million for the years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
The following table summarizes the estimated amortization expense for intangible assets subject to amortization over the next five years:
| | | | | |
(in millions of U.S. dollars) | |
2024 | $ | 38.1 | |
2025 | 30.0 | |
2026 | 29.5 | |
2027 | 24.7 | |
2028 | 20.4 | |
Thereafter | 190.3 | |
Total | $ | 333.0 | |
Note 15—Accounts Payable and Accrued Liabilities
The following table summarizes accounts payable and accrued liabilities as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 |
Trade payables | $ | 94.3 | | | $ | 108.0 | |
Accrued compensation | 48.3 | | | 39.9 | |
Accrued sales incentives | 7.7 | | | 6.2 | |
Accrued interest | 8.6 | | | 9.0 | |
Payroll, sales and other taxes | 9.8 | | | 11.3 | |
Accrued deposits | 52.2 | | | 47.1 | |
| | | |
Insurance reserves | 18.7 | | | 16.9 | |
| | | |
Other accrued liabilities | 36.8 | | | 44.2 | |
Total | $ | 276.4 | | | $ | 282.6 | |
Note 16—Debt
Our total debt as of December 30, 2023 and December 31, 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2023 | | December 31, 2022 |
(in millions of U.S. dollars) | Principal | | Unamortized Debt Costs | | Net | | Principal | | Unamortized Debt Costs | | Net |
| | | | | | | | | | | |
3.875% senior notes due in 2028 | $ | 499.4 | | | $ | 4.8 | | | $ | 494.6 | | | $ | 479.1 | | | $ | 5.6 | | | $ | 473.5 | |
4.375% senior notes due in 2029 | 750.0 | | | 7.2 | | | 742.8 | | | 750.0 | | | 8.6 | | | 741.4 | |
Revolving Credit Facility | — | | | — | | | — | | | 197.0 | | | — | | | 197.0 | |
| | | | | | | | | | | |
Short-term borrowings | — | | | — | | | — | | | 8.8 | | | — | | | 8.8 | |
Finance leases | 47.6 | | | — | | | 47.6 | | | 48.3 | | | — | | | 48.3 | |
| | | | | | | | | | | |
Total debt | $ | 1,297.0 | | | $ | 12.0 | | | $ | 1,285.0 | | | $ | 1,483.2 | | | $ | 14.2 | | | $ | 1,469.0 | |
Less: Short-term borrowings and current debt: | | | | | | | | | | | |
Revolving Credit Facility | $ | — | | | $ | — | | | $ | — | | | $ | 197.0 | | | $ | — | | | $ | 197.0 | |
| | | | | | | | | | | |
Short-term borrowings | — | | | — | | | — | | | 8.8 | | | — | | | 8.8 | |
Finance leases - current maturities | 14.2 | | | — | | | 14.2 | | | 10.9 | | | — | | | 10.9 | |
| | | | | | | | | | | |
Total current debt | $ | 14.2 | | | $ | — | | | $ | 14.2 | | | $ | 216.7 | | | $ | — | | | $ | 216.7 | |
Total long-term debt | $ | 1,282.8 | | | $ | 12.0 | | | $ | 1,270.8 | | | $ | 1,266.5 | | | $ | 14.2 | | | $ | 1,252.3 | |
The long-term debt payments, which include current maturities of long-term debt, required in each of the next five years and thereafter are as follows: | | | | | |
(in millions of U.S. dollars) | Long-Term Debt (including current) |
2024 | $ | 14.2 | |
2025 | 14.5 | |
2026 | 12.4 | |
2027 | 4.3 | |
2028 | 501.3 | |
Thereafter | 750.3 | |
| $ | 1,297.0 | |
Revolving Credit Facility
On March 6, 2020, the Company entered into a credit agreement (the “Credit Agreement”) among the Company, as parent borrower, Primo Water Holdings Inc. and certain other 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 has a five year maturity date and includes letter of credit and swing line loan sub facilities.
Initial borrowings under the Revolving Credit Facility were used to refinance in full and terminate our previously existing asset-based lending credit facility (the “ABL Facility”). Certain letters of credit outstanding under the ABL Facility were rolled over under the Revolving Credit Facility. 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 Facility under GAAP. These new financing fees along with $1.8 million of unamortized deferred costs of the ABL Facility are being amortized using the straight-line method over the duration of the Revolving Credit Facility.
As of December 30, 2023, there were no outstanding borrowings under the Revolving Credit Facility. Outstanding letters of credit totaled $66.7 million, resulting in total utilization under the Revolving Credit Facility of $66.7 million. Accordingly, unused availability under the Revolving Credit Facility as of December 30, 2023 amounted to $283.3 million.
The weighted-average effective interest rate on the outstanding borrowings under the Revolving Credit Facility as of December 30, 2023 and December 31, 2022 was —% and 5.9%, respectively. The effective interest rates are based on our aggregate availability.
On January 13, 2023, we entered into the Second LIBOR Transition Amendment to the Credit Agreement, which replaced interest rate calculations based on LIBOR with calculations based on SOFR. As of December 30, 2023, borrowings under the Credit Agreement bore interest at a rate per annum equal to either: (a) a euro currency rate as determined under the Credit Agreement, plus the applicable margin, or (b) a term SOFR rate, as determined under the Credit Agreement, plus the applicable margin, (c) 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 term SOFR rate, as determined under the Credit Agreement, for a one month interest period, plus 1.0%, plus the applicable margin, or (d) an alternative currency daily or term rate, as determined under the Credit Agreement, plus the applicable margin. The applicable margin for euro currency, term SOFR, and alternative currency rate loans ranges from 1.375% to 2.000% and the applicable margin for base rate loans ranges from 0.375% to 1.000%, in each case depending on our consolidated total leverage ratio. Unutilized commitments under the Credit Agreement are subject to a commitment fee ranging from 0.20% to 0.30% per annum depending on our consolidated total leverage ratio, payable on a quarterly basis.
4.375% Senior Notes due in 2029
On April 30, 2021, we issued $750.0 million of 4.375% senior notes due April 30, 2029 (the “2029 Notes”) to qualified purchasers in a private placement offering under Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. purchasers pursuant to Regulation S under the Securities Act and other applicable laws. The 2029 Notes were issued by our wholly-owned subsidiary Primo Water Holdings Inc. The 2029 Notes are guaranteed by the Company and certain subsidiaries that are currently obligors under the $350.0 million senior secured revolving credit facility and the €450.0 million of 3.875% senior notes due October 31, 2028. The 2029 Notes will mature on April 30, 2029 and interest is payable semi-annually on April 30th and October 31st of each year commencing on October 31, 2021. The proceeds of the 2029 Notes, along with available cash on hand, were used to redeem in full the $750.0 million of 5.500% senior notes due April 1, 2025 (the “2025 Notes”). The redemption of the 2025 Notes included $20.6 million in premium payments, accrued interest of $3.6 million, and the write-off of $6.6 million in deferred financing fees.
We incurred approximately $11.2 million of financing fees for the issuance of the 2029 Notes. The financing fees are being amortized using the effective interest method over an eight-year period, which represents the term to maturity of the 2029 Notes.
3.875% Senior Notes due in 2028
On October 22, 2020, we issued €450.0 million ($499.4 million at exchange rates in effect on December 30, 2023) of 3.875% senior notes due October 31, 2028 (the “2028 Notes”) to qualified purchasers in a private placement offering under Rule 144A under the Securities Act, and outside the United States to non-U.S. purchasers pursuant to Regulation S under the Securities Act and other applicable laws. The 2028 Notes were issued by our wholly-owned subsidiary Primo Water Holdings Inc. The 2028 Notes are guaranteed by the Company and certain subsidiaries that are currently obligors under the Revolving Credit Facility and the 2029 Notes. The 2028 Notes will mature on October 31, 2028 and interest is payable semi-annually on April 30th and October 31st of each year commencing on April 30, 2021.
We incurred approximately $8.5 million of financing fees for the issuance of the 2028 Notes. The financing fees are being amortized using the effective interest method over a period of eight years, which represents the term to maturity of the 2028 Notes.
Covenant Compliance
Indentures Governing Our Outstanding Notes
Under the indentures governing our outstanding notes, we are subject to a number of covenants, including covenants that limit our and certain of our subsidiaries’ ability, subject to certain exceptions and qualifications, to (i) pay dividends or make distributions, repurchase equity securities, prepay subordinated debt or make certain investments, (ii) incur additional debt or issue certain disqualified stock or preferred stock, (iii) create or incur liens on assets securing indebtedness, (iv) merge or consolidate with another company or sell all or substantially all of our assets taken as a whole, (v) enter into transactions with affiliates and (vi) sell assets. The covenants are substantially similar across the series of notes. As of December 30, 2023, we were in compliance with all of the covenants under each series of notes. There have been no amendments to any covenants of our outstanding notes since the date of their issuance or assumption, as applicable.
Revolving Credit Facility
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. The Company was in compliance with these financial covenants as of December 30, 2023.
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 December 30, 2023.
Note 17—Retirement Plans
The Company maintains certain defined contribution (“DC”) retirement plans covering qualifying employees. The total expense with respect to these DC plans was $7.4 million, $6.4 million, and $5.7 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
The Company also maintained defined benefit (“DB”) plans acquired as a part of acquisitions covering certain U.S. employees (the " U.S. Plan"). Retirement benefits are based on years of service multiplied by a monthly benefit factor. Pension costs are funded in accordance with the provisions of the applicable law.
Effective as of December 31, 2021, the U.S. Plan was terminated. In accordance with the amended plan documents, we made distributions for all plan participants and distributed all plan assets during the fiscal year ended December 30, 2023.
Obligations and Funded Status
The following table summarizes the change in the projected benefit obligation, change in plan assets and unfunded status of the U.S. Plan as of December 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | | |
Change in Projected Benefit Obligation | | | | | | |
Projected benefit obligation at beginning of year | $ | 7.3 | | | $ | 9.4 | | | | |
| | | | | | |
| | | | | | |
Interest cost | 0.2 | | | 0.1 | | | | |
| | | | | | |
Benefit payments | (7.4) | | | (0.6) | | | | |
Actuarial gains | — | | | (1.6) | | | | |
Settlement gains | (0.1) | | | — | | | | |
| | | | | | |
| | | | | | |
Projected benefit obligation at end of year | $ | — | | | $ | 7.3 | | | | |
Change in Plan Assets | | | | | | |
Plan assets beginning of year | $ | 7.1 | | | $ | 9.2 | | | | |
| | | | | | |
Employer contributions | 0.3 | | | — | | | | |
| | | | | | |
Benefit payments | (7.4) | | | (0.6) | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Actual return on plan assets | — | | | (1.5) | | | | |
| | | | | | |
Fair value at end of year | $ | — | | | $ | 7.1 | | | | |
Funded Status of Plan | | | | | | |
Projected benefit obligation | $ | — | | | $ | (7.3) | | | | |
Fair value of plan assets | — | | | 7.1 | | | | |
Unfunded status | $ | — | | | $ | (0.2) | | | | |
The accumulated benefit obligation for the U.S. Plan was nil and $7.3 million as of December 30, 2023 and December 31, 2022, respectively.
The components of net periodic pension cost were as follows:
| | | | | | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 | | | | |
| | | | | | | | | |
Interest cost | $ | 0.2 | | | $ | 0.1 | | | $ | 0.2 | | | | | |
Expected return on plan assets | (0.1) | | | (0.1) | | | (0.2) | | | | | |
| | | | | | | | | |
Recognized net loss due to settlement | 0.5 | | | — | | | — | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net periodic pension cost | $ | 0.6 | | | $ | — | | | $ | — | | | | | |
Accumulated Other Comprehensive (Loss) Income
Amounts included in accumulated other comprehensive (loss) income, net of tax, as of the periods presented which have not yet been recognized in net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) | December 30, 2023 | | December 31, 2022 | | January 1, 2022 | | | | |
Unrecognized net actuarial loss | $ | — | | | $ | (0.6) | | | $ | (0.6) | | | | | |
Total accumulated other comprehensive loss | $ | — | | | $ | (0.6) | | | $ | (0.6) | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Actuarial Assumptions
The following table summarizes the weighted-average actuarial assumptions used to determine the projected benefit obligation: | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
| December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
U.S. Plans | | | | | |
Discount rate | — | % | | 4.9 | % | | 2.5 | % |
Expected long-term rate of return on plan assets | — | % | | 1.0 | % | | 2.0 | % |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The following table summarizes the weighted-average actuarial assumptions used to determine net periodic benefit cost:
| | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended |
| December 30, 2023 | | December 31, 2022 | | January 1, 2022 |
U.S. Plans | | | | | |
Discount rate | 5.1 | % | | 1.0 | % | | 2.0 | % |
Expected long-term rate of return on plan assets | 1.0 | % | | 1.0 | % | | 2.0 | % |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The Company utilizes a yield curve analysis to determine the discount rates for its DB plan obligations. The yield curve considers pricing and yield information for high quality corporate bonds with maturities matched to estimated payouts of future pension benefits. The Company evaluates its assumption regarding the estimated long-term rate of return on plan assets based on historical experience, future expectations of investment returns, asset allocations, and its investment strategy. The Company’s long-term rate of return on plan assets reflect expectations of projected weighted-average market returns of plan assets. Changes in expected returns on plan assets also reflect any adjustments to the Company’s targeted asset allocation.
Plan Assets and Asset Mix
Our investment policy is that plan assets will be managed utilizing an investment philosophy and approach characterized by all of the following, listed in priority order: (1) emphasis on total return, (2) emphasis on high-quality securities, (3) sufficient income and stability of income, (4) safety of principal with limited volatility of capital through proper diversification and (5) sufficient liquidity.
In connection with termination of the U.S. Plan and the distribution of all plan assets in the fiscal year ended December 30, 2023, there were no plan assets as of December 30, 2023. The U.S. Plan assets were 100% allocated to cash and cash equivalents as of December 31, 2022.
Note 18—Consolidated Accumulated Other Comprehensive (Loss) Income
Changes in consolidated accumulated other comprehensive (loss) income (“AOCI”) by component for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) 1 | | | Pension Benefit Plan Items | | Currency Translation Adjustment Items | | Total |
Balance as of January 2, 2021 | | | $ | (1.1) | | | $ | (85.6) | | | $ | (86.7) | |
OCI before reclassifications | | | (0.6) | | | 18.2 | | | 17.6 | |
Amounts reclassified from AOCI | | | — | | | — | | | — | |
Net current-period OCI | | | (0.6) | | | 18.2 | | | 17.6 | |
Balance as of January 1, 2022 | | | $ | (1.7) | | | $ | (67.4) | | | $ | (69.1) | |
OCI before reclassifications | | | 2.9 | | | (15.7) | | | (12.8) | |
Amounts reclassified from AOCI | | | — | | | (0.3) | | | (0.3) | |
Net current-period OCI | | | 2.9 | | | (16.0) | | | (13.1) | |
Balance as of December 31, 2022 | | | $ | 1.2 | | | $ | (83.4) | | | $ | (82.2) | |
OCI before reclassifications | | | (1.8) | | | (10.7) | | | (12.5) | |
Amounts reclassified from AOCI | | | (0.2) | | | (10.2) | | | (10.4) | |
Net current-period OCI | | | (2.0) | | | (20.9) | | | (22.9) | |
Balance as of December 30, 2023 | | | $ | (0.8) | | | $ | (104.3) | | | $ | (105.1) | |
______________________
1 All amounts are net of tax.
The following table summarizes the amounts reclassified from AOCI to total net income (loss) for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) | For the Fiscal Year Ended | | Affected Line Item in the Statement Where Net Income Is Presented |
Details About AOCI Components1 | December 30, 2023 | | December 31, 2022 | | January 1, 2022 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Amortization of pension benefit plan items | | | | | | | |
Recognized net actuarial gain | $ | 0.2 | | | $ | — | | | $ | — | | | Gain on sale of discontinued operations and Other expense (income), net 2 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| $ | 0.2 | | | $ | — | | | $ | — | | | Net of tax |
Foreign currency translation adjustments | $ | 10.2 | | | $ | 0.3 | | | $ | — | | | Gain on sale of discontinued operations and Impairment charges 3 |
| | | | | | | |
Total reclassifications for the period | $ | 10.4 | | | $ | 0.3 | | | $ | — | | | Net of tax |
______________________
1 Amounts in parenthesis indicate debits.
2 Includes $0.6 million related to the recognition of unrealized losses resulting from the distribution of the assets of the U.S. defined benefit plan included in Other expense (income), net on the Consolidated Statement of Operations. In addition, it includes $0.8 million related to the recognition of unrealized gains resulting from the sale of the European Business included in Net income (loss) from discontinued operations, net of income taxes on the Consolidated Statement of Operations. Amounts are net of the tax impact of $0.2 million.
3 For the year ended December 30, 2023, the amount relates to the foreign currency translation balances recognized in earnings in connection with the sale of the European Business included in Net income (loss) from discontinued operations, net of income taxes on the Consolidated Statement of Operations. For the year ended December 31, 2022, the foreign currency translation balance recognized was included in Impairment charges on the Consolidated Statement of Operations.
Note 19—Commitments and Contingencies
We are subject to various claims and legal proceedings with respect to matters such as governmental regulations, and other actions arising out of the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect on our financial position, results of operations, or cash flow.
We had $66.7 million, $46.6 million, and $59.4 million in standby letters of credit outstanding as of December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
We have future purchase obligations of $8.1 million that consist of commitments for payments related to inventory and professional information technology outsourcing agreements. These obligations represent the minimum contractual obligations expected under the normal course of business.
Guarantees
In July 2017, we entered into a Share Repurchase Agreement with Refresco Group B.V., a Dutch company (“Refresco”), pursuant to which we sold to Refresco, in January 2018, our carbonated soft drinks and juice businesses and our Royal Crown International finished goods export business (collectively, the “Traditional Business” and such transaction, the “Traditional Business Divestiture”). After the Traditional Business Divestiture, we have continued to provide contractual payment guarantees to two third-party lessors of certain real property used in this business. 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 $10.8 million as of December 30, 2023 and 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 20—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 December 30, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2023 | | December 31, 2022 |
(in millions of U.S. dollars) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | |
3.875% senior notes due in 2028 1, 2 | $ | 494.6 | | | $ | 477.5 | | | $ | 473.5 | | | $ | 418.7 | |
4.375% senior notes due in 2029 1, 2 | 742.8 | | | 683.1 | | | 741.4 | | | 642.2 | |
Total | $ | 1,237.4 | | | $ | 1,160.6 | | | $ | 1,214.9 | | | $ | 1,060.9 | |
______________________
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 December 30, 2023 and December 31, 2022 (see Note 16 to the Consolidated Financial Statements).
Non-Financial Assets Measured at Fair Value on a Non-Recurring Basis
In addition to assets and liabilities that are measured at fair value on a recurring basis, we are also required to measure certain items at fair value on a non-recurring basis. These assets can include goodwill, intangible assets, property, plant and equipment, lease-related right-of-use assets, and long-lived assets that have been reduced to fair value when they are held for sale. If certain triggering events occur, or if an annual impairment test is required, we would evaluate these non-financial assets for impairment. If an impairment were to occur, the asset would be recorded at the estimated fair value, using primarily unobservable Level 3 inputs.
During the second quarter of 2022, the assets held for sale of our business in Russia were measured at the lower of carrying value or fair value less costs to sell as discussed in more detail in Note 1 to the Consolidated Financial Statements. The Company's measurement of fair value less costs to sell was based on the total consideration expected to be received by the Company as outlined in the disposition agreement which is a Level 2 input.
During the second quarter of 2022, as a result of the exit of our Russia business and realignment of segments, we identified a triggering event indicating possible impairment of goodwill and intangible assets. See Note 1 to the Consolidated Financial Statements for additional information on goodwill and intangible asset impairment. The determination of the estimated fair values of the reporting units included unobservable Level 3 inputs. We did not identify impairment of our property, plant and equipment, lease-related right-of-use assets, or long-lived assets except as noted above related to the Russia assets held for sale.
Note 21—Quarterly Financial Information (unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended December 30, 2023 |
(in millions of U.S. dollars, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total |
Revenue, net | $ | 412.5 | | | $ | 450.6 | | | $ | 470.0 | | | $ | 438.7 | | | $ | 1,771.8 | |
Cost of sales | 153.5 | | | 159.8 | | | 166.7 | | | 154.8 | | | 634.8 | |
Gross profit | 259.0 | | | 290.8 | | | 303.3 | | | 283.9 | | | 1,137.0 | |
Selling, general and administrative expenses | 234.6 | | | 246.6 | | | 244.8 | | | 250.0 | | | 976.0 | |
Loss on disposal of property plant and equipment, net | 1.3 | | | 0.9 | | | 1.6 | | | 5.3 | | | 9.1 | |
Acquisition and integration expenses | 1.7 | | | 1.9 | | | 2.4 | | | 3.5 | | | 9.5 | |
Gain on sale of property | — | | | — | | | (5.3) | | | (15.7) | | | (21.0) | |
| | | | | | | | | |
Operating income | 21.4 | | | 41.4 | | | 59.8 | | | 40.8 | | | 163.4 | |
Other (income) expense, net | (0.3) | | | 0.6 | | | (4.0) | | | 4.9 | | | 1.2 | |
Interest expense, net | 18.2 | | | 18.8 | | | 17.8 | | | 16.6 | | | 71.4 | |
Income from continuing operations before taxes | 3.5 | | | 22.0 | | | 46.0 | | | 19.3 | | | 90.8 | |
Income tax expense | 0.3 | | | 8.4 | | | 12.3 | | | 6.0 | | | 27.0 | |
Net income from continuing operations | 3.2 | | | 13.6 | | | 33.7 | | | 13.3 | | | 63.8 | |
Net income (loss) from discontinued operations, net of income taxes | 2.6 | | | 7.7 | | | (0.3) | | | 164.3 | | | 174.3 | |
| | | | | | | | | |
Net income | $ | 5.8 | | | $ | 21.3 | | | $ | 33.4 | | | $ | 177.6 | | | $ | 238.1 | |
| | | | | | | | | |
Net income per common share | | | | | | | | | |
Basic: | | | | | | | | | |
Continuing operations | $ | 0.02 | | | $ | 0.09 | | | $ | 0.21 | | | $ | 0.08 | | | $ | 0.40 | |
Discontinued operations | $ | 0.02 | | | $ | 0.04 | | | $ | — | | | $ | 1.03 | | | $ | 1.09 | |
Net income | $ | 0.04 | | | $ | 0.13 | | | $ | 0.21 | | | $ | 1.11 | | | $ | 1.49 | |
Diluted: | | | | | | | | | |
Continuing operations | $ | 0.02 | | | $ | 0.09 | | | $ | 0.21 | | | $ | 0.08 | | | $ | 0.40 | |
Discontinued operations | $ | 0.02 | | | $ | 0.04 | | | $ | — | | | $ | 1.03 | | | $ | 1.08 | |
Net income | $ | 0.04 | | | $ | 0.13 | | | $ | 0.21 | | | $ | 1.11 | | | $ | 1.48 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Fiscal Year Ended December 31, 2022 |
(in millions of U.S. dollars, except per share amounts) | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Total |
Revenue, net | $ | 399.9 | | | $ | 440.3 | | | $ | 447.9 | | | $ | 405.1 | | | $ | 1,693.2 | |
Cost of sales | 165.9 | | | 177.1 | | | 174.6 | | | 156.4 | | | 674.0 | |
Gross profit | 234.0 | | | 263.2 | | | 273.3 | | | 248.7 | | | 1,019.2 | |
Selling, general and administrative expenses | 211.6 | | | 222.9 | | | 228.0 | | | 221.3 | | | 883.8 | |
Loss on disposal of property, plant and equipment, net | 1.4 | | | 0.2 | | | 2.5 | | | 3.3 | | | 7.4 | |
Acquisition and integration expenses | 3.0 | | | 4.0 | | | 2.5 | | | 2.6 | | | 12.1 | |
Impairment charges | — | | | 11.2 | | | — | | | — | | | 11.2 | |
Gain on sale of property | — | | | — | | | — | | | (38.8) | | | (38.8) | |
Operating income | 18.0 | | | 24.9 | | | 40.3 | | | 60.3 | | | 143.5 | |
Other (income) expense, net | (1.4) | | | (0.9) | | | 2.0 | | | (2.2) | | | (2.5) | |
Interest expense, net | 16.4 | | | 16.6 | | | 16.6 | | | 18.2 | | | 67.8 | |
Income from continuing operations before taxes | 3.0 | | | 9.2 | | | 21.7 | | | 44.3 | | | 78.2 | |
Income tax expense | 2.2 | | | 1.2 | | | 6.6 | | | 9.5 | | | 19.5 | |
Net income from continuing operations | 0.8 | | | 8.0 | | | 15.1 | | | 34.8 | | | 58.7 | |
Net (loss) income from discontinued operations, net of income taxes | (7.5) | | | (30.5) | | | (13.8) | | | 22.7 | | | (29.1) | |
Net (loss) income | $ | (6.7) | | | $ | (22.5) | | | $ | 1.3 | | | $ | 57.5 | | | $ | 29.6 | |
| | | | | | | | | |
Net (loss) income per common share | | | | | | | | | |
Basic: | | | | | | | | | |
Continuing operations | $ | — | | | $ | 0.05 | | | $ | 0.09 | | | $ | 0.22 | | | $ | 0.36 | |
Discontinued operations | $ | (0.04) | | | $ | (0.19) | | | $ | (0.08) | | | $ | 0.14 | | | $ | (0.18) | |
Net (loss) income | $ | (0.04) | | | $ | (0.14) | | | $ | 0.01 | | | $ | 0.36 | | | $ | 0.18 | |
Diluted: | | | | | | | | | |
Continuing operations | $ | — | | | $ | 0.05 | | | $ | 0.09 | | | $ | 0.22 | | | $ | 0.36 | |
Discontinued operations | $ | (0.04) | | | $ | (0.19) | | | $ | (0.08) | | | $ | 0.14 | | | $ | (0.18) | |
Net (loss) income | $ | (0.04) | | | $ | (0.14) | | | $ | 0.01 | | | $ | 0.36 | | | $ | 0.18 | |
Note 22—Subsequent Events
On January 2, 2024, the Company entered into foreign exchange forward contracts with a notional amount of €450.0 million and a maturity date of October 31, 2025. The Company is utilizing the derivative financial instrument to hedge foreign exchange risk associated with the Company’s 2028 Notes.
Since the fiscal year ended December 30, 2023, we repurchased 377,441 common shares for $5.6 million through open market transactions under the repurchase plan approved by the Board of Directors on August 9, 2023.
On February 21, 2024, the Board of Directors declared a dividend of $0.09 per common share, payable in cash on March 25, 2024 to shareholders of record at the close of business on March 8, 2024.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) | For the Fiscal Year Ended December 30, 2023 |
Description | Balance at Beginning of Year | | Reduction in Sales | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions 1 | | Balance at End of Year |
Reserves deducted in the balance sheet from the asset to which they apply | | | | | | | | | | | |
Allowances for losses on: | | | | | | | | | | | |
Accounts receivables | $ | (12.1) | | | $ | — | | | $ | (20.0) | | | $ | — | | | $ | 19.4 | | | $ | (12.7) | |
Inventories | (0.1) | | | — | | | (1.5) | | | — | | | 0.6 | | | (1.0) | |
Deferred tax assets | (115.5) | | | — | | | (15.2) | | | (0.9) | | | — | | | (131.6) | |
| $ | (127.7) | | | $ | — | | | $ | (36.7) | | | $ | (0.9) | | | $ | 20.0 | | | $ | (145.3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) | For the Fiscal Year Ended December 31, 2022 |
Description | Balance at Beginning of Year | | Reduction in Sales | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions 1 | | Balance at End of Year |
Reserves deducted in the balance sheet from the asset to which they apply | | | | | | | | | | | |
Allowances for losses on: | | | | | | | | | | | |
Accounts receivables | $ | (13.5) | | | $ | 0.1 | | | $ | (17.6) | | | $ | — | | | $ | 18.9 | | | $ | (12.1) | |
Inventories | (0.1) | | | — | | | — | | | — | | | — | | | (0.1) | |
Deferred tax assets | (112.6) | | | — | | | (5.4) | | | 2.5 | | | — | | | (115.5) | |
| $ | (126.2) | | | $ | 0.1 | | | $ | (23.0) | | | $ | 2.5 | | | $ | 18.9 | | | $ | (127.7) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions of U.S. dollars) | For the Fiscal Year Ended January 1, 2022 |
Description | Balance at Beginning of Year | | Reduction in Sales | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions 1 | | Balance at End of Year |
Reserves deducted in the balance sheet from the asset to which they apply | | | | | | | | | | | |
Allowances for losses on: | | | | | | | | | | | |
Accounts receivables | $ | (12.5) | | | $ | — | | | $ | (9.4) | | | $ | — | | | $ | 8.4 | | | $ | (13.5) | |
Inventories | — | | | — | | | (0.2) | | | — | | | 0.1 | | | (0.1) | |
Deferred tax assets | (105.1) | | | — | | | (7.6) | | | 0.1 | | | — | | | (112.6) | |
| $ | (117.6) | | | $ | — | | | $ | (17.2) | | | $ | 0.1 | | | $ | 8.5 | | | $ | (126.2) | |
______________________
1 Deductions primarily represent uncollectible accounts written off.