UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q
(Mark One)
☑ | QUARTERLY |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 20182019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 001-34850
PRIMO WATER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 82-1161432 | |||
(State of incorporation) | (I.R.S. Employer Identification No.) |
101 North Cherry Street, Suite 501, Winston-Salem, NC 27101
(Address of principal executive office) (Zip code)(Zip code)
(336) 331-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically, and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☑ | |
Non-accelerated filer ☐ | Smaller reporting company ☐ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act: | ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
$0.001 Par Value Common Stock | PRMW | The NASDAQ Stock Market LLC |
As of May 4, 2018,3, 2019, there were 31,212,12839,050,029 shares of our Common Stock, par value $0.001 per share, outstanding.
PRIMO WATER CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2018
FORM 10-Q
FOR THE THREEMONTHS ENDED MARCH 31, 2019
INDEX
PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value information)
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 5,330 | $ | 5,586 | $ | 4,223 | $ | 7,301 | ||||||||
Accounts receivable, net | 22,700 | 18,015 | 21,265 | 19,179 | ||||||||||||
Inventories | 5,816 | 6,178 | 13,650 | 9,965 | ||||||||||||
Prepaid expenses and other current assets | 5,652 | 3,409 | 8,152 | 7,004 | ||||||||||||
Total current assets | 39,498 | 33,188 | 47,290 | 43,449 | ||||||||||||
Bottles, net | 4,588 | 4,877 | 4,932 | 4,618 | ||||||||||||
Property and equipment, net | 100,409 | 100,692 | 99,558 | 95,627 | ||||||||||||
Operating lease right-of-use assets | 3,797 | – | ||||||||||||||
Intangible assets, net | 143,241 | 144,555 | 77,428 | 78,671 | ||||||||||||
Goodwill | 92,789 | 92,934 | 91,917 | 91,814 | ||||||||||||
Investment in Glacier securities ($3,895 and $3,881 available-for-sale, at fair value at March 31, 2018 and December 31, 2017, respectively) | 6,524 | 6,510 | ||||||||||||||
Other assets | 551 | 997 | 667 | 661 | ||||||||||||
Assets held-for-sale at fair value | 5,288 | 5,288 | ||||||||||||||
Total assets | $ | 387,600 | $ | 383,753 | $ | 330,877 | $ | 320,128 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 26,107 | $ | 18,698 | $ | 28,558 | $ | 25,191 | ||||||||
Accrued expenses and other current liabilities | 7,938 | 9,878 | 8,400 | 8,274 | ||||||||||||
Current portion of long-term debt and capital leases | 3,581 | 3,473 | ||||||||||||||
Current portion of long-term debt and finance leases | 10,979 | 11,159 | ||||||||||||||
Total current liabilities | 37,626 | 32,049 | 47,937 | 44,624 | ||||||||||||
Long-term debt and capital leases, net of current portion and debt issuance costs | 274,531 | 269,793 | ||||||||||||||
Deferred tax liability, net | 6,730 | 8,455 | ||||||||||||||
Long-term debt and finance leases, net of current portion and debt issuance costs | 188,112 | 178,966 | ||||||||||||||
Operating leases, net of current portion | 2,325 | – | ||||||||||||||
Other long-term liabilities | 2,260 | 1,985 | 579 | 607 | ||||||||||||
Liabilities held-for-sale at fair value | 1,438 | 1,438 | ||||||||||||||
Total liabilities | 321,147 | 312,282 | 240,391 | 225,635 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $0.001 par value - 10,000 shares authorized, none issued and outstanding | – | – | – | – | ||||||||||||
Common stock, $0.001 par value - 70,000 shares authorized, 31,003 and 30,084 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively | 31 | 30 | ||||||||||||||
Common stock, $0.001 par value - 70,000 shares authorized, 39,029 and 38,567 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 39 | 39 | ||||||||||||||
Additional paid-in capital | 321,197 | 327,178 | 422,052 | 424,635 | ||||||||||||
Common stock warrants | 18,785 | 18,785 | ||||||||||||||
Accumulated deficit | (272,542 | ) | (273,752 | ) | (330,198 | ) | (328,599 | ) | ||||||||
Accumulated other comprehensive loss | (1,018 | ) | (770 | ) | (1,407 | ) | (1,582 | ) | ||||||||
Total stockholders’ equity | 66,453 | 71,471 | 90,486 | 94,493 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 387,600 | $ | 383,753 | $ | 330,877 | $ | 320,128 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Net sales | $ | 73,659 | $ | 60,737 | $ | 70,047 | $ | 73,659 | ||||||||
Operating costs and expenses: | ||||||||||||||||
Cost of sales | 53,421 | 42,814 | 51,522 | 53,421 | ||||||||||||
Selling, general and administrative expenses | 9,200 | 10,544 | 10,330 | 9,200 | ||||||||||||
Non-recurring and acquisition-related costs | 77 | 4,448 | ||||||||||||||
Special items | 261 | 77 | ||||||||||||||
Depreciation and amortization | 6,057 | 6,391 | 6,550 | 6,057 | ||||||||||||
Loss (gain) on disposal and impairment of property and equipment | 133 | (6 | ) | |||||||||||||
Impairment charges and other | 75 | 133 | ||||||||||||||
Total operating costs and expenses | 68,888 | 64,191 | 68,738 | 68,888 | ||||||||||||
Income (loss) from operations | 4,771 | (3,454 | ) | |||||||||||||
Income from operations | 1,309 | 4,771 | ||||||||||||||
Interest expense, net | 5,286 | 5,002 | 2,581 | 5,286 | ||||||||||||
Change in fair value of warrant liability | – | 3,220 | ||||||||||||||
Loss before income taxes | (515 | ) | (11,676 | ) | (1,272 | ) | (515 | ) | ||||||||
Income tax (benefit) provision | (1,725 | ) | 186 | |||||||||||||
Net income (loss) | $ | 1,210 | $ | (11,862 | ) | |||||||||||
Income tax benefit | – | (1,725 | ) | |||||||||||||
Net (loss) income | $ | (1,272 | ) | $ | 1,210 | |||||||||||
Earnings (loss) per common share: | ||||||||||||||||
(Loss) earnings per common share: | ||||||||||||||||
Basic | $ | 0.04 | $ | (0.37 | ) | $ | (0.03 | ) | $ | 0.04 | ||||||
Diluted | $ | 0.04 | $ | (0.37 | ) | $ | (0.03 | ) | $ | 0.04 | ||||||
Weighted average shares used in computing loss per share: | ||||||||||||||||
Weighted average shares used in computing (loss) earnings per share: | ||||||||||||||||
Basic | 33,164 | 32,364 | 40,296 | 33,164 | ||||||||||||
Diluted | 34,424 | 32,364 | 40,296 | 34,424 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS)
(Unaudited)
(In thousands)
Three months ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
Net income (loss) | $ | 1,210 | $ | (11,862 | ) | |||
Other comprehensive (loss) income: | ||||||||
Unrealized gain on investment in Glacier securities | 14 | 38 | ||||||
Foreign currency translation adjustments, net | (262 | ) | 90 | |||||
Total other comprehensive (loss) income | (248 | ) | 128 | |||||
Comprehensive income (loss) | $ | 962 | $ | (11,734 | ) |
Three months ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Net (loss) income | $ | (1,272 | ) | $ | 1,210 | |||
Other comprehensive income (loss): | ||||||||
Unrealized gain on investment in Glacier securities | – | 14 | ||||||
Foreign currency translation adjustments, net | 175 | (262 | ) | |||||
Total other comprehensive income (loss) | 175 | (248 | ) | |||||
Comprehensive (loss) income | $ | (1,097 | ) | $ | 962 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
(Unaudited) |
(In thousands) |
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance, December 31, 2017 | 30,084 | $ | 30 | $ | 345,963 | $ | (273,752 | ) | $ | (770 | ) | $ | 71,471 | |||||||||||
Employee stock compensation plans | 1,584 | 2 | 2,345 | – | – | 2,347 | ||||||||||||||||||
Shares withheld for taxes related to net share settlement of equity awards | (665 | ) | (1 | ) | (8,326 | ) | – | – | (8,327 | ) | ||||||||||||||
Net Income | – | – | – | 1,210 | – | 1,210 | ||||||||||||||||||
Other comprehensive loss | – | – | – | – | (248 | ) | (248 | ) | ||||||||||||||||
Balance, March 31, 2018 | 31,003 | $ | 31 | $ | 339,982 | $ | (272,542 | ) | $ | (1,018 | ) | $ | 66,453 |
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders’ | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance, December 31, 2018 | 38,567 | $ | 39 | $ | 424,635 | $ | (328,599 | ) | $ | (1,582 | ) | $ | 94,493 | |||||||||||
Effect of ASC 842 adoption | – | – | – | (327 | ) | – | (327 | ) | ||||||||||||||||
Employee stock compensation plans | 734 | 1 | 1,306 | – | – | 1,307 | ||||||||||||||||||
Shares withheld for taxes related to net share settlement of equity awards | (279 | ) | (1 | ) | (3,957 | ) | – | – | (3,958 | ) | ||||||||||||||
Exercise of common stock warrants | 7 | – | 68 | – | – | 68 | ||||||||||||||||||
Net loss | – | – | – | (1,272 | ) | – | (1,272 | ) | ||||||||||||||||
Other comprehensive income | – | – | – | – | 175 | 175 | ||||||||||||||||||
Balance, March 31, 2019 | 39,029 | $ | 39 | $ | 422,052 | $ | (330,198 | ) | $ | (1,407 | ) | $ | 90,486 |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 1,210 | $ | (11,862 | ) | |||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Net loss | $ | (1,272 | ) | $ | 1,210 | |||||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 6,057 | 6,391 | 6,550 | 6,057 | ||||||||||||
Loss (gain) on disposal and impairment of property and equipment | 133 | (6 | ) | |||||||||||||
Impairment charges and other | 75 | 133 | ||||||||||||||
Stock-based compensation expense | 1,292 | 2,335 | 1,475 | 1,292 | ||||||||||||
Non-cash interest income | (20 | ) | (41 | ) | ||||||||||||
Change in fair value of warrant liability | – | 3,220 | ||||||||||||||
Deferred income tax (benefit) expense | (1,725 | ) | 186 | |||||||||||||
Non-cash interest expense (income) | 96 | (20 | ) | |||||||||||||
Bad debt expense | 27 | – | ||||||||||||||
Deferred income tax benefit | – | (1,725 | ) | |||||||||||||
Realized foreign currency exchange loss and other, net | 470 | 35 | (43 | ) | 470 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (4,861 | ) | 519 | (2,066 | ) | (4,861 | ) | |||||||||
Inventories | 356 | (2,211 | ) | (3,686 | ) | 356 | ||||||||||
Prepaid expenses and other assets | (1,793 | ) | (722 | ) | ||||||||||||
Prepaid expenses and other current assets | (1,142 | ) | (1,793 | ) | ||||||||||||
Accounts payable | 4,259 | 2,618 | 691 | 4,259 | ||||||||||||
Accrued expenses and other liabilities | (912 | ) | (415 | ) | ||||||||||||
Net cash provided by operating activities | 4,466 | 47 | ||||||||||||||
Accrued expenses and other current liabilities | (1,645 | ) | (912 | ) | ||||||||||||
Net cash (used in) provided by operating activities | (940 | ) | 4,466 | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property and equipment | (3,490 | ) | (4,466 | ) | (6,937 | ) | (3,490 | ) | ||||||||
Purchases of bottles, net of disposals | (275 | ) | (656 | ) | (747 | ) | (275 | ) | ||||||||
Proceeds from the sale of property and equipment | 58 | 11 | – | 58 | ||||||||||||
Additions to intangible assets | (8 | ) | (76 | ) | (8 | ) | (8 | ) | ||||||||
Net cash used in investing activities | (3,715 | ) | (5,187 | ) | (7,692 | ) | (3,715 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Borrowings under Revolving Credit Facility | 12,000 | – | ||||||||||||||
Payments under Revolving Credit Facility | (6,500 | ) | – | |||||||||||||
Term loan and capital lease payments | (883 | ) | (872 | ) | ||||||||||||
Borrowings under Revolving Credit Facilities | 19,200 | 12,000 | ||||||||||||||
Payments under Revolving Credit Facilities | (8,600 | ) | (6,500 | ) | ||||||||||||
Payments under Term loans | (2,375 | ) | (465 | ) | ||||||||||||
Finance lease payments | (451 | ) | (418 | ) | ||||||||||||
Proceeds from warrant exercises, net | 68 | – | ||||||||||||||
Stock option and employee stock purchase activity | 39 | 24 | ||||||||||||||
Bank overdraft | 2,695 | – | 1,651 | 2,695 | ||||||||||||
Stock option and employee stock purchase activity and other, net | (8,303 | ) | (3,287 | ) | ||||||||||||
Net cash used in financing activities | (991 | ) | (4,159 | ) | ||||||||||||
Payments for taxes related to net share settlement of equity awards | (3,957 | ) | (8,327 | ) | ||||||||||||
Debt issuance costs and other | (33 | ) | – | |||||||||||||
Net cash provided by (used in) financing activities | 5,542 | (991 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | (16 | ) | 29 | 12 | (16 | ) | ||||||||||
Net decrease in cash and cash equivalents | (256 | ) | (9,270 | ) | (3,078 | ) | (256 | ) | ||||||||
Cash and cash equivalents, beginning of year | 5,586 | 15,586 | 7,301 | 5,586 | ||||||||||||
Cash and cash equivalents, end of period | $ | 5,330 | $ | 6,316 | $ | 4,223 | $ | 5,330 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
1. | Description of Business and Significant Accounting Policies |
Business
Primo Water Corporation (together with its consolidated subsidiaries, “Primo,” “we,” “our,” “us,” or “the Company”“us”) is North America’s leading single source provider of multi-gallon purified bottled water, self-service refill drinking water and water dispensers sold through major retailers in the United States and Canada.
Unaudited Interim Financial Information
The accompanying interim condensed consolidated financial statements and notes have been prepared in accordance with our accounting practices described in our audited consolidated financial statements as of and for the year ended December 31, 2017.2018. In the opinion of management, the unaudited interim condensed consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 20172018 as filed on Form 10-K.10-K (the “2018 Form 10-K”). The accompanying interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) with respect to annual audited financial statements. Significant accounting policies are summarized in our 20172018 Form 10-K.
ReclassificationsR
ecent
Certain amounts reported previously have been reclassified to conform to the current year presentation, with no effect on stockholders’ equity or net income (loss) as previously reported. These reclassifications primarily relate to the identification of new reportable segments (see “Note 10 – Segments”).
ly Issued
Recent Accounting Pronouncements
In January 2017,August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within that reporting period. Early adoption is permitted. We are currently in the process of evaluating the impact of adopting this guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The update is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. We are currently in the process of evaluating the impact of adopting this guidance on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The updated guidance eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. The update is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. We currently anticipate that adoption of the new standardguidance will not have a material impact toon our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic Recent805): Clarifying the Definition of a Business ly Adoptedto clarify the definition of a business, which is fundamental in the determination of whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses combinations. The updated guidance requires that in order to be considered a business the integrated set of assets and activities acquired must include, at a minimum, an input and process that contribute to the ability to create output. If substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar assets, it is not considered a business, and therefore would not be considered a business combination. The update is effective for fiscal years beginning after December 15, 2018, and interim periods with fiscal years beginning after December 15, 2019. We are currently evaluating the impact of adopting this guidance for future acquisitions on our consolidated financial statements. Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842),842) along with subsequent amendments to the initial guidance in ASU 2017-13, ASU 2018-10 and ASU 2018-11 (collectively, Topic 842) requiring lessees to recognize for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. We currently are utilizing a comprehensive approach to review our lease portfolio, as well as control implications of adopting the new standard. We are currently evaluating the impact of adopting this guidance on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which supersedes existing revenue recognition requirements in U.S. GAAP.We adopted Topic 842 effective January 1, 2019. The updated guidance requires that an entity recognize revenue to depict the transfereffects of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the guidance establishes a five-step approach foradopting Topic 842 were the recognition of revenue.$4.2 million of operating lease right-of-use assets and $4.1 million of operating lease liabilities. We applied Topic 842 to all contracts conveying the right to control the use of identified property, plant, or equipment as of January 1, 2019, with comparative periods continuing to be reported under Topic 840 in accordance with the alternative transition method. In eachthe adoption of March, April, MayTopic 842, we elected the package of practical expedients allowing us to carry forward the assessment from Topic 840 of whether our contracts contain or are leases, as well as, the classification and December 2016,initial direct costs for any expired or existing leases. We also elected the FASB issued further guidancepractical expedient allowing us to provide clarity regarding principal versus agent considerations,use hindsight when determining the identificationlease term and assessing impairment of performance obligationsright-of-use assets. For short-term leases with an initial term of 12 months or less, we have made an accounting policy election whereby a right-of-use asset and certain other matters. The updates are currently effectivelease liability is not recognized. Lease expense for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Financial statement disclosures required undershort-term leases is recognized on a straight-line basis over the guidance will enable users to understand the nature, amount, timing, judgments and uncertainty of revenue and cash flows relating to contracts with customers. Based on the analysislease term. A portion of our contractsleases contain lease and non-lease components in the form of maintenance and utilities. We have elected to combine non-lease and lease components and treat them as a single lease component, which increases the amount of our lease assets and corresponding liabilities. We implemented a lease management system to assist in centralizing, maintaining and accounting for all leases to ensure compliance with customers, the timing, measurement,Topic 842 reporting and presentation of revenues based on Topic 606 is consistent with our revenues under Topic 605. We adopted the abovedisclosure requirements. Our accounting for finance leases remains substantially unchanged. The standard utilizing the modified retrospective method beginning January 1, 2018, with no adjustment to the opening balance of retained earnings. Baseddoes not have a significant impact on our analysiscondensed consolidated statements of disclosure requirements within the standard, we have included additional disclosuresoperations or our condensed consolidated statements of disaggregated net sales included in Note 2cash flows. See “Note 3 – Revenue Recognition below. Leases” for further details.
2. | Revenue Recognition |
Sales of Products
We earn revenue from contracts with customers, primarily through the sale of our purified, multi-gallon bottled water, self-service filtered drinking water, or through the sale of water dispensers. All revenue recognized in the current period is derived from contracts with customers. We account for these revenues under Topic 606 which we adopted January 1, 2018, using the modified retrospective approach, which resulted in no adjustment to the opening balance of retained earnings.606.
In certain arrangements, depending on the nature and scope of the contract, our customer may be identified as the end consumer as we are interacting directly with the consumer via an implied contract upon the dispensing of self-service purified water. In other arrangements, our customer may be identified as the retailer, as we enter into contracts with retailers to resell purified multi-gallon bottled water or self-service filtered drinking water to the end consumer on our behalf. Our arrangements may also include standalone purchase orders from retailers to sell water dispensers. In such arrangements, the retailer is our customer.
Our performance obligations vary by business segment. Our performance obligations may include the delivery of purified water, the sale of the related bottle, or the sale of a water dispenser. In some instances, our sales arrangements may include multiple of the aforementioned performance obligations.
Our arrangements may include the shipping of products to our customers after the performance obligation related to that product has been satisfied. For such arrangements when shipping and handling activities are performed subsequent to the performance obligation being satisfied, we have elected to account for shipping and handling as activities to fulfill the promise to transfer goods. In such instances, we recognize shipping and handling costs at the same time as we recognize revenue.
We have no contractual obligation to accept returns nor do we guarantee sales. We may accept returns or issue credits for manufacturer defects or for items that were damaged in transit. We recognize revenue net of an estimated allowance for returns based on historical average return rates.
Typically, the transaction price of our products is fixed as agreed upon in our contracts with customers. Our arrangements may include variable consideration in the form of volume incentive agreements or coupon programs. We provide sales incentives to certain retailers in the form of a volume rebate to promote the sale of our products. Generally, the rebates are tiered, such that as sales increase, the rebate percentage increases. We estimate the expected amount of these rebates based on historical sales volume at the time of the original sale. We update our assessment of the amount of rebates that will be earned either quarterly or annually based on our best estimate of the volume levels the customer will reach during the measurement period. We also may include a redeemable coupon for the purchase of purified, multi-gallon bottled water upon the purchase of one of our products. We account for the coupons based on historical redemption rates. The customer’s right to redeem the coupon for a free purified, multi-gallon bottle of water is exercised at or near the purchase of our products such that it does not create a material timing difference in the recognition of revenue.
Our sales arrangements may involve collecting revenue directly from the end consumer. Tax on filtered water dispensed from a vended machine is exempt in several jurisdictions. For those remaining jurisdictions in which taxes are not exempt, we have analyzed our contracts with customers, concluding that we are the primary obligor to the respective taxing authority, and as such present sales tax charged to the end consumer utilizing the gross method.
We recognize revenue on the products we sell at a point in time. The delivery of purified water and sale of the related bottle are completed via a point-of-sale transaction at which time the customer obtains control and remits payment for the product. The shipment of a water dispenser to our customer reflects the transfer of control. We may grant credit limits and terms to customers based upon traditional practices and competitive conditions. In such instances, the terms may vary, but payments are generally due in 30 days or less from the invoicing date. Due to the point-of-sale nature of our products, we have not recognized revenue in the current period for performance obligations satisfied in previous reporting periods and have no unsatisfied performance obligations as of the end of the current period.
Multiple Performance Obligations
Our sales arrangements may include multiple performance obligations. We identify each of the performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its identified relative selling price. In such arrangements, all of the performance obligations are met simultaneously as our products are concurrently delivered and have the same pattern of transfer to the customer. Thus, revenue is recognized simultaneously for each performance obligation when the customer obtains control of the product.
Presentation of Revenue
Our arrangements may involve another party selling products to our customers. We partner with retailers to place our self-service filtered water dispensing machines in their stores. We pay retailers a commission on the amount of sales generated from our products. We evaluate whether we control the products before they are transferred to the customer. In such instances where we control our products prior to transferring them to the customer, we are the principal in the transaction and record revenue at the gross amount and record commission paid to retailers as cost of sales. If we conclude that we do not control the products, we are the agent in the transaction and record revenue net of commissions paid to retailers.
Accounts Receivable and Net of Allowance for Doubtful Accountss
Trade accounts receivable represent amounts billed to customers and not yet collected, and are presented net of an allowance for doubtful accounts.allowances. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis and is our best estimate of the amount of probable credit losses in our existing accounts receivable. Judgements are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. We also maintain an allowance for sales discounts, rebates and promotions based on our arrangements with customers. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. The allowance for doubtful accounts was $1,830These allowances totaled $1,888 and $1,509$1,755 at March 31, 20182019 and December 31, 2017,2018, respectively. Bad debt write-offs for the three months ended March 31,30, 2019 and 2018 and 2017 were immaterial.
Disaggregation of Revenue
The tables below present our consolidated net sales by geographic area.
Three months ended March 31, 2019 | ||||||||||||||||
Refill | Exchange | Dispensers | Total | |||||||||||||
Geographical area | ||||||||||||||||
United States | $ | 37,318 | $ | 18,522 | $ | 11,695 | $ | 67,535 | ||||||||
Canada | 1,008 | 830 | 674 | 2,512 | ||||||||||||
$ | 38,326 | $ | 19,352 | $ | 12,369 | $ | 70,047 |
Three months ended March 31, 2018 | ||||||||||||||||
Refill | Exchange | Dispensers | Total | |||||||||||||
Geographical area | ||||||||||||||||
United States | $ | 40,145 | $ | 17,481 | $ | 12,933 | $ | 70,559 | ||||||||
Canada | 1,330 | 777 | 993 | 3,100 | ||||||||||||
$ | 41,475 | $ | 18,258 | $ | 13,926 | $ | 73,659 |
Three months ended March 31, 2017 | ||||||||||||||||
Refill | Exchange | Dispensers | Total | |||||||||||||
Geographical area | ||||||||||||||||
United States | $ | 35,317 | $ | 16,016 | $ | 7,627 | $ | 58,960 | ||||||||
Canada | 1,048 | 729 | – | 1,777 | ||||||||||||
$ | 36,365 | $ | 16,745 | $ | 7,627 | $ | 60,737 |
3. |
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We determine if an arrangement is a lease or service contract at inception. Where an arrangement is a lease we determine if it is an operating lease or a finance lease. Subsequently, if the arrangement is modified we reevaluate our classification. We have entered into finance lease agreements for vehicles with lease periods expiring between 2019 and 2024. We have entered into operating lease agreements primarily for buildings and equipment expiring between 2019 and 2028. Our short-term leases are typically in the form of storage units with month-to-month terms located throughout the United States.
At lease commencement, we record a lease liability and corresponding right-of-use asset. Lease liabilities represent the present value of our future lease payments over the expected lease term which includes options to extend or terminate the lease when it is reasonably certain those options will be exercised. We generally use the base, non-cancellable lease term to determine lease assets and liabilities. The interest rate implicit in our leases is not readily determinable and as such, the present value of our lease liability is determined using our incremental collateralized borrowing rate under the SunTrust Revolving Facility, which approximates the interest rate on a collateralized basis under similar terms as our underlying leased assets. Operating lease assets also include prepaid lease payments and lease incentives when present.
Operating lease right-of-use assets and liabilities are included on our Condensed Consolidated Balance Sheet beginning January 1, 2019. As of March 31, 2019 the current portion of our operating lease liabilities of $1,503 are presented within accrued expenses and other current liabilities. As of March 31, 2019 the long-term portion of our operating lease liabilities of $2,325 is presented within operating leases.
Finance lease right-of-use assets are presented within property and equipment, net. As of March 31, 2019 and December 31, 2018 vehicles under finance lease with a cost basis of $8,091 and $7,408, respectively, were included in property and equipment, net. As of March 31, 2019 the current portion of our finance lease liabilities of $1,479 are presented within current portion of long-term debt and finance leases. As of March 31, 2019 the long term portion of our finance lease liabilities of $2,323 are presented within long-term debt and finance leases, net of current portion and debt issuance costs.
Components of operating lease expense were as follows:
Three months ended March 31, 2019 | ||||
Long-term Operating | $ | 437 | ||
Short-term Operating | 116 | |||
Total Operating lease expense | $ | 553 |
As of March 31, 2019, our operating leases had a weighted average remaining lease term of 3.6 years and a weighted average discount rate of 4.76%. Future lease payments under operating leases as of March 31, 2019 were as follows:
Operating Leases | ||||
Remainder of 2019 | $ | 1,268 | ||
2020 | 1,530 | |||
2021 | 519 | |||
2022 | 421 | |||
2023 | 239 | |||
Thereafter | 324 | |||
Total future lease payments | 4,301 | |||
Less: imputed interest | (474 | ) | ||
Total lease liability | $ | 3,827 |
Supplemental information related to operating leases was as follows:
Three months ended March 31, 2019 | ||||
Operating cash flows used for operating leases | $ | 438 |
4. | Ice Assets Held-for-Sale |
During the quarter ended September 30, 2018, we concluded that a sale of certain assets of our Refill segment (the “Ice Assets”) was probable to take place within one year, which meets the criteria for assets held-for-sale treatment in accordance with FASB ASC Topic 360, Property, Plant, and Equipment. There have been no changes to the estimated fair value of the Ice Assets since December 31, 2018. The Ice Assets fair value less costs to sell at March 31, 2019 was as follows:
March 31, | ||||
2019 | ||||
Property and equipment, net | $ | 4,688 | ||
Identifiable intangible assets | 600 | |||
Assets held-for-sale at fair value | $ | 5,288 | ||
Contingent consideration | $ | 1,438 | ||
Liabilities held-for-sale at fair value | $ | 1,438 | ||
Ice Assets, net | $ | 3,850 |
The estimated fair value of the assets held-for-sale does not include accounts receivable for which we anticipate retaining the rights.
5. | Debt and |
Debt and capitalfinance leases, net of debt issuance costs are summarized as follows:
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
Revolving facility | $ | 5,500 | $ | – | ||||
Term loans | 183,675 | 184,140 | ||||||
Debt issuance costs | (2,817 | ) | (3,011 | ) | ||||
Total Credit Facilities | 186,358 | 181,129 | ||||||
Junior Subordinated Debentures | 88,341 | 88,579 | ||||||
Capital leases | 3,413 | 3,558 | ||||||
278,112 | 273,266 | |||||||
Less current portion | (3,581 | ) | (3,473 | ) | ||||
Long-term debt and capital leases, net of current portion and debt issuance costs | $ | 274,531 | $ | 269,793 |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Revolving Credit Facility | $ | 13,600 | $ | 3,000 | ||||
Term loans | 182,875 | 185,250 | ||||||
Debt issuance costs, net | (1,186 | ) | (1,265 | ) | ||||
Total Credit Facilities | 195,289 | 186,985 | ||||||
Finance leases | 3,802 | 3,140 | ||||||
199,091 | 190,125 | |||||||
Less current portion | (10,979 | ) | (11,159 | ) | ||||
Long-term debt and finance leases, net of current portion and debt issuance costs | $ | 188,112 | $ | 178,966 |
GoldmanSunTrust Credit Facility
On December 12, 2016, to complete the acquisition by merger (the “Acquisition”) of Glacier Water Services, Inc. (“Glacier”),June 22, 2018, we entered into the Goldmana senior secured credit facility (the “SunTrust Credit FacilityFacility”) that provides for an $186,000a $190,000 senior term loan facility (the “Term Loan”) and a $10,000$30,000 senior revolving loan facility (the “Revolving Facility”). SunTrust Bank serves as the Administrative Agent, Swingline Lender and Issuing Bank under the SunTrust Credit Facility. The GoldmanSunTrust Credit Facility matures on December 12, 2021.June 22, 2023. The Term Loan requires annual principal payments (payable in quarterly installments) equal to 1%5% per annum, or $1,860,$9,500, with the remaining indebtedness due at maturity. The GoldmanSunTrust Credit Facility is secured onby a first priority basis bysecurity interest in and lien on substantially all of our assets but no more than 65%assets. The SunTrust Credit Facility and related obligations are guaranteed by certain of the voting equity of non-U.S.our domestic subsidiaries.
Interest on outstanding borrowings under the GoldmanSunTrust Credit Facility is calculated at our option at either (1) a base rate (which is derived from the Administrative Agent’s prime lending rate, the federal funds effective rate)rate plus 0.5%, or a London Interbank Offered Rate (“LIBOR”), subject to floors of 4.0% for the base rate and plus 1.0% per annum for) or (2) LIBOR respectively, plus, in each case of the foregoing (1) and (2), a margin, initially set at 5.50%2.50% per annum with respect to LIBOR loans and 4.50%1.50% per annum for base rate loans. Interest rate margins for the loans step down upon the achievement of consolidated leverage ratios. A commitment fee, of 0.50%initially set at 0.30% per annum, ranging from 0.15% to 0.30% per annum, is payable quarterly on the average undrawn portion of the Revolving Facility. The margins and commitment fee fluctuate based on our consolidated leverage ratio as specified in the SunTrust Credit Facility. Total issuance costs associated with the GoldmanSunTrust Credit Facility were $4,310,$1,700, which have been presented either as a direct deduction from the carrying amount of the debt within long-term debt and capitalfinance leases, net of current portion and debt issuance costs, with respect to costs attributable to the Term Loan, or within other assets, with respect to costs attributable to the Revolving Facility. The costs are being amortized as part of interest expense over the term of the GoldmanSunTrust Credit Facility. As of March 31, 2018,2019, we had $5,500$13,600 outstanding borrowings and $4,500$16,400 of availability under the Revolving Facility.
The GoldmanSunTrust Credit Facility contains a number of affirmative and negative covenants that use consolidated adjusted EBITDA (“Adjusted EBITDA”). Adjusted EBITDA is a non-U.S. GAAP financial measure that is calculated as net income (loss) before depreciation and amortization; interest expense, net; income taxes; change in fair value of warrant liability; non-cash stock-based compensation expense; non-recurring and acquisition-related costs; and loss (gain) loss on disposal and impairment of property and equipment and other assets, and other.
The primary operational covenants included in the GoldmanSunTrust Credit Facility are as follows: (i) a minimum consolidated fixed charge coverage ratio of 1.15:1.10:1.00 beginning with the fiscal quarter ended June 30, 2018 and (ii) a maximum totalconsolidated leverage ratio of 4.00:4.50:1.00 and (iii) a minimum consolidated liquidity of $3,500,beginning with the fiscal quarter ended June 30, 2018 with the financial ratios tested as of the last day of each fiscal quarter. The leverage ratio steps down to 4.25:1.00 with respect to each fiscal quarter ending after June 30, 2019 and the minimum liquidity required at all times. The required financial ratios step down furtheron or prior to lower levels in future periods as provided in the Goldman Credit Facility.June 30, 2020 and to 4.00:1.00 with respect to each fiscal quarter ending after June 30, 2020. At March 31, 2018,2019, we were in compliance with all operational covenants, including (i) a consolidated fixed charge coverage ratio of 1.32:1.12:1.00 and (ii) a totalconsolidated leverage ratio of 3.26:1.00 and (iii) consolidated liquidity greater than $3,500.3.80:1.00.
Junior Subordinated DebenturesFinance Leases
In connection with the Acquisition, we assumed $89,529As of Junior Subordinated Debentures (the “Subordinated Debentures”) issued to Glacier Water Trust I,March 31, 2019, our finance leases had a wholly owned subsidiaryweighted average remaining lease term of Primo following the Acquisition. Interest on the Subordinated Debentures accrues at an annual3.0 years and a weighted average discount rate of 9.0625% payable monthly in arrears. The Subordinated Debentures mature on January 31, 2028, but may be redeemed at our option at any time at 100%4.76%. Future finance lease obligations as of the principal amount plus any accrued but unpaid interest. The balance of the Subordinated Debentures was $88,341 at March 31, 2018 and $88,579 at December 31, 2017.2019 were as follows:
Finance Leases | ||||
Remainder of 2019 | $ | 1,664 | ||
2020 | 1,118 | |||
2021 | 718 | |||
2022 | 368 | |||
2023 | 128 | |||
Thereafter | 7 | |||
Total future lease obligations | 4,003 | |||
Less: imputed interest | (201 | ) | ||
Total finance lease liability | $ | 3,802 |
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On December 12, 2016, we issued warrants to purchase 2,000 shares of our common stock in connection with the Acquisition (the “Glacier Warrants”). The Glacier Warrants became exercisable as follows: 33% became exercisable on June 10, 2017, an additional 33% became exercisable on September 8, 2017 and the final 34% became exercisable on December 12, 2017. The Glacier Warrants are exercisable at an exercise price of $11.88 per share of Primo common stock and expire on December 12, 2021. The Glacier Warrants’ fair value at the date of issuance of $8,420 was initially recorded as a liability on our condensed consolidated balance sheets as part of consideration for the Acquisition. Prior to the Amendment (as defined below), subsequent changes in the estimated fair value of the Glacier Warrants were recorded in our consolidated statements of operations.
On March 13, 2017, we entered into Amendment No. 1 to the Glacier Warrant Agreement (the “Amendment”). The Amendment provides, among other things, that under no circumstances may a Glacier Warrant holder exercise any Glacier Warrants and receive a cash payment as a net cash settlement. Thus, effective March 13, 2017, the Glacier Warrants were no longer reported as a liability on the consolidated balance sheets with changes in the fair value of the warrant liability reported within the consolidated statements of operations. Instead, following the Amendment, the Glacier Warrants were reported as equity instruments on the consolidated statements of stockholders’ equity. The change in the estimated fair value of the warrant liability for the period of January 1, 2017 through March 13, 2017 resulted in non-cash expense of $3,220 as presented on the consolidated statements of operations for the period ended March 31, 2017.
The estimated fair value of these Warrants was determined using Level 3 inputs and assumptions within the Black- Scholes pricing model. The key assumptions used in the Black-Scholes model were as follows:
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The risk-free interest rate was based on the U.S. Treasury rate for the expected remaining life of common stock warrants. Our expected volatility was based on the average long-term historical volatilities of peer companies. The dividend yield assumption was based on our current intent not to issue dividends.
| Stock-Based Compensation |
Overview
Total non-cash stock-based compensation expense by award type for all of our plans, all of which is included in selling, general and administrative expenses on our condensed consolidated statements of operations, was as follows:
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Stock options | $ | 174 | $ | 154 | $ | 78 | $ | 174 | ||||||||
Restricted stock | 809 | 588 | 968 | 809 | ||||||||||||
Value Creation Plan | – | 1,482 | ||||||||||||||
Long-Term Performance Plan | 272 | 100 | 402 | 272 | ||||||||||||
Employee Stock Purchase Plan | 37 | 11 | 27 | 37 | ||||||||||||
$ | 1,292 | $ | 2,335 | $ | 1,475 | $ | 1,292 |
Value Creation Plan
On May 7, 2012, we established the Value Creation Plan (the “VCP”), which was subsequently amended on May 14, 2013 and amended and restated on March 3, 2016. The VCP provided awards comprised of cash or equity grants for eligible employees as determined by the Compensation Committee, based on the attainment of certain performance-based targets. The VCP provided for the issuance of up to three separate awards to eligible employees based on our attainment of financial targets of at least $15,000, $24,000 and $28,000 in Adjusted EBITDA for any fiscal year between 2014 and 2019. On December 22, 2016, the Compensation Committee of our Board of Directors approved the termination of the VCP, effective December 31, 2016, eliminating the third award related to the $28,000 Adjusted EBITDA target.
The award pool for the second issuance based on the achievement of the $24,000 Adjusted EBITDA target equaled 17.5% of the market capital appreciation of our stock from March 11, 2016 to March 20, 2017, the market close on the third full trading day after public announcement of financial results for 2016. On March 20, 2017, 1,370 shares were issued or deferred into the Primo Water Corporation Executive Deferred Compensation Plan (the “Deferred Compensation Plan”) as a result of the achievement of the $24,000 Adjusted EBITDA target. The deferral of certain shares did not alter the existing vesting conditions, number of awards vested or the form of the awards issued under the VCP. During the first quarter of 2017, we recorded an additional non-cash expense of $1,482 related to the VCP.
Long-Term Performance Plan
On February 28, 2017, we established the Long-Term Performance Plan (the “LTPP”). The LTPP provides equity grants for eligible employees based on the attainment of certain performance-based targets. Our intention is that all awards under the LTPP will be in the form of equity grants.
On March 20, 2017, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2017 through December 31, 2019 (the “March 2017 Grant”). The number of shares earnable under the March 2017 Grant awards vary based on achievement of the established financial targets of Adjusted EBITDA and free cash flow on a cumulative basis for fiscal years 2017 through 2019. Additionally, on
On March 9, 2018, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2018 through December 31, 2020 (the “March 2018 Grant”). The number of shares earnable under the March 2018 Grant awards vary based on achievement of the established financial targets of Adjusted EBITDA and free cash flow on a cumulative basis for fiscal years 2018 through 2020.
On March 8, 2019, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2019 through December 31, 2021 (the “March 2019 Grant”). The number of shares earnable under the March 2019 Grant awards vary based on achievement of the established financial targets of net sales and free cash flow on a cumulative basis for fiscal years 2019 through 2021.
Restricted Stock under the Plans
A summary of restricted stock activity is presented below:
Number of Shares | Weighted Average Grant Date Price Per Share | |||||||
Unvested at December 31, 2017 | 308 | $ | 12.11 | |||||
Granted | 2,081 | $ | 12.25 | |||||
Vested | (1,945 | ) | $ | 11.87 | ||||
Forfeited | (57 | ) | $ | 12.55 | ||||
Unvested at December 31, 2018 | 387 | $ | 12.34 | |||||
Granted | 753 | $ | 15.29 | |||||
Vested | (726 | ) | $ | 11.84 | ||||
Forfeited | (1 | ) | $ | 9.39 | ||||
Unvested at March 31, 2019 | 413 | $ | 13.85 |
| Special Items |
We have incurred expenses that either we do not believe to be indicative of our core operations, or we believe are significant to our current operating results warranting separate classification. As such, we have separately classified these expenses as special items. The components of special items are as follows:
Three months ended March 31, | ||||||||
2019 | 2018 | |||||||
Acquisition-related costs(1) | $ | 56 | $ | 75 | ||||
Other costs(2) | 205 | 2 | ||||||
Total | $ | 261 | $ | 77 |
(1) | Acquisition-related costs that represent transaction expenses associated with the acquisition of Glacier, including fees payable to financial, legal, accounting and other advisors. |
(2) | Non-recurring costs that represent various other expenses associated with restructuring and other costs which had not occurred in the two years prior to recording them and were not reasonably likely to occur within two years of such recording. |
8. | Commitments and Contingencies |
Omnifrio Single-Serve Beverage Business
We previously accrued deferred purchase price payments totaling $1,901 on the condensed consolidated balance sheets as of December 31, 2016 related to the April 11, 2011 acquisition of certain intellectual property and other assets from the seller, Omnifrio Beverage Company LLC (“Omnifrio”). On March 31, 2017, we entered into a settlement and release agreement with Omnifrio in which we agreed to a cash payment of $710 to Omnifrio and to transfer all intellectual property and other assets purchased from Omnifrio in April 2011 back to Omnifrio. The settlement resulted in a gain of $1,191, reported within non-recurring and acquisition-related costs on the condensed consolidated statement of operations for the three months ended March 31, 2017.
Texas Regional Operator Litigation/Arbitration
On August 8, 2014, a lawsuit was commenced against us by our regional operators Artesia Springs, LLC, HOD Enterprises, L.P., and BBB Water, Inc. (the “ROs”) in the State of Texas. DS Services of America, Inc. was also named as a defendant in the lawsuit. The claims alleged against us in the lawsuit were breach of contract, conspiracy and fraud, and the ROs sought unspecified monetary damages as well as injunctive relief. On April 10, 2015, the ROs initiated an arbitration proceeding with the American Arbitration Association (the “AAA”). We resolved the claims asserted by BBB Water, Inc. as of December 31, 2015, and BBB Water, Inc. was no longer a party to the arbitration proceedings.
We entered into a settlement and mutual release agreement with Artesia Springs, LLC and HOD Enterprises, L.P. on April 5, 2017, pursuant to which we agreed to make payments including interest in each of April, July and September 2017 totaling $3,783. The settlement resulted in other expense of $3,701, reported within non-recurring and acquisition-related costs on the condensed consolidated statement of operations for the three months ended March 31, 2017.
Sales Tax
We routinely purchase equipment for use in operations from various vendors. These purchases are subject to sales tax depending on the equipment type and local sales tax regulations; however, we believe certain vendors have not assessed the appropriate sales tax. For purchases that are subject to sales tax in which we believe the vendor did not assess the appropriate amount, we accrue an estimate of the sales tax liability we ultimately expect to pay.
Other Contingencies
From time to time, we are involved in various claims and legal actions that arise in the normal course of business. Management believes that the outcome of such claims and legal actions will not have a significant adverse effect on our financial position, results of operations or cash flows.
| Income Tax (Benefit) |
On December 22, 2017,For the Tax Cuts and Jobs Act (the “2017 Tax Act”)three months ended March 31, 2019 there was signed into law and made broad and complex changes to the U.S. tax code. The 2017 Tax Act reduced the U.S. federal corporate$0 income tax rate from 35% to 21%.expense recognized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The 2017 Tax Act also established newultimate realization of deferred tax laws that went into effectassets is dependent upon the generation of future taxable income during the periods in 2018. ASC 740 requires a company to recordwhich those temporary differences become deductible. Management considers the effectsscheduled reversal of adeferred tax law changeliabilities, available taxes in the periodcarryback periods, projected future taxable income and tax planning strategies in making this assessment. Accordingly, we have provided a full valuation allowance to offset the net deferred tax assets that are not expected to be realized as of enactment, however, shortly after the enactment of the 2017 Tax Act, the SEC staff issued SAB 118, which allows a company to record a provisional amount when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in the tax law. The measurement period ends when the company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.March 31, 2019.
Although we have incurred operating losses since inception, inFor the three months ended March 31, 2018, we recorded an income tax benefit of $1,725 primarily due to the newly established tax laws resulting from the 2017 Tax Act changes that went into effect on January 1, 2018.Cuts and Jobs Act. We recorded an income tax benefit of $2,074 related to the federal net operating loss, which can be carried forward indefinitely as a result of the 2017 Tax Act. This benefit was partially offset by income tax expense of $349 related to goodwill and certain intangible assets. We are continuing to gather additional information related to estimates surrounding the remeasurement of deferred taxes to more precisely compute the remeasurement of deferred taxes and the impact of the transition tax. For the three months ended March 31, 2017, there was $186 income tax expense recognized related to goodwill and intangibles.
Section 382 of the U.S. Internal Revenue Code imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We believe our prior ownership changes have created an annual limit, imposed by Section 382, on the amount of net operating loss we can utilize in a given year. Realization of the loss carryforwards is dependent upon generating sufficient taxable income prior to the expiration of the loss carryforwards, subject to the Section 382 limitation.
We have no unrecognized tax benefits and there are no uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will increase within the next 12 months. Substantially all tax years remain open by federal, state and foreign tax jurisdictions.
| Fair Value Measurements |
Fair value rules currently apply to all financial assets and liabilities and for certain nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value. For this purpose, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1 — quoted prices in active markets for identical assets and liabilities.
Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.
At March 31, 20182019 and December 31, 2017,2018, we held financial assets and liabilities that are required to be measured at fair value on a recurring basis. The financial assets and liabilities held by the Companyus and the fair value hierarchy used to determine their fair values are as follows:
March 31, 2018 | March 31, 2019 | |||||||||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Investment in Glacier securities | $ | 3,895 | $ | – | $ | 3,895 | $ | – | ||||||||||||||||||||||||
Assets held-for-sale at fair value | $ | 5,288 | $ | – | $ | – | $ | 5,288 | ||||||||||||||||||||||||
Total assets | $ | 3,895 | $ | – | $ | 3,895 | $ | – | $ | 5,288 | $ | – | $ | – | $ | 5,288 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Contingent consideration | $ | 1,460 | $ | – | $ | – | $ | 1,460 | ||||||||||||||||||||||||
Liabilities held-for-sale at fair value | $ | 1,438 | $ | – | $ | – | $ | 1,438 | ||||||||||||||||||||||||
Total liabilities | $ | 1,460 | $ | – | $ | – | $ | 1,460 | $ | 1,438 | $ | – | $ | – | $ | 1,438 |
December 31, 2017 | December 31, 2018 | |||||||||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Investment in Glacier securities | $ | 3,881 | $ | – | $ | 3,881 | $ | – | ||||||||||||||||||||||||
Assets held-for-sale at fair value | $ | 5,288 | $ | – | $ | – | $ | 5,288 | ||||||||||||||||||||||||
Total assets | $ | 3,881 | $ | – | $ | 3,881 | $ | – | $ | 5,288 | $ | – | $ | – | $ | 5,288 | ||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||||||||
Contingent consideration | $ | 1,464 | $ | – | $ | – | $ | 1,464 | ||||||||||||||||||||||||
Liabilities held-for-sale at fair value | $ | 1,438 | $ | – | $ | – | $ | 1,438 | ||||||||||||||||||||||||
Total liabilities | $ | 1,464 | $ | – | $ | – | $ | 1,464 | $ | 1,438 | $ | – | $ | – | $ | 1,438 |
The carrying amounts of cash and cash equivalents, accounts receivable, net, operating lease right-of-use assets and corresponding operating lease liabilities, accounts payable, and accrued expenses and other current liabilities, approximate their fair values due to their short maturities. Other long-term liabilities on our condensed consolidated balance sheets are presented at their carrying value, which approximates their fair value. Based on borrowing rates currently available to us for loans with similar terms and the variable interest rate for borrowings under our GoldmanSunTrust Credit Facility, and the fact that the Junior Subordinated Debentures were recorded at fair value at the time of the Acquisition, the carrying value of debt and capitalfinance leases approximates fair value. There have been no changes in the recurring fair value measurements of assets or liabilities from December 31, 2018 to March 31, 2019.
The following table provides a rollforward of the Company’s Level 3There were no material nonrecurring fair value measurement:measurements recorded in the three months ended March 31, 2019 and 2018, respectively.
Contingent Consideration | ||||
Balance at December 31, 2017 | $ | 1,464 | ||
Change in fair value | (4 | ) | ||
Balance at March 31, 2018 | $ | 1,460 |
| Earnings Per Share |
The following table sets forth the calculations of basic and diluted earnings per share:
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Basic: | ||||||||||||||||
Net income (loss) | $ | 1,210 | $ | (11,862 | ) | |||||||||||
Net (loss) income | $ | (1,272 | ) | $ | 1,210 | |||||||||||
Weighted average shares | 33,164 | 32,364 | 40,296 | 33,164 | ||||||||||||
Basic earnings (loss) per share | $ | 0.04 | $ | (0.37 | ) | |||||||||||
Basic (loss) earnings per share | $ | (0.03 | ) | $ | 0.04 | |||||||||||
Diluted: | ||||||||||||||||
Net income (loss) | $ | 1,210 | $ | (11,862 | ) | |||||||||||
Net (loss) income | $ | (1,272 | ) | $ | 1,210 | |||||||||||
Weighted average shares | 33,164 | 32,364 | 40,296 | 33,164 | ||||||||||||
Potential shares arising from stock options, restricted stock and warrants | 1,260 | – | – | 1,260 | ||||||||||||
Weighted average shares - diluted | 34,424 | 32,364 | 40,296 | 34,424 | ||||||||||||
Diluted earnings (loss) per share | $ | 0.04 | $ | (0.37 | ) | |||||||||||
Diluted (loss) earnings per share | $ | (0.03 | ) | $ | 0.04 |
For the three months ended March 31, 2019, stock options, restricted stock and warrants with respect to an aggregate of 2,232 shares have been excluded from the computation of the number of shares used in the diluted loss per share because we incurred a net loss for the period and their inclusion would be anti-dilutive.
For the three months ended March 31, 2018, stock options, restricted stock and warrants with respect to an aggregate of 386 shares have been excluded from the computation of the number of shares used in the diluted earnings per share because the exercise or grant prices of the awards were greater than the average market price of the underlying common stock and the effect of their inclusion would have been anti-dilutive.
For the three months ended March 31, 2017, stock options, warrants and unvested shares of restricted stock with respect to an aggregate of 4,682 shares were excluded from the computation of the number of shares used in the diluted loss per share. These shares have been excluded because we incurred a net loss for the period and their inclusion would be anti-dilutive.
| Segments |
Effective May 31, 2017, Billy D. Prim transitioned from his position as Chief Executive Officer to the Executive Chairman of the Board of Directors. At that time, Matthew T. Sheehan, President and Chief Operating Officer, assumed the role of Chief Executive Officer. Prior to this change, we had two reportable segments, Primo Water and Primo Dispensers (“Dispensers”). Following this change, we determined that weWe have three operating and reportable segments, Primo Refill (“Refill)Refill”), Primo Exchange (“Exchange”), and Dispensers. These segments are reflective of how the Company’s Chief Operating Decision Maker reviews operating results for the purposes of allocating resources and assessing performance. Prior periods have been recast to reflect the change in reportable segments.Primo Dispensers (“Dispensers”).
Our Refill segment sales consistsconsist of the sale of filtered drinking water dispensed directly to consumers through technologically advanced, self-service machines located at major retailers throughout the United States and Canada.
Our Exchange segment sales consist of the sale of multi-gallon purified bottled water offered through retailers in the United States and Canada. Our Exchange products are offered through point of purchase display racks and recycling centers that are prominently located at major retailers in space that is often underutilized.
Our Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Dispensers sales are primarily generated through major retailers in the United States and Canada, where we recognize revenues for the sale of the water dispensers when the customer obtains control. We support retail sell-through with domestic inventory.
We evaluate the financial results of these segments focusing primarily on segment net sales and segment (loss) income (loss) from operations before depreciation and amortization (“segment (loss) income (loss) from operations”). We utilize segment net sales and segment (loss) income (loss) from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.
Cost of sales for Refill consists primarily of costs associated with routine maintenance of reverse osmosis water filtration systems and filtered water displays, costs of our Company field service operations and commissions paid to retailers associated with revenues earned. Cost of sales for Exchange consists primarily of costs for bottling, distribution and bottles. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.
Selling, general and administrative expenses for Refill, Exchange, and Dispensers consist primarily of personnel costs for operations support as well as other supporting costs for operating each segment.
Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.
The following table presents segment information for the following periods:
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Segment net sales: | ||||||||||||||||
Refill | $ | 41,475 | $ | 36,365 | $ | 38,326 | $ | 41,475 | ||||||||
Exchange | 18,258 | 16,745 | 19,352 | 18,258 | ||||||||||||
Dispensers | 13,926 | 7,627 | 12,369 | 13,926 | ||||||||||||
$ | 73,659 | $ | 60,737 | $ | 70,047 | $ | 73,659 | |||||||||
Segment income (loss) from operations: | ||||||||||||||||
Segment income from operations: | ||||||||||||||||
Refill | $ | 11,584 | $ | 8,708 | $ | 10,084 | $ | 11,584 | ||||||||
Exchange | 5,263 | 5,152 | 5,468 | 5,263 | ||||||||||||
Dispensers | 1,144 | 580 | 584 | 1,144 | ||||||||||||
Corporate | (6,953 | ) | (7,061 | ) | (7,941 | ) | (6,953 | ) | ||||||||
Non-recurring and acquisition-related costs | (77 | ) | (4,448 | ) | ||||||||||||
Special items | (261 | ) | (77 | ) | ||||||||||||
Depreciation and amortization | (6,057 | ) | (6,391 | ) | (6,550 | ) | (6,057 | ) | ||||||||
(Loss) gain on disposal and impairment of property and equipment | (133 | ) | 6 | |||||||||||||
Impairment charges and other | (75 | ) | (133 | ) | ||||||||||||
$ | 1,309 | $ | 4,771 | |||||||||||||
$ | 4,771 | $ | (3,454 | ) | ||||||||||||
Depreciation and amortization expense: | ||||||||||||||||
Refill | $ | 4,174 | $ | 5,012 | $ | 4,283 | $ | 4,174 | ||||||||
Exchange | 1,682 | 1,204 | 1,982 | 1,682 | ||||||||||||
Dispensers | 52 | 46 | 50 | 52 | ||||||||||||
Corporate | 149 | 129 | 235 | 149 | ||||||||||||
$ | 6,057 | $ | 6,391 | $ | 6,550 | $ | 6,057 | |||||||||
Capital expenditures: | ||||||||||||||||
Refill | $ | 2,569 | $ | 3,190 | $ | 4,889 | $ | 2,569 | ||||||||
Exchange | 1,026 | 1,367 | 2,335 | 1,026 | ||||||||||||
Dispensers | – | 57 | 100 | – | ||||||||||||
Corporate | 170 | 508 | 360 | 170 | ||||||||||||
$ | 3,765 | $ | 5,122 | $ | 7,684 | $ | 3,765 |
March 31, 2019 | December 31, 2018 | |||||||||||||||
March 31, 2018 | December 31, 2017 | |||||||||||||||
Identifiable assets: | ||||||||||||||||
Refill | $ | 341,643 | $ | 343,513 | $ | 270,015 | $ | 268,427 | ||||||||
Exchange | 23,067 | 23,296 | 26,897 | 24,444 | ||||||||||||
Dispensers | 16,016 | 12,486 | 26,771 | 20,523 | ||||||||||||
Corporate | 6,874 | 4,458 | 7,194 | 6,734 | ||||||||||||
$ | 387,600 | $ | 383,753 | $ | 330,877 | $ | 320,128 |
As of March 31, 20182019 and December 31, 2017,2018, we had goodwill of $92,789$91,917 and $92,934,$91,814, respectively, as a result of the Acquisition.our acquisition of Glacier Water Services, Inc. in December 2016 (the “Glacier Acquisition”). All goodwill is reported within our Refill segment.
ItemItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes thereto in this Quarterly Report on Form 10-Q and with our AnnualAnnual Report on Form 10-K for the year ended December 31, 2017.2018. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and SectionSection 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “believe,“anticipates,” “expect,“believes,” “could,” “estimates,” “expects,” “feel,” “forecasts,” “intends,” “may,” “will,“plan,” “potential,” “predict,” “project,” “seek,” “should,” “could,“will,” “seek,“would,” “intend,” “plan,” “estimate,” “anticipate” or other comparable terms.terms. These forward-looking statements are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary Note Regarding Forward-Looking Statements” in this Item 2 and in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2017. 2018. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Overview
Primo Water Corporation (together with its consolidated subsidiaries, “Primo,” “we,” “our,” or “us,” or “the Company”“us”) is North America’s leading single source provider of multi-gallon purified bottled water, self-service refill drinking water and water dispensers sold through major retailers in the United States and Canada. We believe the market for purified water continues to grow due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified and filtered water. We are a Delaware corporation that was incorporated in 2017 in connection with the creation of a holding company structure. Our predecessor was founded in Delaware in 2004.
On December 12, 2016, we completed the acquisition by merger (the “Acquisition”) of Glacier Water Services, Inc. (“Glacier”), the leading provider of high-quality filtered drinking water dispensed to consumers through self-service water machines located at over 20,000 locations, including supermarkets and other retail locations. The Acquisition was consummated pursuant to the terms of the Agreement and Plan of Merger, dated October 9, 2016. Aggregate consideration was approximately $200.2 million consisting of cash, Primo common stock and warrants, plus the assumption of approximately $78.8 million of debt, net of cash. The Acquisition diversified our retailer concentration and offered cross-selling opportunities, while creating operational and shared service synergies. We financed the transaction through a combination of cash-on-hand and borrowings under the $196.0 million Credit Agreement with Goldman Sachs Bank USA (the “Goldman Credit Facility”).Business
Our business is designed to generate recurring demand for our purified bottled water or self-service filteredrefill drinking water through the sale of innovative water dispensers. 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. Once our bottled water is consumed using a water dispenser, empty bottles are exchanged at our recycling center displays, which provide a recycling ticket that offers a discount toward the purchase of a new bottle of Primo purified water or they are refilled at a self-service filteredrefill drinking water location. Each of our multi-gallon Exchange water bottles can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of equivalent volumes of single-serve bottled water. As of March 31, 2018,2019, our products were offered in the United States and in Canada at overapproximately 45,000 combined retail locations, including Lowe’s Home Improvement, Walmart, Sam’s Club, The Home Depot, Meijer, Kroger, Food Lion, H-E-B Grocery, Sobeys, Circle K, Family Dollar, Walgreens, Albertsons, Publix, and CVS. We believe the market for purified water continues to grow due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified and filteredrefill drinking water.
We provide major retailers throughout the United States and Canada with a single-vendor solution for our three reporting segments, Primo Refill (“Refill”), Primo Exchange (“Exchange”), and Primo Dispensers (“Dispensers”), addressing a market demand that we believe was previously unmet. Our overapproximately 45,000 locations include approximately 25,10024,300 Refill locations, 13,40013,200 Exchange locations and 7,4007,200 Dispenser locations. Our solutions are easy for retailers to implement, require minimal management supervision and store-based labor, and provide centralized billing and detailed performance reports. Exchange offers retailers attractive financial margins and the ability to optimize typically unused retail space with our displays. Refill provides filtereddrinking water for consumer purchase through the installation of self-service vending displays at retail locations. The Refill business model eliminates the bottling and distribution infrastructure required to deliver traditional bottled water, thereby allowing us to provide filteredrefill drinking water at a value price.price as compared to alternatives in the marketplace. Additionally, due to the recurring nature of water consumption, retailers benefit from year-round customer traffic, and highly predictable revenue.revenue and health and wellness focused consumers.
Business Segments
Effective May 31, 2017, Billy D. Prim transitioned from his position as Chief Executive Officer to the Executive Chairman of the Board of Directors. At that time, Matthew T. Sheehan, President and Chief Operating Officer, assumed the role of Chief Executive Officer. Prior to this change, we had two reportable segments, Primo Water and Dispensers. Following this change, we determined that we nowWe have three operating and reportable segments, Refill, Exchange, and Dispensers. These segments are reflective of how the Company’s Chief Operating Decision Maker reviews operating results for the purposes of allocating resources and assessing performance. Prior periods have been recast to reflect the change in reportable segments.
Our Refill segment sales consistsconsist of the sale of filtered drinking water dispensed directly to consumers through technologically advanced, self-service machines located at major retailers throughout the United States and Canada.
Our Exchange segment sales consist of the sale of multi-gallon purified bottled water offered through retailers in the United States and Canada. Our Exchange products are offered through point of purchase display racks and recycling centers that are prominently located at major retailers in space that is often underutilized.
Our Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Dispensers sales are primarily generated through major retailers in the United States and Canada, where we recognize revenues for the sale of the water dispensers when the customer obtains control. We support retail sell-through with domestic inventory.
We evaluate the financial results of these segments focusing primarily on segment net sales and segment (loss) income (loss) from operations before depreciation and amortization (“segment (loss) income (loss) from operations”). We utilize segment net sales and segment (loss) income (loss) from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.
Cost of sales for Refill consists primarily of costs associated with routine maintenance of reverse osmosis water filtration systems and filtered water displays, costs of our Company field service operations and commissions paid to retailers associated with revenues earned. Cost of sales for Exchange consists primarily of costs for bottling, distribution and bottles. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.
Selling, general and administrative expenses for Refill, Exchange, and Dispensers consist primarily of personnel costs for operations support as well as other supporting costs for operating each segment.
Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, when we refer to “same-store unit growth”, we are comparing retail locations at which our products have been available for at least 12 months at the beginning of the relevant period. In addition, “gross margin percentage” is defined as net sales less cost of sales, as a percentage of net sales.
Results of Operations
The following table sets forth our results of operations (dollars in thousands):
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Consolidated statements of operations data: | ||||||||||||||||
Net sales | $ | 73,659 | $ | 60,737 | $ | 70,047 | $ | 73,659 | ||||||||
Operating costs and expenses: | ||||||||||||||||
Cost of sales | 53,421 | 42,814 | 51,522 | 53,421 | ||||||||||||
Selling, general and administrative expenses | 9,200 | 10,544 | 10,330 | 9,200 | ||||||||||||
Non-recurring and acquisition-related costs | 77 | 4,448 | ||||||||||||||
Special items | 261 | 77 | ||||||||||||||
Depreciation and amortization | 6,057 | 6,391 | 6,550 | 6,057 | ||||||||||||
Loss (gain) on disposal and impairment of property and equipment | 133 | (6 | ) | |||||||||||||
Impairment charges and other | 75 | 132 | ||||||||||||||
Total operating costs and expenses | 68,888 | 64,191 | 68,738 | 68,888 | ||||||||||||
Income (loss) from operations | 4,771 | (3,454 | ) | |||||||||||||
Income from operations | 1,309 | 4,771 | ||||||||||||||
Interest expense, net | 5,286 | 5,002 | 2,581 | 5,286 | ||||||||||||
Change in fair value of warrant liability | – | 3,220 | ||||||||||||||
Loss before income taxes | (515 | ) | (11,676 | ) | (1,272 | ) | (515 | ) | ||||||||
Income tax (benefit) provision | (1,725 | ) | 186 | |||||||||||||
Net income (loss) | $ | 1,210 | $ | (11,862 | ) | |||||||||||
Income tax benefit | – | (1,725 | ) | |||||||||||||
Net (loss) income | $ | (1,272 | ) | $ | 1,210 |
The following table sets forth our results of operations expressed as a percentage of net sales:sales (percentage amounts may not add to totals due to rounding):
Three months ended March 31, | Three months ended March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Consolidated statements of operations data: | ||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Operating costs and expenses: | ||||||||||||||||
Cost of sales | 72.5 | 70.5 | 73.6 | 72.5 | ||||||||||||
Selling, general and administrative expenses | 12.5 | 17.4 | 14.7 | 12.5 | ||||||||||||
Non-recurring and acquisition-related costs | 0.1 | 7.3 | ||||||||||||||
Special items | 0.4 | 0.1 | ||||||||||||||
Depreciation and amortization | 8.2 | 10.5 | 9.4 | 8.2 | ||||||||||||
Loss (gain) on disposal and impairment of property and equipment | 0.2 | – | ||||||||||||||
Impairment charges and other | 0.1 | 0.2 | ||||||||||||||
Total operating costs and expenses | 93.5 | 105.7 | 98.2 | 93.5 | ||||||||||||
Income (loss) from operations | 6.5 | (5.7 | ) | |||||||||||||
Income from operations | 1.9 | 6.5 | ||||||||||||||
Interest expense, net | 7.2 | 8.2 | 3.7 | 7.2 | ||||||||||||
Change in fair value of warrant liability | – | 5.3 | ||||||||||||||
Loss before income taxes | (0.7 | ) | (19.2 | ) | (1.8 | ) | (0.7 | ) | ||||||||
Income tax (benefit) provision | (2.3 | ) | 0.3 | |||||||||||||
Net income (loss) | 1.6 | % | (19.5 | )% | ||||||||||||
Income tax benefit | – | (2.3 | ) | |||||||||||||
Net (loss) income | (1.8 | )% | 1.6 | % |
The following table setstables set forth our segment net sales in dollars and as a percent of net sales, and segment (loss) income (loss) from operations presented on a segment basis and reconciled to our consolidated income from operations, and segment gross margin percentages (dollars in thousands) (percentage amounts may not add to totals due to rounding):
Three months ended March 31, | Three months ended March 31, | |||||||||||||||||||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||||||||||||||||||
Percent | Percent | Percent | Percent | |||||||||||||||||||||||||||||
Dollars | of Net Sales | Dollars | of Net Sales | Dollars | of Net Sales | Dollars | of Net Sales | |||||||||||||||||||||||||
Segment net sales | ||||||||||||||||||||||||||||||||
Segment net sales: | ||||||||||||||||||||||||||||||||
Refill | $ | 41,475 | 56.3 | % | $ | 36,365 | 59.9 | % | $ | 38,326 | 54.7 | % | $ | 41,475 | 56.3 | % | ||||||||||||||||
Exchange | 18,258 | 24.8 | % | 16,745 | 27.6 | % | 19,352 | 27.6 | % | 18,258 | 24.8 | % | ||||||||||||||||||||
Dispensers | 13,926 | 18.9 | % | 7,627 | 12.6 | % | 12,369 | 17.7 | % | 13,926 | 18.9 | % | ||||||||||||||||||||
Total net sales | $ | 73,659 | 100.0 | % | $ | 60,737 | 100.0 | % | $ | 70,047 | 100.0 | % | $ | 73,659 | 100.0 | % | ||||||||||||||||
Segment income (loss) from operations | ||||||||||||||||||||||||||||||||
Segment income from operations: | ||||||||||||||||||||||||||||||||
Refill | $ | 11,584 | $ | 8,708 | $ | 10,084 | $ | 11,584 | ||||||||||||||||||||||||
Exchange | 5,263 | 5,152 | 5,468 | 5,263 | ||||||||||||||||||||||||||||
Dispensers | 1,144 | 580 | 584 | 1,144 | ||||||||||||||||||||||||||||
Corporate | (6,953 | ) | (7,061 | ) | (7,941 | ) | (6,953 | ) | ||||||||||||||||||||||||
Non-recurring and acquisition-related costs | (77 | ) | (4,448 | ) | ||||||||||||||||||||||||||||
Special items | (261 | ) | (77 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization | (6,057 | ) | (6,391 | ) | (6,550 | ) | (6,057 | ) | ||||||||||||||||||||||||
(Loss) Gain on disposal and impairment of property and equipment | (133 | ) | 6 | |||||||||||||||||||||||||||||
Impairment charges and other | (75 | ) | (133 | ) | ||||||||||||||||||||||||||||
$ | 4,771 | $ | (3,454 | ) | $ | 1,309 | $ | 4,771 |
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Segment gross margin: | ||||||||
Refill | 30.1 | % | 31.6 | % | ||||
Exchange | 30.8 | % | 31.3 | % | ||||
Dispensers | 8.4 | % | 10.2 | % | ||||
Total gross margin | 26.4 | % | 27.5 | % |
Three Months EndedMarch 31, 2019Compared to Three Months EndedMarch 31, 2018 Compared to Three Months Ended March 31, 2017
Net Salessales. Net sales increased 21.3%decreased 4.9%, or $12.9$3.6 million, to $73.7$70.0 million for the three months ended March 31, 20182019 from $60.7 million for the three months ended March 31, 2017. The change was due to increases in sales for Refill, Exchange, and Dispensers of $5.1 million, $1.5 million and $6.3 million, respectively.
Refill. Refill net sales increased 14.1% to $41.5$73.7 million for the three months ended March 31, 2018. The change was due to decreases in sales for Refill and Dispensers of $3.1 million and $1.6 million, respectively, partially offset by the $1.1 million increase for Exchange.
Refill. Refill net sales decreased 7.6% to $38.3 million for the three months ended March 31, 2019. The decrease in Refill net sales was primarily due to a 14.8% decline in five-gallon equivalent units to 20.4 million attributable in part to fewer locations, partially offset by the Glacierimplementation of price increases. The decline in Refill integration, in which the Primo locations with a retailer were moved under the Glacier contract in April 2017. Under the Glacier contract terms, revenue is recognized as the gross amount charged to the end consumers. In the first quarter of 2017, revenue from this retailer was reported as the revenue net of the commission amount paid to the retailer. This resulted in an increase in revenue recognized of $4.1 million in the Refill segment for the three months ended March 31, 2018. This is not expected to have a material impact on future quarters in 2018, when compared to 2017. The remaining increase in net sales was duepartially attributable to unit growth as five-gallon equivalent units increased 1.4%issues identified in 2018 related to 23.5 million in the three months ended March 31, 2018 compareddowntime of certain Refill machines and the speed at which those out-of-service machines were identified. Among other factors, these downtime issues may have prevented sales to 23.2 million incurrent or prospective Refill customers, and may have impaired relationships with existing customers or prevented us from establishing relationships with new customers, and the prior year quarter, and to a lesser extent, price increases were implemented near the endeffects of the first quarterpreviously identified downtime issues may continue through the foreseeable future. We continue to drive implementation of 2018a number of changes to our Refill business arising from the identification and correction of these issues, and we believe that these changes will help drive incremental, sustainable and long-term growth in certain coin-operated machines.our Refill business.
Exchange. Exchange net sales increased 9.0%6.0% to $18.3$19.4 million for the three months ended March 31, 2018. The2019. Exchange sales weregrowth was driven by the increase in U.S. same-store unit growthunits of approximately 9.5%13.6% for the three months ended March 31, 2018.2019. In addition, five-gallon equivalent units for Exchange increased 8.9%10.2% to 4.1 million units for the three months ended March 31, 2019 from 3.7 million units for the same period in 2018. The increase in sales units was greater than the increase in sales dollars, primarily due to the impact of consumer-focused promotional efforts including the instantly redeemable coupons for free water with the purchase of a dispenser.
Dispensers. Dispensers net sales decreased 11.2% to $12.4 million for the three months ended March 31, 2018 compared2019 due primarily to 3.4 million in the same period of the prior year.
Dispensers. Dispensers net sales increased 82.6% to $13.9 million for the three months ended March 31, 2018. The increase in Dispensers net sales was primarily due to increased consumer demand and the timing of orders byfrom major retail customersretailers compared to the same period in the prior year. Consumer demand, which we measure as the dispenser unit sales to end consumers, increased approximately 29.0% to a record 185,000 unitswas virtually unchanged for the three months ended March 31, 2018 from 143,000 units in the prior year quarter.2019 at 185,000 units.
Gross Margin Percentage.margin percentage. The overall gross margin percentage was 26.4% for the three months ended March 31, 2019, compared to 27.5% for the three months ended March 31, 2018 compared to 29.5% for the same period of the prior year primarily due to an increase in lower margin dispenser sales.2018.
Refill. Gross margin as a percentage of net sales for our Refill segment was 30.1% for the three months ended March 31, 2019 compared to 31.6% for the three months ended March 31, 2018 compared2018. While certain operational initiatives have driven a reduction in cost of sales, the magnitude of the decrease in net sales for Refill described above drove a lower gross margin percentage due to 31.5% for the three months ended March 31, 2017.fixed nature of certain costs in our Refill segment.
Exchange. Gross margin as a percentage of net sales for our Exchange segment was 30.8% for the three months ended March 31, 2019, compared to 31.3% for the three months ended March 31, 2018 compared to 33.4% for the three months ended March 31, 2017.2018. The changedecrease was primarily due to changes in product and customer mix.costs associated with certain promotional efforts.
Dispensers. Gross margin as a percentage of net sales for our Dispensers segment decreased to 8.4% for the three months ended March 31, 2019 from 10.2% for the three months ended March 31, 2018 from 11.5% for the three months ended March 31, 2017.2018. The decrease in gross margin percentage was primarily due to the changean increase in product andpromotional activities as well as a shift in customer mix.
Selling, Generalgeneral and Administrative Expensesadministrative expenses (“SG&A”). SG&A decreased 12.7%increased 12.3% to $10.3 million for the three months ended March 31, 2019 from $9.2 million for the three months ended March 31, 2018 from $10.52018. The increase in SG&A expense was driven primarily by the increase in costs associated with marketing, advertising and consumer experience-related initiatives. In addition, we continue to develop and implement new marketing and brand activation strategies in order to increase awareness of the healthy and environmentally-friendly aspects of our products and the risks associated with consumption of tap water, and to drive increased sales and customer loyalty. While we expect these strategies to drive increased net sales and market penetration in the long-term, the near-term incremental costs associated with such strategies may adversely impact our expenses.
Special items. Special items were $0.3 million for the three months ended March 31, 2017. As a percentage of net sales, SG&A decreased2019 compared to 12.5% for the three months ended March 31, 2018 from 17.4% for the three months ended March 31, 2017. The decrease in SG&A expense was primarily due to the $1.2 million reduction in employee-related expenses attributable to synergies realized since the Acquisition, and a $1.0 million decrease in non-cash stock-based compensation expense (see “Note 5 - Stock-Based Compensation” in the Notes to the Condensed Consolidated Financial Statements). These decreases were partially offset by an increase in marketing costs of $0.7 million.
Non-recurring and acquisition-related costs. Non-recurring and acquisition-related costs were $0.1 million for the three months ended March 31, 2018 compared2018.
Depreciation and amortization. Depreciation and amortization increased 8.1% to $4.4$6.6 million for the same period in 2017. Non-recurring and acquisition-related costs for the three months ended March 31, 2017 include approximately $3.8 million related to settlement payments and legal expenses associated with former Texas Regional Distributors and Prism Distribution and costs associated with the Acquisition totaling $1.8 million. These costs were partially offset by a settlement reached with Omnifrio in March 2017 resulting in a $1.2 million gain (see “Note 6 – Commitments and Contingencies” in the Notes to Condensed Consolidated Financial Statements).
Depreciation and Amortization. Depreciation and amortization decreased to2019 from $6.1 million for the three months ended March 31, 2018 from $6.42018.
Impairment Charges and Other. Impairment charges and other remained flat at $0.1 million for the three months ended March 31, 2017 as certain assets became fully depreciated during2019 and 2018, respectively. Impairment charges and other for the prior year.three months ended March 31, 2019 and 2018 were primarily related to losses on disposal of property and equipment.
Interest Expense,expense, net. Interest expense, increasednet decreased to $2.6 million for the three months ended March 31, 2019 from $5.3 million for the three months ended March 31, 2018. The decrease was due primarily to the June 2018 from $5.0 millionrefinancing of our outstanding senior indebtedness which resulted in lower interest rates and lower outstanding indebtedness. See “Note 5 – Debt and Finance Leases, net of Debt Issuance Costs” in the Notes to the Condensed Consolidated Financial Statements.
Income Tax Benefit. We recorded no income tax benefit for the three months ended March 31, 2017. The increase was primarily due to an increase in the London Interbank Offered Rate (“LIBOR”) component of the interest rate related to the Term Loan and an increase in borrowings under the Revolving Facility during the three months ended March 31, 20182019 compared to the three months ended March 31, 2017.
Income Tax (Benefit) Provision. We recorded an income taxa benefit of $1.7 million for the three months ended March 31, 2018 compared to a provision of $0.2 million2018. The benefit recorded for the three months ended March 31, 2017. On December 22, 2017,2018 was primarily due to the Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law. The 2017 Tax Act makes broad and complex changes to the United States tax code that affected our income tax provision in 2018. For the three months ended March 31, 2018, we recorded a tax benefit of $1.7 million primarily due to the 2017 Tax Act changes that went into effect on January 1, 2018 related to the federal net operating loss,losses, which can be carried forward indefinitely. In the three months ended March 31, 2017, we recorded income tax expense of $0.2 million related to goodwill and certain intangible assets.
Liquidity and Capital Resources
Adequacy of Capital Resources
Since our inception, we have financed our operations primarily through the sale of stock, the issuance of debt, borrowings under credit facilities and cash provided by operations. We had capital expenditures of $3.8$7.7 million for the three months ended March 31, 20182019 and we anticipate net capital expenditures to range between $14.0$15.0 million and $18.0$20.0 million for the remainder of 2018.2019. Anticipated capital expenditures are related primarily to growth and maintenance in Refill and Exchange locations. We anticipate using cash on hand and availability under the Goldman Credit Facility to meet these capital commitments.
At March 31, 2018,2019, our cash and cash equivalents totaled $5.3$4.2 million and we had $4.5$16.4 million in availability under our revolving credit facility.Revolving Facility. We anticipate that ourusing current cash, availability under our revolving credit facility and cash flow from operations will be sufficientand availability under our Revolving Facility to meet our current needs for working capital and capital expenditures in the ordinary course of business for the foreseeable future. Given our increased indebtedness incurred under the Goldman Credit Facility in connection with the Acquisition, ifIf we do require additional debt financing, such debt financing may not be available to us on terms favorable to us, if at all.
Our future capital requirements may vary materially from those now anticipated and will depend on many factors including: the number of growth initiatives, including our marketing and brand activation strategies and changes implemented in our Refill business resulting from the downtime issues identified in 2018 that we believe will drive same store sales and the rate of growth in new Refill and Exchange locations and related display, rack and reverse osmosis filtration system costs, cost to develop new Dispenser product lines, sales and marketing resources needed to further penetrate our markets, the expansion of our operations in the United States and Canada, the response of competitors to our solutions and products, as well as the completion of future acquisitions. Historically, we have experienced increases in our capital expenditures consistent with the growth in our operations, and we anticipate that our expenditures will continue to increase as we grow our business.
Our ability to satisfy our obligations or to fund planned capital expenditures will depend on our future performance, which to a certain extent is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. We also believe that if we pursue any material acquisitions in the foreseeable future we will need to finance this activity through the issuance of equity or additional debt financing, and such financing may not be available to us on terms favorable to us, if at all.
Changes in Cash Flows
The following table shows the components of our cash flows for the periods presented (in millions):
Three months ended March 31, | ||||||||
2018 | 2017 | |||||||
Net cash provided by operating activities | $ | 4.5 | $ | 0.1 | ||||
Net cash used in investing activities | $ | (3.7 | ) | $ | (5.2 | ) | ||
Net cash used in financing activities | $ | (1.0 | ) | $ | (4.2 | ) |
Three months ended March 31, | ||||||||
2019 | ||||||||
Net cash (used in) provided by operating activities | $ | (0.9 | ) | $ | 4.5 | |||
Net cash used in investing activities | $ | (7.7 | ) | $ | (3.7 | ) | ||
Net cash provided by (used in) financing activities | $ | 5.5 | $ | (1.0 | ) |
Net Cash Flows from Operating Activities
Net cash provided byused in operating activities increased to $4.5was $0.9 million for the three months ended March 31, 2018, from $0.12019 compared to net cash provided by operating activities of $4.5 million for the same period of the prior year. The increasedecrease was driven by changes in working capital, primarily by an $8.2 millionthe increase in income from operations partially offsetinventory on hand at March 31, 2019 compared to March 31, 2018. We expect working capital to be a use of cash in the negative impactfirst half of the changesyear and to be a source of cash in operating assets and liabilities. the second half of the year.
Net Cash Flows from Investing Activities
Net cash used in investing activities decreasedincreased to $3.7$7.7 million for the three months ended March 31, 2018,2019 from $5.2$3.7 million for the same period of the prior year, primarily as a resultdue to an increase in purchases of a decrease in capital expendituresproperty and equipment related to ourthe growth and maintenance in Refill segment.and Exchange locations.
Net Cash Flows from Financing Activities
Net cash used inprovided by financing activities decreased to $1.0was $5.5 million for the three months ended March 31, 2018, from $4.22019 compared to net cash used in financing activities of $1.0 million for the same period of the prior year. ForThe change was due primarily to an increase in borrowings under the three months ended March 31, 2018,SunTrust Credit Facility, driven by the netdecrease in cash flow from operations and the increase in cash used in financinginvesting activities, resulted primarily from an increasepartially offset by a decrease in shares purchased to pay taxes associated with certain incentive stock award payouts, partially offset by an increase in net borrowing on our revolver under the Goldman Credit Facility and the bank overdraft at the end of the first quarter of 2018 as a result of timing. For the three months ended March 31, 2017, net cash used in financing activities resulted primarily from an increase in shares purchased to pay taxes associated with certain incentive stock award payouts. equity awards.
Adjusted EBITDA U.S. GAAP Reconciliation
Adjusted EBITDA is a non-U.S. GAAP financial measure that is calculated as net (loss) income (loss) before depreciation and amortization; interest expense, net; income taxes; change in fair value of warrant liability; non-cash stock-based compensation expense; non-recurring and acquisition-related costs; and (gain) loss on disposal and impairment of property and equipmentcharges and other. Our SunTrust Credit AgreementFacility contains financial covenants that use Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management, investors and investorsfinancial analysts regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors.
Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses that are required by U.S. GAAP to be recorded in our financial statements and is subject to inherent limitations. In addition, other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The table below provides a reconciliation between net loss and Adjusted EBITDA.EBITDA (dollars in thousands).
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Net income (loss) | $ | 1,210 | $ | (11,862 | ) | |||||||||||
Net (loss) income | $ | (1,272 | ) | $ | 1,210 | |||||||||||
Depreciation and amortization | 6,057 | 6,391 | 6,550 | 6,057 | ||||||||||||
Interest expense, net | 5,286 | 5,002 | 2,581 | 5,286 | ||||||||||||
Income tax (benefit) provision | (1,725 | ) | 186 | |||||||||||||
Income tax benefit | – | (1,725 | ) | |||||||||||||
EBITDA | 10,828 | (283 | ) | 7,859 | 10,828 | |||||||||||
Change in fair value of warrant liability | – | 3,220 | ||||||||||||||
Non-cash, stock-based compensation expense | 1,292 | 2,335 | 1,475 | 1,292 | ||||||||||||
Non-recurring and acquisition-related costs | 77 | 4,448 | ||||||||||||||
Loss on disposal and impairment of property and equipment and other | 184 | 59 | ||||||||||||||
Special items (1) | 261 | 77 | ||||||||||||||
Impairment charges and other | 173 | 184 | ||||||||||||||
Adjusted EBITDA | $ | 12,381 | $ | 9,779 | $ | 9,768 | $ | 12,381 |
(1) | For the three months ended March 31, 2019, “Special items” consisted of approximately $0.1 million of acquisition-related expenses associated with the Glacier Acquisition, including fees payable to legal advisors associated with restructuring, and $0.2 million of costs associated with restructuring and other costs. For the three months ended March 31, 2018, “Special items” consisted of approximately $0.1 million of transactional expenses associated with the Glacier Acquisition, including fees payable to financial, legal, accounting and other advisors. |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we arewere not a party to any derivative contracts or synthetic leases.leases as of March 31, 2019.
Inflation and Changing Prices
In the three most recent fiscal years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
Seasonality; Fluctuations of Results
We have experienced and expect to continue to experience seasonal fluctuations in our sales and operating income. Our sales and operating income have been highest in the spring and summer and lowest in the fall and winter. Our Refill and Exchange segments, which generally enjoy higher margins than our Dispensers segment, experience higher sales and operating income in the spring and summer. We have historically experienced higher sales and operating income from our Dispensers segment in spring and summer; however, we believe the seasonality of dispenser sales are more dependent on retailer inventory management and purchasing cycles and not correlated to weather. Sustained periods of poor weather, particularly in the spring and summer, can negatively impact our sales in our higher margin Refill and Exchange segments. Accordingly, our results of operations in any quarter will not necessarily be indicative of the results that we may achieve for a fiscal year or any future quarter.
Critical Accounting Policies and Estimates
Other than the adoption of Topic 606ASC 842 on January 1, 20182019, as described in Note 2 to“Note 3 - Leases” in the condensed consolidated financial statements, there have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Cautionary Note Regarding Forward-Looking Statements
This document includes and other information we make public from time to time may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, projections, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,“feel,” “forecasts,” “intends,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “should,” “could,” “seek,” “plan,“would,” and similar expressions to identify our forward-looking statements. These forward-looking statements are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known and unknown risks, including those factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Item 3.3. Quantitative and Qualitative Disclosure About Market Risk
There has been no material change in our exposure to market risk during the three months ended March 31, 2018.2019. Please refer to "Quantitative and Qualitative Disclosures about Market Risk" contained in Part II, Item 7A of our Form 10-K for the year ended December 31, 20172018 for a discussion of our exposure to market risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures are effective for the purpose of providing reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Not applicable.
In addition to the other information set forth in this report, you should carefully consider the factors discussed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.2018 and in subsequently filed Quarterly Reports on Form 10-Q. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Other than as set forth below, there have been no material changes to such risk factors.
PotentialRecently imposed tariffs and other potential changes in international trade relations implemented by the U.S. presidential administration could have a material adverse effect on our business, financial condition, cash flows and results of operations. Further, any suspension, revocation, expiration, non-renewal or other loss of our recently secured temporary exemption from existing tariffs (including the extension of applicable tariffs beyond the duration of our temporary exemption) could adversely affect our business, financial condition, cash flows and results of operation.
Currently, all of our Dispensers are assembled by independent manufacturers in, and imported from, China. These import operations are subject to international trade regulations, including import charges and other agreements among the United States and its trading partners, including China.
The current U.S. presidential administration, certain membersgovernment recently proposed, among other actions, imposing new or higher tariffs on specified imported products originating from China in response to what it characterizes as unfair trade practices, and China has responded by proposing new or higher tariffs on specified products imported from the United States. In a notice published on June 20, 2018, the Office of Congress and other U.S. officials have indicated that they may advocate and/or enact key policy shifts in trade relations among the United States Trade Representative (the “USTR”) issued a determination and other countries,request for public comment under Section 301 under the Trade Act of 1974 (the “Notices”) concerning the proposed imposition of an additional 25% tariff on specified products from China (the “June 2018 Tariffs”). The list of products set forth in the Notice included self-contained drinking water coolers, including our Dispensers, which we import from China. We have worked with our suppliers and secured a reduction in tradethe amount we pay for Dispensers and with Chinaour customers to increase our prices to include the remaining incremental cost associated with the Tariff as implemented in the Notice. We believe the cost reduction and increased pricing will offset the impact of the Tariff as implemented in the Notice, however, if retailers increase prices to consumers, consumer demand may be reduced, and any increases in the rate of the Tariff or any additional tariffs may adversely affect us in a manner where we cannot negotiate cost reductions or price increases to offset any potential impact.
In July 2018, we applied to the USTR for a Request for Exclusion from the Tariffs for our Dispensers (the “Request for Exclusion”). Our Request for Exclusion was granted by the USTR in the fourth quarter of 2018. The exclusion is retroactive to July 6, 2018, and any amounts we paid in respect of such June 2018 Tariffs between the time of their implementation and the raisinggranting of tariffsour Request for Exclusion will be reimbursed. However, the exemption granted to us by the USTR is temporary and expires after one year from its granting. Any suspension, revocation, expiration, non-renewal or other loss of our temporary exemption from the June 2018 Tariffs, or the extension of the June 2018 Tariffs beyond the expiration date of our temporary exemption, could adversely affect our business, financial condition, cash flows and results of operations.
In addition, in September 2018, the USTR finalized a new list of products imported from China that are subject to a new 10% tariff, which went into effect on September 24, 2018 and which was scheduled to increase to 25% on January 1, 2019 (the “List 3 Tariffs” and, together with the June 2018 Tariffs, the “Tariffs”). On February 28, 2019, President Trump delayed the increase from 10% to 25% to provide time for further negotiations with Chinese imports. It remains unclear whattrade representatives. On May 5, 2019, President Trump announced his intention to implement the currentpreviously-delayed increase in the List 3 Tariffs from 10% to 25%, effective May 10, 2019. In the event the List 3 Tariffs are increased to 25%, the USTR is considering making available an opportunity to allow certain affected parties to apply for a request for exclusion from the List 3 Tariffs.
We import a small number of lower-priced products subject to the List 3 Tariffs, and we are continuing to monitor the U.S. presidential administration may dogovernment’s actions with respect to such List 3 Tariffs and will evaluate available options with respect thereto. The List 3 Tariffs, including the rate thereof and the availability of a request for exclusion process, are subject to the discretion of the President and may change at any time without advanced notice as to the timing or magnitude of such restrictive measures, though it has recently announced planschanges. The continued implementation of such List 3 Tariffs, and any increase in the duties subject to imposesuch List 3 Tariffs or any continuing or increased uncertainty with respect to the List 3 Tariffs, may have an adverse impact on our business, financial condition, cash flows and results of operations.
These Tariffs, along with any additional tariffs on certain imports from China, and we cannot predict whether tariffs, duties or other similar restrictions will be imposed by the United States upon the import of materials, including our Dispensers, from China. Any such tariffs,trade actions (including duties, import charges or other similar restrictions onor other reductions in trade) that may be implemented, may further increase the cost of certain materials and/or products that we import from China, including our Dispensers, or any other foreign-sourcedforeign nation from which we may source any goods, thereby adversely affecting our profitability. These actions could require us to raise our prices, which could decrease demand for our products or otherwise impact the marketability of our products to retailers and consumers. The Tariffs could also force us to seek alternative suppliers for our Dispensers and other materials we import from China or force our existing suppliers to establish new manufacturing operations in other countries, and the products produced by such manufacturers may be of inferior quality, cost more than the Dispensers we currently import from China, or otherwise be sourced from suppliers with unproven operations or reliability. As a result, these actions, including potential retaliatory measures by China, may adversely impact our business. Given the uncertainty regarding the scope and duration of these trade actions by the United States or other countries, as well as the potential for additional trade actions, the impact on our operations and results remains uncertain and could be significant. To the extent that we sell could substantially affect our ability to source goods at commercially attractive prices, thus having an adverse effect onsupply chain, costs, sales or profitability are negatively affected by the Tariffs or any other trade actions (including duties, import charges or other similar restrictions or other reductions in trade), our business, financial condition and results of operations including by virtue of increasing our cost of goods sold or exposing us to additional capital expenses if we must find replacement manufacturing or repatriate certain production to the United States.may be materially adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
EXHIBIT INDEX
Exhibit | Description |
2.1 | |
3.1 | |
3.2 | |
3.3 | |
4.1 | |
4.2 | |
10.1 | Primo Water Corporation 2019 Omnibus Long-Term Incentive Plan (filed herewith)* |
| |
31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance Document (1) |
101.SCH | XBRL Taxonomy Extension Schema Document (1) |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (1) |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (1) |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (1) |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (1) |
(1) | Included herewith |
* Indicates management contract or compensatory plan or arrangement.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PRIMO WATER CORPORATION | |
| (Registrant) | |
|
|
|
Date: May 9, | By: | /s/ Matthew T. Sheehan |
|
| Matthew T. Sheehan |
|
| Chief Executive Officer |
Date: May 9, | By: | /s/ David J. Mills |
David J. Mills | ||
Chief Financial Officer |
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