PRIMO WATER CORPORATION This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to further the reader's understanding of the consolidated financial condition and results of operations of our Company. It should be read in conjunction with the financial statements included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 (our "2022 Annual Report"). These historical financial statements may not be indicative of our future performance. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks referred to under "Risk Factors" in Part I, Item 1A in our 2022 Annual Report. As used herein, "Primo," "the Company," "Primo Water Corporation ," "we," "us," or "our" refers toPrimo Water Corporation , together with its consolidated subsidiaries.
Overview
Primo is a leading pure-play water solutions provider inNorth America andEurope . Primo operates largely under a recurring revenue model in the large format water category (defined as 3 gallons or greater). This business strategy is commonly referred to as "razor-razorblade" because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. The razor in Primo's revenue model is its industry leading line-up of innovative water dispensers, which are sold through approximately 10,000 retail locations and online at various price points. The dispensers help increase household and business penetration which drives recurring purchases of Primo's razorblade offering or water solutions. Primo's razorblade offering is comprised of Water Direct, Water Exchange, and Water Refill. Through its Water Direct business, Primo delivers sustainable hydration solutions across its 21-country footprint direct to customers, whether at home or to businesses. Through its Water Exchange business, customers visit retail locations and purchase a pre-filled bottle of water. Once consumed, empty bottles are exchanged at our recycling center displays, which provide a ticket that offers a discount toward the purchase of a new bottle. Water Exchange is available in approximately 17,500 retail locations. Through its Water Refill business, customers refill empty bottles at approximately 23,500 self-service refill drinking water machines. Primo also offers water filtration units across its 21-country footprint. Primo's water solutions expand consumer access to purified, spring and mineral water to promote a healthier, more sustainable lifestyle while simultaneously reducing plastic waste and pollution. Primo is committed to its water stewardship standards and is proud to partner with theInternational Bottled Water Association inNorth America as well as with Watercoolers Europe, which ensure strict adherence to safety, quality, sanitation and regulatory standards for the benefit of consumer protection. Environmental stewardship is a part of who we are, and we have worked to progressively achieve carbon neutrality throughout our organization. Our European operations have maintained carbon neutrality for more than eleven years, and ourU.S. operations achieved carbon neutral certification in 2020 under the CarbonNeutral Protocol, an international standard administered byClimate Impact Partners . In 2021, the Company achieved carbon neutrality on a global basis. In late 2021, we announced our planned exit from the North American small-format retail water business. This business was relatively small and used predominantly single-use plastic bottles. The exit from this category is estimated to reduce single-use retail water bottles from our production environment by more than 400 million, annually, while also improving overall margins. The exit was completed during the second quarter of 2022. The markets in which we operate are subject to some seasonal variations. Our water delivery sales are generally higher during the warmer months. Our purchases of raw materials and related accounts payable fluctuate based upon the demand for our products. The seasonality of our sales volume causes our working capital needs to fluctuate throughout the year. We conduct operations in countries involving transactions denominated in a variety of currencies. We are subject to currency exchange risks to the extent that our costs are denominated in currencies other than those in which we earn revenues. As our financial statements are denominated inU.S. dollars, fluctuations in currency exchange rates between theU.S. dollar and other currencies have had and will continue to have an impact on our results of operations. During the second quarter of 2022, our Board of Directors approved the exit from our business inRussia , which was completed during the third quarter of 2022. Separately, we reviewed our reporting segments, and following such review, certain of our businesses previously included in the Rest of World segment (now renamed "Europe") were realigned between theEurope reporting segment and the Other category. Our two reporting segments are as follows:North America (which includes ourDS Services of America, Inc. ("DSS"),Aquaterra Corporation ("Aquaterra"),Mountain Valley Spring Company ("Mountain Valley") and Legacy Primo businesses) andEurope (which includes the European business ofEden Springs Netherlands B.V. ("Eden Europe"),Decantae Mineral Water Limited ("Decantae") andFonthill Waters Ltd ("Fonthill") businesses). The Other category includes theIsrael business of Eden ("Eden Israel"),Aimia Foods Limited ("Aimia") andJohn Farrer & Company Limited ("Farrers") businesses, as well as our corporate oversight function and other miscellaneous expenses. Segment reporting results have been recast to reflect these changes for all periods presented. 17
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Impact of General Economic Conditions
Our global operations expose us to risks associated with disruptions to global supply chains, labor shortages, inflation and the ongoingRussia /Ukraine war which are likely to continue to create challenging economic conditions for our business, through increased costs, increased employee attrition and vacancies, lower consumer spending or other impacts. While we have taken steps to minimize the impact of these increased costs, global supply chain disruption may deteriorate and inflationary pressures may increase, which could adversely affect our business, financial condition, results of operations and cash flows.
Divestiture, Acquisition and Financing Transactions
OnJanuary 13, 2023 , we entered into the Second LIBOR Transition Amendment to the Credit Agreement, which replaced interest rate calculations based on LIBOR with calculations based on the Secured Overnight Financing Rate ("SOFR"). See Note 7 - Debt to the Consolidated Financial Statements for more details. OnNovember 4, 2021 , as part of our overall strategy to increase profitability and further reduce our environmental footprint, we announced a plan to exit theNorth America single-use retail bottled water category, which consists primarily of 1-gallon, 2.5 gallon and case-pack water. The plan does not affect our large format exchange, refill, and dispenser business or our Mountain Valley brand, which sells products primarily in glass bottles. On an annualized basis, these products have accounted for revenue of approximately$140 million . The unwinding of this business was completed during the second quarter of 2022.
Forward-Looking Statements
In addition to historical information, this report, and the reports and documents incorporated by reference in this report, may contain statements relating to future events and future results. These statements are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation and involve known and unknown risks, uncertainties, future expectations and other factors that may cause actual results, performance or achievements ofPrimo Water Corporation to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such statements include, but are not limited to, statements that relate to projections of sales, cash flows, capital expenditures or other financial items, statements regarding our intentions to pay regular quarterly dividends on our common shares, and discussions of estimated future revenue enhancements and cost savings. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, profitability, liquidity and capital resources. Generally, words such as "anticipate," "believe," "continue," "could," "endeavor," "estimate," "expect," "intend," "may," "will," "plan," "predict," "project," "should" and similar terms and phrases are used to identify forward-looking statements in this report and in the documents incorporated in this report by reference. These forward-looking statements reflect current expectations regarding future events and operating performance and are made only as of the date of this report. The forward-looking statements are not guarantees of future performance or events and, by their nature, are based on certain estimates and assumptions regarding interest and foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective income tax rates, which are subject to inherent risks and uncertainties. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in forward-looking statements may include, but are not limited to, assumptions regarding management's current plans and estimates. Although we believe the assumptions underlying these forward-looking statements are reasonable, any of these assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions could prove to be incorrect. Our operations involve risks and uncertainties, many of which are outside of our control, and any one or any combination of these risks and uncertainties could also affect whether the forward-looking statements ultimately prove to be correct. These risks and uncertainties include, but are not limited to, those described in Part I, Item 1A "Risk Factors" and elsewhere in our 2022 Annual Report and those described from time to time in our future reports filed with theSecurities and Exchange Commission ("SEC") and Canadian securities regulatory authorities. The following are some of the factors that could affect our financial performance, including but not limited to, sales, earnings and cash flows, or could cause actual results to differ materially from estimates contained in or underlying the forward-looking statements:
•our ability to compete successfully in the markets in which we operate;
•fluctuations in commodity prices and our ability to pass on increased costs to our customers or hedge against such rising costs, and the impact of those increased prices on our volumes;
•our ability to manage our operations successfully;
•our ability to protect our intellectual property;
•the seasonal nature of our business and the effect of adverse weather conditions;
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•the impact of national, regional and global events, including those of a political, economic, business and competitive nature;
•our ability to fully realize the potential benefit of transactions or other strategic opportunities that we pursue;
•our ability to realize revenue and cost synergies of our acquisitions due to integration difficulties and other challenges;
•our exposure to intangible asset risk;
•the impact of the spread of COVID-19, related government actions and the Company's strategy in response thereto on our business, financial condition and results of operations;
•currency fluctuations that adversely affect exchanges between currencies, including theU.S. dollar, the British pound sterling, the Euro, the Canadian dollar and other currencies;
•our ability to maintain favorable arrangements and relationships with our suppliers;
•our ability to manage supply chain disruptions and cost increases related to inflation;
•our ability to meet our obligations under our debt agreements, and risks of further increases to our indebtedness;
•our ability to maintain compliance with the covenants and conditions under our debt agreements;
•fluctuations in interest rates, which could increase our borrowing costs;
•our ability to recruit, retain and integrate new management;
•the impact of increased labor costs on our business;
•our ability to renew our collective bargaining agreements on satisfactory terms;
•the impact on our financial results from uncertainty in the financial markets and other adverse changes in general economic conditions;
•any disruption to production at our manufacturing facilities;
•our ability to maintain access to our water sources;
•compliance with product health and safety standards;
•liability for injury or illness caused by the consumption of contaminated products;
•liability and damage to our reputation as a result of litigation or legal proceedings;
•changes in the legal and regulatory environment in which we operate;
•our ability to adequately address the challenges and risks associated with our international operations and address difficulties in complying with complex and overlapping laws and regulations;
•our ability to utilize tax attributes to offset future taxable income;
•the impact on our tax obligations and effective tax rate arising from changes in local tax laws or countries adopting more aggressive interpretations of tax laws;
•disruptions in our information systems;
•our ability to securely maintain our customers' confidential or credit card information, or other private data relating to our employees or our company;
•our ability to maintain our quarterly dividend; or
•credit rating changes.
We undertake no obligation to update any information contained in this report or
to publicly release the results of any revisions to forward-looking statements
to reflect events or circumstances of which we may become aware of after the
date of this report. Undue reliance should not be placed on forward-looking
statements.
All future written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
foregoing.
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Non-GAAP Measures
In this report, we supplement our reporting of financial measures determined in accordance withU.S. generally accepted accounting principles ("GAAP") by utilizing certain non-GAAP financial measures that exclude certain items to make period-over-period comparisons for our underlying operations before material charges. We exclude these items to better understand trends in the business. We exclude the impact of foreign exchange to separate the impact of currency exchange rate changes from our results of operations. We also utilize earnings (loss) before interest expense, taxes, depreciation and amortization ("EBITDA"), which is GAAP net income (loss) before interest expense, net, expense (benefit) for income taxes and depreciation, and amortization. We consider EBITDA to be an indicator of operating performance. We also use EBITDA, as do analysts, lenders, investors, and others, because it excludes certain items that can vary widely across different industries or among companies within the same industry. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. We also utilize adjusted EBITDA, which is EBITDA excluding acquisition and integration costs, share-based compensation costs, COVID-19 costs, impairment charges, foreign exchange and other (gains) losses, net, loss on disposal of property, plant and equipment, net, loss on extinguishment of long-term debt, (gain) loss on sale of business, (gain) loss on sale of property, and other adjustments, net, as the case may be ("Adjusted EBITDA"). We consider Adjusted EBITDA to be an indicator of our operating performance. Adjusted EBITDA excludes certain items to make more meaningful period-over-period comparisons of our underlying operations before material charges. Because we use these adjusted financial results in the management of our business and to understand underlying business performance, we believe this supplemental information is useful to investors for their independent evaluation and understanding of our business performance and the performance of our management. The non-GAAP financial measures described above are in addition to, and not meant to be considered superior to, or a substitute for, our financial statements prepared in accordance with GAAP. In addition, the non-GAAP financial measures included in this report reflect our judgment of particular items, and may be different from, and therefore may not be comparable to, similarly titled measures reported by other companies.
Summary Financial Results
Net income for the three months endedApril 1, 2023 (the "first quarter") was$5.8 million , or$0.04 per diluted common share, compared with net loss of$6.7 million , or$0.04 per diluted common share, for the three months endedApril 2, 2022 , respectively.
The following items of significance affected our financial results for the first three months of 2023:
•Net revenue increased$20.4 million , or 3.9%, to$546.5 million from the prior year period due primarily to increased demand for products and services from residential and business customers of$17.0 million and pricing initiatives of$51.2 million , partially offset by the exit from the single-use retail bottled water business inNorth America of$26.6 million , the sale of theRussia business of$2.8 million , and the impact of unfavorable foreign exchange rates of$12.1 million ; •Gross profit increased to$328.3 million from$299.6 million in the prior year period. Gross profit as a percentage of net revenue was 60.1% compared to 56.9% in the prior year period. The 320 basis point increase is due primarily to increased demand and pricing initiatives and the exit from the single-use retail bottled water business inNorth America , partially offset by the impact of unfavorable foreign exchange rates; •SG&A expenses increased to$303.5 million from$278.3 million in the prior year period due primarily to higher selling and operating costs supporting volume and revenue growth related primarily to labor and transportation cost increases, which increased by$11.7 million and$4.6 million , respectively, from the prior year period, and professional fee increases of$2.2 million , partially offset by the favorable impact of foreign exchange rates of$4.1 million . SG&A expenses as a percentage of net revenue was 55.5% compared to 52.9% in the prior year period; •Acquisition and integration expenses decreased to$2.0 million from$4.3 million in the prior year period due primarily to lower ongoing integration costs incurred in connection with the acquisition ofPrimo Water Corporation ("Legacy Primo" and such transaction, the "Legacy Primo Acquisition") and lower costs associated with tuck-in acquisitions compared to the prior year period. Acquisition and integration expenses as a percentage of revenue was 0.4% compared to 0.8% in the prior year period; •Other income, net was$6.3 million compared to other expense, net of$2.7 million in the prior year period due primarily to unrealized foreign exchange gains in the current year period compared to unrealized foreign exchange losses in the prior year period; •Income tax expense was$3.2 million on pre-tax income of$9.0 million compared to income tax expense of$2.4 million on pre-tax loss of$4.3 million in the prior year period due to increased income related primarily to foreign exchange gains in tax jurisdictions for which no tax expense is recognized due to existing valuation allowances; 20
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•Adjusted EBITDA increased to
•Cash flows provided by operating activities was$34.3 million compared to$23.6 million in the prior year period. The$10.7 million increase was due primarily to improved earnings, excluding non-cash charges, and a decrease in cash used for working capital relative to the prior year period.
Results of Operations
The following table summarizes our Consolidated Statements of Operations as a percentage of revenue for the three months endedApril 1, 2023 andApril 2, 2022 : For the Three Months Ended April 1, 2023 April 2, 2022 (in millions of U.S. dollars) $ % $ % Revenue, net 546.5 100.0 526.1 100.0 Cost of sales 218.2 39.9 226.5 43.1 Gross profit 328.3 60.1 299.6 56.9 Selling, general and administrative expenses 303.5 55.5 278.3 52.9 Loss on disposal of property, plant and equipment, net 1.3 0.2 1.7 0.3 Acquisition and integration expenses 2.0 0.4 4.3 0.8 Operating income 21.5 3.9 15.3 2.9 Other (income) expense, net (6.3) (1.2) 2.7 0.5 Interest expense, net 18.8 3.4 16.9 3.2 Income (loss) before income taxes 9.0 1.6 (4.3) (0.8) Income tax expense 3.2 0.6 2.4 0.5 Net income (loss) 5.8 1.1 (6.7) (1.3) Depreciation & amortization 62.4 11.4 61.2 11.6
The following table summarizes the change in revenue by reporting segment for
the three months ended
For the Three Months Ended April 1, 2023
(in millions of U.S. dollars, except percentage
amounts) North America Europe Other Total
Change in revenue $ 15.2 $ 5.1 $ 0.1 $ 20.4
Impact of foreign exchange 1 1.1 4.2 6.8 12.1
Change excluding foreign exchange $ 16.3 $ 9.3 $ 6.9 $ 32.5
Percentage change in revenue 3.8 % 7.9 % 0.2 % 3.9 %
Percentage change in revenue excluding foreign
exchange 4.1 % 14.5 % 10.7 % 6.2 %
______________________
1 Impact of foreign exchange is the difference between the current period
revenue translated utilizing the current period average foreign exchange rates
less the current period revenue translated utilizing the prior period average
foreign exchange rates.
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The following table summarizes the change in gross profit by reporting segment
for the three months ended
For the Three Months Ended April 1, 2023
(in millions of U.S. dollars, except percentage
amounts) North America Europe Other Total
Change in gross profit $ 26.8 $ 3.7 $ (1.8) $ 28.7
Impact of foreign exchange 1 0.7 2.7 2.2 5.6
Change excluding foreign exchange $ 27.5 $ 6.4 $ 0.4 $ 34.3
Percentage change in gross profit 11.6 % 8.4 % (7.6) % 9.6 %
Percentage change in gross profit excluding
foreign exchange 11.9 % 14.6 % 1.7 % 11.4 %
______________________
1 Impact of foreign exchange is the difference between the current period
gross profit translated utilizing the current period average foreign exchange
rates less the current period gross profit translated utilizing the prior period
average foreign exchange rates.
Our corporate oversight function is not treated as a segment; it includes certain general and administrative costs that are disclosed in the Other category.
The following table summarizes our net revenue, gross profit, SG&A expenses and operating income (loss) by reporting segment for the three months endedApril 1, 2023 andApril 2, 2022 : For the Three Months Ended (in millions of U.S. dollars) April 1, 2023 April 2, 2022 Revenue, net North America$ 412.3 $ 397.1 Europe 69.4 64.3 Other 64.8 64.7 Total$ 546.5 $ 526.1 Gross profit North America$ 258.8 $ 232.0 Europe 47.5 43.8 Other 22.0 23.8 Total$ 328.3 $ 299.6 Selling, general and administrative expenses North America$ 221.1 $ 199.7 Europe 44.3 46.2 Other 38.1 32.4 Total$ 303.5 $ 278.3 Operating income (loss) North America $ 34.7 $ 28.3 Europe 2.9 (3.6) Other (16.1) (9.4) Total $ 21.5 $ 15.3 22
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The following tables summarize net revenue by channel for the three months ended
For the Three Months Ended April 1, 2023
(in millions of U.S. dollars) North America Europe Other Total
Revenue, net
Water Direct/Water Exchange $ 312.4 $ 53.0 $ 10.4 $ 375.8
Water Refill/Water Filtration 52.2 8.8 0.6 61.6
Other Water 11.3 0.2 15.7 27.2
Water Dispensers 12.7 0.1 - 12.8
Other 23.7 7.3 38.1 69.1
Total $ 412.3 $ 69.4 $ 64.8 $ 546.5
For the Three Months Ended April 2, 2022
(in millions of U.S. dollars) North America Europe Other Total
Revenue, net
Water Direct/Water Exchange $ 278.3 $ 48.2 $ 10.8 $ 337.3
Water Refill/Water Filtration 42.2 8.2 0.5 50.9
Other Water 34.0 0.4 16.0 50.4
Water Dispensers 14.2 - - 14.2
Other 28.4 7.5 37.4 73.3
Total $ 397.1 $ 64.3 $ 64.7 $ 526.1 The following table summarizes our EBITDA and Adjusted EBITDA for the three
months ended
For the Three Months Ended
(in millions of U.S. dollars) April 1, 2023 April 2, 2022
Net income (loss) $ 5.8 $ (6.7)
Interest expense, net 18.8 16.9
Income tax expense 3.2 2.4
Depreciation and amortization 62.4 61.2
EBITDA $ 90.2 $ 73.8
Acquisition and integration costs 2.0 4.3
Share-based compensation costs 2.3 3.3
Foreign exchange and other (gains) losses, net (5.9) 3.9
Loss on disposal of property, plant and equipment, net 1.3 1.7
Other adjustments, net 5.0 0.9
Adjusted EBITDA $ 94.9 $ 87.9
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Three Months Ended
Revenue, Net
Net revenue increased
North America net revenue increased$15.2 million , or 3.8%, in the first quarter from the prior year period due primarily to increased demand for products and services from residential and business customers of$10.0 million and pricing initiatives of$39.2 million , partially offset by the effects of exit from the single-use retail bottled water business of$26.6 million and unfavorable impact of foreign exchange of$1.1 million .Europe net revenue increased$5.1 million , or 7.9%, in the first quarter from the prior year period due primarily to increased demand for products and services from residential and business customers of$4.8 million , pricing initiatives of$7.3 million , partially offset by the sale of theRussia business of$2.8 million and unfavorable impact of foreign exchange rates of$4.2 million . Other net revenue increased$0.1 million , or 0.2%, in the first quarter from the prior year period due primarily to increased demand for products and services from residential and business customers of$2.2 million and pricing initiatives of$4.7 million , offset by the unfavorable impact of foreign exchange rates of$6.8 million . Gross Profit
Gross profit increased to
North America gross profit increased to$258.8 million in the first quarter from$232.0 million in the prior year period, and gross profit as a percentage of revenue was 62.8% in the first quarter compared to 58.4% in the prior year period. The 440 basis point increase is due primarily to increased demand and pricing initiatives and the exit from the single-use retail bottled water business inNorth America .Europe gross profit increased to$47.5 million in the first quarter from$43.8 million in the prior year period, and gross profit as a percentage of revenue remained relatively flat at 68.4% in the first quarter compared to 68.1% in the prior year period. Other gross profit decreased to$22.0 million in the first quarter from$23.8 million in the prior year period, and gross profit as a percentage of revenue was 34.0% in the first quarter compared to 36.8% in the prior year. The 280 basis point decrease is due primarily to the unfavorable impact of inflationary cost increases.
Selling, General and Administrative Expenses
SG&A expenses increased to
North America SG&A expenses increased to$221.1 million in the first quarter from$199.7 million in the prior year period due primarily to higher selling and operating costs that supported volume and revenue growth related primarily to labor and transportation cost increases, which increased by$7.9 million and$4.1 million , respectively, from the prior year period. Europe SG&A expenses decreased to$44.3 million in the first quarter from$46.2 million in the prior year period due primarily to the favorable impact of foreign exchange rates of$2.7 million , partially offset by higher selling and operating costs that supported volume and revenue growth related primarily to labor cost increases, which increased by$0.6 million from the prior year period. Other SG&A expenses increased to$38.1 million in the first quarter from$32.4 million in the prior year period due primarily to labor and transportation cost increases, which increased by$3.2 million and$0.5 million , respectively, and professional fee increases of$2.2 million from the prior year period, partially offset by the favorable impact of foreign exchange rates of$1.4 million . 24
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Acquisition and Integration Expenses
Acquisition and integration expenses decreased to$2.0 million in the first quarter from$4.3 million in the prior year period. Acquisition and integration expenses as a percentage of revenue was 0.4% in the first quarter compared to 0.8% in the prior year period.North America acquisition and integration expenses decreased to$1.7 million in the first quarter from$2.5 million in the prior year period due primarily to lower ongoing integration costs incurred in connection with the Legacy Primo Acquisition and lower costs associated with tuck-in acquisitions.Europe acquisition and integration expenses decreased to$0.3 million in the first quarter from$1.2 million in the prior year period due primarily to lower costs associated with tuck-in acquisitions.
Other acquisition and integration expenses decreased to nil in the first quarter
from
Operating Income
Operating income increased to
Other operating loss increased to
Other (Income) Expense, Net
Other income, net was
Income Taxes
Income tax expense was$3.2 million in the first quarter compared to income tax expense of$2.4 million in the prior year period. The effective tax rate for the first quarter was 35.6% compared to (55.8)% in the prior year period. The effective tax rate for the first quarter varied from the effective tax rate from the prior year period due to increased income related primarily to foreign exchange gains in tax jurisdictions for which no tax expense is recognized due to existing valuation allowances.
Liquidity and Capital Resources
As of
Our global operations expose us to risks associated with disruptions to global supply chains, labor shortages, inflation and the ongoingRussia /Ukraine war which are likely to continue to create challenging economic conditions for our business, through increased costs, increased employee attrition and vacancies, lower consumer spending or other impacts. While we have taken steps to minimize the impact of these increased costs, global supply chain disruption may deteriorate and inflationary pressures may increase, which could adversely affect our business, financial condition, results of operations and cash flows. We believe that our level of resources, which includes cash on hand, borrowings under our Revolving Credit Facility and funds provided by our operations, will be adequate to fund cash outflows that have both a short- and long-term component. These cash flows will support our growth platform and include our expenses, capital expenditures, anticipated dividend payments, and debt service obligations. The Company regularly assesses its cash requirements and the available resources to fund these needs. Our ability to generate cash to meet our current expenses and debt service obligations will depend on our future performance. If we do not have enough cash to pay our debt service obligations, or if the Revolving Credit Facility or our outstanding notes were to become currently due, either at maturity or as a result of a breach, we may be required to take actions such as amending our Credit Agreement or the indentures governing our outstanding notes, refinancing all or part of our existing debt, selling assets, incurring additional indebtedness or raising equity. If we need to seek additional financing, there is no assurance that this additional financing will be available on favorable terms or at all. 25 -------------------------------------------------------------------------------- As ofApril 1, 2023 , our outstanding borrowings under the Revolving Credit Facility were$224.8 million and outstanding letters of credit totaled$56.6 million , resulting in total utilization under the Revolving Credit Facility of$281.4 million . Accordingly, unused availability under the Revolving Credit Facility as ofApril 1, 2023 amounted to$68.6 million . We earn substantially all of our consolidated operating income in subsidiaries located outside ofCanada . We have not provided for federal, state, and foreign deferred income taxes on the undistributed earnings of our non-Canadian subsidiaries. We expect that these earnings will be permanently reinvested by such subsidiaries except in certain instances where repatriation attributable to current earnings results in minimal or no tax consequences. We expect our existing cash and cash equivalents, cash flows and the issuance of debt to continue to be sufficient to fund our operating, investing, and financing activities. In addition, we expect our existing cash and cash equivalents and cash flows outside ofCanada to continue to be sufficient to fund the operating activities of our subsidiaries.
A future change to our assertion that foreign earnings will be permanently reinvested could result in additional income taxes and/or withholding taxes payable, where applicable. Therefore, a higher effective tax rate could occur during the period of repatriation.
We may, from time to time, depending on market conditions, including without limitation whether our outstanding notes are then trading at a discount to their face amount, repurchase our outstanding notes for cash and/or in exchange for our common shares, warrants, preferred shares, debt, or other consideration, in each case in open market purchases and/or privately negotiated transactions. The amounts involved in any such transactions, individually or in the aggregate, may be material. However, the covenants in our Revolving Credit Facility subject such purchases to certain limitations and conditions.
A dividend of
The following table summarizes our cash flows for the three months endedApril 1, 2023 andApril 2, 2022 , as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements: For the Three Months Ended (in millions of U.S. dollars) April 1, 2023 April 2, 2022 Net cash provided by operating activities $ 34.3 $ 23.6 Net cash used in investing activities (61.5) (40.5) Net cash provided by (used in) financing activities 0.3 (12.6) Effect of exchange rate changes on cash 0.8 (0.9) Net decrease in cash, cash equivalents and restricted cash (26.1) (30.4)
Cash and cash equivalents and restricted cash, beginning of period
122.6 128.4
Cash and cash equivalents and restricted cash, end of period $
96.5 $ 98.0 Operating Activities Cash provided by operating activities was$34.3 million year to date compared to$23.6 million in the prior year period. The$10.7 million increase was due primarily to improved earnings, excluding non-cash charges, and a decrease in cash used for working capital relative to the prior year period.
Investing Activities
Cash used in investing activities was
Financing Activities
Cash provided by financing activities was$0.3 million year to date compared to cash used in financing activities of$12.6 million in the prior year period. The$12.9 million increase was due primarily to an increase in cash provided by net short-term borrowings and issuances of common shares, partially offset by an increase in share repurchases and dividends paid to common shareholders.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of
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Contractual Obligations
There were no material changes to our outstanding contractual obligations from amounts previously disclosed in our 2022 Annual Report.
Credit Ratings and Covenant Compliance
Credit Ratings
We have no material changes to the disclosure on this matter made in our 2022 Annual Report.
Covenant Compliance
Indentures governing our outstanding notes
Under the indentures governing our outstanding notes, we are subject to a number of covenants, including covenants that limit our and certain of our subsidiaries' ability, subject to certain exceptions and qualifications, to (i) pay dividends or make distributions, repurchase equity securities, prepay subordinated debt or make certain investments, (ii) incur additional debt or issue certain disqualified stock or preferred stock, (iii) create or incur liens on assets securing indebtedness, (iv) merge or consolidate with another company or sell all or substantially all of our assets taken as a whole, (v) enter into transactions with affiliates and (vi) sell assets. The covenants are substantially similar across the series of notes. As ofApril 1, 2023 , we were in compliance with all of the covenants under each series of notes. There have been no amendments to any such covenants of our outstanding notes since the date of their issuance. Revolving Credit Facility Under the Credit Agreement governing the Revolving Credit Facility, we and our restricted subsidiaries are subject to a number of business and financial covenants, including a consolidated secured leverage ratio and an interest coverage ratio. The consolidated secured leverage ratio must not be more than 3.50 to 1.00, with an allowable temporary increase to 4.00 to 1.00 for the quarter in which we consummate a material acquisition with a price not less than$125.0 million , for three quarters. The interest coverage ratio must not be less than 3.00 to 1.00. We were in compliance with these financial covenants as ofApril 1, 2023 . In addition, the Credit Agreement has certain non-financial covenants, such as covenants regarding indebtedness, investments, and asset dispositions. We were in compliance with all of the applicable covenants as ofApril 1, 2023 .
Issuer Purchases of
Common Share Repurchase Program
OnAugust 9, 2022 , our Board of Directors approved a new share repurchase program for up to$100.0 million of our outstanding common shares over a 12-month period commencing onAugust 15, 2022 . During the first quarter of 2023, we repurchased 1,112,514 common shares for approximately$16.6 million through open market transactions. Repurchased shares were subsequently cancelled. Please refer to the table in Part II, Item 2 of this Quarterly Report on Form 10-Q. We are unable to predict the number of common shares that ultimately will be repurchased under the share repurchase program, or the aggregate dollar amount of common shares to be purchased in future periods. We may discontinue purchases at any time, subject to compliance with applicable regulatory requirements.
Tax Withholding
In the first quarter of 2023, an aggregate of 165,324 common shares were withheld from delivery to our employees to satisfy their respective tax obligations related to share-based awards. In the first quarter of 2022, an aggregate of 113,527 common shares were withheld from delivery to our employees to satisfy their respective tax obligations related to share-based awards.
Please refer to the table in Part II, Item 2 of this Quarterly Report on Form 10-Q.
Capital Structure SinceDecember 31, 2022 , our equity has decreased by$26.4 million . The decrease was due to common shares repurchased and canceled of$19.3 million , common share dividend payments of$12.9 million and other comprehensive loss, net of tax of$6.6 million , partially offset by net income of$5.8 million , the issuance of common shares of$4.3 million , and share-based compensation costs of$2.3 million . 27
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Dividend Payments
Common Share Dividend
OnFebruary 22, 2023 , the Board of Directors declared a dividend of$0.08 per share on common shares, payable in cash onMarch 27, 2023 to shareowners of record at the close of business onMarch 10, 2023 . OnMay 3, 2023 , the Board of Directors declared a dividend of$0.08 per share on common shares, payable in cash onJune 14, 2023 , to shareowners of record at the close of business onJune 2, 2023 . We intend to pay a regular quarterly dividend on our common shares subject to, among other things, the best interests of our shareowners, our results of operations, cash balances and future cash requirements, financial condition, statutory regulations and covenants set forth in the Revolving Credit Facility and indentures governing our outstanding notes, as well as other factors that the Board of Directors may deem relevant from time to time.
Critical Accounting Policies
Our critical accounting policies require management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and the accompanying notes. These estimates are based on historical experience, the advice of external experts or on other assumptions management believes to be reasonable. Where actual amounts differ from estimates, revisions are included in the results for the period in which actual amounts become known. Historically, differences between estimates and actual amounts have not had a significant impact on our Consolidated Financial Statements.
Critical accounting policies and estimates used to prepare the Consolidated Financial Statements are discussed with the Audit Committee of our Board of Directors as they are implemented and on an annual basis.
We have no material changes to our Critical Accounting Policies and Estimates disclosure as filed in our 2022 Annual Report.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting guidance.
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