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 28, 2019 (our "2019 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 2019 Annual Report and under "Risk Factors" in Part II, Item 1A in our Quarterly Report on Form 10-Q for the quarter endedMarch 28, 2020 . 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 ,Europe andIsrael . Primo operates largely under a recurring razor/razorblade revenue model. The razor in Primo's revenue model is its industry leading line-up of sleek and innovative water dispensers, which are sold through major retailers and online at various price points or leased to customers. The dispensers help increase household penetration, which drives recurring purchases of Primo's razorblade offering. Primo's razorblade offering is comprised of Water Direct, Water Exchange, and Water Refill. Through its Water Direct business, Primo delivers sustainable hydration solutions across its 21-country footprint direct to the customer's door, whether at home or to commercial businesses. Through its Water Exchange and Water Refill businesses, Primo offers pre-filled and reusable containers at over 13,000 locations and water refill units at approximately 22,000 locations, respectively. Primo also offers water filtration units across its 21-country footprint representing a top five position. Primo's water solutions expand consumer access to purified, spring and mineral water to promote a healthier, more sustainable lifestyle while simultaneously reducing plastic waste and pollution. Primo is committed to its water stewardship standards and is proud to partner with theInternational Bottled Water Association inNorth America as well as with Water coolersEurope , which ensure strict adherence to safety, quality, sanitation and regulatory standards for the benefit of consumer protection. The market in which we operate is 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 2020, we implemented a restructuring program intended to optimize synergies from the Company's transition to a pure-play water company following the Legacy Primo Acquisition (defined below) and, as a result, reorganized into two reporting segments:North America (which includes ourDS Services of America, Inc. ("DSS"),Aquaterra Corporation ("Aquaterra"),Mountain Valley Spring Company ("Mountain Valley") and Legacy Primo (defined below) businesses) and Rest of World (which includes ourEden Springs Nederland B.V. ("Eden"),Aimia Foods Limited ("Aimia"),Decantae Mineral Water Limited ("Decantae") andJohn Farrer & Company Limited ("Farrers") businesses). Our corporate oversight function and other miscellaneous expenses are aggregated and included in the All Other category. Segment reporting results have been recast to reflect these changes for all periods presented. Impact of the COVID-19 Pandemic Our global operations expose us to risks associated with the COVID-19 pandemic, which has resulted in challenging operating environments. COVID-19 has spread across the globe to all of the countries in which we operate. Authorities in many of these markets have implemented numerous measures to stall the spread of COVID-19, including travel bans and restrictions, quarantines, curfews, shelter in place orders, and business shutdowns. These measures have impacted and will further impact us, our customers, employees, distributors, suppliers and other third parties with whom we do business. There is considerable uncertainty regarding the extent and duration of any impact that these measures and future measures in response to the pandemic may have on our business, including whether they will result in further changes in demand for our services and products, further increases in operating costs (whether as a result of changes to our supply chain or increases in employee costs or otherwise), and how they will further impact our supply chain, each or all of which can impact our ability to make, manufacture, distribute and sell our products. In addition, measures that impact our ability to access our offices, plants, warehouses, distribution centers or other facilities, or that impact the ability of our customers, employees, distributors, suppliers and other third parties to do the same, may impact the availability of our and their employees, many of whom are not able to perform their job functions remotely. 34 -------------------------------------------------------------------------------- We have implemented safety protocols, including implementing social distancing guidelines, staggering employee shifts, providing our associates with personal protective equipment, and continuing to allow members of our team to work from home where possible. We have been working and will continue to work closely with our business partners on contingency planning in an effort to maintain supply. To date, we have not experienced a material disruption to our operations or supply chain. While we continue to develop and implement health and safety protocols, business continuity plans and crisis management protocols and have taken other operational actions in an effort to try to mitigate the negative impact of COVID-19 to our employees and our business, the extent of the impact of the pandemic on our business and financial results will depend on numerous evolving factors that we are not able to accurately predict and that all will vary by market, including the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken, or may be taken in the future, in response to the pandemic and changes in customer behavior in response to the pandemic, some of which may be more than just temporary. As we deliver bottled water to residential and business customers across a 21-country footprint and provide multi-gallon purified bottled water, self-service refill drinking water and water dispensers to customers through major retailers inNorth America , the profile of the services we provide and the products we sell, and the amount of revenue attributable to such services and products, varies by jurisdiction. Changes in demand as a result of COVID-19 will vary in scope and timing across these markets. For example, to date, we have seen an increase in volumes in our residential water direct business and a decrease in volumes in our commercial water direct business as a result of the COVID-19 pandemic. Any continued economic uncertainty can adversely affect our customers' financial condition, resulting in an inability to pay for our services or products, reduced or canceled orders of our services or products, or our business partners' inability to supply us with the items necessary for us to make, manufacture, distribute or sell our products. Such adverse changes in our customers' or business partners' financial condition may also result in our recording impairment charges for our inability to recover or collect any accounts receivable. In addition, economic uncertainty associated with COVID-19 pandemic has resulted in volatility in the global capital and credit markets, which can impair our ability to access these markets on terms commercially acceptable to us, or at all. In response to COVID-19, certain government authorities have enacted programs which provide various economic stimulus measures, including several tax provisions. Among the business tax provisions is the deferral of certain payroll and other tax remittances to future years and wage subsidies as reimbursement for a portion of certain furloughed employees' salaries. During the three and six months endedJune 27, 2020 , we received wage subsidies under these programs totaling$3.4 million . We review our eligibility for these programs for each qualifying period and account for such wage subsidies on an accrual basis when the conditions for eligibility are met. The Company has adopted an accounting policy to present wage subsidies as a reduction of selling, general and administrative ("SG&A") expenses. In addition, deferred payroll and other taxes totaling$6.3 million were included in accounts payable and accrued liabilities and$2.9 million were included in other long-term liabilities on our Consolidated Balance Sheet as ofJune 27, 2020 . During the three and six months endedJune 27, 2020 , we recorded a total of$115.2 million of non-cash impairment charges related to goodwill and intangible assets. See Note 1 to the Consolidated Financial Statements for additional information on goodwill and intangible asset impairment. The impairment charges were primarily driven by the impact of the COVID-19 pandemic and revised projections of future operating results. Additionally, onJune 11, 2020 , we announced that our Board of Directors approved a plan intended to optimize synergies from the Company's transition to a pure-play water company following the Legacy Primo Acquisition and to mitigate the negative financial and operational impacts of the COVID-19 pandemic, including implementing headcount reductions and furloughs in ourNorth America and Rest of World reporting segments ("2020 Restructuring Plan"). When we implement these programs, we incur various charges, including severance, asset impairments, and other employment related costs. In connection with the 2020 Restructuring Plan, we expect to incur approximately$19.0 million in severance costs, all of which are expected to result in cash expenditures and are expected to be fully paid by the end of 2020. All costs incurred by the 2020 Restructuring Plan are included in SG&A expenses for the three and six months endedJune 27, 2020 . See Note 1 to the Consolidated Financial Statements for additional information on restructuring charges incurred during the three and six months endedJune 27, 2020 . During the three and six months endedJune 27, 2020 we also incurred$6.6 million and$7.9 million , respectively, in other COVID-19 related costs. Other COVID-19 related costs primarily include front-line incentives paid and costs incurred for supplies. 35 --------------------------------------------------------------------------------
Divestiture, Acquisition and Financing Transactions
On February 28, 2020 , we completed the sale of our coffee, tea and extract
solutions business, S. & D. Coffee, Inc. ("S&D"), to Westrock Coffee Company,
LLC , a Delaware limited liability company ("Westrock"), pursuant to which
Westrock acquired all of the issued and outstanding equity of S&D from the
Company ("S&D Divestiture"). The consideration was $405.0 million paid at
closing in cash, with customary post-closing working capital adjustments, which
were resolved in June 2020 by payment of $1.5 million from the Company to
Westrock. We used the proceeds of the transaction to finance a portion of the
Legacy Primo Acquisition.
As a result of the S&D Divestiture, the operating results associated with S&D
have been presented as discontinued operations for all periods presented. The
following discussion and analysis of financial condition and results of
operations are those of our continuing operations unless otherwise indicated.
For additional information regarding our discontinued operations, see Note 2 to
the Consolidated Financial Statements.
On March 2, 2020 , pursuant to the terms and conditions of the Agreement and Plan
of Merger entered into on January 13, 2020 , Cott Corporation completed the
acquisition of Primo Water Corporation ("Legacy Primo" and such transaction, the
"Legacy Primo Acquisition"). The aggregate consideration paid in the Legacy
Primo Acquisition was approximately $798.2 million and includes $377.6 million
of our common shares issued by us to holders of Legacy Primo common stock,
$216.1 million paid in cash by us to holders of Legacy Primo common stock,
$196.9 million of cash paid to retire outstanding indebtedness on behalf of
Legacy Primo, $4.7 million to settle a pre-existing liability and $2.9 million
in fair value of replacement common share options and restricted stock units for
vested Legacy Primo awards. The Legacy Primo Acquisition is consistent with our
strategy of transitioning to a pure-play water solutions provider.
In connection with the closing of the Legacy Primo Acquisition, Cott Corporation
changed its corporate name to Primo Water Corporation and its ticker symbol on
the New York Stock Exchange and Toronto Stock Exchange to "PRMW".
On March 6, 2020 (the "Closing Date"), we entered into a credit agreement among
the Company, as parent borrower, Primo Water Holdings Inc. (formerly known as
Cott Holdings Inc. ) and Eden, each as subsidiary borrowers, certain other
subsidiaries of the Company from time to time designated as subsidiary
borrowers, Bank of America, N.A ., as administrative agent and collateral agent,
and the lenders from time to time party thereto (the "Credit Agreement").
The Credit Agreement provides for a senior secured revolving credit facility in
an initial aggregate committed amount of $350.0 million (the "Revolving Credit
Facility"), which may be increased by incremental credit extensions from time to
time in the form of term loans or additional revolving credit commitments. The
Revolving Credit Facility will mature five years from the Closing Date and
includes letter of credit and swing line loan sub facilities. Borrowings under
the Revolving Credit Facility were used on the Closing Date to refinance in full
and terminate our previously existing asset-based lending credit facility.
Forward-Looking Statements
In addition to historical information, this report, and any documents
incorporated in this report by reference, 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 of Primo 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 any 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.
36
--------------------------------------------------------------------------------
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" in
our 2019 Annual Report and in Part II, Item 1A "Risk Factors" in our Quarterly
Report on Form 10-Q for the quarter ended March 28, 2020 , and those described
from time to time in our future reports filed with the U.S. Securities 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 exposure to intangible asset risk;
•the impact of national, regional and global events, including those of a
political, economic, business and competitive nature;
•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;
•our ability to fully realize the potential benefit of transactions (including
the Legacy Primo Acquisition and the S&D Divestiture) or other strategic
opportunities that we pursue;
•our ability to realize cost synergies of our acquisitions due to integration
difficulties and other challenges;
•our limited indemnification rights in connection with the Legacy Primo
Acquisition;
•currency fluctuations that adversely affect the exchange between the U.S.
dollar and the British pound sterling, the exchange between the Euro, the
Canadian dollar and other currencies and the exchange between the British pound
sterling and the Euro;
•our ability to maintain favorable arrangements and relationships with our
suppliers;
•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;
•the incurrence of substantial indebtedness to finance our acquisitions,
including the Legacy Primo Acquisition;
•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;
•our ability to protect our intellectual property;
•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;
37
--------------------------------------------------------------------------------
•the seasonal nature of our business and the effect of adverse weather
conditions;
•our ability to recruit, retain and integrate new management;
•our ability to renew our collective bargaining agreements on satisfactory
terms;
•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;
•our ability to adequately address the challenges and risks associated with our
international operations and address difficulties in complying with laws and
regulations including the U.S. Foreign Corrupt Practices Act and the U.K.
Bribery Act of 2010;
•increased tax liabilities in the various jurisdictions in which we operate;
•our ability to utilize tax attributes to offset future taxable income;
•the impact of the 2017 Tax Cuts and Jobs Act on our tax obligations and
effective tax rate; 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, and 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.
Non-GAAP Measures
In this report, we supplement our reporting of financial measures determined
in accordance with U.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
changes. 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 (loss) earnings before interest expense, taxes, depreciation
and amortization ("EBITDA"), which is GAAP net (loss) income from continuing
operations before interest expense, net, (benefit) expense 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, goodwill and
intangible asset impairment charges, foreign exchange and other (gains) losses,
net, loss on disposal of property, plant and equipment, net, (gain) loss on sale
of business and other adjustments, net, as the case may be ("Adjusted EBITDA").
We consider Adjusted EBITDA to be an indicator of our operating performance.
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.
38
--------------------------------------------------------------------------------
Summary Financial Results
Net loss from continuing operations for the three months ended June 27, 2020
(the "second quarter") and six months ended June 27, 2020 (the "first half of
2020" or "year to date") was $131.7 million or $0.82 per diluted common share,
and $159.1 million or $1.06 per diluted common share, respectively, compared
with net income from continuing operations for the three months ended June 29,
2019 and net loss from continuing operations for the six months ended June 29,
2019 of $2.7 million or $0.02 per diluted common share, and $20.0 million or
$0.15 per diluted common share, respectively.
The following items of significance affected our financial results for the first
half of 2020:
•Net revenue increased $47.7 million , or 5.4%, from the prior year period due
primarily to the addition of revenues from the Legacy Primo business and pricing
initiatives, partially offset by a decline in water and office coffee services
consumption and volumes due to the impact of COVID-19 and the non-recurrence of
revenues contributed by our Cott Beverages LLC business, which was sold during
the first quarter of 2019;
•Gross profit increased to $528.0 million from $514.7 million in the prior year
period due primarily to the addition of the Legacy Primo business and pricing
initiatives, partially offset by a decline in water and office coffee services
consumption and volumes due to the impact of COVID-19. Gross profit as a
percentage of net revenue was 56.7% compared to 58.3% in the prior year period;
•SG&A expenses increased to $501.8 million from $481.5 million in the prior year
period due primarily to the addition of the Legacy Primo business, partially
offset by lower delivery expenses incurred as a result of the impact of COVID-19
and the non-recurrence of SG&A expenses incurred by our Cott Beverages LLC
business, which was sold during the first quarter of 2019. SG&A expenses as a
percentage of net revenue was 53.9% compared to 54.5% in the prior year period;
•Acquisition and integration expenses increased to $25.1 million from $7.4
million in the prior year period due primarily to the acquisition and
integration of the Legacy Primo business. Acquisition and integration expenses
as a percentage of revenue was 2.7% compared to 0.8% in the prior year period;
•Goodwill and intangible asset impairment charges increased to $115.2 million
from nil in the prior year period due primarily to general deterioration in
economic and market conditions in which we operate arising from COVID-19.
•Other expense, net was $5.4 million compared to $3.3 million in the prior year
period due primarily to an increase of net losses on foreign currency
transactions in the first half, partially offset by the loss recognized on the
sale of our Cott Beverages LLC business in the prior year period;
•Income tax benefit was $4.7 million on pre-tax loss from continuing operations
of $163.8 million compared to income tax expense of $0.8 million on pre-tax loss
from continuing operations of $19.2 million in the prior year period due
primarily to impairment charges incurred in the second quarter of 2020 for which
minimal tax benefit is recognized;
•Adjusted EBITDA increased to $152.9 million compared to $128.4 million in the
prior year period due to the items listed above; and
•Cash flows provided by operating activities from continuing operations was
$70.2 million compared to $16.3 million in the prior year period. The $53.9
million increase was due primarily to the change in working capital balances
relative to the prior year period.
39
--------------------------------------------------------------------------------
Results of Operations
The following table summarizes our Consolidated Statements of Operations as a
percentage of revenue for the three and six months ended June 27, 2020 and June
29, 2019 :
For the Three Months Ended For the Six Months Ended
June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
(in millions of U.S. dollars) $ % $ % $ % $ %
Revenue, net 456.8 100.0 455.6 100.0 931.0 100.0 883.3 100.0
Cost of sales 202.1 44.2 184.0 40.4 403.0 43.3 368.6 41.7
Gross profit 254.7 55.8 271.6 59.6 528.0 56.7 514.7 58.3
Selling, general and
administrative expenses 246.7 54.0 245.7 53.9 501.8 53.9 481.5 54.5
Loss on disposal of property,
plant and equipment, net 2.5 0.5 1.7 0.4 3.9 0.4 3.6 0.4
Acquisition and integration
expenses 4.3 0.9 2.7 0.6 25.1 2.7 7.4 0.8
Goodwill and intangible asset
impairment charges 115.2 25.2 - - 115.2 12.4 - -
Operating (loss) income (114.0) (25.0) 21.5 4.7 (118.0) (12.7) 22.2 2.5
Other (income) expense, net (1.6) (0.4) (2.2) (0.5) 5.4 0.6 3.3 0.4
Interest expense, net 20.7 4.5 18.8 4.1 40.4 4.3 38.1 4.3
(Loss) income from continuing
operations before income taxes (133.1) (29.1) 4.9 1.1 (163.8) (17.6) (19.2) (2.2)
Income tax (benefit) expense (1.4) (0.3) 2.2 0.5 (4.7) (0.5) 0.8 0.1
Net (loss) income from
continuing operations (131.7) (28.8) 2.7 0.6 (159.1) (17.1) (20.0) (2.3)
Net (loss) income from
discontinued operations, net of
income taxes (4.3) (0.9) 1.7 0.4 26.6 2.9 4.7 0.5
Net (loss) income (136.0) (29.8) 4.4 1.0 (132.5) (14.2) (15.3) (1.7)
Depreciation & amortization 52.8 11.6 42.9 9.4 97.8 10.5 82.6 9.4
The following tables summarize the change in revenue by reporting segment for
the three and six months ended
For the Three Months Ended June 27, 2020
(in millions of U.S. dollars, except percentage
amounts) North America Rest of World All Other Total
Change in revenue $ 40.4 $ (39.2) $ - $ 1.2
Impact of foreign exchange 1 0.4 2.1 - 2.5
Change excluding foreign exchange $ 40.8 $ (37.1) $ - $ 3.7
Percentage change in revenue 12.5 % (29.7) % - % 0.3 %
Percentage change in revenue excluding foreign
exchange 12.6 % (28.1) % - % 0.8 %
______________________
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.
40
--------------------------------------------------------------------------------
For the Six Months Ended June 27, 2020
(in millions of U.S. dollars, except percentage
amounts) North America Rest of World All Other Total
Change in revenue $ 93.0 $ (38.1) $ (7.2) $ 47.7
Impact of foreign exchange 1 0.5 2.2 - 2.7
Change excluding foreign exchange $ 93.5 $ (35.9) $ (7.2) $ 50.4
Percentage change in revenue 15.0 % (15.0) % (100.0) % 5.4 %
Percentage change in revenue excluding foreign
exchange 15.0 % (14.1) % (100.0) % 5.7 %
______________________
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.
The following tables summarize the change in gross profit by reporting segment
for the three and six months ended
For the Three Months Ended June 27, 2020
(in millions of U.S. dollars, except percentage
amounts) North America Rest of World All Other Total
Change in gross profit $ 9.6 $ (26.5) $ - $ (16.9)
Impact of foreign exchange 1 0.2 1.1 - 1.3
Change excluding foreign exchange $ 9.8 $ (25.4) $ - $ (15.6)
Percentage change in gross profit 4.9 % (35.2) % - % (6.2) %
Percentage change in gross profit excluding
foreign exchange 5.0 % (33.7) % - % (5.7) %
______________________
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.
For the Six Months Ended June 27, 2020
(in millions of U.S. dollars, except percentage
amounts) North America Rest of World All Other Total
Change in gross profit $ 40.1 $ (26.5) $ (0.3) $ 13.3
Impact of foreign exchange 1 0.3 1.1 - 1.4
Change excluding foreign exchange $ 40.4 $ (25.4) $ (0.3) $ 14.7
Percentage change in gross profit 10.8 % (18.6) % (100.0) % 2.6 %
Percentage change in gross profit excluding
foreign exchange 10.9 % (17.8) % (100.0) % 2.9 %
______________________
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 All Other
category.
41
--------------------------------------------------------------------------------
The following table summarizes our net revenue, gross profit, SG&A expenses
and operating income (loss) by reporting segment for the three and six months
ended June 27, 2020 and June 29, 2019 :
For the Six Months
For the Three Months Ended Ended
(in millions of U.S. dollars) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Revenue, net
North America $ 363.9 $ 323.5 $ 714.6 $ 621.6
Rest of World 92.9 132.1 216.4 254.5
All Other - - - 7.2
Total $ 456.8 $ 455.6 $ 931.0 $ 883.3
Gross profit
North America $ 205.9 $ 196.3 $ 412.0 $ 371.9
Rest of World 48.8 75.3 116.0 142.5
All Other - - - 0.3
Total $ 254.7 $ 271.6 $ 528.0 $ 514.7
Selling, general and administrative expenses
North America $ 175.5 $ 171.8 $ 352.7 $ 334.4
Rest of World 60.1 64.4 126.7 124.8
All Other 11.1 9.5 22.4 22.3
Total $ 246.7 $ 245.7 $ 501.8 $ 481.5
Operating income (loss)
North America $ 24.4 $ 21.9 $ 48.1 $ 32.1
Rest of World (126.6) 9.0 (127.1) 14.3
All Other (11.8) (9.4) (39.0) (24.2)
Total $ (114.0) $ 21.5 $ (118.0) $ 22.2 The following tables summarize net revenue by channel for the three and six
months ended
For the Three Months Ended June 27, 2020
(in millions of U.S. dollars) North America Rest of World All Other Total
Revenue, net
Water Direct/Water Exchange $ 225.8 $ 42.3 $ - $ 268.1
Water Refill/Water Filtration 51.2 6.3 - 57.5
Other Water 42.5 14.3 - 56.8
Water Dispensers 20.8 - - 20.8
Other 23.6 30.0 - 53.6
Total $ 363.9 $ 92.9 $ - $ 456.8
42--------------------------------------------------------------------------------
For the Six Months Ended June 27, 2020
(in millions of U.S. dollars) North America Rest of World All Other Total
Revenue, net
Water Direct/Water Exchange $ 463.2 $ 100.1 $ - $ 563.3
Water Refill/Water Filtration 74.9 13.4 - 88.3
Other Water 84.7 27.5 - 112.2
Water Dispensers 26.7 - - 26.7
Other 65.1 75.4 - 140.5
Total $ 714.6 $ 216.4 $ - $ 931.0
For the Three Months Ended June 29, 2019
(in millions of U.S. dollars) North America Rest of World All Other Total
Revenue, net
Water Direct/Water Exchange $ 229.7 $ 66.0 $ - $ 295.7
Water Refill/Water Filtration 8.8 6.5 - 15.3
Other Water 41.6 16.5 - 58.1
Water Dispensers - - - -
Other 43.4 43.1 - 86.5
Total $ 323.5 $ 132.1 $ - $ 455.6
For the Six Months Ended June 29, 2019
(in millions of U.S. dollars) North America Rest of World All Other Total
Revenue, net
Water Direct/Water Exchange $ 436.2 $ 123.7 $ - $ 559.9
Water Refill/Water Filtration 17.7 12.9 - 30.6
Other Water 81.3 27.6 - 108.9
Water Dispensers - - - -
Other 86.4 90.3 7.2 183.9
Total $ 621.6 $ 254.5 $ 7.2 $ 883.3
43--------------------------------------------------------------------------------
The following table summarizes our EBITDA and Adjusted EBITDA for the three and
six months ended
For the Six Months
For the Three Months Ended Ended
(in millions of U.S. dollars) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Net (loss) income from continuing
operations $ (131.7) $ 2.7 $ (159.1) $ (20.0)
Interest expense, net 20.7 18.8 40.4 38.1
Income tax (benefit) expense (1.4) 2.2 (4.7) 0.8
Depreciation and amortization 52.8 42.9 97.8 82.6
EBITDA $ (59.6) $ 66.6 $ (25.6) $ 101.5
Acquisition and integration costs 1 4.3 2.7 25.1 7.4
Share-based compensation costs 4.9 3.0 7.3 6.1
COVID-19 costs 15.4 - 16.8 -
Goodwill and intangible asset
impairment charges 115.2 - 115.2 -
Foreign exchange and other (gains)
losses, net (1.1) (0.7) 5.2 0.3
Loss on disposal of property, plant
and equipment, net 2.5 1.7 3.9 3.6
(Gain) loss on sale of business (0.6) 0.6 (0.6) 6.0
Other adjustments, net 1.5 0.8 5.6 3.5
Adjusted EBITDA $ 82.5 $ 74.7 $ 152.9 $ 128.4
______________________
1 Includes
Three Months EndedJune 27, 2020 Compared to Three Months EndedJune 29, 2019 Revenue,Net Net revenue increased$1.2 million , or 0.3%, in the second quarter from the comparable prior year period.North America net revenue increased$40.4 million , or 12.5%, in the second quarter from the comparable prior year period due primarily to the addition of revenues from the Legacy Primo business and pricing initiatives, partially offset by a decline in water and office coffee services consumption and volumes due to the impact of COVID-19. Rest of World net revenue decreased$39.2 million , or 29.7%, in the second quarter from the comparable prior year period due primarily to a decline in water consumption and volumes due to the impact of COVID-19. Gross Profit Gross profit decreased to$254.7 million in the second quarter from$271.6 million in the comparable prior year period. Gross profit as a percentage of revenue was 55.8% in the second quarter compared to 59.6% in the comparable prior year period.North America gross profit increased to$205.9 million in the second quarter from$196.3 million in the comparable prior year period due primarily to the addition of the Legacy Primo business and pricing initiatives, partially offset by a decline in water and office coffee services consumption and volumes, as well as additional costs incurred as a result of the impact of COVID-19. Rest of World gross profit decreased to$48.8 million in the second quarter from$75.3 million in the comparable prior year period due primarily to a decline in water consumption and volumes due to the impact of COVID-19. 44 -------------------------------------------------------------------------------- Selling, General and Administrative Expenses SG&A expenses increased to$246.7 million in the second quarter from$245.7 million in the comparable prior year period. SG&A expenses as a percentage of revenue was 54.0% in the second quarter compared to 53.9% in the comparable prior year period. North America SG&A expenses increased to$175.5 million in the second quarter from$171.8 million in the comparable prior year period due primarily to the addition of the Legacy Primo business, partially offset by lower delivery expenses incurred as a result of the impact of COVID-19 and wage subsidies received. Rest of World SG&A expenses decreased to$60.1 million in the second quarter from$64.4 million in the comparable prior year period due primarily to lower delivery expenses incurred as a result of the impact of COVID-19 and wage subsidies received, partially offset by an increase in severance costs. All Other SG&A expenses increased to$11.1 million in the second quarter from$9.5 million in the comparable prior year period due primarily to an increase in professional fees. Acquisition and Integration Expenses Acquisition and integration expenses increased to$4.3 million in the second quarter from$2.7 million in the comparable prior year period. Acquisition and integration expenses as a percentage of revenue was 0.9% in the second quarter compared to 0.6% in the comparable prior year period.North America acquisition and integration expenses increased to$2.4 million in the second quarter from$1.0 million in the comparable prior year period due primarily to the addition of the Legacy Primo business. Rest of World acquisition and integration expenses decreased to$1.0 million in the second quarter from$1.9 million in the comparable prior year period due primarily to a reduction in costs associated with tuck-in acquisitions. All Other acquisition and integration expenses increased to$0.9 million in the second quarter from income of$0.2 million in the comparable prior year period due primarily to the addition of the Legacy Primo business.Goodwill and Intangible Asset Impairment ChargesGoodwill and intangible asset impairment charges increased to$115.2 million in the second quarter from nil in the comparable prior year period.Goodwill and intangible asset impairment charges as a percentage of revenue was 25.2% in the second quarter compared to nil in the comparable prior year period.North America goodwill and intangible asset impairment charges increased to$1.2 million in the second quarter from nil in the comparable prior year period due to impairment charges recorded on our Canadian trademarks primarily resulting from general deterioration in economic and market conditions in which we operate arising from COVID-19 and revised projections of future operating results. Rest of World goodwill and intangible asset impairment charges increased to$114.0 million in the second quarter from nil in the comparable prior year period due primarily to general deterioration in economic and market conditions in which we operate arising from COVID-19 and revised projections of future operating results. Operating (Loss) Income Operating loss was$114.0 million in the second quarter compared to operating income of$21.5 million in the comparable prior year period.North America operating income increased to$24.4 million in the second quarter from$21.9 million in the comparable prior year period due to the items discussed above. Rest of World operating loss increased to$126.6 million in the second quarter from operating income of$9.0 million in the comparable prior year period due to the items discussed above. All Other operating loss increased to$11.8 million in the second quarter from$9.4 million in the comparable prior year period due to the items discussed above. Other Income, Net Other income, net was$1.6 million for the second quarter compared to$2.2 million in the comparable prior year period due primarily to a decrease of net gains on foreign currency transactions in the second quarter compared to the prior year period. 45 -------------------------------------------------------------------------------- Income Taxes Income tax benefit was$1.4 million in the second quarter compared to income tax expense of$2.2 million in the comparable prior year period. The effective tax rate for the second quarter was 1.1% compared to 44.9% in the comparable prior year period. The effective tax rate for the second quarter varied from the effective tax rate from the comparable prior year period due to impairment charges incurred in the second quarter of 2020 for which minimal tax benefit is recognized. Six Months EndedJune 27, 2020 Compared to Six Months EndedJune 29, 2019 Revenue,Net Net revenue increased$47.7 million , or 5.4%, for the year to date from the comparable prior year period.North America net revenue increased$93.0 million , or 15.0%, for the year to date from the comparable prior year period due primarily to the addition of revenues from the Legacy Primo business and pricing initiatives, partially offset by a decline in water and office coffee services consumption and volumes due to the impact of COVID-19. Rest of World net revenue decreased$38.1 million , or 15.0%, for the year to date from the comparable prior year period due primarily to a decline in water consumption and volumes due to the impact of COVID-19. All Other net revenue decreased$7.2 million , or 100.0%, for the year to date from the comparable prior year period due primarily to the non-recurrence of revenue contributed by ourCott Beverages LLC business, which was sold in the first quarter of 2019. Gross Profit Gross profit increased to$528.0 million for the year to date from$514.7 million in the comparable prior year period. Gross profit as a percentage of revenue was 56.7% year to date compared to 58.3% in the comparable prior year period.North America gross profit increased to$412.0 million for the year to date from$371.9 million in the comparable prior year period due primarily to the addition of the Legacy Primo business and pricing initiatives, partially offset by a decline in water and office coffee services consumption and volumes as a result of the impact of COVID-19. Rest of World gross profit decreased to$116.0 million for the year to date from$142.5 million in the comparable prior year period due primarily to a decline in water consumption and volumes due to the effect of COVID-19. All Other gross profit decreased to nil for the year to date from$0.3 million in the comparable prior year period due primarily to the non-recurrence of gross profit contributed by ourCott Beverages LLC business, which was sold in the first quarter of 2019. Selling, General and Administrative Expenses SG&A expenses increased to$501.8 million for the year to date from$481.5 million in the comparable prior year period. SG&A expenses as a percentage of revenue was 53.9% year to date compared to 54.5% in the comparable prior year period. North America SG&A expenses increased to$352.7 million for the year to date from$334.4 million in the comparable prior year period due primarily to the addition of the Legacy Primo business, partially offset by lower delivery expenses incurred as a result of the impact of COVID-19. Rest of World SG&A expenses increased to$126.7 million for the year to date from$124.8 million in the comparable prior year period due primarily to an increase in severance costs, partially offset by lower delivery expenses incurred as a result of the impact of COVID-19. All Other SG&A expenses increased to$22.4 million for the year to date from$22.3 million in the comparable prior year period due primarily to an increase in professional fees, partially offset by the non-recurrence of SG&A expenses incurred by ourCott Beverages LLC business, which was sold in the first quarter of 2019. 46 -------------------------------------------------------------------------------- Acquisition and Integration Expenses Acquisition and integration expenses increased to$25.1 million for the year to date from$7.4 million in the comparable prior year period. Acquisition and integration expenses as a percentage of revenue was 2.7% year to date compared to 0.8% in the comparable prior year period.North America acquisition and integration expenses increased to$6.5 million for the year to date from$1.9 million in the comparable prior year period due primarily to the addition of the Legacy Primo business, partially offset by lower acquisition and integration expenses related to our Mountain Valley andCrystal Rock businesses. Rest of World acquisition and integration expenses decreased to$2.1 million for the year to date from$3.4 million in the comparable prior year period due primarily to a reduction in costs associated with tuck-in acquisitions. All Other acquisition and integration expenses increased to$16.5 million for the year to date from$2.1 million in the comparable prior year period due primarily to the addition of the Legacy Primo business.Goodwill and Intangible Asset Impairment ChargesGoodwill and intangible asset impairment charges increased to$115.2 million for the year to date from nil in the comparable prior year period.Goodwill and intangible asset impairment charges as a percentage of revenue was 12.4% year to date compared to nil in the comparable prior year period.North America goodwill and intangible asset impairment charges increased to$1.2 million for the year to date from nil in the comparable prior year period due to impairment charges recorded on our Canadian trademarks primarily resulting from general deterioration in economic and market conditions in which we operate arising from COVID-19 and revised projections of future operating results. Rest of World goodwill and intangible asset impairment charges increased to$114.0 million for the year to date from nil in the comparable prior year period due primarily to general deterioration in economic and market conditions in which we operate arising from COVID-19 and revised projections of future operating results. Operating (Loss) Income Operating loss was$118.0 million for the year to date compared to operating income of$22.2 million in the comparable prior year period.North America operating income increased to$48.1 million for the year to date from$32.1 million in the comparable prior year period due to the items discussed above. Rest of World operating loss increased to$127.1 million for the year to date from operating income of$14.3 million in the comparable prior year period due to the items discussed above. All Other operating loss increased to$39.0 million for the year to date from$24.2 million in the comparable prior year period due to the items discussed above. Other Expense, Net Other expense, net was$5.4 million for the year to date compared to$3.3 million in the comparable prior year period due primarily to an increase of net losses on foreign currency transactions in the first half, partially offset by the loss recognized on the sale of ourCott Beverages LLC business in the prior year period. Income Taxes Income tax benefit was$4.7 million for the year to date compared to income tax expense of$0.8 million in the comparable prior year period. The effective tax rate for the year to date was 2.9% compared to (4.2)% in the comparable prior year period. The effective tax rate for the year to date varied from the effective tax rate from the comparable prior year period due to impairment charges incurred in the second quarter of 2020 for which minimal tax benefit is recognized. 47 -------------------------------------------------------------------------------- Liquidity and Capital Resources As ofJune 27, 2020 , we had total debt of$1,509.8 million and$211.1 million of cash and cash equivalents compared to$1,358.4 million of debt and$156.9 million of cash and cash equivalents as ofDecember 28, 2019 . Our cash and cash equivalents balances as ofJune 27, 2020 andDecember 28, 2019 include$12.4 million of cash proceeds received from the sale of our legacy carbonated soft drink and juice business and ourRoyal Crown International finished goods export business that are being held in escrow by a third party escrow agent to secure potential indemnification claims. Our cash and cash equivalents balances as ofJune 27, 2020 andDecember 28, 2019 also include$0.5 million of cash proceeds received from the sale of ourCott Beverages LLC business that are being held in escrow by a third party escrow agent to secure potential indemnification claims. InJuly 2020 , a settlement agreement was reached with Refresco, the buyer of both businesses. In exchange for a settlement of pending and future claims,$4.0 million of the escrow funds were released to Refresco. The remaining$8.4 million and$0.5 million were released to us. The recent COVID-19 pandemic has disrupted our business. The extent and duration of the impact of the COVID-19 pandemic on our business and financial results will depend on numerous evolving factors that we are not able to accurately predict and that all will vary by market. These factors include the duration and scope of the pandemic, global economic conditions during and after the pandemic, governmental actions that have been taken, or may be taken in the future, in response to the pandemic, and changes in customer behavior in response to the pandemic, some of which may be more than just temporary. In response to the COVID-19 pandemic, we have taken certain measures to preserve our liquidity. For example, onApril 3, 2020 , we borrowed$170.0 million under the Revolving Credit Facility as a precautionary measure to increase our cash position and preserve financial flexibility considering current uncertainty in the global markets resulting from the COVID-19 pandemic. In the second quarter of 2020, we repaid$100.0 million of the outstanding borrowings under the Revolving Credit Facility. 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 meet our expenses, capital expenditures, and debt service obligations for the next twelve months. 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. As ofJune 27, 2020 , our outstanding borrowings under the Revolving Credit Facility were$206.0 million and outstanding letters of credit totaled$44.7 million resulting in total utilization under the Revolving Credit Facility of$250.7 million . Accordingly, unused availability under the Revolving Credit Facility as ofJune 27, 2020 amounted to$99.3 million . We earn a portion 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$0.06 per common share was declared during each quarter of 2020 for aggregate dividend payments of approximately$19.5 million . 48 -------------------------------------------------------------------------------- The following table summarizes our cash flows for the three and six months endedJune 27, 2020 andJune 29, 2019 , as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements: For the Six Months For the Three Months Ended Ended (in millions of U.S. dollars) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Net cash provided by operating activities from continuing operations$ 65.5 $ 1.2 $ 70.2 $ 16.3 Net cash used in investing activities from continuing operations (41.4) (46.2) (501.6) (22.2) Net cash provided by (used in) financing activities from continuing operations 76.0 1.6 63.2 (45.1) Cash flows from discontinued operations: Net cash (used in) provided by operating activities from discontinued operations (0.7) 7.1 (18.0) 15.6 Net cash (used in) provided by investing activities from discontinued operations (1.6) (4.1) 392.9 (23.2) Net cash used in financing activities from discontinued operations - (0.2) (0.1) (0.2) Effect of exchange rate changes on cash 1.1 0.1 (1.0) 1.4 Net increase (decrease) in cash, cash equivalents and restricted cash 98.9 (40.5) 5.6 (57.4) Cash and cash equivalents and restricted cash, beginning of period 112.2 153.9 205.5 170.8 Cash and cash equivalents and restricted cash from continuing operations, end of period$ 211.1 $ 113.4 $ 211.1 $ 113.4 Operating Activities Cash provided by operating activities from continuing operations was$70.2 million year to date compared to$16.3 million in the comparable prior year period. The$53.9 million increase was due primarily to the change in working capital balances relative to the prior year period. Investing Activities Cash used in investing activities from continuing operations was$501.6 million year to date compared to$22.2 million in the comparable prior year period. The$479.4 million increase was due primarily to the cash used to acquire our Legacy Primo business, an increase in additions to property, plant and equipment relative to the prior year period, and cash received from the sale of ourCott Beverages LLC business in the prior year period. Financing Activities Cash provided by financing activities from continuing operations was$63.2 million year to date compared to cash used in financing activities from continuing operations of$45.1 million in the comparable prior year period. The$108.3 million increase was due primarily to an increase in net short-term borrowings in the current year as compared to the prior year period, partially offset by an increase in common shares repurchased and cash used for financing fees relative to the prior year period. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as defined under Item 303(a)(4) of Regulation S-K as ofJune 27, 2020 . Contractual Obligations We have no material changes to the disclosure on this matter made in our 2019 Annual Report. Credit Ratings and Covenant Compliance Credit Ratings We have no material changes to the disclosure on this matter made in our 2019 Annual Report. 49 -------------------------------------------------------------------------------- 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 ofJune 27, 2020 , 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 ofJune 27, 2020 . 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 ofJune 27, 2020 . Issuer Purchases ofEquity Securities Tax Withholding In the second quarter of 2020, an aggregate of 19,978 common shares were withheld from delivery to our employees to satisfy their respective tax obligations related to share-based awards. In the second quarter of 2019, an aggregate of 3,832 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 28, 2019 , our equity has increased by$182.0 million . The increase was due primarily to the issuance of common shares of$384.0 million , partially offset by net loss of$132.5 million , common shares repurchased and canceled of$32.2 million , other comprehensive loss, net of tax of$21.5 million and common share dividend payments of$19.5 million . Dividend Payments Common Share Dividend OnMay 5, 2020 , the Board of Directors declared a dividend of$0.06 per share on common shares, payable in cash onJune 17, 2020 to shareowners of record at the close of business onJune 5, 2020 . OnAugust 4, 2020 , the Board of Directors declared a dividend of$0.06 per share on common shares, payable in cash onSeptember 2, 2020 to shareowners of record at the close of business onAugust 19, 2020 . 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 continuing 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. Except as provided below, we have no material changes to our Critical Accounting Policies and Estimates disclosure as filed in our 2019 Annual Report. 50 -------------------------------------------------------------------------------- Impairment testing of goodwillGoodwill represents the excess purchase price of acquired businesses over the fair value of the net assets acquired. We test goodwill for impairment at least annually on the first day of the fourth quarter, based on our reporting unit carrying values, calculated as total assets less non-interest bearing liabilities, as of the end of the third quarter, or more frequently if we determine a triggering event has occurred during the year. During the second quarter of 2020, given the general deterioration in economic and market conditions in which we operate arising from COVID-19 pandemic, we identified a triggering event indicating possible impairment of goodwill and intangible assets, as further described below. We did not identify impairment of our property, plant and equipment, lease-related right-of-use assets, or long-lived assets. Due to the triggering event identified above arising from the impact of the COVID-19 pandemic, we first performed a qualitative assessment of goodwill to determine whether it was more likely than not that the fair value of these reporting units exceeded their respective carrying values. Based on this qualitative assessment, we determined that it was more likely than not that the fair value of our Eden, Aimia, Decantae, and Farrers reporting units did not exceed their respective carrying values. As a result, we performed an interim quantitative impairment test as ofJune 27, 2020 on these reporting units. Based on the quantitative assessment including consideration of the sensitivity of the assumptions made and methods used to determine fair value, industry trends and other relevant factors, we noted that the estimated fair value of the Aimia reporting unit exceeded its carrying value by approximately 23.5%. Therefore, no goodwill impairment charge was recorded for the Aimia reporting unit. Based on the quantitative assessment including consideration of the sensitivity of the assumptions made and methods used to determine fair value, industry trends and other relevant factors, we determined that goodwill was impaired for the Eden, Decantae, and Farrers reporting units and recognized impairment charges of$103.3 million ,$0.3 million and$0.5 million , respectively. The impairment charges are included in goodwill and intangible asset impairment charge expense in the Consolidated Statements of Operations for the three and six months endedJune 27, 2020 . Critical assumptions used in our valuation of the Eden reporting unit included the anticipated future cash flows, a weighted-average terminal growth rate of 1.5% and a discount rate of 9.5%. Critical assumptions used in our valuation of the Aimia, Decantae, and Farrers reporting units included a weighted-average terminal growth rate of 2.0% and a discount rate of 11.5%. The anticipated future cash flows assumption reflects projected revenue growth rates, operating profit margins and capital expenditures. The terminal growth rate assumption incorporated into the discounted cash flow calculation reflects our long-term view of the market and industry, projected changes in the sale of our products, pricing of such products and operating profit margins. The discount rate was determined using various factors and sensitive assumptions, including bond yields, size premiums and tax rates. This rate was based on the weighted average cost of capital a market participant would use if evaluating the reporting unit as an investment. These assumptions are considered significant unobservable inputs and represent our best estimate of assumptions that market participants would use to determine the fair value of the respective reporting units. The key inputs into the discounted cash flow analysis were consistent with market data, where available, indicating that the assumptions used were in a reasonable range of observable market data. See Note 1 to the Consolidated Financial Statements for a discussion on goodwill impairment. Impairment testing of intangible assets with an indefinite life Our intangible assets with indefinite lives relate to trademarks acquired in the acquisition of businesses, and there are no legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life of these intangible assets. Our trademarks with indefinite lives are not amortized, but rather are tested for impairment at least annually or more frequently if we determine a triggering event has occurred during the year. As a result of the triggering event described above arising from the impact of the COVID-19 pandemic, we also performed recoverability tests on our intangible assets, primarily trademarks, within each of our reporting segments as ofJune 27, 2020 . We assessed qualitative factors to determine whether the existence of events or circumstances indicated that it was more likely than not that the fair value of our trademarks with indefinite lives were less than their respective carrying value. The qualitative factors we assessed included macroeconomic conditions, industry and market considerations, cost factors that would have a negative effect on earnings and cash flows, overall financial performance compared with forecasted projections in prior periods, and other relevant events, the impact of which are all significant judgments and estimates. Based on this qualitative assessment, we determined that impairment was more likely than not with the trademarks with indefinite lives associated with our Eden andAquaterra businesses. As a result, we performed an interim quantitative impairment test as ofJune 27, 2020 on these intangible assets. 51 -------------------------------------------------------------------------------- To determine the fair value of the trademarks with indefinite lives associated with our Eden andAquaterra businesses, we use a relief from royalty method of the income approach, which calculates a fair value royalty rate that is applied to revenue forecasts associated with those trademarks. The resulting cash flows are discounted using a rate to reflect the risk of achieving the projected royalty savings attributable to the trademarks. The assumptions used to estimate the fair value of these trademarks are subjective and require significant management judgment, including estimated future revenues, the fair value royalty rate (which is estimated to be a reasonable market royalty charge that would be charged by a licensor of the trademarks) and the risk adjusted discount rate. Based on our impairment test, we determined the trademarks with indefinite lives associated with our Eden andAquaterra businesses were impaired and recognized impairment charges of$9.9 million and$1.2 million , respectively. The impairment charges are included in goodwill and intangible asset impairment charge expense in the Consolidated Statements of Operations for the three and six months endedJune 27, 2020 . See Note 1 to the Consolidated Financial Statements for a discussion on intangible assets with an indefinite life impairment. Recent Accounting Pronouncements See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting guidance. 52
--------------------------------------------------------------------------------
© Edgar Online, source
