prmw20190930_10q.htm
 

Table of Contents 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 


 

COMMISSION FILE NUMBER 001-34850

PRIMO WATER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware 82-1161432
(State of incorporation) (I.R.S. Employer Identification No.)

 

101 North Cherry Street, Suite 501, Winston-Salem, NC 27101 

(Address of principal executive office)               (Zip code)

 

(336) 331-4000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

     

$0.001 Par Value Common Stock

PRMW

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐

 

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☐ Accelerated filer  ☑
   
Non-accelerated filer  ☐ Smaller reporting company  ☐
   
Emerging growth company ☐  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ☐          No ☑

 

As of November 1, 2019, there were 39,235,209 shares of our Common Stock, par value $0.001 per share, outstanding.

 

 

 

PRIMO WATER CORPORATION

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019

 

INDEX

 

PART 1.   Financial Information

Page number 

   

Item 1.  Financial Statements (Unaudited) 

3

   

Condensed Consolidated Balance Sheets

3

   

Condensed Consolidated Statements of Operations

4

   

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

   

Condensed Consolidated Statements of Stockholders' Equity

6

   

Condensed Consolidated Statements of Cash Flows

7

   

Notes to Condensed Consolidated Financial Statements

8

   

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

22

   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

32

   

Item 4.  Controls and Procedures

33

   

PART II.  Other Information

 
   

Item 1.  Legal Proceedings

33

   

Item 1A.  Risk Factors

33

   

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

35

   

Item 3.  Defaults Upon Senior Securities

35

   

Item 4.  Mine Safety Disclosures

35

   

Item 5.  Other Information

35

   

Item 6.  Exhibits

36

   

Signatures 

37

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value information)

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
   

(unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 2,021     $ 7,301  

Accounts receivable, net

    27,026       19,179  

Inventories

    11,878       9,965  

Prepaid expenses and other current assets

    7,425       7,004  

Total current assets

    48,350       43,449  
                 

Bottles, net

    5,738       4,618  

Property and equipment, net

    108,162       95,627  

Operating lease right-of-use assets

    5,006        

Intangible assets, net

    74,469       78,671  

Goodwill

    94,746       91,814  

Note receivable, net of current portion

    3,094        

Other assets

    663       661  

Assets held-for-sale at fair value

          5,288  

Total assets

  $ 340,228     $ 320,128  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 31,583     $ 25,191  

Accrued expenses and other current liabilities

    9,241       8,274  

Current portion of long-term debt and finance leases

    11,562       11,159  

Total current liabilities

    52,386       44,624  
                 

Long-term debt and finance leases, net of current portion and debt issuance costs

    186,638       178,966  

Operating leases, net of current portion

    3,192        

Other long-term liabilities

    1,157       607  

Liabilities held-for-sale at fair value

          1,438  

Total liabilities

    243,373       225,635  
                 

Commitments and contingencies

               
                 

Stockholders’ equity:

               

Preferred stock, $0.001 par value - 10,000 shares authorized, none issued and outstanding

           

Common stock, $0.001 par value - 70,000 shares authorized, 39,228 and 38,567 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

    39       39  

Additional paid-in capital

    424,935       424,635  

Accumulated deficit

    (326,702 )     (328,599 )

Accumulated other comprehensive loss

    (1,417 )     (1,582 )

Total stockholders’ equity

    96,855       94,493  

Total liabilities and stockholders’ equity

  $ 340,228     $ 320,128  

 

See accompanying notes.

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net sales

  $ 86,967     $ 81,770     $ 236,275     $ 231,231  

Operating costs and expenses:

                               

Cost of sales

    64,694       58,312       174,418       164,462  

Selling, general and administrative expenses

    8,007       7,369       27,105       26,169  

Special items

    827       139       2,240       626  

Depreciation and amortization

    7,657       6,194       21,499       18,365  

Impairment charges and other

    (217 )     67,940       109       68,184  

Total operating costs and expenses

    80,968       139,954       225,371       277,806  

Income (loss) from operations

    5,999       (58,184 )     10,904       (46,575 )

Interest expense, net

    3,378       2,465       8,680       18,909  

Income (loss) before income taxes

    2,621       (60,649 )     2,224       (65,484 )

Income tax benefit

          (2,411 )           (8,907 )

Net income (loss)

  $ 2,621     $ (58,238 )   $ 2,224     $ (56,577 )
                                 

Earnings (loss) per common share:

                               

Basic

  $ 0.06     $ (1.45 )   $ 0.06     $ (1.55 )

Diluted

  $ 0.06     $ (1.45 )   $ 0.05     $ (1.55 )
                                 

Weighted average shares used in computing earnings (loss) per share:

                               

Basic

    40,515       40,072       40,400       36,410  

Diluted

    41,112       40,072       41,096       36,410  

 

See accompanying notes.

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

 

   

Three months ended

   

Nine months ended

 
   

September 30,

   

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income (loss)

  $ 2,621     $ (58,238 )   $ 2,224     $ (56,577 )

Other comprehensive income (loss):

                               

Reclassification of gain recognized in net loss on redemption of Glacier securities

                      (86 )

Unrealized gain on investment in Glacier securities

                      14  

Interest rate swaps

    568             (71 )      

Foreign currency translation adjustments, net

    (80 )     160       236       (269 )

Total other comprehensive income (loss)

    488       160       165       (341 )

Comprehensive income (loss)

  $ 3,109     $ (58,078 )   $ 2,389     $ (56,918 )

 

See accompanying notes.

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands)

 

Three Months Ended September 30, 2018

 
                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance, June 30, 2018

    37,636     $ 38     $ 424,427     $ (272,091 )   $ (1,271 )   $ 151,103  

Employee stock compensation plans

    413       1       929                   930  

Shares withheld for taxes related to net share settlement of equity awards

    (129 )     (1 )     (2,652 )                     (2,653 )

Exercise of common stock warrants

    607       1       698                       699  

Net loss

                            (58,238 )             (58,238 )

Other comprehensive income

                            160       160  

Balance, September 30, 2018

    38,527     $ 39     $ 423,402     $ (330,329 )   $ (1,111 )   $ 92,001  

 

Nine Months Ended September 30, 2018

 
                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance, December 31, 2017

    30,084     $ 30     $ 345,963     $ (273,752 )   $ (770 )   $ 71,471  

Employee stock compensation plans

    2,318       3       5,689                   5,692  

Shares withheld for taxes related to net share settlement of equity awards

    (797 )     (1 )     (11,013 )                 (11,014 )

Exercise of common stock warrants

    1,583       2       12,148                   12,150  

Proceeds from equity offering, net of costs

    5,339       5       70,786                   70,791  

Reclassification of equity issuance costs previously capitalized

                (171 )                 (171 )

Net loss

                      (56,577 )           (56,577 )

Other comprehensive loss

                            (341 )     (341 )

Balance, September 30, 2018

    38,527     $ 39     $ 423,402     $ (330,329 )   $ (1,111 )   $ 92,001  

 

Three Months Ended September 30, 2019

 
                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance, June 30, 2019

    39,185     $ 39     $ 423,729     $ (329,323 )   $ (1,905 )   $ 92,540  

Employee stock compensation plans

    44       1       1,221                   1,222  

Shares withheld for taxes related to net share settlement of equity awards

    (1 )     (1 )     (15 )                 (16 )

Net income

                      2,621             2,621  

Other comprehensive income

                            488       488  

Balance, September 30, 2019

    39,228     $ 39     $ 424,935     $ (326,702 )   $ (1,417 )   $ 96,855  

 

Nine Months Ended September 30, 2019

 
                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders’

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance, December 31, 2018

    38,567     $ 39     $ 424,635     $ (328,599 )   $ (1,582 )   $ 94,493  

Effect of ASC 842 adoption

                      (327 )           (327 )

Employee stock compensation plans

    937       1       4,240                   4,241  

Shares withheld for taxes related to net share settlement of equity awards

    (283 )     (1 )     (4,008 )                 (4,009 )

Exercise of common stock warrants

    7             68                   68  

Net income

                      2,224             2,224  

Other comprehensive income

                            165       165  

Balance, September 30, 2019

    39,228     $ 39     $ 424,935     $ (326,702 )   $ (1,417 )   $ 96,855  

 

See accompanying notes.

 

 

 

PRIMO WATER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net income (loss)

  $ 2,224     $ (56,577 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

               

Depreciation and amortization

    21,499       18,365  

Impairment charges and other

    109       68,184  

Stock-based compensation expense

    3,479       2,710  

Non-cash interest expense

    1,005       2,547  

Bad debt expense

    78       170  

Deferred income tax benefit

          (8,907 )

Realized foreign currency exchange (gain) loss and other, net

    (364 )     338  

Changes in operating assets and liabilities:

               

Accounts receivable

    (7,886 )     (5,724 )

Inventories

    (1,907 )     (3,431 )

Prepaid expenses and other current assets

    (185 )     (618 )

Operating lease right-of-use assets

    862        

Book overdraft

    1,144       1,023  

Accounts payable

    4,832       6,523  

Accrued expenses and other current liabilities

    (1,004 )     (796 )

Operating lease liabilities

    (816 )      

Net cash provided by operating activities

    23,070       23,807  
                 

Cash flows from investing activities:

               

Purchases of property and equipment, net

    (18,484 )     (14,200 )

Purchases of bottles, net of disposals

    (3,314 )     (1,596 )

Proceeds from the sale of property and equipment

    855       227  

Proceeds from the sale of Ice Assets

    400        

Proceeds from redemption of investment in Glacier securities

          6,277  

Acquisitions, net cash acquired

    (6,283 )      

Additions to intangible assets

    (29 )     (975 )

Net cash used in investing activities

    (26,855 )     (10,267 )
                 

Cash flows from financing activities:

               

Borrowings under Revolving Credit Facilities

    44,000       29,000  

Payments under Revolving Credit Facilities

    (33,000 )     (29,000 )

Borrowings under Term loans

          190,000  

Payments under Term loans

    (7,125 )     (186,515 )

Payments upon redemption of Junior Subordinated Debentures

          (87,629 )

Finance lease payments

    (2,219 )     (1,190 )

Proceeds from common stock issuance, net of costs

          70,791  

Proceeds from warrant exercises, net

    68       12,150  

Stock option and employee stock purchase activity

    762       1,589  

Payments for taxes related to net share settlement of equity awards

    (4,009 )     (11,013 )

Debt issuance costs and other

          (1,671 )

Net cash used in financing activities

    (1,523 )     (13,488 )
                 

Effect of exchange rate changes on cash and cash equivalents

    28       (8 )

Net (decrease) increase in cash and cash equivalents

    (5,280 )     44  

Cash and cash equivalents, beginning of year

    7,301       5,586  

Cash and cash equivalents, end of period

  $ 2,021     $ 5,630  
                 

Supplemental cash flow information:

               

Promissory note received in exchange for sale of ice assets

  $ 3,294     $  

Cash paid for interest

  $ 2,487     $ 2,340  

 

See accompanying notes.

 

 

PRIMO WATER CORPORATION 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands, except per share amounts)

 

 

1.

Description of Business and Significant Accounting Policies

 

Business

 

Primo Water Corporation (together with its consolidated subsidiaries, “Primo,” “we,” “our,” or “us”) is North America’s leading single source provider of multi-gallon purified bottled water, self-service refill drinking water and water dispensers sold through major retailers in the United States and Canada.

 

Unaudited Interim Financial Information

 

The accompanying interim condensed consolidated financial statements and notes have been prepared in accordance with our accounting practices described in our audited consolidated financial statements as of and for the year ended December 31, 2018. In the opinion of management, the unaudited interim condensed consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2018 as filed on Form 10-K (the “2018 Form 10-K”). The accompanying interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) with respect to annual audited financial statements. Significant accounting policies are summarized in our 2018 Form 10-K.

 

Reclassifications

 

Certain amounts reported previously have been reclassified with no effect on stockholders’ equity or net income (loss) as previously reported. These classifications, the effect of which is not material to the prior period financial statements, relate to the reclass of bank overdraft in financing activities to book overdraft in operating activities within the condensed consolidated statements of cash flows.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within that reporting period. Early adoption is permitted. We are currently in the process of evaluating the impact of adopting this guidance on our consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The update is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019 and early adoption is permitted. We are currently in the process of evaluating the impact of adopting this guidance on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The updated guidance eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. The update is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. We currently anticipate that adoption of the guidance will not have a material impact on our consolidated financial statements.

 

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, along with subsequent amendments to the initial guidance in ASU 2018-19, 2019-04 and 2019-05 (collectively, Topic 326) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. Topic 326 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. These changes will result in earlier recognition of credit losses. We will adopt ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings. We currently anticipate that adoption of the guidance will not have a material impact on our consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815) – Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU 2018-16 is intended alleviate concerns about the sustainability of the London Inter-Bank Offered Rate (“LIBOR”), allowing SOFR to be considered eligible as a benchmark interest rate for purposes of applying hedge accounting under Topic 815. The adoption of the standard in the second quarter of 2019 did not have an impact on our consolidated financial statements as LIBOR will continue to be used until it is phased out by financial institutions.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) along with subsequent amendments to the initial guidance in ASU 2017-13, ASU 2018-10, ASU 2018-11 and ASU 2019-1 (collectively, Topic 842) requiring lessees to recognize for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

We adopted Topic 842 effective January 1, 2019. The effects of adopting Topic 842 were the recognition of $4.2 million of operating lease right-of-use assets and $4.1 million of operating lease liabilities. We applied Topic 842 to all contracts conveying the right to control the use of identified property, plant, or equipment as of January 1, 2019, with comparative periods continuing to be reported under Topic 840 in accordance with the alternative transition method. In the adoption of Topic 842, we elected the package of practical expedients allowing us to carry forward the assessment from Topic 840 of whether our contracts contain or are leases, as well as, the classification and initial direct costs for any expired or existing leases. We also elected the practical expedient allowing us to use hindsight when determining the lease term and assessing impairment of right-of-use assets. For short-term leases with an initial term of 12 months or less, we have made an accounting policy election whereby a right-of-use asset and lease liability is not recognized. Lease expense for short-term leases is recognized on a straight-line basis over the lease term. A portion of our leases contain lease and non-lease components in the form of maintenance and utilities. We have elected to combine non-lease and lease components and treat them as a single lease component, which increases the amount of our lease assets and corresponding liabilities. We implemented a lease management system to assist in centralizing, maintaining and accounting for all leases to ensure compliance with Topic 842 reporting and disclosure requirements. Our accounting for finance leases remains substantially unchanged. The standard did not have a significant impact on our condensed consolidated statements of operations or our condensed consolidated statements of cash flows. See “Note 5 – Leases” for further details.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 is intended to better align the Company's risk management activities with financial reporting for hedging relationships. The standard eliminates the requirement to separately measure and report hedge ineffectiveness, expands the ability to hedge specific risk components, and generally requires the change in value of the hedge instrument and hedged item to be presented in the same income statement line. We adopted ASU 2017-12 in the second quarter of 2019 upon entering into an interest rate swap on our variable rate term loan. The new disclosure requirements were applied on a prospective basis. The adoption of the standard did not have a material impact on our consolidated financial statements.

 

 

 

2.

Revenue Recognition

 

Sales of Products

 

We earn revenue from contracts with customers, primarily through the sale of our purified, multi-gallon bottled water, self-service filtered drinking water, or through the sale of water dispensers. All revenue recognized in the current period is derived from contracts with customers. We account for these revenues under Topic 606.

 

 

In certain arrangements, depending on the nature and scope of the contract, our customer may be identified as the end consumer as we are interacting directly with the consumer via an implied contract upon the dispensing of self-service purified water or the purchase of a dispenser (either online or in a physical retail location). In other arrangements, our customer may be identified as the retailer, as we enter into contracts with retailers to resell purified multi-gallon bottled water or self-service filtered drinking water to the end consumer on our behalf. Our arrangements may also include standalone purchase orders from retailers to sell water dispensers. In such arrangements, the retailer is our customer.

 

Our performance obligations vary by business segment. Our performance obligations may include the delivery of purified water, the sale of the related bottle, or the sale of a water dispenser. In some instances, our sales arrangements may include multiple of the aforementioned performance obligations.

 

Our arrangements may include the shipping of products to our customers after the performance obligation related to that product has been satisfied. For such arrangements when shipping and handling activities are performed subsequent to the performance obligation being satisfied, we have elected to account for shipping and handling as activities to fulfill the promise to transfer goods. In such instances, we recognize shipping and handling costs at the same time as we recognize revenue.

 

We have no contractual obligation to accept returns nor do we guarantee sales. We may accept returns or issue credits for manufacturer defects or for items that were damaged in transit. We recognize revenue net of an estimated allowance for returns based on historical average return rates.

 

Typically, the transaction price of our products is fixed as agreed upon in our contracts with customers. Our arrangements may include variable consideration in the form of volume incentive agreements or coupon programs. We provide sales incentives to certain retailers in the form of a volume rebate to promote the sale of our products. Generally, the rebates are tiered, such that as sales increase, the rebate percentage increases. We estimate the expected amount of these rebates based on historical sales volume at the time of the original sale. We update our assessment of the amount of rebates that will be earned either quarterly or annually based on our best estimate of the volume levels the customer will reach during the measurement period. We also may include a redeemable coupon for the purchase of purified, multi-gallon bottled water upon the purchase of one of our products. We account for the coupons based on historical redemption rates. The customer’s right to redeem the coupon for a free purified, multi-gallon bottle of water is exercised at or near the purchase of our products such that it does not create a material timing difference in the recognition of revenue.

 

Our sales arrangements may involve collecting revenue directly from the end consumer. Tax on filtered water dispensed from a vended machine is exempt in several jurisdictions. For those remaining jurisdictions in which taxes are not exempt, we have analyzed our contracts with customers, concluding that we are the primary obligor to the respective taxing authority, and as such present sales tax charged to the end consumer utilizing the gross method.

 

We recognize revenue on the products we sell at a point in time. The delivery of purified water and sale of the related bottle are completed via a point-of-sale transaction at which time the customer obtains control and remits payment for the product. The shipment of a water dispenser to our customer reflects the transfer of control. We may grant credit limits and terms to customers based upon traditional practices and competitive conditions. In such instances, the terms may vary, but payments are generally due in 30 days or less from the invoicing date. Due to the point-of-sale nature of our products, we have not recognized revenue in the current period for performance obligations satisfied in previous reporting periods and have no unsatisfied performance obligations as of the end of the current period.

 

Multiple Performance Obligations

 

Our sales arrangements may include multiple performance obligations. We identify each of the performance obligations in these arrangements and allocate the total transaction price to each performance obligation based on its identified relative selling price. In such arrangements, all of the performance obligations are met simultaneously as our products are concurrently delivered and have the same pattern of transfer to the customer. Thus, revenue is recognized simultaneously for each performance obligation when the customer obtains control of the product.

 

 

Presentation of Revenue

 

Our arrangements may involve another party selling products to our customers. We partner with retailers to place our self-service filtered water dispensing machines in their stores. We pay retailers a commission on the amount of sales generated from our products. We evaluate whether we control the products before they are transferred to the customer. In such instances where we control our products prior to transferring them to the customer, we are the principal in the transaction and record revenue at the gross amount and record commission paid to retailers as cost of sales. If we conclude that we do not control the products, we are the agent in the transaction and record revenue net of commissions paid to retailers.

 

Accounts Receivable Net of Allowances

 

Trade accounts receivable represent amounts billed to customers and not yet collected, and are presented net of allowances. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis and is our best estimate of the amount of probable credit losses in our existing accounts receivable. Judgements are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. We also maintain an allowance for sales discounts, rebates and promotions based on our arrangements with customers. Account balances are charged off against the allowance in the period in which we determine that it is probable the receivable will not be recovered. These allowances totaled $2,515 and $1,755 at September 30, 2019 and December 31, 2018, respectively. Bad debt write-offs for the three and nine months ended September 30, 2019 and 2018 were immaterial.

 

Disaggregation of Revenue

 

The tables below present our consolidated net sales by geographic area.

 

   

Three months ended September 30, 2019

 
   

Refill

   

Exchange

   

Dispensers

   

Total

 

Geographical area

                               

United States

  $ 43,743     $ 23,282     $ 17,660     $ 84,685  

Canada

    732       952       598       2,282  
    $ 44,475     $ 24,234     $ 18,258     $ 86,967  

 

   

Three months ended September 30, 2018

 
   

Refill

   

Exchange

   

Dispensers

   

Total

 

Geographical area

                               

United States

  $ 46,884     $ 20,658     $ 11,053     $ 78,595  

Canada

    1,446       855       874       3,175  
    $ 48,330     $ 21,513     $ 11,927     $ 81,770  

 

   

Nine months ended September 30, 2019

 
   

Refill

   

Exchange

   

Dispensers

   

Total

 

Geographical area

                               

United States

  $ 122,567     $ 61,974     $ 44,144     $ 228,685  

Canada

    2,509       2,616       2,465       7,590  
    $ 125,076     $ 64,590     $ 46,609     $ 236,275  

 

   

Nine months ended September 30, 2018

 
   

Refill

   

Exchange

   

Dispensers

   

Total

 

Geographical area

                               

United States

  $ 130,526     $ 57,273     $ 33,522     $ 221,321  

Canada

    4,016       2,504       3,390       9,910  
    $ 134,542     $ 59,777     $ 36,912     $ 231,231  

 

 

 

3.

Impairment Charges and Other

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Impairment of Glacier trade name intangible

  $     $ 60,750     $     $ 60,750  

Impairment of property and equipment

          2,363             2,363  

Impairment of Ice assets held-for-sale

          4,586             4,586  

(Gain) loss on property and equipment and other

    (217 )     241       109       485  

Total

  $ (217 )   $ 67,940     $ 109     $ 68,184  

 

During the third quarter ended September 30, 2018, we decided to discontinue the use of the Glacier Water Services, Inc. (“Glacier”) trade name acquired as part of the acquisition of Glacier (the “Acquisition”) in December 2016, in order to more effectively and efficiently focus our brand building and marketing efforts in Refill around the Primo brand (the “Re-branding Strategy”). In connection with the initial accounting for the Acquisition, $62,900 of the purchase price was allocated to the indefinite-lived trade name related to the Refill segment. As a result of the Re-branding Strategy, as of September 30, 2018, we recorded a pre-tax, non-cash intangible asset impairment charge of $60,750 to reduce the carrying value of the trade name to its estimated fair value, which is recorded in impairment charges and other on the condensed consolidated statements of operations. The fair value of the trade name was estimated based on the future discounted cash flows expected to be generated under the trade name prior to its complete phase-out. Based on the change in circumstances arising from the Re-branding Strategy, the Glacier trade name was determined to have a finite life and will be amortized straight line over 18 month useful life, in-line with the expected roll-out of the Re-Branding Strategy. The following table provides a rollforward of the discontinued Glacier trade name:

 

   

Glacier

 
   

Trade Name

 
   

Intangible

 

Balance at December 31, 2018

  $ 2,150  

Amortization

    717  

Balance at September 30, 2019

  $ 1,433  

 

In addition, as a result of the Re-branding Strategy, during the third quarter ended September 30, 2018, we recorded a pre-tax, non-cash asset impairment charge of $2,363 to reduce the carrying value of property and equipment to its estimated fair value associated with certain Glacier-branded Refill equipment that is not expected to generate future cash flows sufficient to recover the net book value of the equipment. The fair value was estimated based on the undiscounted cash flows expected to be produced by the property and equipment. The impairment charge is recorded in impairment charges and other on the condensed consolidated statements of operations.

 

 

 

4.

Acquisition

 

On August 30, 2019, we acquired a 100% equity interest in Avant Premium Water & Ice (“Avant”), a provider of high-quality drinking water dispensed to consumers through self-service water kiosks located in parking lots at supermarkets and other retail locations.  We believe that the acquisition provides expansion to new geographic locations and a complimentary business model that can be expanded in the future.

 

Aggregate consideration in connection with the acquisition was cash of $6,533, including approximately $35 recorded in accrued expenses and other current liabilities in our condensed consolidated balance sheet.

 

We have recorded the assets purchased and liabilities assumed at their estimated fair value in accordance with FASB ASC Topic 805: Business Combinations. The purchase price exceeded the fair value of the net assets acquired resulting in goodwill of $2,787, attributable to expected financial synergies, the capture of additional market share, and expanded business model. The identifiable definite-lived intangible assets consist of customer lists and Avant trade name and will be amortized over seven years and two years, respectively.

 

 

The purchase price has been allocated to the assets acquired in the Avant acquisition as follows:   

 

   

Purchase Price Allocation

 

Cash and cash equivalents

  $ 250  

Prepaid expenses and other current assets

    25  

Property and equipment

    2,989  

Intangible assets

    482  

Goodwill

    2,787  

Aggregate purchase price

  $ 6,533  

 

The estimated fair values are subject to refinement during the measurement period (which is no longer than one year after the closing date of the acquisition), as additional information regarding closing date fair value becomes available. During the measurement period, the causes of any changes in cash flow estimates are considered to determine whether the change results from circumstances that existed at the acquisition date or if the change results from an event that occurred after the date of acquisition.

 

 

 

5.

Leases

 

We determine if an arrangement is a lease or service contract at inception. Where an arrangement is a lease we determine if it is an operating lease or a finance lease. Subsequently, if the arrangement is modified we reevaluate our classification. We have entered into finance lease agreements for vehicles with lease periods expiring between 2019 and 2024. We have entered into operating lease agreements primarily for buildings and equipment expiring between 2019 and 2028. As part of the Avant acquisition, we have entered into operating lease agreements for use of space within parking lots expiring between 2019 and 2024. Our short-term leases are typically in the form of storage units with month-to-month terms located throughout the United States.

 

At lease commencement, we record a lease liability and corresponding right-of-use asset. Lease liabilities represent the present value of our future lease payments over the expected lease term which includes options to extend or terminate the lease when it is reasonably certain those options will be exercised. We generally use the base, non-cancellable lease term to determine lease assets and liabilities. The interest rate implicit in our leases is not readily determinable and as such, the present value of our lease liability is determined using our incremental collateralized borrowing rate under the SunTrust Revolving Facility, which approximates the interest rate on a collateralized basis under similar terms as our underlying leased assets. Operating lease assets also include prepaid lease payments and lease incentives when present.

 

Operating lease right-of-use assets and liabilities are included on our Condensed Consolidated Balance Sheet beginning January 1, 2019. As of September 30, 2019, the current portion of our operating lease liabilities of $1,864 are presented within accrued expenses and other current liabilities. As of September 30, 2019, the long-term portion of our operating lease liabilities of $3,192 is presented within operating leases.

 

Finance lease right-of-use assets are presented within property and equipment, net. As of September 30, 2019 and December 31, 2018, vehicles under finance lease with a cost basis of $11,287 and $7,408, respectively, were included in property and equipment, net. As of September 30, 2019, the current portion of our finance lease liabilities of $2,063 is presented within current portion of long-term debt and finance leases. As of September 30, 2019 the long term portion of our finance lease liabilities of $5,043 is presented within long-term debt and finance leases, net of current portion and debt issuance costs.

 

 

Components of operating lease expense recorded in cost of sales and selling, general and administrative expenses on the condensed consolidated statements of operations were as follows:

 

   

Three months ended September 30, 2019

 
         

Long-term Operating

  $ 478  

Short-term Operating

    126  

Total Operating lease expense

  $ 604  

 

   

Nine months ended September 30, 2019

 
         

Long-term Operating

  $ 1,353  

Short-term Operating

    373  

Total Operating lease expense

  $ 1,726  

 

As of September 30, 2019, our operating leases had a weighted average remaining lease term of 4.8 years and a weighted average discount rate of 4.76%. Future lease payments under operating leases as of September 30, 2019 were as follows:

 

   

Operating Leases

 

Remainder of 2019

  $ 556  

2020

    1,971  

2021

    914  

2022

    769  

2023

    544  

Thereafter

    899  

Total future lease payments

    5,653  

Less: imputed interest

    (597 )

Total lease liability

  $ 5,056  

 

Supplemental information related to amount of cash paid on operating lease liability was as follows:

 

   

Nine months ended September 30, 2019

 
         

Operating cash flows used for operating leases

  $ 1,444  

 

 

 

6.

Ice Assets Held-for-Sale and Promissory Note

 

During the quarter ended September 30, 2018, we concluded that a sale of certain assets of our Refill segment (the “Ice Assets”) was probable to take place within one year, which meets the criteria for assets held-for-sale treatment in accordance with FASB ASC Topic 360, Property, Plant, and Equipment. The Ice Assets fair value less costs to sell at December 31, 2018 was as follows: 

 

   

December 31,

 
   

2018

 

Property and equipment, net

  $ 4,688  

Identifiable intangible assets

    600  

Assets held-for-sale at fair value

  $ 5,288  
         

Contingent consideration

  $ 1,438  

Liabilities held-for-sale at fair value

  $ 1,438  

Ice Assets, net

  $ 3,850  

 

 

On June 28, 2019, we sold the Ice Assets to a buyer in exchange for cash consideration of $400 and a promissory note of $3,600. The note has a five-year term and requires the buyer to make quarterly principal payments of $50 and quarterly interest payments at an annual interest rate of 7%. At the end of the five-year term of the note, the entire remaining outstanding principal amount is due and payable in full. Under the terms of the note, the buyer, under certain circumstances may make elections that would allow for a reduction in the interest rate and principal amount upon the prepayment of amounts owed under the promissory note. The note was recorded at its fair value of $3,278 which was measured based upon the present value of estimated future cash flows taking into consideration the terms and non-market interest rate of the note. As of September 30, 2019, the current portion of the note of $200 is presented within prepaid expenses and other assets, and the non-current portion of $3,094 is presented as a promissory note on the condensed consolidated balance sheet.

 

The buyer is not a related party and our continuing involvement following the sale will be minimal. The sale of the Ice Assets resulted in a loss of $580 for the nine months ended September 30, 2019 presented within impairment charges and other.

 

 

 

7.

Debt and Finance Leases, net of Debt Issuance Costs and Interest Rate Swap

 

Debt and finance leases, net of debt issuance costs are summarized as follows:

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
                 

Revolving Credit Facility

  $ 14,000     $ 3,000  

Term loans

    178,125       185,250  

Debt issuance costs, net

    (1,031 )     (1,265 )

SunTrust Credit Facility

    191,094       186,985  

Finance leases

    7,106       3,140  
      198,200       190,125  

Less current portion

    (11,562 )     (11,159 )

Long-term debt and finance leases, net of current portion and debt issuance costs

  $ 186,638     $ 178,966  

 

SunTrust Credit Facility

 

On June 22, 2018, we entered into a senior secured credit facility (the “SunTrust Credit Facility”) that provides for a $190,000 senior term loan facility (the “Term Loan”) and a $30,000 senior revolving loan facility (the “Revolving Facility”). SunTrust Bank serves as the Administrative Agent, Swingline Lender and Issuing Bank under the SunTrust Credit Facility. The SunTrust Credit Facility matures on June 22, 2023. The Term Loan requires annual principal payments (payable in quarterly installments) equal to 5% per annum, or $9,500, with the remaining indebtedness due at maturity. The SunTrust Credit Facility is secured by a first priority security interest in and lien on substantially all of our assets. The SunTrust Credit Facility and related obligations are guaranteed by certain of our domestic subsidiaries.

 

Interest on outstanding borrowings under the SunTrust Credit Facility is calculated at our option at either (1) a base rate (which is derived from the Administrative Agent’s prime lending rate, the federal funds effective rate plus 0.5%, or a LIBOR plus 1.0%) or (2) LIBOR plus, in each case of the foregoing (1) and (2), a margin, initially set at 2.50% per annum with respect to LIBOR loans and 1.50% per annum for base rate loans. A commitment fee, initially set at 0.30% per annum, ranging from 0.15% to 0.30% per annum, is payable quarterly on the average undrawn portion of the Revolving Facility. The margins and commitment fee fluctuate based on our consolidated leverage ratio as specified in the SunTrust Credit Facility. Total issuance costs associated with the SunTrust Credit Facility were $1,700, which have been presented either as a direct deduction from the carrying amount of the debt within long-term debt and finance leases, net of current portion and debt issuance costs, with respect to costs attributable to the Term Loan, or within other assets, with respect to costs attributable to the Revolving Facility. The costs are being amortized as part of interest expense over the term of the SunTrust Credit Facility. As of September 30, 2019, we had $14,000 outstanding borrowings and $16,000 of availability under the Revolving Facility.

 

The SunTrust Credit Facility contains a number of affirmative and negative covenants that use consolidated adjusted EBITDA (“Adjusted EBITDA”). Adjusted EBITDA is a non-U.S. GAAP financial measure that is calculated as net income (loss) before depreciation and amortization; interest expense, net; income taxes; change in fair value of warrant liability; non-cash stock-based compensation expense; special items; and impairment charges and other.

 

 

The primary operational covenants included in the SunTrust Credit Facility are as follows: (i) a minimum consolidated fixed charge coverage ratio of 1.10:1.00 beginning with the fiscal quarter ended June 30, 2018 and (ii) a maximum consolidated leverage ratio of 4.25:1.00 beginning with the fiscal quarter ended September 30, 2019 with the financial ratios tested as of the last day of each fiscal quarter. The leverage ratio steps down to 4.00:1.00 with respect to each fiscal quarter ending after June 30, 2020. At September 30, 2019, we were in compliance with all operational covenants, including (i) a consolidated fixed charge coverage ratio of 1.20:1.00 and (ii) a consolidated leverage ratio of 3.91:1.00.

 

Goldman Credit Facility

 

On December 12, 2016, to complete the acquisition by merger (the “Acquisition”) of Glacier Water Services, Inc. (“Glacier”), we entered into a senior secured credit facility with Goldman Sachs Bank USA (the “Goldman Credit Facility”) that provided for an $186,000 term loan facility and a $10,000 revolving loan facility. We repaid all outstanding borrowings and accrued interest under the Goldman Credit Facility with the proceeds from a follow-on equity offering completed in the second quarter of 2018 and the proceeds from the SunTrust Credit Facility. In connection with the repayment and termination of the Goldman Credit Facility during the second quarter of 2018, we immediately charged to interest expense, net on the condensed consolidated statements of operations the remaining $2,960 in unamortized debt issuance costs related to the Goldman Credit Facility and $3,904 related to early payment penalties.

 

Junior Subordinated Debentures and Investments

 

In connection with the Acquisition, we assumed $89,529 of 9-1/16% Junior Subordinated Deferrable Interest Debentures due 2028 (the “Subordinated Debentures”) issued to Glacier Water Trust I (“the Trust”), a wholly owned subsidiary of Primo following the Acquisition. On June 29, 2018, in connection with the closing of the SunTrust Credit Facility, we paid $87,938, including accrued interest of $309, to redeem the Subordinated Debentures. In connection with the redemption of the Subordinated Debentures, we recorded a gain of $475 in interest expense, net on the condensed consolidated statements of operations resulting from the accretion of the remaining fair value adjustment allocated to the Subordinated Debentures as part of the purchase price allocation of the Acquisition.

 

In connection with the redemption of the Subordinated Debentures described above, the Trust issued a revocable notice of redemption of all outstanding capital securities of the Trust, and all outstanding capital securities of the Trust were redeemed on June 29, 2018. We owned a portion of such securities and received $6,277 in proceeds upon their redemption, resulting in a $161 loss on the redemption of the securities which is included in impairment charges and other on the condensed consolidated statements of operations.

 

Finance Leases

 

As of September 30, 2019, our finance leases had a weighted average remaining lease term of 3.2 years and a weighted average discount rate of 4.76%. Future finance lease obligations as of September 30, 2019 were as follows:

 

   

Finance Leases

 

Remainder of 2019

  $ 2,367  

2020

    2,001  

2021

    1,562  

2022

    934  

2023

    299  

Total future lease obligations

    7,163  

Less: imputed interest

    (57 )

Total finance lease liability

  $ 7,106  

 

Interest Rate Swap

 

To mitigate the risks associated with future interest rate movements, we have employed interest rate swaps to fix the rate on a portion of our outstanding borrowings under the SunTrust Credit Facility. We executed our first interest rate swap agreement in April 2019. The notional amount of the interest rate swap agreement was $25,000 as of September 30, 2019.  The interest rate swap matures April 2023. We did not utilize hedge accounting for this interest rate swap and the change in fair value recorded in interest expense on the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 is $782 and $789, respectively.

 

 

We executed a second interest rate swap agreement in September 2019. The notional amount of the interest rate swap agreement was $25,000 as of September 30, 2019. The interest rate swap matures April 2023. The interest rate swap is deemed an effective cash flow hedge and the change in fair value recorded through other comprehensive income (loss) on the condensed consolidated statements of comprehensive income (loss) for both the three and nine months ended September 30, 2019 is $71.

 

An interest rate swap liability of $858 is recorded in other long-term liabilities on the condensed consolidated balance sheets at September 30, 2019.

 

 

 

 

8.

Stock-Based Compensation

 

Overview

 

Total non-cash stock-based compensation expense by award type for all of our plans, all of which is included in selling, general and administrative expenses on our condensed consolidated statements of operations, was as follows:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Stock options

  $ 59     $ 85     $ 206     $ 361  

Restricted stock

    659       (12 )     2,725       1,709  

Long-Term Performance Plan

    269       (67 )     489       565  

Employee Stock Purchase Plan

          25       59       75  
    $ 987     $ 31     $ 3,479     $ 2,710  

 

Long-Term Performance Plan

 

On February 28, 2017, we established the Long-Term Performance Plan (the “LTPP”). The LTPP provides equity grants for eligible employees based on the attainment of certain performance-based targets. Our intention is that all awards under the LTPP will be in the form of equity grants.

 

On March 20, 2017, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2017 through December 31, 2019 (the “March 2017 Grant”). The number of shares earnable under the March 2017 Grant awards vary based on achievement of the established financial targets of Adjusted EBITDA and free cash flow on a cumulative basis for fiscal years 2017 through 2019.

 

On March 9, 2018, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2018 through December 31, 2020 (the “March 2018 Grant”). The number of shares earnable under the March 2018 Grant awards vary based on achievement of the established financial targets of Adjusted EBITDA and free cash flow on a cumulative basis for fiscal years 2018 through 2020.

 

On March 8, 2019, we granted performance based equity awards under the LTPP with vesting terms based on our attainment of certain financial targets for the period of January 1, 2019 through December 31, 2021 (the “March 2019 Grant”). The number of shares earnable under the March 2019 Grant awards vary based on achievement of the established financial targets of net sales and free cash flow on a cumulative basis for fiscal years 2019 through 2021.

 

 

 

9.

Special Items

 

We have incurred expenses that either we do not believe to be indicative of our core operations, or we believe are significant to our current operating results warranting separate classification. As such, we have separately classified these expenses as special items. The components of special items are as follows:

 

   

Three months ended September 30,

 
   

2019

   

2018

 
                 

Acquisition-related costs(1)

  $ 138     $ 210  

Other costs(2)

    500       (71 )

Activist investor-related costs (3)

    189        

Total

  $ 827     $ 139  

 

   

Nine months ended September 30,

 
   

2019

   

2018

 
                 

Acquisition-related costs(1)

  $ 445     $ 571  

Other costs(2)

    1,067       55  

Activist investor-related costs(3)

    728        

Total

  $ 2,240     $ 626  

 

 

(1)

Acquisition-related expenses, including fees payable to financial, legal, accounting and other advisors.

 

(2)

Restructuring, severance, and other costs not indicative of our core operations.

 

(3)

Activist investor-related expense, including fees payable to legal and other advisors.

 

 

 

10.

Commitments and Contingencies

 

Sales Tax

 

We routinely purchase equipment for use in operations from various vendors.  These purchases are subject to sales tax depending on the equipment type and local sales tax regulations; however, we believe certain vendors have not assessed the appropriate sales tax.  For purchases that are subject to sales tax in which we believe the vendor did not assess the appropriate amount, we accrue an estimate of the sales tax liability we ultimately expect to pay.

 

Other Contingencies

 

From time to time, we are involved in various claims and legal actions that arise in the normal course of business. Management believes that the outcome of such claims and legal actions will not have a significant adverse effect on our financial position, results of operations or cash flows.

 

 

 

11.

Income Tax (Benefit) Provision

 

For the three and nine months ended September 30, 2019 there was $0 income tax expense recognized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, available taxes in the carryback periods, projected future taxable income and tax planning strategies in making this assessment. Accordingly, we have provided a full valuation allowance to offset the net deferred tax assets that are not expected to be realized as of September 30, 2019.

 

During the third quarter of 2018, as described in Note 3 – Impairment Charges and Other, we recorded a $60,750 impairment for the Glacier trade name as a result of the Re-branding Strategy.  We recorded an income tax benefit of $4,150 in the third quarter of 2018 associated with this impairment, noting that our tax benefit is limited to the amount of previously recorded tax expense.

 

During the third quarter of 2018, we completed our assessment regarding the deductibility of certain performance-based compensation plans under the 2017 Tax Act, resulting in the reversal of $1,739 of tax benefit recorded in the second quarter of 2018. 

 

 

Section 382 of the U.S. Internal Revenue Code imposes an annual limitation on the amount of net operating loss carryforwards that might be used to offset taxable income when a corporation has undergone significant changes in stock ownership. We believe our prior ownership changes have created an annual limit, imposed by Section 382, on the amount of net operating loss we can utilize in a given year.  Realization of the loss carryforwards is dependent upon generating sufficient taxable income prior to the expiration of the loss carryforwards, subject to the Section 382 limitation. 

 

We have no unrecognized tax benefits and there are no uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will increase within the next 12 months. Substantially all tax years remain open by federal, state and foreign tax jurisdictions.

 

 

 

12.

Fair Value Measurements

 

Fair value rules currently apply to all financial assets and liabilities and for certain nonfinancial assets and liabilities that are required to be recognized or disclosed at fair value. For this purpose, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

 

Level 1 — quoted prices in active markets for identical assets and liabilities.

 

 

Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.

 

 

Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.

 

At September 30, 2019 and December 31, 2018, we held financial assets and liabilities that are required to be measured at fair value on a recurring basis. The financial assets and liabilities held by us and the fair value hierarchy used to determine their fair values are as follows:

 

   

September 30, 2019

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Liabilities:

                               

Interest rate swaps

  $ 858     $     $ 858     $  

Total liabilities

  $ 858     $     $ 858     $  

 

   

December 31, 2018

 
   

Fair Value

   

Level 1

   

Level 2

   

Level 3

 

Assets:

                               

Assets held-for-sale at fair value

  $ 5,288     $     $     $ 5,288  

Total assets

  $ 5,288     $     $     $ 5,288  

Liabilities:

                               

Liabilities held-for-sale at fair value

  $ 1,438     $     $     $ 1,438  

Total liabilities

  $ 1,438     $     $     $ 1,438  

 

The carrying amounts of cash and cash equivalents, accounts receivable, net, operating accounts payable, and accrued expenses and other current liabilities, approximate their fair values due to their short maturities. Other long-term liabilities on our condensed consolidated balance sheets are presented at their carrying value, which approximates their fair value. Operating lease right-of-use assets and corresponding operating lease liabilities approximate their fair value and recorded at the present value of future cash flows based on incremental borrowing rate. Based on borrowing rates currently available to us for loans with similar terms and the variable interest rate for borrowings under our SunTrust Credit Facility, the carrying value of debt and finance leases approximates fair value.

 

At September 30, 2019, we held financial assets in the form of a $3,294 promissory note acquired in connection with the sale of the Ice Assets that is required to be measured at fair value on a nonrecurring basis. The note was measured based on the present value of estimated future cash flows. There were no material nonrecurring fair value measurements recorded in the nine months ended September 30, 2018.

 

 

 

13.

Earnings Per Share

 

The following table sets forth the calculations of basic and diluted earnings per share:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Basic:

                               

Net income (loss)

  $ 2,621     $ (58,238 )   $ 2,224     $ (56,577 )
                                 

Weighted average shares

    40,515       40,072       40,400       36,410  
                                 

Basic (loss) earnings per share

  $ 0.06     $ (1.45 )   $ 0.06     $ (1.55 )
                                 

Diluted:

                               

Net income (loss)

  $ 2,621     $ (58,238 )   $ 2,224     $ (56,577 )
                                 

Weighted average shares

    40,515       40,072       40,400       36,410  

Potential shares arising from stock options, restricted stock and warrants

    597             696        

Weighted average shares - diluted

    41,112       40,072       41,096       36,410  
                                 

Diluted (loss) earnings per share

  $ 0.06     $ (1.45 )   $ 0.05     $ (1.55 )

 

For the three and nine months ended September 30, 2019, stock options, restricted stock and warrants with respect to an aggregate of 48 and 1,463 shares have been excluded from the computation of the number of shares used in the diluted earnings per share because the exercise or grant prices of the awards were greater than the average market prices of the underlying common stock and the effect of their inclusion would have been anti-dilutive.

 

For the three and nine months ended September 30, 2018, stock options, restricted stock and warrants with respect to an aggregate of 2,437 and 963 shares, respectively, were excluded from the computation of the number of shares used in the diluted loss per share. These shares have been excluded because we incurred a net loss for the respective periods and their inclusion would be anti-dilutive.

 

 

 

14.

Segments

 

We have three operating and reportable segments, Primo Refill (“Refill”), Primo Exchange (“Exchange”), and Primo Dispensers (“Dispensers”).

 

Our Refill segment sales consist of the sale of filtered drinking water dispensed directly to consumers through technologically advanced, self-service machines located at major retailers throughout the United States and Canada.

 

Our Exchange segment sales consist of the sale of multi-gallon purified bottled water offered through retailers in the United States and Canada. Our Exchange products are offered through point of purchase display racks and recycling centers that are prominently located at major retailers in space that is often underutilized.

 

Our Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Dispensers sales are primarily generated through major retailers in the United States and Canada, where we recognize revenues for the sale of the water dispensers when the customer obtains control. We support retail sell-through with domestic inventory.

 

We evaluate the financial results of these segments focusing primarily on segment net sales and segment (loss) income from operations before depreciation and amortization (“segment (loss) income from operations”). We utilize segment net sales and segment (loss) income from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.

 

 

Cost of sales for Refill consists primarily of costs associated with routine maintenance of reverse osmosis water filtration systems and filtered water displays, costs of our field service operations and commissions paid to retailers associated with revenues earned. Cost of sales for Exchange consists primarily of costs for bottling, distribution and bottles. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.

 

Selling, general and administrative expenses for Refill, Exchange, and Dispensers consist primarily of personnel costs for operations support as well as other supporting costs for operating each segment.

 

Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.

 

The following table presents segment information for the following periods:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Segment net sales:

                               

Refill

  $ 44,475     $ 48,330     $ 125,076     $ 134,542  

Exchange

    24,234       21,513       64,590       59,777  

Dispensers

    18,258       11,927       46,609       36,912  
    $ 86,967     $ 81,770     $ 236,275     $ 231,231  
                                 

Segment income (loss) from operations:

                               

Refill

  $ 12,813     $ 14,565     $ 34,373     $ 40,043  

Exchange

    6,668       6,274       18,030       17,567  

Dispensers

    175       323       1,884       2,309  

Corporate

    (5,390 )     (5,073 )     (19,535 )     (19,319 )

Special items

    (827 )     (139 )     (2,240 )     (626 )

Depreciation and amortization

    (7,657 )     (6,194 )     (21,499 )     (18,365 )

Impairment charges and other

    217       (67,940 )     (109 )     (68,184 )
    $ 5,999     $ (58,184 )   $ 10,904     $ (46,575 )
                                 
                                 

Depreciation and amortization expense:

                               

Refill

  $ 5,126     $ 4,651     $ 14,294     $ 12,705  

Exchange

    2,256       1,676       6,362       5,029  

Dispensers

    40       45       140       141  

Corporate

    235       (178 )     703       490  
    $ 7,657     $ 6,194     $ 21,499     $ 18,365  
                                 

Capital expenditures:

                               

Refill

                  $ 13,875     $ 9,334  

Exchange

                    7,290       5,152  

Dispensers

                    100       94  

Corporate

                    533       1,216  
                    $ 21,798     $ 15,796  

 

   

September 30, 2019

   

December 31, 2018

 
                 

Identifiable assets:

               

Refill

  $ 267,061     $ 268,427  

Exchange

    31,035       24,444  

Dispensers

    30,559       20,523  

Corporate

    11,573       6,734  
    $ 340,228     $ 320,128  

 

As of September 30, 2019 and December 31, 2018, we had goodwill of $94,746 and $91,814, respectively, primarily as a result of our acquisition of Glacier Water Services, Inc. in December 2016 (the “Glacier Acquisition”). All goodwill is reported within our Refill reporting segment.

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes thereto in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2018. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are intended to be covered by the “safe harbor” created by those sections. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of forward-looking terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “feel,” “forecasts,” “intends,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” or other comparable terms. These forward-looking statements are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary Note Regarding Forward-Looking Statements” in this Item 2 and in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 and in Item 1A of Part II of our subsequently filed Quarterly Reports on Form 10-Q. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

Overview

 

Primo Water Corporation (together with its consolidated subsidiaries, “Primo,” “we,” “our,” or “us”) is North America’s leading single source provider of multi-gallon purified bottled water, self-service refill drinking water and water dispensers sold through major retailers in the United States and Canada.  We believe the market for purified water continues to grow due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified and filtered water.  We are a Delaware corporation that was incorporated in 2017 in connection with the creation of a holding company structure. Our predecessor was founded in Delaware in 2004.

 

Business

 

Our business is designed to generate recurring demand for our purified bottled water or self-service refill drinking water through the sale of innovative water dispensers. This business strategy is commonly referred to as “razor-razorblade” because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. Once our bottled water is consumed using a water dispenser, empty bottles are exchanged at our recycling center displays, which provide a recycling ticket that offers a discount toward the purchase of a new bottle of Primo purified water or they are refilled at a self-service refill drinking water location. Each of our multi-gallon Exchange water bottles can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of equivalent volumes of single-serve bottled water. As of September 30, 2019, our products were offered in the United States and in Canada at approximately 45,600 combined retail locations, including Lowe’s Home Improvement, Walmart, Sam’s Club, The Home Depot, Meijer, Kroger, Food Lion, H-E-B Grocery, Circle K, Family Dollar, Walgreens, Albertsons, Publix, and CVS.

 

We provide major retailers throughout the United States and Canada with a single-vendor solution for our three reporting segments, Primo Refill (“Refill”), Primo Exchange (“Exchange”), and Primo Dispensers (“Dispensers”), addressing a market demand that we believe was previously unmet. Our approximately 45,600 locations include approximately 23,100 Refill locations, 13,800 Exchange locations and 8,700 Dispenser locations. Our solutions are easy for retailers to implement, require minimal management supervision and store-based labor, and provide centralized billing and detailed performance reports. Exchange offers retailers attractive financial margins and the ability to optimize typically unused retail space with our displays.  Refill provides drinking water for consumer purchase through the installation of self-service vending displays at retail locations. The Refill business model eliminates the bottling and distribution infrastructure required to deliver traditional bottled water, thereby allowing us to provide refill drinking water at a value price as compared to alternatives in the marketplace. Additionally, due to the recurring nature of water consumption, retailers benefit from year-round customer traffic, highly predictable revenue and health and wellness focused consumers.

 

 

Business Segments

 

We have three operating and reporting segments, Refill, Exchange, and Dispensers.

 

Our Refill segment sales consist of the sale of filtered drinking water dispensed directly to consumers through technologically advanced, self-service machines located at major retailers throughout the United States and Canada.

 

Our Exchange segment sales consist of the sale of multi-gallon purified bottled water offered through retailers in the United States and Canada. Our Exchange products are offered through point of purchase display racks and recycling centers that are prominently located at major retailers in space that is often underutilized.

 

Our Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Dispensers sales are primarily generated through major retailers in the United States and Canada, where we recognize revenues for the sale of the water dispensers when the customer obtains control. We support retail sell-through with domestic inventory.

 

We evaluate the financial results of these segments focusing primarily on segment net sales and segment (loss) income from operations before depreciation and amortization (“segment (loss) income from operations”). We utilize segment net sales and segment (loss) income from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.

 

Cost of sales for Refill consists primarily of costs associated with routine maintenance of reverse osmosis water filtration systems and filtered water displays, costs of our field service operations and commissions paid to retailers associated with revenues earned. Cost of sales for Exchange consists primarily of costs for bottling, distribution and bottles. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.

 

Selling, general and administrative expenses for Refill, Exchange, and Dispensers consist primarily of personnel costs for operations support as well as other supporting costs for operating each segment.

 

Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.

 

In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, when we refer to “same-store unit growth”, we are comparing retail locations at which our products have been available for at least 12 months at the beginning of the relevant period. In addition, “gross margin percentage” is defined as net sales less cost of sales, as a percentage of net sales.

 

 

Results of Operations

 

The following table sets forth our results of operations (dollars in thousands):

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Consolidated statements of operations data:

                               

Net sales

  $ 86,967     $ 81,770     $ 236,275     $ 231,231  

Operating costs and expenses:

                               

Cost of sales

    64,694       58,312       174,418       164,462  

Selling, general and administrative expenses

    8,007       7,369       27,105       26,169  

Special items

    827       139       2,240       626  

Depreciation and amortization

    7,657       6,194       21,499       18,365  

Impairment charges and other

    (217 )     67,940       109       68,184  

Total operating costs and expenses

    80,968       139,954       225,371       277,806  

Income (loss) from operations

    5,999       (58,184 )     10,904       (46,575 )

Interest expense, net

    3,378       2,465       8,680       18,909  

Income (loss) before income taxes

    2,621       (60,649 )     2,224       (65,484 )

Income tax benefit

          (2,411 )           (8,907 )

Net income (loss)

  $ 2,621     $ (58,238 )   $ 2,224     $ (56,577 )

 

The following table sets forth our results of operations expressed as a percentage of net sales (percentage amounts may not add to totals due to rounding):

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Consolidated statements of operations data:

                               

Net sales

    100.0 %     100.0 %     100.0 %     100.0 %

Operating costs and expenses:

                               

Cost of sales

    74.4       71.3       73.8       71.1  

Selling, general and administrative expenses

    9.2       9.0       11.5       11.3  

Special items

    1.0       0.2       0.9       0.3  

Depreciation and amortization

    8.8       7.6       9.1       7.9  

Impairment charges and other

    (0.2 )     83.1       0.1       29.5  

Total operating costs and expenses

    93.2       171.2       95.4       120.1  

Income (loss) from operations

    6.9       (71.2 )     4.6       (20.1 )

Interest expense, net

    3.9       3.0       3.7       8.2  

Income (loss) before income taxes

    3.0       (74.2 )     0.9       (28.3 )

Income tax benefit

          (2.9 )           (3.9 )

Net income (loss)

    3.0 %     (71.2 )%     0.9 %     (24.5 )%

 

 

The following tables set forth our segment net sales in dollars and as a percent of net sales, segment (loss) income from operations presented on a segment basis and reconciled to our consolidated income from operations, and segment gross margin percentages (dollars in thousands) (percentage amounts may not add to totals due to rounding):

 

   

Three months ended September 30,

 
   

2019

   

2018

 
           

Percent

           

Percent

 
   

Dollars

   

of Net Sales

   

Dollars

   

of Net Sales

 

Segment net sales:

                               

Refill

  $ 44,475       51.1 %   $ 48,330       59.1 %

Exchange

    24,234       27.9 %     21,513       26.3 %

Dispensers

    18,258       21.0 %     11,927       14.6 %

Total net sales

  $ 86,967       100.0 %   $ 81,770       100.0 %
                                 

Segment income (loss) from operations:

                               

Refill

  $ 12,813             $ 14,565          

Exchange

    6,668               6,274          

Dispensers

    175               323          

Corporate

    (5,390 )             (5,073 )        

Special items

    (827 )             (139 )        

Depreciation and amortization

    (7,657 )             (6,194 )        

Impairment charges and other

    217               (67,940 )        
    $ 5,999             $ (58,184 )        

 

   

Three Months September 30,

 
   

2019

   

2018

 

Segment gross margin:

               

Refill

    32.4 %     33.4 %

Exchange

    29.8 %     31.1 %

Dispensers

    3.5 %     5.2 %

Total gross margin

    25.6 %     28.7 %

 

   

Nine months ended September 30,

 
   

2019

   

2018