The accompanying notes are an integral part of these consolidated financial statements.
8
Primo Water Corporation
Notes to the Consolidated Financial Statements
Unaudited
Note 1 - Business and Recent Accounting Pronouncements
Description of Business
As used herein, “Primo,” “the Company,” “our Company,” “Primo Water Corporation,” “us,” or “our” refers to Primo Water Corporation, together with its consolidated subsidiaries.
Primo 是一家以北美為重點的純水解決方案提供商，主要在大規格水類（定義為 3 加侖或更大）的經常收入模式下運營。這種業務策略通常被稱為「剃須刀刀」，因為產品的初始銷售會創造了經常購買互補消耗產品的用戶基礎。Primo 收入模式中的剃須刀是其業界領先的創新飲水機系列，銷售通過大約 11,700 零售地點和在線以各種價格點進行。這些飲水機有助於增加家庭和企業的滲透率，從而推動定期購買 Primo 的刮鬍刀產品或水解決方案。Primo 的刮鬍刀產品包括直接水、換水和補水器。通過 Water Direct 業務，Primo 直接向客戶提供可持續保濕解決方案，無論是在家中還是企業。通過其水交換業務，客戶訪問零售地點並購買一瓶預裝水。消耗後，空瓶將在我們的回收中心展示器交換，這些機票提供購買新瓶的折扣優惠。水交換服務提供大約 18,100 零售地點。通過其補水業務，客戶大約為空瓶補充 23,500 自助補充飲用水站。Primo 還在北美提供水過濾裝置。
We have established strict counterparty credit guidelines and enter into transactions only with financial institutions of investment grade or better. We monitor counterparty exposures regularly and review promptly any downgrade in counterparty credit rating. We mitigate pre-settlement risk by being permitted to net settle for transactions with the same counterparty. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.
Fair Value Hedging Strategy
On January 2, 2024, we entered into foreign exchange contracts with a notional amount of €450.0 million ($502.1 million at exchange rates in effect on September 28, 2024) and a maturity date of October 31, 2025.We are utilizing the derivative financial instruments to hedge foreign exchange risk associated with our 2028 Notes.
We designated the foreign exchange contracts as fair value hedges. The foreign exchange contracts are recognized in the Consolidated Balance Sheets at fair value and changes in the fair value of the foreign exchange contracts are recorded in the same line as the hedged item, which is Other expense (income), net in the Consolidated Statements of Operations. We exclude forward points from our assessment of hedge effectiveness and amortize them on a straight-line basis over the life of the hedging instruments in Other expense (income), net in the Consolidated Statements of Operations. The difference between fair value changes of the excluded component and the amount amortized to Other expense (income), net is recorded in AOCI on the Consolidated Balance Sheets.
22
The following amount was recorded on the Consolidated Balance Sheets related to hedged item as of September 28, 2024:
(in millions of U.S. dollars)
September 28, 2024
Line Item in Consolidated Balance Sheets in Which the Hedged Item Is Included
Carrying Amount of the Hedged Liability
Long-term debt 1
$
(502.1)
______________________
1Carrying amount is gross of unamortized debt issuance costs as of September 28, 2024.
The fair value of our derivative liabilities included in Other long-term liabilities as of September 28, 2024 was as follows:
(in millions of U.S. dollars)
September 28, 2024
Derivative Contract
Assets
Liabilities
Foreign exchange contracts
$
—
$
(1.3)
The amount of gains or (losses) recognized in Other expense (income), net in the Consolidated Statements of Operations for fair value hedging relationships, presented on a pre-tax basis, for the three and nine months ended September 28, 2024 is shown in the table below:
(in millions of U.S. dollars)
For the Three Months Ended September 28, 2024
For the Nine Months Ended September 28, 2024
Foreign exchange contracts
Hedged Item
$
(20.5)
$
(2.6)
Derivative designated as hedging instrument
$
20.5
$
7.7
Amount reclassed from AOCI to expense (amortized)
$
(2.1)
$
(6.6)
The amount of gains or (losses), net of tax, recognized in our Condensed Consolidated Statements of Comprehensive Income (Loss) for fair value hedging relationships for the three and nine months ended September 28, 2024 is shown in the table below:
(in millions of U.S. dollars)
For the Three Months Ended September 28, 2024
For the Nine Months Ended September 28, 2024
Foreign exchange contracts
Amount excluded from the assessment of effectiveness 1
$
(4.2)
$
(6.7)
______________________
1Amount is net of tax impact of $1.4 million and $2.3 million for the three and nine months ended September 28, 2024, respectively.
There were no settlements of our derivative instruments during the three and nine months ended September 28, 2024.
Note 14 - Fair Value Measurements
FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
23
The three levels of inputs used to measure fair value are as follows:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Our derivative assets and liabilities represent Level 2 instruments. Level 2 instruments are valued based on observable inputs for quoted prices for similar assets and liabilities in active markets. The fair value for the net derivative liabilities as of September 28, 2024 was $1.3 million. We had no derivative assets as of September 28, 2024.
Fair Value of Financial Instruments
The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, receivables, payables, short-term borrowings, and long-term debt approximate their respective fair values, except as otherwise indicated. The carrying values and estimated fair values of our significant outstanding debt as of September 28, 2024 and December 30, 2023 were as follows:
September 28, 2024
December 30, 2023
(in millions of U.S. dollars)
Carrying Value
Fair Value
Carrying Value
Fair Value
3.875% senior notes due in 2028 1,2
$
498.0
$
491.9
$
494.6
$
477.5
4.375% senior notes due in 2029 1,2
743.8
717.3
742.8
683.1
Total
$
1,241.8
$
1,209.2
$
1,237.4
$
1,160.6
______________________
1The fair values were based on the trading levels and bid/offer prices observed by a market participant and are considered Level 2 financial instruments.
2Carrying value of our significant outstanding debt is net of unamortized debt issuance costs as of September 28, 2024 and December 30, 2023.
Note 15 - Subsequent Events
On October 15, 2024, our Board of Directors declared a special dividend of $0.82 per share on common shares, payable in cash on November 21, 2024, to shareowners of record at the close of business on November 5, 2024, in connection with the previously announced BlueTriton Transaction.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ended December 30, 2023 (the “2023 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 2023 Annual Report and Part II. Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. As used herein, “Primo,” “the Company,” “Primo Water Corporation,” “we,” “us,” or “our” refers to Primo Water Corporation, together with its consolidated subsidiaries.
Overview
Primo is a leading North America-focused pure-play water solutions provider that operates largely under a recurring revenue model in the large format water category (defined as 3 gallons or greater). This business strategy is commonly referred to as “razor-razorblade” because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. The razor in Primo’s revenue model is its industry leading line-up of innovative water dispensers, which are sold through approximately 11,700 retail locations and online at various price points. The dispensers help increase household and business penetration which drives recurring purchases of Primo’s razorblade offering or water solutions. Primo’s razorblade offering is comprised of Water Direct, Water Exchange, and Water Refill. Through its Water Direct business, Primo delivers sustainable hydration solutions direct to customers, whether at home or to businesses. Through its Water Exchange business, customers visit retail locations and purchase a pre-filled bottle of water. Once consumed, empty bottles are exchanged at our recycling center displays, which provide a ticket that offers a discount toward the purchase of a new bottle. Water Exchange is available in approximately 18,100 retail locations. Through its Water Refill business, customers refill empty bottles at approximately 23,500 self-service refill drinking water stations. Primo also offers water filtration units across North America.
Primo’s water solutions expand consumer access to purified, spring and mineral water to promote a healthier, more sustainable lifestyle while simultaneously reducing plastic waste and pollution. Primo is committed to its water stewardship standards and is proud to partner with the International Bottled Water Association in North America which ensure strict adherence to safety, quality, sanitation and regulatory standards for the benefit of consumer protection.
The markets in which we operate are subject to some seasonal variations. Our water delivery sales are generally higher during the warmer months. Our purchases of raw materials and related accounts payable fluctuate based upon the demand for our products. The seasonality of our sales volume causes our working capital needs to fluctuate throughout the year.
We conduct operations in Canada and 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 in U.S. dollars, fluctuations in currency exchange rates between the U.S. dollar and the Canadian dollar have had and will continue to have an impact on our results of operations.
Pending Transaction with BlueTriton Brands
On June 16, 2024, Primo Water entered into an Arrangement Agreement and Plan of Merger (as amended, the “Arrangement Agreement”) by and among Primo Water, Triton Water Parent, Inc., a corporation incorporated under the laws of Delaware (“BlueTriton Brands”), Triton US HoldCo, Inc., a corporation incorporated under the laws of Delaware and a wholly-owned subsidiary of BlueTriton Brands (“NewCo”), Triton Merger Sub 1, Inc., a corporation incorporated under the laws of Delaware and direct, wholly‑owned subsidiary of NewCo (“Merger Sub”) and 1000922661 Ontario Inc., a corporation organized under the laws of the Province of Ontario and a direct, wholly‑owned subsidiary of NewCo (“Amalgamation Sub”). The Arrangement Agreement was amended on October 1, 2024.
The Arrangement Agreement provides that, subject to the terms and conditions set forth therein, (i) Amalgamation Sub will acquire all of the issued and outstanding shares of Primo Water in a court-approved plan of arrangement (the “Plan of Arrangement”) in exchange for shares of NewCo, followed immediately by an amalgamation of the Company and Amalgamation Sub, with Primo Water surviving as a wholly-owned subsidiary of NewCo (collectively, the “Arrangement”), (ii) immediately following the Arrangement, Merger Sub will be merged with and into BlueTriton Brands (the “Merger”), with BlueTriton Brands surviving as a wholly-owned subsidiary of NewCo and (iii) immediately following the Merger, and as part of one integrated transaction with the Merger, BlueTriton Brands, as the surviving company in the Merger, will be merged with and into NewCo (the “Subsequent Merger” and, together with the Merger, the “Mergers” and, collectively with the Arrangement, the “BlueTriton Transaction”), with NewCo being the surviving corporation and (iv) as a result of the BlueTriton Transaction, the Company and Triton Water Intermediate, Inc., a wholly-owned subsidiary of BlueTriton Brands, will be wholly-owned subsidiaries of NewCo. The BlueTriton Transaction is expected to close on or about November 8, 2024, subject satisfaction of the final conditions to closing under the Arrangement Agreement. On November 4, 2024, the Company
25
announced that the new company name for "NewCo" is Primo Brands Corporation, which is expected to begin trading on the New York Stock Exchange under the ticker "PRMB" after closing of the BlueTriton Transaction. See Part II. Item 1A. Risk Factors in this Quarterly Report on Form 10-Q for information about certain risks and uncertainties related to the BlueTriton Transaction.
International Business Sales
On November 2, 2023, Primo entered into a Share Purchase Agreement (the “Purchase Agreement”) with a subsidiary of the Culligan Group providing for the sale of Carbon Luxembourg S.à.r.l. and certain of its subsidiaries (the "European Business"). On December 29, 2023, Primo completed the sale of the European Business for aggregate deal consideration of $575.0 million, adjusted for customary purchase price adjustments, resulting in total cash consideration of $565.9 million (the “European Divestiture”). The European Divestiture did not include Primo's interest in Aimia Foods Limited (“Aimia”), Decantae Mineral Water Limited (“Decantae”), Fonthill Waters Ltd (“Fonthill”), John Farrer & Company Limited (“Farrers”), and the portions of the Eden Springs Netherlands B.V. business located in the United Kingdom, Israel, and Portugal (collectively the "Other International Businesses"). On June 7, 2024, Primo sold its interest in the Aimia and Farrers businesses, and on July 3, 2024, Primo sold the Portugal business. The European Business and the Other International Businesses are collectively referred to as the "International Businesses." These deals are a part of several transactions occurring in 2024 as part of a Board-approved plan to sell all of our international businesses, representing a strategic shift in our operations. Accordingly, the International Businesses are presented herein as discontinued operations for all periods presented. See Note 2 to the interim unaudited Consolidated Financial Statements for additional information on discontinued operations. Unless otherwise noted, discussion within Item 2 relates to continuing operations.
At the beginning of 2023, our business operated through two reporting segments: (i) North America, which included our DS Services of America, Inc. (“DSS”), Aquaterra Corporation (“Aquaterra”), and Mountain Valley Spring Company (“Mountain Valley”) businesses, and (ii) Europe, which included the European business of Eden Springs Netherlands B.V. (“Eden Europe”), and our Decantae and Fonthill businesses. The Other category included the Israel business of Eden ("Eden Israel"), and our Aimia and Farrers businesses, as well as our corporate oversight function and other miscellaneous expenses.
As a result of the Board-approved plan to sell all of our International Businesses, during the fourth quarter of 2023, we reviewed and realigned our reporting segments to exclude the businesses within discontinued operations which reflects how the business will be managed and results will be evaluated by the Chief Executive Officer, who is the Company’s chief operating decision maker. Following such review, our one reporting segment is North America, which includes our DSS, Aquaterra, and Mountain Valley businesses. The Other category includes our corporate oversight function and other miscellaneous expenses. Segment reporting results have been recast to reflect these changes for all periods presented.
Impact of General Economic and Geopolitical Conditions
Our operations and supplier relationships expose us to risks associated with disruptions to global supply chains, labor shortages, inflation and the ongoing conflicts in the Middle East and between Russia/Ukraine, all of which are likely to continue to create challenging conditions for our business through increased costs, increased employee attrition and vacancies, lower consumer spending, volatility in financial markets or other impacts. While we have taken steps to minimize the impact of these increased costs, global supply chain disruption may deteriorate and inflationary pressures may increase, which could adversely affect our business, financial condition, results of operations and cash flows. To date, our operations in Israel have not been materially impacted by the Israel/Hamas war, though we continue to monitor the situation closely and prioritize the safety of our associates.
Divestiture Transactions
On July 3, 2024, the Company completed the sale of its Portugal business for aggregate deal consideration of $19.2 million, resulting in a gain on sale in the amount of $7.7 million which was recorded in Net income from discontinued operations, net of income taxes on the Consolidated Statements of Operations during the three and nine months ended September 28, 2024.
On June 7, 2024, the Company completed the sale of its Aimia and Farrers businesses for aggregate deal consideration of $75.5 million, resulting in a loss on sale in the amount of $2.0 million which was recorded in Net income from discontinued operations, net of income taxes on the Consolidated Statements of Operations during the nine months ended September 28, 2024.
On November 2, 2023, Primo entered into a Share Purchase Agreement providing for the sale of the European Business to a subsidiary of the Culligan Group. As described above, the European Divestiture closed on December 29, 2023.
Forward-Looking Statements
In addition to historical information, this report, and the reports and documents incorporated by reference in this report, may contain statements relating to future events and future results. These statements are “forward-looking” within the meaning
26
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 in the documents incorporated in this report by reference. These forward-looking statements reflect current expectations regarding future events and operating performance and are made only as of the date of this report.
The forward-looking statements are not guarantees of future performance or events and, by their nature, are based on certain estimates and assumptions regarding interest and foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective income tax rates, which are subject to inherent risks and uncertainties. Material factors or assumptions that were applied in drawing a conclusion or making an estimate set out in forward-looking statements may include, but are not limited to, assumptions regarding management’s current plans and estimates. Although we believe the assumptions underlying these forward-looking statements are reasonable, any of these assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions could prove to be incorrect. Our operations involve risks and uncertainties, many of which are outside of our control, and any one or any combination of these risks and uncertainties could also affect whether the forward-looking statements ultimately prove to be correct. These risks and uncertainties include, but are not limited to, those described in Part I, Item 1A “Risk Factors” and elsewhere in our 2023 Annual Report and those described from time to time in our future reports filed with the 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 and BlueTriton Brands’ ability to complete the pending combination transaction on the anticipated terms and schedule;
•the risk that disruptions from the transaction will harm our business;
•our ability to compete successfully in the markets in which we operate;
•our ability to manage supply chain disruptions and cost increases related to inflation;
•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 maintain favorable arrangements and relationships with our suppliers;
•our ability to manage our operations successfully;
•currency fluctuations that adversely affect exchanges between currencies, including the U.S. dollar and the Canadian dollar;
•the impact on our financial results from uncertainty in the financial markets and other adverse changes in general economic conditions, including inflation, interest rates and tariffs;
•any disruption to production at our manufacturing facilities;
•our ability to maintain access to our water sources;
•the impact of climate change on our business;
•our ability to protect our intellectual property;
•the seasonal nature of our business and the effect of adverse weather conditions;
•the impact of national, regional and global events, including those of a political, economic, business and competitive nature such as the Russia/Ukraine war or conflict in the Middle East;
•the impact of a pandemic, such as COVID-19, related government actions and the Company's strategy in response thereto on our business, financial condition and results of operations;
27
•our ability to fully realize the potential benefit of transactions or other strategic opportunities that we pursue, including the BlueTriton Transaction;
•our ability to realize revenue and cost synergies of our acquisitions due to integration difficulties and other challenges;
•our exposure to intangible asset risk;
•our ability to meet our obligations under our debt agreements, and risks of further increases to our indebtedness;
•our ability to maintain compliance with the covenants and conditions under our debt agreements;
•fluctuations in interest rates, which could increase our borrowing costs;
•our ability to recruit, retain and integrate new management;
•the impact of increased labor costs on our business;
•our ability to renew our collective bargaining agreements from time to time on satisfactory terms;
•disruptions in our information systems;
•the potential occurrence of cyber-security breaches, cyber-security attacks and other technology outages and security incidents;
•our ability to securely maintain our customers’ confidential or credit card information, or other private data relating to our employees or our company;
•compliance with product health and safety standards;
•liability for injury or illness caused by the consumption of contaminated products;
•liability and damage to our reputation as a result of litigation or legal proceedings;
•changes in the legal and regulatory environment in which we operate;
•our ability to adequately address the challenges and risks associated with our operations and address difficulties in complying with complex and overlapping laws and regulations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010;
•our ability to utilize tax attributes to offset future taxable income;
•the impact on our tax obligations and effective tax rate arising from changes in local tax laws or countries adopting more aggressive interpretations of tax laws;
•our ability to maintain our quarterly dividend; or
•credit rating changes.
We undertake no obligation to update any information contained in this report or to publicly release the results of any revisions to forward-looking statements to reflect events or circumstances of which we may become aware of after the date of this report. Undue reliance should not be placed on forward-looking statements.
All future written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing.
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 charges. We exclude these items to better understand trends in the business. We exclude the impact of foreign exchange to separate the impact of currency exchange rate changes from our results of operations.
We also utilize earnings (loss) before interest expense, taxes, depreciation and amortization (“EBITDA”), which is GAAP net income (loss) before interest expense, net, expense (benefit) for income taxes, and depreciation and amortization. We consider EBITDA to be an indicator of operating performance. We also use EBITDA, as do analysts, lenders, investors, and others, because it excludes certain items that can vary widely across different industries or among companies within the same industry. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. We also utilize adjusted EBITDA, which is EBITDA excluding acquisition and integration costs, share-based compensation costs, impairment charges, foreign exchange and other (gains) losses, net, loss on disposal of property, plant and equipment, net, loss on extinguishment of long-term debt, (gain) loss on sale of business, (gain)
28
loss on sale of property, and other adjustments, net, as the case may be (“Adjusted EBITDA”). We consider Adjusted EBITDA to be an indicator of our operating performance. Adjusted EBITDA excludes certain items to make more meaningful period-over-period comparisons of our underlying operations before material charges.
Because we use these adjusted financial results in the management of our business and to understand underlying business performance, we believe this supplemental information is useful to investors for their independent evaluation and understanding of our business performance and the performance of our management. The non-GAAP financial measures described above are in addition to, and not meant to be considered superior to, or a substitute for, our financial statements prepared in accordance with GAAP. In addition, the non-GAAP financial measures included in this report reflect our judgment of particular items, and may be different from, and therefore may not be comparable to, similarly titled measures reported by other companies.
Summary Financial Results
Net income from continuing operations for the three months ended September 28, 2024 (the "third quarter") and nine months ended September 28, 2024 (the "first nine months of 2024" or "year to date") was $38.2 million, or $0.24 per diluted share, and $70.2 million, or $0.43 per diluted common share, respectively, compared with net income from continuing operations of $33.7 million, or $0.21 per diluted share, and $50.5 million, or $0.32 per diluted common share, for the three and nine months ended September 30, 2023, respectively.
The following items of significance affected our financial results for the first nine months of 2024:
•Net revenue increased to $1,448.4 million from $1,333.1 million in the prior year period, an increase of $115.3 million, or 8.6%, due primarily to pricing initiatives of $56.6 million and volume increases of $58.7 million from increased demand for products and services from residential and business customers;
•Gross profit increased to $940.1 million from $853.1 million in the prior year period. Gross profit as a percentage of net revenue was 64.9% compared to 64.0% in the prior year period. The 90 basis point increase is due primarily to pricing initiatives and increased volume;
•SG&A expenses increased to $776.1 million from $726.0 million in the prior year period due primarily to higher selling and operating costs supporting volume and revenue growth related primarily to labor cost increases of $31.0 million from the prior year period, insurance cost increases of $11.6 million from the prior year period, as well as an increase in share-based compensation of $10.9 million, partially offset by a decrease of $6.7 million related to professional fees in the prior year period not recurring in the current year period. SG&A expenses as a percentage of net revenue was 53.6% compared to 54.5% in the prior year period;
•Acquisition and integration expenses increased to $26.6 million from $6.0 million in the prior year period due primarily to higher legal and other professional fees related to the BlueTriton Transaction compared to the prior year period, partially offset by lower integration costs compared to the prior year period. Acquisition and integration expenses as a percentage of revenue was 1.8% compared to 0.5% in the prior year period;
•Gain on sale of property decreased to $0.5 million from $5.3 million in the prior year period due to lower gains resulting from sale transactions for owned real properties in the current year period compared to the prior year period;
•Other expense, net was $1.2 million compared to Other income, net of $3.7 million in the prior year period due primarily to unrealized foreign exchange losses in the current period compared to unrealized foreign exchange gains in the prior year period and a favorable insurance settlement received in the prior year period;
•Income tax expense was $37.4 million on pre-tax income of $107.6 million compared to income tax expense of $21.0 million on pre-tax income of $71.5 million in the prior year period due primarily to increased income in taxable jurisdictions.
•Adjusted EBITDA increased to $331.5 million compared to $285.8 million in the prior year period due to the items listed above; and
•Cash flows provided by operating activities was $255.7 million compared to cash flows provided by operating activities of $222.2 million in the prior year period. The $33.5 million increase was due primarily to improved earnings, excluding non-cash charges, partially offset by lower cash provided by working capital in the current year period relative the prior year period.
29
Results of Operations - Continuing Operations
The following table summarizes our Consolidated Statements of Operations as a percentage of revenue for the three and nine months ended September 28, 2024 and September 30, 2023:
For the Three Months Ended
For the Nine Months Ended
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
(in millions of U.S. dollars)
$
%
$
%
$
%
$
%
Revenue, net
511.4
100.0
470.0
100.0
1,448.4
100.0
1,333.1
100.0
Cost of sales
180.6
35.3
166.7
35.5
508.3
35.1
480.0
36.0
Gross profit
330.8
64.7
303.3
64.5
940.1
64.9
853.1
64.0
Selling, general and administrative expenses
262.3
51.3
244.8
52.1
776.1
53.6
726.0
54.5
Loss on disposal of property, plant and equipment, net
1.3
0.3
1.6
0.3
4.1
0.3
3.8
0.3
Acquisition and integration expenses
8.2
1.6
2.4
0.5
26.6
1.8
6.0
0.5
Gain on sale of property
—
—
(5.3)
(1.1)
(0.5)
—
(5.3)
(0.4)
Operating income
59.0
11.5
59.8
12.7
133.8
9.2
122.6
9.2
Other expense (income), net
1.1
0.2
(4.0)
(0.9)
1.2
0.1
(3.7)
(0.3)
Interest expense, net
5.8
1.1
17.8
3.8
25.0
1.7
54.8
4.1
Income from continuing operations before income taxes
52.1
10.2
46.0
9.8
107.6
7.4
71.5
5.4
Income tax expense
13.9
2.7
12.3
2.6
37.4
2.6
21.0
1.6
Net income from continuing operations
38.2
7.5
33.7
7.2
70.2
4.8
50.5
3.8
Net income (loss) from discontinued operations, net of income taxes
0.4
0.1
(0.3)
(0.1)
9.4
0.6
10.0
0.8
Net income
38.6
7.5
33.4
7.1
79.6
5.5
60.5
4.5
Depreciation and amortization
51.0
10.0
49.3
10.5
148.9
10.3
143.6
10.8
30
The following table summarizes our net revenue, gross profit, SG&A expenses and operating income (loss) by reporting segment for the three and nine months ended September 28, 2024 and September 30, 2023:
For the Three Months Ended
For the Nine Months Ended
(in millions of U.S. dollars)
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Revenue, net
North America
$
511.2
$
469.8
$
1,447.6
$
1,332.6
Other
0.2
0.2
0.8
0.5
Total
$
511.4
$
470.0
$
1,448.4
$
1,333.1
Gross profit
North America
$
330.6
$
303.1
$
939.5
$
852.6
Other
0.2
0.2
0.6
0.5
Total
$
330.8
$
303.3
$
940.1
$
853.1
Selling, general and administrative expenses
North America
$
251.6
$
235.1
$
733.0
$
687.2
Other
10.7
9.7
43.1
38.8
Total
$
262.3
$
244.8
$
776.1
$
726.0
Operating income (loss)
North America
$
76.7
$
70.3
$
201.0
$
162.3
Other
(17.7)
(10.5)
(67.2)
(39.7)
Total
$
59.0
$
59.8
$
133.8
$
122.6
31
The following tables summarize net revenue by channel for the three and nine months ended September 28, 2024 and September 30, 2023:
For the Three Months Ended September 28, 2024
(in millions of U.S. dollars)
North America
Other
Total
Revenue, net
Water Direct/Water Exchange
$
384.8
$
—
$
384.8
Water Refill/Water Filtration
66.4
—
66.4
Other Water 1
27.5
—
27.5
Water Dispensers
18.7
—
18.7
Other
13.8
0.2
14.0
Total
$
511.2
$
0.2
$
511.4
For the Nine Months Ended September 28, 2024
(in millions of U.S. dollars)
North America
Other
Total
Revenue, net
Water Direct/Water Exchange
$
1,092.4
$
—
$
1,092.4
Water Refill/Water Filtration
186.2
—
186.2
Other Water 1
67.4
—
67.4
Water Dispensers
48.7
—
48.7
Other
52.9
0.8
53.7
Total
$
1,447.6
$
0.8
$
1,448.4
For the Three Months Ended September 30, 2023
(in millions of U.S. dollars)
North America
Other
Total
Revenue, net
Water Direct/Water Exchange
$
356.2
$
—
$
356.2
Water Refill/Water Filtration
62.0
—
62.0
Other Water 1
13.6
—
13.6
Water Dispensers
16.5
—
16.5
Other
21.5
0.2
21.7
Total
$
469.8
$
0.2
$
470.0
For the Nine Months Ended September 30, 2023
(in millions of U.S. dollars)
North America
Other
Total
Revenue, net
Water Direct/Water Exchange
$
1,011.5
$
—
$
1,011.5
Water Refill/Water Filtration
169.6
—
169.6
Other Water 1
36.8
—
36.8
Water Dispensers
45.9
—
45.9
Other
68.8
0.5
69.3
Total
$
1,332.6
$
0.5
$
1,333.1
______________________
1Primarily Mountain Valley retail and on-premise revenue.
32
The following table summarizes our EBITDA and Adjusted EBITDA for the three and nine months ended September 28, 2024 and September 30, 2023:
For the Three Months Ended
For the Nine Months Ended
(in millions of U.S. dollars)
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Net income from continuing operations
$
38.2
$
33.7
$
70.2
$
50.5
Interest expense, net
5.8
17.8
25.0
54.8
Income tax expense
13.9
12.3
37.4
21.0
Depreciation and amortization
51.0
49.3
148.9
143.6
EBITDA
$
108.9
$
113.1
$
281.5
$
269.9
Acquisition and integration costs
8.2
2.4
26.6
6.0
Share-based compensation costs
4.6
1.4
17.1
6.1
Foreign exchange and other losses (gains), net
1.2
(0.2)
2.0
(0.1)
Loss on disposal of property, plant and equipment, net
1.3
1.6
4.1
3.8
Gain on sale of property
—
(5.3)
(0.5)
(5.3)
Other adjustments, net
0.5
(1.1)
0.7
5.4
Adjusted EBITDA
$
124.7
$
111.9
$
331.5
$
285.8
Three Months Ended September 28, 2024 Compared to Three Months Ended September 30, 2023
Revenue, Net
Net revenue increased to $511.4 million in the third quarter from $470.0 million in the prior year period, an increase of $41.4 million, or 8.8%, in the third quarter from the prior year period.
North America net revenue increased to $511.2 million in the third quarter from $469.8 million in the prior year period, an increase of $41.4 million, or 8.8%, due primarily to pricing initiatives of $17.8 million and volume increases of $23.6 million from increased demand for products and services from residential and business customers.
Other net revenue remained flat at $0.2 million in the third quarter compared to $0.2 million in the prior year period.
Gross Profit
Gross profit increased to $330.8 million in the third quarter from $303.3 million in the prior year period. Gross profit as a percentage of revenue was 64.7% in the third quarter compared to 64.5% in the prior year period.
North America gross profit increased to $330.6 million in the third quarter from $303.1 million in the prior year period, and gross profit as a percentage of revenue was 64.7% in the third quarter compared to 64.5% in the prior year period. The 20 basis point increase is due primarily to pricing initiatives and increased volume.
Other gross profit remained flat at $0.2 million in the third quarter compared to $0.2 million in the prior year period, and gross profit as a percentage of revenue was 100.0% in the third quarter compared to 100.0% in the prior year.
Selling, General and Administrative Expenses
SG&A expenses increased to $262.3 million in the third quarter from $244.8 million in the prior year period. SG&A expenses as a percentage of revenue was 51.3% in the third quarter compared to 52.1% in the prior year period.
North America SG&A expenses increased to $251.6 million in the third quarter from $235.1 million in the prior year period due primarily to higher selling and operating costs that supported volume and revenue growth related primarily to labor cost increases of $11.8 million, increases in insurance costs of $3.1 million and increases in share-based compensation of $1.8 million from the prior year period.
Other SG&A expenses remained relatively flat at $10.7 million in the third quarter compared to $9.7 million in the prior year period.
Acquisition and Integration Expenses
Acquisition and integration expenses increased to $8.2 million in the third quarter from $2.4 million in the prior year period. Acquisition and integration expenses as a percentage of revenue was 1.6% in the third quarter compared to 0.5% in the prior year period.
33
North America acquisition and integration expenses remained relatively flat at $1.0 million in the third quarter compared to $1.4 million in the prior year period.
Other acquisition and integration expenses increased to $7.2 million in the third quarter compared to $1.0 million in the prior year period due primarily to increased legal and other professional fees in the current year period related to the BlueTriton Transaction.
Gain on Sale of Property
Gain on sale of property decreased to nil in the third quarter from $5.3 million in the prior year period. Gain on sale of property as a percentage of revenue was 0.0% in the third quarter compared to 1.1% in the prior year period.
The decrease was due to the completion of sale transactions for two of our owned real properties in the prior year period.
Operating Income
Operating income decreased to $59.0 million in the third quarter from $59.8 million in the prior year period.
North America operating income increased to $76.7 million in the third quarter from $70.3 million in the prior year period due to the items discussed above.
Other operating loss increased to $17.7 million in the third quarter from $10.5 million in the prior year period due to the items discussed above.
Other Expense (Income), Net
Other expense, net was $1.1 million for the third quarter compared to Other income, net of $4.0 million in the prior year period due primarily to unrealized foreign exchange losses in the current year period compared unrealized foreign exchange gains in the prior year period and a favorable insurance settlement received in prior year period.
Income Taxes
Income tax expense was $13.9 million in the third quarter compared to income tax expense of $12.3 million in the prior year period. The effective tax rate for the third quarter was 26.7% compared to 26.7% in the prior year period.
The effective tax rate for the third quarter remained consistent with the effective tax rate in the comparable prior year period.
The effective tax rate for the third quarter varied from the statutory tax rate due primarily to losses in tax jurisdictions for which no tax benefit was recognized due to existing valuation allowances and income in tax jurisdictions with tax rates lower than the Canadian statutory tax rate.
Nine Months Ended September 28, 2024 Compared to Nine Months Ended September 30, 2023
Revenue, Net
Net revenue increased to $1,448.4 million for the year to date from $1,333.1 million in the prior year period, an increase of $115.3 million, or 8.6%, for the year to date from the prior year period.
North America net revenue increased to $1,447.6 million for the year to date from $1,332.6 million in the prior year period, an increase of $115.0 million, or 8.6%, due primarily to pricing initiatives of $56.6 million and volume increases of $58.7 million from increased demand for products and services from residential and business customers.
Other net revenue remained relatively flat at $0.8 million for the year to date compared to $0.5 million in the prior year period.
Gross Profit
Gross profit increased to $940.1 million for the year to date from $853.1 million in the prior year period. Gross profit as a percentage of revenue was 64.9% for the year to date compared to 64.0% in the prior year period.
North America gross profit increased to $939.5 million for the year to date from $852.6 million in the prior year period, and gross profit as a percentage of revenue was 64.9% for the year to date compared to 64.0% in the prior year period. The 90 basis point increase is due primarily to pricing initiatives and increased volume.
Other gross profit remained relatively flat at $0.6 million for the year to date compared to $0.5 million in the prior year period, and gross profit as a percentage of revenue was 75.0% for the year to date compared to 100.0% in the prior year period.
34
Selling, General and Administrative Expenses
SG&A expenses increased to $776.1 million for the year to date from $726.0 million in the prior year period. SG&A expenses as a percentage of revenue was 53.6% for the year to date compared to 54.5% in the prior year period.
North America SG&A expenses increased to $733.0 million for the year to date from $687.2 million in the prior year period due primarily to higher selling and operating costs that supported volume and revenue growth related primarily to labor increases of $31.0 million, increases in insurance costs of $11.6 million and increases in share-based compensation of $1.8 million from the prior year period.
Other SG&A expenses increased to $43.1 million for the year to date from $38.8 million in the prior year period due primarily to an increase in share-based compensation of $9.1 million, partially offset by a decrease of $6.7 million related to professional fees in the prior year period not recurring in the current year period.
Acquisition and Integration Expenses
Acquisition and integration expenses increased to $26.6 million for the year to date from $6.0 million in the prior year period. Acquisition and integration expenses as a percentage of revenue was 1.8% for the year to date compared to 0.5% in the prior year period.
North America acquisition and integration expenses decreased to $1.9 million for the year to date from $4.6 million in the prior year period due primarily to lower integration costs in the current year period.
Other acquisition and integration expenses increased to $24.7 million for the year to date compared to $1.4 million in the prior year period due primarily to increased legal and other professional fees in the current year related to the BlueTriton Transaction.
Gain on Sale of Property
Gain on sale of property decreased to $0.5 million for the year to date from $5.3 million in the prior year period. Gain on sale of property as a percentage of revenue was 0.0% for the year to date compared to 0.4% in the prior year period.
The decrease was due to lower gains resulting from sale transactions for owned real properties in the current year period compared to the prior year period.
Operating Income
Operating income increased to $133.8 million for the year to date from $122.6 million in the prior year period.
North America operating income increased to $201.0 million for the year to date from $162.3 million in the prior year period due to the items discussed above.
Other operating loss increased to $67.2 million for the year to date from $39.7 million in the prior year period due to the items discussed above.
Other Expense (Income), Net
Other expense, net was $1.2 million for the year to date compared to Other income, net of $3.7 million in the prior year period due primarily to unrealized foreign exchange losses in the current period compared to unrealized foreign exchange gains in the prior year period and a favorable insurance settlement received in prior year period.
Income Taxes
Income tax expense was $37.4 million for the year to date compared to income tax expense of $21.0 million in the prior year period. The effective tax rate for the year to date was 34.8% compared to 29.4% in the prior year period.
The effective tax rate for the year to date varied from the effective tax rate in the comparable prior year period due primarily to increased non-deductible expenses in the US.
The effective tax rate for the year to date varied from the statutory tax rate due primarily to losses in tax jurisdictions for which no tax benefit was recognized due to existing valuation allowances and income in tax jurisdictions with tax rates lower than the Canadian statutory tax rate.
Liquidity and Capital Resources
As of September 28, 2024, we had total debt of $1,283.7 million and $667.3 million of cash and cash equivalents compared to $1,285.0 million of debt and $507.9 million of cash and cash equivalents as of December 30, 2023.
Our operations and supplier relationships expose us to risks associated with disruptions to global supply chains and the ongoing Russia/Ukraine and Israel/Hamas wars, all of which are likely to continue to create challenging conditions for our
35
business, through increased costs, lower consumer spending, volatility in financial markets or other impacts. While we have taken steps to minimize the impact of these increased costs, global supply chain disruption may deteriorate, which could adversely affect our business, financial condition, results of operations and cash flows.
We believe that our level of resources, which includes cash on hand, borrowings under the credit agreement (the “Credit Agreement”) among the Company, as parent borrower, Primo Water Holdings Inc. and certain other subsidiary borrowers, certain other subsidiaries of the Company from time to time designated as subsidiary borrowers, Bank of America, N.A., as administrative agent and collateral agent, and the lenders from time to time party thereto, including the $350.0 million revolving credit facility (the "Revolving Credit Facility") and funds provided by our operations, will be adequate to fund cash outflows that have both a short- and long-term component. These cash flows will support our growth platform and include our expenses, capital expenditures, anticipated dividend payments, and debt service obligations. The Company regularly assesses its cash requirements and the available resources to fund these needs. Our ability to generate cash to meet our current expenses and debt service obligations will depend on our future performance. If we do not have enough cash to pay our debt service obligations, or if the Revolving Credit Facility or our outstanding notes were to become currently due, either at maturity or as a result of a breach, we may be required to take actions such as amending our Credit Agreement or the indentures governing our outstanding notes, refinancing all or part of our existing debt, selling assets, incurring additional indebtedness or raising equity. If we need to seek additional financing, there is no assurance that this additional financing will be available on favorable terms or at all.
As of September 28, 2024, there were no outstanding borrowings under the Revolving Credit Facility and outstanding letters of credit totaled $65.6 million, resulting in total utilization under the Revolving Credit Facility of $65.6 million. Accordingly, unused availability under the Revolving Credit Facility as of September 28, 2024 amounted to $284.4 million.
We earn substantially all of our consolidated operating income in subsidiaries located outside of Canada. 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 of Canada 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 $0.08 per common share was declared during each quarter of 2023 for an aggregate dividend payment of approximately $51.8 million. A dividend payment of $0.09 per common share was declared during each of the first, second, and third quarters of 2024 for an aggregate dividend payment of approximately $43.9 million. The Board also declared a special dividend of $0.82 per common share on October 15, 2024, to be paid on November 21, 2024.
36
The following table summarizes our cash flows for the three and nine months ended September 28, 2024 and September 30, 2023, as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:
For the Three Months Ended
For the Nine Months Ended
(in millions of U.S. dollars)
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Net cash provided by operating activities of continuing operations
$
91.0
$
126.7
$
255.7
$
222.2
Net cash used in investing activities of continuing operations
(36.7)
(28.6)
(137.2)
(122.7)
Net cash used in financing activities of continuing operations
(18.4)
(93.9)
(59.5)
(137.9)
Cash flows from discontinued operations:
Net cash provided by operating activities from discontinued operations
4.6
21.4
6.8
37.0
Net cash provided by (used in) investing activities from discontinued operations
16.8
(12.6)
75.9
(32.4)
Net cash (used in) provided by financing activities from discontinued operations
(2.0)
(0.5)
(1.0)
9.1
Effect of exchange rate changes on cash
0.3
(1.5)
(0.1)
(0.1)
Net increase (decrease) in cash, cash equivalents and restricted cash
55.6
11.0
140.6
(24.8)
Cash and cash equivalents and restricted cash, beginning of period
615.5
86.8
530.5
122.6
Cash and cash equivalents and restricted cash of continuing operations, end of period
671.1
97.8
671.1
97.8
Cash and cash equivalents and restricted cash from discontinued operations, end of period
3.8
36.9
3.8
36.9
Cash and cash equivalents and restricted cash of continuing operations, end of period
$
667.3
$
60.9
$
667.3
$
60.9
Operating Activities
Cash provided by operating activities was $255.7 million year to date compared to $222.2 million in the prior year period. The $33.5 million increase was due primarily to improved earnings, excluding non-cash charges, partially offset by lower cash provided by working capital in the current year period relative the prior year period.
Investing Activities
Cash used in investing activities was $137.2 million year to date compared to $122.7 million in the prior year period. The $14.5 million increase was due primarily to an a decrease in the proceeds from sale of property and an increase in additions to property, plant and equipment relative to the prior year period.
Financing Activities
Cash used in financing activities was $59.5 million year to date compared to $137.9 million in the prior year period. The $78.4 million decrease was due primarily to a decrease in net payments of short-term debt borrowings and an increase in the issuance of common shares relative to the prior year period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as of September 28, 2024.
Contractual Obligations
There were no material changes to our outstanding contractual obligations from amounts previously disclosed in our 2023 Annual Report.
Credit Ratings and Covenant Compliance
Credit Ratings
We have no material changes to the disclosure on this matter made in our 2023 Annual Report.
37
Covenant Compliance
Indentures Governing Our Outstanding Notes
Under the indentures governing our outstanding notes, we are subject to a number of covenants, including covenants that limit our and certain of our subsidiaries’ ability, subject to certain exceptions and qualifications, to (i) pay dividends or make distributions, repurchase equity securities, prepay subordinated debt or make certain investments, (ii) incur additional debt or issue certain disqualified stock or preferred stock, (iii) create or incur liens on assets securing indebtedness, (iv) merge or consolidate with another company or sell all or substantially all of our assets taken as a whole, (v) enter into transactions with affiliates and (vi) sell assets. The covenants are substantially similar across the series of notes. As of September 28, 2024, 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 of September 28, 2024.
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 of September 28, 2024.
On July 11, 2024, the Company entered into the Third Amendment to the Credit Agreement, which provides an exception to the restricted payments covenant for a one-time special dividend in conjunction with the BlueTriton Transaction.
Issuer Purchases of Equity Securities
Common Share Repurchase Program
On August 9, 2023, our Board of Directors approved a share repurchase program for up to $50.0 million of our outstanding common shares. Upon the closing of the European Divestiture on December 29, 2023, an incremental $25.0 million share repurchase was authorized, revising the total share repurchase authorization to $75.0 million. For the nine months ended September 28, 2024, we repurchased 932,896 common shares for approximately $15.9 million through open market transactions under this repurchase plan. There were no shares repurchased under the program during the three months ended September 28, 2024.
On August 9, 2022, our Board of Directors approved a share repurchase program for up to $100.0 million of our outstanding common shares over a 12-month period that expired on August 14, 2023. For the nine months ended September 30, 2023, we repurchased 1,272,612 common shares for approximately $19.0 million through open market transactions under this repurchase plan. There were no shares repurchased under the program during the three months ended September 30, 2023.
Repurchased shares were subsequently canceled. Please refer to the table in Part II, Item 2 of this Quarterly Report on Form 10-Q.
We paused our share repurchase program in light of the BlueTriton Transaction.
Tax Withholding
During the three months ended September 28, 2024 and September 30, 2023, an aggregate of 2,747 common shares and 46,989 common shares, respectively, 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
Since December 30, 2023, our equity has increased by $41.6 million. The increase was due to net income of $79.6 million, the issuance of common shares of $17.5 million, and share-based compensation costs of $17.5 million, partially offset by common shares repurchased and canceled of $20.3 million, common share dividend payments of $43.9 million and other comprehensive loss, net of tax of $8.8 million.
38
Dividend Payments
Common Share Dividend
On August 6, 2024, our Board of Directors declared a dividend of $0.09 per share on common shares, payable in cash on September 5, 2024, to shareowners of record at the close of business on August 22, 2024. The Board also declared a special dividend of $0.82 per common share on October 15, 2024, to be paid on November 21, 2024. We intend to pay a regular quarterly dividend on our common shares subject to, among other things, the best interests of our shareowners, our results of operations, cash balances and future cash requirements, financial condition, statutory regulations and covenants set forth in the Revolving Credit Facility and indentures governing our outstanding notes, as well as other factors that the Board of Directors may deem relevant from time to time.
Critical Accounting Policies
Our critical accounting policies require management to make estimates and assumptions that affect the reported amounts in the Consolidated Financial Statements and the accompanying notes. These estimates are based on historical experience, the advice of external experts or on other assumptions management believes to be reasonable. Where actual amounts differ from estimates, revisions are included in the results for the period in which actual amounts become known. Historically, differences between estimates and actual amounts have not had a significant impact on our Consolidated Financial Statements.
Critical accounting policies and estimates used to prepare the Consolidated Financial Statements are discussed with the Audit Committee of our Board of Directors as they are implemented and on an annual basis.
We have no material changes to our Critical Accounting Policies and Estimates disclosure as filed in our 2023 Annual Report.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting guidance.
39
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the ordinary course of business, we are exposed to foreign currency, interest rate, commodity price, and credit risks. We hedge firm commitments or anticipated transactions and do not enter into derivatives for speculative purposes. We do not hold financial instruments for trading purposes. We have no material changes to the Quantitative and Qualitative Disclosures about Market Risk as filed in our 2023 Annual Report.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 28, 2024. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 28, 2024, the Company’s disclosure controls and procedures are functioning effectively to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In addition, our management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in our internal control over financial reporting. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that there have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to various claims and legal proceedings with respect to matters such as governmental regulations, income taxes, and other actions arising out of the normal course of business. Management believes that the resolution of these matters will not have a material adverse effect on our financial position or results of operations.
Pursuant to SEC rules, we will disclose any proceeding in which a government authority is a party and that arises under any federal, state or local provisions enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment only where we believe that such proceedings, individually or in the aggregate, will result in monetary sanctions on us, exclusive of interest and costs, above $500,000 or is otherwise material to our financial position, results of operations, or cash flows.
Item 1A. Risk Factors
Except as described below, there have been no material changes to our risk factors since December 30, 2023. Please refer to our 2023 Annual Report on Form 10-K.
Primo Water's business relationships may be subject to disruption due to uncertainty associated with the BlueTriton Transaction, which could have an adverse effect on Primo Water's cash flows and financial position.
Parties with which Primo Water does business may experience uncertainty associated with the BlueTriton Transaction, including with respect to current or future business relationships with Primo Water following the completion of the BlueTriton Transaction. Primo Water’s relationships may be subject to disruption as persons with whom Primo Water has a business relationship may have concerns about a larger organization, or otherwise, and may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationships with Primo Water or consider entering into business relationships with parties other than Primo Water. These disruptions could have a material adverse effect on the results of operations, cash flows and financial position of Primo Water following the completion of the BlueTriton Transaction, including an adverse effect on the parties’ ability to realize the expected benefits of the BlueTriton Transaction. The risk, and adverse effect, of any disruption could be exacerbated by a delay in the completion of or failure to complete the BlueTriton Transaction.
In addition, some amount of Primo Water management’s and employees’ attention will be directed toward the completion of the BlueTriton Transaction and thus will be diverted from their respective day-to-day operations. Further, the BlueTriton Transaction could cause disruptions to Primo Water’s business or business relationships, which could have an adverse impact on their results of operations. The pursuit of the BlueTriton Transaction and the preparation for the integration has placed and will continue to place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns could adversely affect Primo Water’s operations and financial results.
Conditions precedent to the BlueTriton Transaction may not be satisfied or waived or may take longer than expected.
The completion of the BlueTriton Transaction is subject to the satisfaction or waiver of a number of conditions. No assurance can be given that all conditions precedent to the BlueTriton Transaction will be satisfied or waived, nor can there be any certainty as to the timing of their satisfaction or waiver. Any delay in completing the BlueTriton Transaction could cause the parties not to realize, or to be delayed in realizing, some or all of the benefits that they expect to achieve if the BlueTriton Transaction is successfully completed within their expected time frame.
In addition, the completion of the BlueTriton Transaction by BlueTriton Brands is conditional on, among other things, no Primo Material Adverse Effect (as defined in the Arrangement Agreement) having occurred since the date of the Arrangement Agreement. There can be no certainty, nor can Primo Water provide any assurance, that these conditions will be satisfied or waived or, if satisfied or waived, when they will be satisfied or waived. If any of the conditions precedent to the BlueTriton Transaction are not met and BlueTriton Brands, in its sole discretion, does not waive these conditions on or before the date specified, it will not be obligated to complete the BlueTriton Transaction and either Primo Water or BlueTriton may then terminate the Arrangement Agreement.
Termination of the Arrangement Agreement could negatively impact Primo Water.
Each of Primo Water and BlueTriton Brands has the right, in certain circumstances, to terminate the Arrangement Agreement, in which case the BlueTriton Transaction will not be consummated. There is no certainty, nor can the parties provide any assurance that the Arrangement Agreement will not be terminated by Primo Water or BlueTriton Brands prior to the completion of the BlueTriton Transaction. If the Arrangement Agreement is terminated, Primo Water will not recognize the anticipated benefits of the BlueTriton Transaction and may be obligated to pay a termination fee of $105 million in connection with termination of the Arrangement Agreement. If the Arrangement Agreement is terminated in accordance with its terms and the BlueTriton Transaction is not consummated, the ongoing business of Primo Water may be adversely affected by a variety of
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factors. Primo Water’s business may be adversely impacted by the failure to pursue other beneficial opportunities during the pendency of the BlueTriton Transaction, by the failure to obtain the anticipated benefits of completing the BlueTriton Transaction, by payment of certain costs relating to the BlueTriton Transaction, and by the focus of management on the BlueTriton Transaction for an extended period of time rather than on other strategic and operational opportunities. The market price of Primo Water shares might decline as a result of any such failures to the extent that the current market prices reflect a market assumption that the BlueTriton Transaction will be completed.
Primo Water may also be negatively impacted if the Arrangement Agreement is terminated and Primo Water’s Board of Directors seeks but is unable to find another business combination or strategic transaction offering equivalent or more attractive consideration than the consideration to be provided in the BlueTriton Transaction, or if the parties become subject to litigation related to entering into or failing to consummate the BlueTriton Transaction, including actions by the Primo shareowners against the directors and/or officers of Primo Water for breaches of fiduciary duty, or derivative actions brought by the Primo shareowners in the name of the Company.
We are subject to certain contractual restrictions while the proposed BlueTriton Transaction is pending.
The Arrangement Agreement restricts the Company from making certain acquisitions and divestitures, entering into, amending or terminating certain contracts, incurring certain indebtedness and expenditures, and repurchasing or issuing securities outside of existing equity award programs, and taking other specified actions until the earlier of the completion of the BlueTriton Transaction or the termination of the Arrangement Agreement. These restrictions may prevent Primo Water from pursuing attractive business opportunities that may arise prior to the completion of BlueTriton Transaction and could have the effect of delaying or preventing other strategic transactions. Adverse effects arising from the pendency of the BlueTriton Transaction could be exacerbated by any delays in consummation of the combination or the termination of the Arrangement Agreement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchases
On August 9, 2023, our Board of Directors approved a share repurchase program for up to $50.0 million of our outstanding common shares. Upon the closing of the European Divestiture on December 29, 2023, an incremental $25.0 million share repurchase was authorized, revising the total share repurchase authorization to $75.0 million. For the three months ended September 28, 2024, we did not repurchase any outstanding common shares under this repurchase plan. We paused our share repurchase program in light of the BlueTriton Transaction.
Tax Withholding
The following table contains information about common shares that we withheld from delivering to employees during the three months ended September 28, 2024 to satisfy their respective tax obligations related to share-based awards.
Total Number of Common Shares Purchased
Average Price Paid per Common Share
Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs
June 30, 2024 - July 31, 2024
—
$
—
N/A
N/A
August 1, 2024 - August 31, 2024
—
$
—
N/A
N/A
September 1, 2024 - September 28, 2024
2,747
$
23.84
N/A
N/A
Total
2,747
Item 5. Other Information
10b5-1 Plans
During the three months ended September 28, 2024, none of our directors or executive officers (as such term is defined in Rule 16a-1(f) promulgated under the Exchange Act) adopted or terminated any Rule 10b5-1 trading arrangement or any non-Rule 10b5-1 trading arrangement (as each term is defined in Item 408 of Regulation S-K).
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Transaction Bonus
On August 29, 2024, the Compensation Committee delegated authority to Robbert Rietbroek to award transaction bonuses to David Hass and Marni Morgan Poe in an additional aggregate amount of up to $600,000 (collectively, the “Transaction Bonuses”) based on their efforts during the pendency of the Transaction or other factors. On November 5, 2024, Mr. Hass and Ms. Poe were each awarded a Transaction Bonus of $300,000, payable on the next regularly scheduled payroll date.
The following financial statements from Primo Water Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2024, filed November 7, 2024, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Equity, (vi) Notes to the Consolidated Financial Statements.
*
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.