PRIMO WATER CORPORATION Item 2.02 Results of Operations and Financial Condition.
Selected Preliminary Unaudited Financial Information:
Three Months Ended Years Ended
December 31, December 31,
2019 2018 2019 2018
(Unaudited; dollars in thousands)
Segment net sales:
Refill $ 40,761 $ 40,454 $ 165,837 $ 174,996
Exchange 22,051 18,296 86,641 78,072
Dispensers 17,586 12,131 64,194 49,044
$ 80,398 $ 70,881 $ 316,672 $ 302,112
Segment gross margin:
Refill 32.2 % 31.1 % 31.4 % 32.7 %
Exchange 28.3 % 30.4 % 29.9 % 31.4 %
Dispensers 2.8 % 13.9 % 5.9 % 9.8 %
Total gross margin 24.7 % 28.0 % 25.8 % 28.7 %
Net income (loss) $ 470 $ 1,730 $ 2,692 $ (54,847 )
Adjusted EBITDA $ 12,780 $ 11,808 $ 51,306 $ 55,378 Three Months Ended
Net sales. Net sales increased 13.4% to$80.4 million for the three months endedDecember 31, 2019 from$70.9 million for the three months endedDecember 31, 2018 . The change was primarily due to increases in sales for Dispensers and Exchange. Net sales adjusted for theJune 2019 sale of the Ice Assets ("AdjustedNet Sales ") increased 15.4%. See the AdjustedNet Sales table below. Refill. Refill net sales increased 0.8% to$40.8 million for the three months endedDecember 31, 2019 . AdjustedNet Sales for Refill, which excludes the impact of the sale of the Ice Assets, increased 3.9%, due primarily to a 2.0% increase in five-gallon equivalent units to 22.6 million. See the AdjustedNet Sales for Refill table below. Exchange. Exchange net sales increased 20.5% to$22.1 million for the three months endedDecember 31, 2019 . Exchange sales growth was driven by the increase inU.S. same-store units of 20.5%. Five-gallon equivalent units for Exchange increased 23.3% to 4.8 million units for the three months endedDecember 31, 2019 . The increase in Exchange sales and units was aided by an increase in the number of locations and by the consumer focused promotional efforts, including instantly redeemable coupons for free water with the purchase of a dispenser and new display and in-store signage. Dispensers. Dispensers net sales increased 45.0% to$17.6 million for the three months endedDecember 31, 2019 due to growth in consumer demand and retailer orders related to certain fourth quarter promotional activities. Consumer demand, which the Company measures as the dispenser unit sales to end consumers, increased 56.6% to a record 248,000 units for the three months endedDecember 31, 2019 . Gross margin percentage. The overall gross margin percentage was 24.7% for the three months endedDecember 31, 2019 , below the 28.0% for the three months endedDecember 31, 2018 , primarily due to a shift in sales mix towards Dispensers and lower gross margin percentages in Exchange. -------------------------------------------------------------------------------- Refill. Gross margin as a percentage of net sales for Refill improved to 32.2% for the three months endedDecember 31, 2019 from 31.1% for the three months endedDecember 31, 2018 , primarily due to an increase of 2.0% in five-gallon equivalent units to 22.6 million, which drove a higher gross margin percentage due to the fixed nature of certain costs in Refill. Exchange. Gross margin as a percentage of net sales for Exchange was 28.3% for the three months endedDecember 31, 2019 , compared to 30.4% for the three months endedDecember 31, 2018 . The decrease was primarily due to increased costs associated with consumer-focused promotional efforts, including the instantly redeemable coupons for free water with the purchase of a dispenser, as well as a change in product and retailer mix compared to the prior year. Dispensers. Gross margin as a percentage of net sales for Dispensers decreased to 2.8% for the three months endedDecember 31, 2019 from 13.9% for the three months endedDecember 31, 2018 , primarily due to a shift in product and customer mix, as well as the benefit associated with Tariff exclusion received in the prior period.
Year Ended
Net sales. Net sales increased 4.8% to$316.7 million for 2019 from$302.1 million for 2018. The change was primarily due to increases in sales for Dispensers and Exchange. Net sales adjusted for theJune 2019 sale of the Ice Assets ("AdjustedNet Sales ") increased 6.7%. See the AdjustedNet Sales table below. Refill. Refill net sales decreased 5.2% to$165.8 million for 2019. AdjustedNet Sales for Refill, which excludes the impact of the sale of the Ice Assets, decreased 2.4%, due primarily to a 5.6% decrease in five-gallon equivalent units to 90.8 million. See the AdjustedNet Sales for Refill table below. Exchange. Exchange net sales increased 11.0% to$86.6 million for 2019, driven by the increase inU.S. same-store units of 16.5%. Five-gallon equivalent units for Exchange increased 13.9% to 18.5 million units for 2019. The increase in Exchange sales and units was aided by an increase in the number of locations and by the consumer focused promotional efforts, including instantly redeemable coupons for free water with the purchase of a dispenser and new display and in-store signage. Dispensers. Dispensers net sales increased 30.9% to$64.2 million for 2019 due to growth in consumer demand and retailer orders driven by certain promotional activities. Consumer demand, which the Company measures as the dispenser unit sales to end consumers, increased 22.2% to a record 887,000 units for 2019.
Gross margin percentage. The overall gross margin percentage was 25.8% for 2019, below the 28.7% for 2018, primarily due to a shift in sales mix towards Dispensers and lower gross margin percentages in Refill and Exchange.
Refill. Gross margin as a percentage of net sales for Refill was 31.4% for 2019 compared to 32.7% for 2018. The decrease was primarily due to lower net sales for Refill, which drove a lower gross margin percentage due to the fixed nature of certain costs in Refill, as well as incremental operating costs related to addressing machine downtime. Exchange. Gross margin as a percentage of net sales for Exchange was 29.9% for 2019, compared to 31.4% for 2018. The decrease was primarily due to increased costs associated with consumer-focused promotional efforts, including the instantly redeemable coupons for free water with the purchase of a dispenser, as well as a change in product and retailer mix compared to the prior year. Dispensers. Gross margin as a percentage of net sales for Dispensers decreased to 5.9% for 2019 from 9.8% for 2018, primarily due to a shift in product and customer mix. -------------------------------------------------------------------------------- The above information is preliminary and subject to completion, including the completion of customary financial statement closing and review procedures for the three months and fiscal year endedDecember 31, 2019 . As a result, the preliminary results set forth above reflect the Company's preliminary estimate with respect to such information, based on information currently available to management, and may vary from the Company's actual financial results as of and for the three months and year endedDecember 31, 2019 . Further, these preliminary estimates are not a comprehensive statement or estimate of the Company's financial results or financial condition as of and for the three months and year endedDecember 31, 2019 . These preliminary estimates should not be viewed as a substitute for financial statements prepared in accordance withU.S. GAAP and they are not necessarily indicative of the results to be achieved in any future period. Accordingly, you should not place undue reliance on these preliminary estimates. These preliminary estimates, which are the responsibility of the Company's management, were prepared by the Company's management and are based upon a number of assumptions. Additional items that may require adjustments to these preliminary estimates may be identified and could result in material changes to these preliminary estimates. Preliminary estimates of results are inherently uncertain and the Company undertakes no obligation to update this information.BDO USA, LLP ("BDO"), the Company's independent registered public accounting firm, has not audited, reviewed, compiled or performed any procedures with respect to this preliminary financial information. Accordingly, BDO does not express an opinion or provide any form of assurance with respect thereto.
Additional Information and Where to Find It
This communication relates to a pending business combination between Cott and Primo. Cott commenced an exchange offer for the outstanding shares of Primo onJanuary 28, 2020 . This communication is for informational purposes only and does not constitute an offer to purchase or a solicitation of an offer to sell shares, nor is it a substitute for any offer materials that the parties will file with theU.S. Securities and Exchange Commission (the "SEC"). At the time the exchange offer was commenced, Cott and its acquisition subsidiary filed an exchange offer statement on Schedule TO, Cott filed a registration statement on Form S-4 and Primo filed a Solicitation/Recommendation Statement on Schedule 14D-9 with theSEC with respect to the exchange offer. Each of Cott and Primo also plan to file other relevant documents with theSEC regarding the proposed transaction. THE EXCHANGE OFFER MATERIALS (INCLUDING THE OFFER TO EXCHANGE, THE RELATED LETTER OF ELECTION AND TRANSMITTAL AND CERTAIN OTHER EXCHANGE OFFER DOCUMENTS), THE SOLICITATION / RECOMMENDATION STATEMENT AND OTHER RELEVANT DOCUMENTS THAT MAY BE FILED WITH THESEC , AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO ANY OF THE FOREGOING DOCUMENTS, CONTAIN IMPORTANT INFORMATION. PRIMO STOCKHOLDERS ARE URGED TO READ THESE DOCUMENTS CAREFULLY BECAUSE THEY CONTAIN IMPORTANT INFORMATION THAT HOLDERS OF PRIMO SECURITIES SHOULD CONSIDER BEFORE MAKING ANY DECISION REGARDING EXCHANGING THEIR SECURITIES. The Solicitation/Recommendation Statement, the Offer to Exchange, the related Letter of Election and Transmittal and certain other exchange offer documents are available to all of Primo's stockholders at no expense to them. The exchange offer materials and the Solicitation/Recommendation Statement are available for free on theSEC's website at www.sec.gov. Copies of the documents filed with theSEC by Cott are available free of charge under the heading of the Investor Relations section of Cott's website at www.cott.com/investor-relations/. Copies of the documents filed with theSEC by Primo are available free of charge under theSEC filings heading of the Investors section of Primo's website athttp://ir.primowater.com/.
Safe Harbor Statements
This communication contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements involve inherent risks and uncertainties and you are cautioned that a number of important factors could cause actual results to differ materially from those contained in any such forward-looking statement. These statements can otherwise be identified by the use of words such as "anticipate," "believe," "could," "estimate," "expect," "feel," "forecast," "intend," "may," "plan," "potential," "predict," "project," "seek," "should," "would," "will," and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The forward-looking statements contained in this communication include, but are not limited to, statements related to Cott's and Primo's plans, objectives, expectations and intentions with respect to the proposed transaction and the combined company, the anticipated timing of the proposed transaction, and the potential impact the transaction will have on Primo or Cott and other matters related to either or both of them. The forward-looking statements are based on assumptions regarding current plans and estimates of management of Cott and Primo. Such management believes these assumptions to be reasonable, but there is no assurance that they will prove to be accurate. -------------------------------------------------------------------------------- Factors that could cause actual results to differ materially from those described in this communication include, among others: changes in expectations as to the closing of the transaction including timing and changes in the method of financing the transaction; the satisfaction of the conditions precedent to the consummation of the proposed transaction (including a sufficient number of Primo shares being validly tendered into the exchange offer to meet the minimum condition), the risk of litigation and regulatory action related to the proposed transactions, expected synergies and cost savings are not achieved or achieved at a slower pace than expected; integration problems, delays or other related costs; retention of customers and suppliers; and unanticipated changes in laws, regulations, or other industry standards affecting the companies; and other risks and important factors contained and identified in Cott's and Primo's filings with theSEC , including their respective Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. The foregoing list of factors is not exhaustive. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. Readers are urged to carefully review and consider the various disclosures, including but not limited to risk factors contained in Cott's and Primo's Annual Reports on Form 10-K and its quarterly reports on Form 10-Q, as well as other filings with theSEC . Forward-looking statements reflect the analysis of management of Cott and Primo as of the date of this communication. Neither Cott nor Primo undertakes to update or revise any of these statements in light of new information or future events, except as expressly required by applicable law.
Use of Non-
To supplement its financial statements, the Company provides investors with information related to adjusted EBITDA, adjusted net sales and adjusted net sales for Refill, which are not financial measures calculated in accordance with generally accepted accounting principles inthe United States ("U.S. GAAP"). Adjusted EBITDA is calculated as net (loss) income before depreciation and amortization; interest expense, net; income tax benefit; non-cash, stock-based compensation expense; special items; and impairment charges and other. Adjusted net sales is calculated as total net sales less net sales related to the ice assets sold inJune 2019 . Adjusted net sales for Refill is calculated as Refill segment net sales less net sales related to the ice assets sold inJune 2019 . The Company believes these non-U.S. GAAP financial measures provide useful information to management, investors and financial analysts regarding certain financial and business trends relating to the Company's financial condition and results of operations. Management uses these non-U.S. GAAP financial measures to compare the Company's performance to that of prior periods for trend analyses and planning purposes. These non-U.S. GAAP financial measures are also presented to the Company's Board of Directors and adjusted EBITDA is used in its credit agreements. Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance withU.S. GAAP. These non-U.S. GAAP measures exclude significant expenses that are required byU.S. GAAP to be recorded in the Company's financial statements and are subject to inherent limitations. Non-GAAP EBITDA and Adjusted EBITDA Reconciliation (Unaudited; in thousands) Three Months Ended Years Ended December 31, December 31, 2019 2018 2019 2018 Net income (loss)$ 470 $ 1,730 $ 2,692 $ (54,847 ) Depreciation and amortization 7,969 6,197 29,468 24,562 Interest expense, net 1,922 2,508 10,603 21,417 Income tax benefit - - - (8,907 ) EBITDA 10,361 10,435 42,763 (17,775 ) Non-cash stock-based compensation expense 207 973 3,686 3,683 Special items 1,370 136 3,611 762 Impairment charges and other 842 264 1,246 68,708 Adjusted EBITDA$ 12,780 $ 11,808 $ 51,306 $ 55,378
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Non-GAAP Adjusted Net Sales
(Unaudited; in thousands)
Three Months Ended Years Ended
December 31, December 31,
2019 2018 2019 2018
Net sales $ 80,398 $ 70,881 $ 316,672 $ 302,112
Less: Ice net sales - 1,238 2,654 7,791
Adjusted net sales $ 80,398 $ 69,643 $ 314,018 $ 294,321
Non-GAAP Adjusted Net Sales, Refill Segment
(Unaudited; in thousands)
Three Months Ended Years Ended
December 31, December 31,
2019 2018 2019 2018
Refill segment net sales $ 40,761 $ 40,454 $ 165,837 $ 174,996
Less: Ice net sales - 1,238 2,654 7,791
Adjusted net sales for Refill $ 40,761 $ 39,216 $ 163,183 $ 167,205
The information in this Current Report on Form 8-K is being furnished pursuant
to Item 2.02 of Form 8-K and shall not be deemed to be "filed" for purposes of
Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act"), or
otherwise subject to the liabilities of that section, nor shall it be deemed
incorporated by reference in any filing made by the Company under the Securities
Act of 1933 or the Exchange Act, except as shall be expressly set forth by
specific reference in such a filing.
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