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PRMW > SEC Filings for PRMW > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for PRIMO WATER CORP

Form 10-Q for PRIMO WATER CORP


14-Nov-2013

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and related notes thereto in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2012. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in "Cautionary Note Regarding Forward-Looking Statements" in this Item 2 and in "Risk Factors" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

Primo Water Corporation (together with its consolidated subsidiaries, "Primo", "we", "our," "us") is a leading provider of multi-gallon purified bottled water, self-serve filtered drinking water and water dispensers sold through major retailers in the United States and Canada. We believe the market for purified water is growing due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified and filtered water. We are a Delaware corporation that was founded in 2004 and is headquartered in Winston-Salem, North Carolina.

Our business is designed to generate recurring demand for our purified bottled water or self-serve filtered drinking water through the sale of innovative water dispensers. This business strategy is commonly referred to as "razor-razorblade" because the initial sale of a product creates a base of users who frequently purchase complementary consumable products. We believe dispenser owners consume an average of 35 multi-gallon bottles of water annually. Once our bottled water is consumed using a water dispenser, empty bottles are exchanged at our recycling center displays, which provide a recycling ticket that offers a discount toward the purchase of a new bottle of Primo purified water ("Exchange") or they are refilled at a self-serve filtered drinking water location ("Refill"). Each of our multi-gallon water bottles can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of equivalent volumes of single-serve bottled water. As of September 30, 2013, our products and services were offered in each of the contiguous United States and in Canada at approximately 24,300 combined retail locations, including Lowe's Home Improvement, Walmart, Kmart, Meijer, Kroger, Food Lion, H-E-B Grocery, Sobeys and Walgreens.

We provide major retailers throughout the United States and Canada with single-vendor solutions for Exchange and Refill services, addressing a market demand that we believe was previously unmet. Our solutions are easy for retailers to implement, require minimal management supervision and store-based labor, and provide centralized billing and detailed performance reports. Our Exchange solution offers retailers attractive financial margins and the ability to optimize typically unused retail space with our displays. Our Refill solution provides filtered water through the installation and servicing of reverse osmosis water filtration systems in the back room of the retailer's store location, which minimizes the usage of the customer's retail space. The refill vending machine, which is typically accompanied by a sales display containing empty reusable bottles, is located within the retailer customer's floor space. Additionally, due to the recurring nature of water consumption, retailers benefit from year-round customer traffic and highly predictable revenue.

Business Segments

At September 30, 2013, we had two operating segments and two reportable segments: Primo Water ("Water") and Primo Dispensers ("Dispensers").

Our Water segment sales consist of the sale of multi-gallon purified bottled water (exchange services) and our self-serve filtered drinking water vending service (refill services) offered through retailers in each of the contiguous United States and Canada. Our Water services are offered through point of purchase display racks or self-serve filtered water vending displays and recycling centers that are prominently located at major retailers in space that is often underutilized.

Our Dispensers segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Dispensers sales are primarily generated through major U.S. retailers and are sold primarily through a direct-import model, where we recognize revenues for the sale of the water dispensers when title is transferred. We support retail sell-through with domestic inventory. We design, market and arrange for certification and inspection of our water dispensers.


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In 2012, we committed to a plan to sell the assets related to the sparkling beverage appliances, flavor concentrates, CO2 cylinders and accessories sold under the Flavorstation brand (the "Disposal Group"), which met all the criteria for classification as discontinued operations. As a result, current and prior year amounts and disclosures reflect these operations as discontinued operations, which were previously reported as the Flavorstation segment.

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

Cost of sales for Water consists of costs for distribution, bottles and related packaging materials for our exchange services and servicing and material costs for our refill services. Cost of sales for Dispensers consists of contract manufacturing, freight and duties.

Selling, general and administrative expenses for Water and Dispensers consist primarily of personnel costs for sales, marketing, operations support and customer service, as well as other supporting costs for operating each segment.

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

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

Recent Developments

On November 12, 2013, we entered into a Strategic Alliance Agreement (the "Agreement") with DS Waters of America, Inc. ("DS Waters") pursuant to which DS Waters will act as our primary bottler and distributor of three and five gallon purified bottled drinking water (the "Product") and provider of exchange and supply services for the Product in the United States. Pursuant to the Agreement, DS Waters will become our primary bottler and distributor in the United States in all territories for which we do not currently have an existing distributor agreement and in other territories as existing regional operator arrangements expire or are terminated.


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Results of Operations

The following table sets forth our results of operations:

                                                  Three months ended September 30,           Nine months ended September 30,
                                                     2013                  2012                2013                  2012
Consolidated statements of operations data:
Net sales                                       $        25,519       $        26,158     $       71,696       $         70,594
Operating costs and expenses:
Cost of sales                                            18,936                19,868             53,924                 54,081
Selling, general and administrative expenses              3,873                 4,783             11,722                 13,657
Non-recurring and acquisition-related costs                  96                   170                190                    565
Depreciation and amortization                             3,050                 2,898              8,579                  7,929
Goodwill impairment                                           -                     -                  -                 11,488
Total operating costs and expenses                       25,955                27,719             74,415                 87,720
Loss from operations                                       (436 )              (1,561 )           (2,719 )              (17,126 )
Interest expense and other, net                           1,138                   904              3,359                  3,082
Loss from continuing operations before income
taxes                                                    (1,574 )              (2,465 )           (6,078 )              (20,208 )
Income tax benefit                                            -                     -                  -                   (960 )
Loss from continuing operations                          (1,574 )              (2,465 )           (6,078 )              (19,248 )
Loss from discontinued operations                          (511 )              (1,370 )             (872 )              (14,757 )
Net loss                                        $        (2,085 )     $        (3,835 )   $       (6,950 )     $        (34,005 )

The following table sets forth our results of operations expressed as a percentage of net sales:

                                                          Three months ended September 30,                Nine months ended September 30,
                                                           2013                      2012                 2013                      2012
Consolidated statements of operations data:
Net sales                                                       100.0 %                   100.0 %              100.0 %                   100.0 %
Operating costs and expenses:
Cost of sales                                                    74.2                      76.0                 75.2                      76.6
Selling, general and administrative expenses                     15.2                      18.3                 16.3                      19.3
Non-recurring and acquisition-related costs                       0.3                       0.6                  0.3                       0.9
Depreciation and amortization                                    12.0                      11.1                 12.0                      11.2
Goodwill and other impairment                                       -                         -                    -                      16.3
Total operating costs and expenses                              101.7                     106.0                103.8                     124.3
Loss from operations                                             (1.7 )                    (6.0 )               (3.8 )                   (24.3 )
Interest expense and other, net                                   4.5                       3.4                  4.7                       4.3
Loss from continuing operations before income taxes              (6.2 )                    (9.4 )               (8.5 )                   (28.6 )
Income tax provision                                                -                         -                    -                      (1.3 )
Loss from continuing operations                                  (6.2 )                    (9.4 )               (8.5 )                   (27.3 )
Loss from discontinued operations                                (2.0 )                    (5.3 )               (1.2 )                   (20.9 )
Net loss                                                         (8.2 %)                  (14.7 %)              (9.7 %)                  (48.2 %)

The following table sets forth our segment net sales and segment income (loss) from operations presented on a segment basis and reconciled to our consolidated loss from operations.

                                                  Three months ended September 30,           Nine months ended September 30,
                                                     2013                  2012                2013                  2012
Segment net sales
Water                                           $        17,544       $        17,264     $       48,686       $         47,624
Dispensers                                                7,975                 8,894             23,010                 22,970
Total net sales                                 $        25,519       $        26,158     $       71,696       $         70,594

Segment income (loss) from operations
Water                                           $         4,924       $         4,718     $       13,652       $         12,654
Dispensers                                                  447                  (441 )              701                 (1,223 )
Corporate                                                (2,661 )              (2,770 )           (8,303 )               (8,575 )
Non-recurring and acquisition-related costs                 (96 )                (170 )             (190 )                 (565 )
Depreciation and amortization                            (3,050 )              (2,898 )           (8,579 )               (7,929 )
Goodwill impairment                                           -                     -                  -                (11,488 )
Loss from operations                            $          (436 )     $        (1,561 )   $       (2,719 )     $        (17,126 )


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Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Net Sales. Net sales decreased 2.4%, or $0.6 million, to $25.5 million for the three months ended September 30, 2013 from $26.2 million for the three months ended September 30, 2012. The change in net sales resulted from a $0.9 million decrease in Dispenser sales partially offset by a $0.3 million increase in Water sales.

Water. Water net sales increased 1.6% to $17.5 million, representing 68.7% of our total net sales, for the three months ended September 30, 2013. We believe that unfavorable, cooler weather conditions for the third quarter of 2013 compared to the same period in the prior year had a negative impact on Exchange and Refill net sales. The increase in Water net sales was primarily due to a 4.6% increase in Exchange sales driven by same-store unit growth of 8.5% for the Company's U.S. Exchange services compared to the third quarter of 2012. The improvement in Exchange sales was partially offset by a 2.1% decline in Refill sales. Five-gallon equivalent units for Water for the nine months ended September 30, 2013 were unchanged from the prior period at 7.5 million.

Dispensers. Dispensers net sales decreased 10.3% to $8.0 million, representing 31.3% of our total net sales, for the three months ended September 30, 2013.
The decrease was due to additional sales in the third quarter of 2012 related to the rollout of new locations for a major retailer as well as the timing of shipments to major retailers in the third quarter of 2013. Despite the 3.7% decline in dispenser unit sell-in to retailers, dispenser unit sell-thru to consumers increased 2.0% for the three months ended September 30, 2013 compared to the same period in the prior year.

Gross Margin Percentage. Our overall gross margin percentage increased to 25.8% for the three months ended September 30, 2013 from 24.0% for the three months ended September 30, 2012. The increase was due to improvements for both Water and Dispensers gross margins.

Water. Gross margin as a percentage of net sales for our Water segment increased to 33.7% for the three months ended September 30, 2013 from 32.3% for the same period in the prior year. The increase was driven by the improvement in Exchange margins, due primarily to improvements in supply chain costs, and the slight improvement in Refill margins.

Dispensers. Gross margin as a percentage of net sales for our Dispensers segment increased to 8.4% for the three months ended September 30, 2013 from 8.0% for the same period in the prior year. The increase in gross margin percentage was primarily due to improvements in supply chain costs.

Selling, General and Administrative Expenses ("SG&A"). SG&A decreased 19.0% to $3.9 million for the three months ended September 30, 2013 from $4.8 million for the three months ended September 30, 2012. As a percentage of net sales, SG&A decreased to 15.2% for the three months ended September 30, 2013 from 18.3% for the three months ended September 30, 2012.

Water. SG&A for our Water segment increased 15.1% to $1.0 million for the three months ended September 30, 2013 from $0.9 million for the three months ended September 30, 2012. Water SG&A as a percentage of Water net sales increased to 5.6% for the three months ended September 30, 2013 compared to 5.0% for the three months ended September 30, 2012. The increase in Water SG&A was primarily a result of increased headcount compared to the prior year.

Dispensers. SG&A for our Dispensers segment decreased 80.5% to $0.2 million for the three months ended September 30, 2013 from $1.2 million for the three months ended September 30, 2012. SG&A as a percentage of Dispensers segment net sales decreased to 2.8% for the three months ended September 30, 2013 from 13.0% for the three months ended September 30, 2012. This decrease was primarily due to expenses in 2012 related to the rollout of new dispenser retail locations that were not incurred in the current quarter.

Corporate. Corporate SG&A decreased 3.9% to $2.7 million for the three months ended September 30, 2013 from $2.8 million for the three months ended September 30, 2012. Corporate SG&A as a percentage of consolidated net sales decreased to 10.4% for the three months ended September 30, 2013 from 10.6% for the three months ended September 30, 2012. The change was primarily due to a reduction in bad debt expense compared to the prior year.

Non-Recurring and Acquisition-Related Costs. Non-recurring and acquisition-related costs were $0.1 million for the three months ended September 30, 2013 compared to $0.2 million for the three months ended September 30, 2012.
Non-recurring and acquisition-related costs consisted primarily of certain legal charges in 2013 and severance, restructuring and certain legal charges in 2012.


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Depreciation and Amortization. Depreciation and amortization increased 5.3% to $3.1 million for the three months ended September 30, 2013 from $2.9 million for the three months ended September 30, 2012. The increase was primarily due to depreciation on additional property and equipment.

Interest Expense and Other, net. Interest expense and other, net increased to $1.1 million for the three months ended September 30, 2013 from $0.9 million for the three months ended September 30, 2012. The increase was primarily due to interest charges related to supplier financing costs incurred in 2013 which were not incurred in 2012.

Discontinued Operations. Loss from discontinued operations decreased to $0.5 million for the three months ended September 30, 2013 compared to $1.4 million for the three months ended September 30, 2012. The change is due primarily to the impact of inventory and fixed asset impairments recorded in the prior year and the overall winding-down of our discontinued operations.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Net Sales. Net sales increased 1.6%, or $1.1 million, to $71.7 million for the nine months ended September 30, 2013 from $70.6 million for the nine months ended September 30, 2012. The change was the result of a $1.1 million increase in Water net sales.

Water. Water net sales increased 2.2% to $48.7 million, representing 67.9% of our total net sales, for the nine months ended September 30, 2013. The increase in Water net sales was due to a 5.2% increase in Exchange sales driven by same-store unit growth of 10.4% for our U.S. Exchange services compared to the nine months ended September 30, 2012, partially offset by a 1.5% decrease in Refill revenue. Five-gallon equivalent units for Water for the nine months ended September 30, 2013 were unchanged from the prior period at 21.0 million.

Dispensers. Dispensers net sales increased marginally to $23.0 million, representing 32.1% of our total net sales, for the nine months ended September 30, 2013. Our dispenser unit sales to retailers decreased by 3.7% for the nine months ended September 30, 2013 compared to the same period in the prior year, due primarily to the sell-in related to the rollout of new locations for a major retailer during the first half of 2012. Despite the decline in dispenser unit sell-in to retailers, dispenser unit sell-thru to consumers increased 10.7% for the nine months ended September 30, 2013 compared to the same period in the prior year. Dispenser unit sales declined while sales were virtually unchanged due primarily to sales mix of higher priced units.

Gross Margin Percentage. Our overall gross margin percentage increased to 24.8% for the nine months ended September 30, 2013 from 23.4% for the nine months ended September 30, 2012. The increase was due to improvements for both Water and Dispensers gross margins.

Water. Gross margin as a percentage of net sales for our Water segment increased to 33.4% for the nine months ended September 30, 2013 from 32.9% for the same period in the prior year. An improvement in Exchange gross margin percentage for the period, due primarily to improvements in supply chain costs, was partially offset by a slight reduction in Refill gross margin percentage.

Dispensers. Gross margin as a percentage of net sales in our Dispensers segment increased to 6.5% for the nine months ended September 30, 2013 from 3.6% for the same period in the prior year. The increase in gross margin percentage was primarily due to improved supply chain costs and price increases during the third quarter of 2012.

Selling, General and Administrative Expenses ("SG&A"). SG&A decreased 14.2% to $11.7 million for the nine months ended September 30, 2013 from $13.7 million for the nine months ended September 30, 2012. As a percentage of net sales, SG&A decreased to 16.3% for the nine months ended September 30, 2013 from 19.3% for the nine months ended September 30, 2012.

Water. SG&A for our Water segment decreased 13.9% to $2.6 million for the nine months ended September 30, 2013 from $3.0 million for the nine months ended September 30, 2012. Water SG&A as a percentage of Water net sales decreased to 5.4% for the nine months ended September 30, 2013 compared to 6.4% for the nine months ended September 30, 2012. The decrease in Water SG&A was primarily a result of lower advertising expenses compared to the prior year.


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Dispensers. SG&A for our Dispensers segment decreased 60.6% to $0.8 million for the nine months ended September 30, 2013 from $2.0 million for the nine months ended September 30, 2012. This decrease was primarily due to expenses in 2012 related to the rollout of new dispenser retail locations that were not incurred in the first nine months of 2013. SG&A as a percentage of Dispensers segment net sales decreased to 3.5% for the nine months ended September 30, 2013 from 8.9% for the nine months ended September 30, 2012.

Corporate. Corporate SG&A decreased 3.2% to $8.3 million for the nine months ended September 30, 2013 from $8.6 million for the nine months ended September 30, 2012. Corporate SG&A as a percentage of consolidated net sales decreased to 11.6% for the nine months ended September 30, 2013 from 12.1% for the nine months ended September 30, 2012. The change was primarily attributable to lower bad debt and employee compensation-related expenses compared to the prior year.

Non-Recurring and Acquisition-Related Costs. Non-recurring and acquisition-related costs were $0.2 million for the nine months ended September 30, 2013 compared to $0.6 million for the nine months ended September 30, 2012.
Non-recurring and acquisition-related costs consisted primarily of severance, restructuring and certain legal charges in 2013 and 2012.

Depreciation and Amortization. Depreciation and amortization increased 8.2% to $8.6 million for the nine months ended September 30, 2013 from $7.9 million for the nine months ended September 30, 2012. The increase was primarily due to the change in the estimated useful life of bottles from three years to two years effective July 1, 2012.

Interest Expense and Other, net. Interest expense and other, net increased 9.3% to $3.4 million for the nine months ended September 30, 2013 from $3.1 million for the nine months ended September 30, 2012. Lower deferred loan cost amortization was offset by supplier financing costs incurred in 2013 which were not incurred in 2012.

Income Taxes Benefit. We recorded an income tax provision in 2011 as a result of the recognition of a deferred tax liability related to tax deductible goodwill. For the nine months ended September 30, 2012, the impairment of goodwill resulted in a reversal of the related deferred tax liability and the recognition of a deferred tax asset and income tax benefit. We have provided valuation allowances to fully offset the net deferred tax assets at September 30, 2013.

Discontinued Operations. Loss from discontinued operations decreased to $0.9 million for the nine months ended September 30, 2013 compared to $14.8 million for the nine months ended September 30, 2012. The decrease is due primarily to the impact of impairment charges to goodwill and developed technology recorded for the nine months ended September 30, 2012.

Liquidity and Capital Resources

Adequacy of Capital Resources

Since our inception, we have financed our operations primarily through the sale of stock, the issuance of debt, borrowings under credit facilities and cash flow from operations. While we had no material commitments for capital expenditures as of September 30, 2013, we anticipate capital expenditures to range between $1.0 million and $1.5 million for the remainder of 2013. Anticipated capital expenditures are related primarily to growth in Water locations.

At September 30, 2013, our cash totaled $0.3 million and we had approximately $3.8 million in additional availability under the Senior Revolving Credit Facility. This availability is subject to borrowing base requirements related to our eligible accounts receivable and inventory. We anticipate that our current cash and cash equivalents, availability under the Senior Revolving Credit Facility and cash flow from operations will be sufficient to meet our needs for . . .

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