The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to the Consolidated Financial Statements
Unaudited
Note 1Summary of
Significant Accounting Policies
Description of Business
As used herein, Cott, the Company, our Company, Cott Corporation, we,
us, or our refers to Cott Corporation, together with its consolidated subsidiaries. Cott is a water, coffee, tea, extracts and filtration service company with a leading volume-based national presence in the North American and
European home and office delivery industry for bottled water and a leader in custom coffee roasting, blending of iced tea and extract solutions for the U.S. foodservice industry. Our platform reaches over 2.4 million customers or delivery
points across North America and Europe supported by strategically located sales and distribution facilities and fleets, as well as wholesalers and distributors. This enables us to efficiently service residences, businesses, restaurant chains,
hotels and motels, small and large retailers, and healthcare facilities.
Basis of Presentation
The accompanying interim unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form
10-Q
and Article 10 of Regulation
S-X
and in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial reporting. In the opinion
of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of our results of operations for the interim periods reported and of our financial condition as of the date of the interim balance
sheet have been included. The Consolidated Balance Sheet as of December 30, 2017 included herein was derived from the audited consolidated financial statements included in our Annual Report on Form
10-K
for the fiscal year ended December 30, 2017 (2017 Annual Report). This Quarterly Report on Form
10-Q
should be read in conjunction with the annual audited Consolidated Financial Statements and
accompanying notes in our 2017 Annual Report. The accounting policies used in these interim Consolidated Financial Statements are consistent with those used in the annual Consolidated Financial Statements.
The presentation of these interim Consolidated Financial Statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.
Changes in Presentation
Certain prior period amounts have been reclassified to conform to current period presentation in the accompanying Consolidated Statements of
Cash Flows. These reclassifications had no effect on net cash provided by operating activities.
On January 30, 2018, we sold our
carbonated soft drinks and juice businesses via the sale of our North America, United Kingdom (U.K.) and Mexico business units (including the Canadian business) and our Royal Crown International (RCI) finished goods export
business (collectively, Traditional Business and such transaction, the Transaction). As a result, the Company has reclassified the financial results of the Traditional Business to net income (loss) from discontinued
operations, net of income taxes in the Consolidated Statement of Operations for the three months ended April 1, 2017. Cash flows from the Companys discontinued operations are presented in the Consolidated Statement of Cash Flows for the
three months ended April 1, 2017. See Note 2 to the Consolidated Financial Statements for additional information on discontinued operations.
Significant Accounting Policies
Included in Note 1 of the 2017 Annual Report is a summary of the Companys significant accounting policies. Provided below is a summary of
additional accounting policies that are significant to the financial results of the Company.
Cost of sales
We record costs associated with the manufacturing of our products in cost of sales. Shipping and handling costs incurred to store, prepare and
move products between production facilities or from production facilities to branch locations or storage facilities are recorded in cost of sales. Shipping and handling costs incurred to deliver products from our Route Based Services and Coffee, Tea
and Extract Solutions reporting segment branch locations to the
end-user
consumer of those products are recorded in selling, general and administrative (SG&A) expenses. All other costs incurred
in shipment of products from our production facilities to customer locations are reflected in cost of sales. Shipping and handling costs included in SG&A were $113.8 million and $106.3 million for the three months ended March 31,
2018 and April 1, 2017, respectively. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production.
8
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair value of the net assets acquired. Goodwill is not amortized,
but instead is tested for impairment at least annually. The following table summarizes our goodwill on a reporting segment basis as of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reporting Segment
|
|
|
|
|
(in millions of U.S. dollars)
|
|
Route
Based
Services
|
|
|
Coffee, Tea
and Extract
Solutions
|
|
|
All Other
|
|
|
Total
|
|
Balance December 30, 2017
|
|
$
|
936.7
|
|
|
$
|
117.8
|
|
|
$
|
50.2
|
|
|
$
|
1,104.7
|
|
Goodwill acquired during the year
|
|
|
18.9
|
|
|
|
|
|
|
|
3.3
|
|
|
|
22.2
|
|
Foreign exchange
|
|
|
8.5
|
|
|
|
|
|
|
|
1.9
|
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2018
|
|
$
|
964.1
|
|
|
$
|
117.8
|
|
|
$
|
55.4
|
|
|
$
|
1,137.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently adopted accounting pronouncements
Update ASU
2014-09
Revenue from Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board (FASB) amended its guidance regarding revenue recognition and created a new
Topic 606, Revenue from Contracts with Customers. The objectives for creating Topic 606 were to remove inconsistencies and weaknesses in revenue recognition, provide a more robust framework for addressing revenue issues, provide more useful
information to users of the financial statements through improved disclosure requirements, simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer, and improve comparability of revenue
recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, an entity should apply the following steps: 1) identify the contract(s) with a customer; 2) identify the
performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. For
public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments may be applied retrospectively to each prior reporting period
presented or retrospectively with the cumulative effect of initially applying the amendment recognized at the date of initial application.
Effective December 31, 2017 we adopted FASB Accounting Standards Codification (ASC) Topic 606,
Revenue from Contracts with
Customers
(ASC 606). ASC 606 was applied using the modified retrospective method. Adoption of this standard did not result in a cumulative adjustment to the opening balance of retained earnings at December 31, 2017 and did not
have any other material effect on the results of operations, financial position or cash flows of the Company for the three months ended April 1, 2017 (see Note 3 to the Consolidated Financial Statements).
Update ASU
2017-01
Business Combinations (Topic 805)
In January 2017, the FASB amended its guidance regarding business combinations. The amendment clarified the definition of a business with the
objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide an analysis of fair value of assets acquired to determine
when a set of assets is not a business, and uses more stringent criteria related to inputs, substantive process, and outputs to determine if a business exists. We adopted the guidance in this amendment effective December 31, 2017, and applied
it prospectively to all periods presented. Adoption of this new standard may result in more transactions being accounted for as asset acquisitions versus business combinations; however, the impact on our Consolidated Financial Statements in
future periods will depend on the facts and circumstances of future transactions.
9
Update ASU
2017-07
CompensationRetirement Benefits (Topic
715)
In March 2017, the FASB issued an update to its guidance on presentation of net periodic pension cost and net periodic
post-retirement pension cost, and requires the service cost component to be presented in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net
benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this update also allow only the service cost component to be eligible
for capitalization when applicable.
Effective December 31, 2017, we adopted the guidance in this amendment retrospectively. The new
standard requires that only the service cost component of periodic benefit cost is recorded in SG&A expenses. All other components of net periodic benefit cost are excluded from operating income. The adoption of ASU
2017-07
did not have a material impact on operating income for the three months ended March 31, 2018 or April 1, 2017.
Update ASU
2017-09
Stock Compensation Scope of Modification Accounting (Topic 718)
In May 2017, the FASB amended its guidance regarding the scope of modification accounting for share-based compensation arrangements. The
amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. For public entities, the amendments in this update are effective for fiscal
years beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public entities for reporting periods for which financial statements have not yet been issued. We adopted the guidance in this
amendment effective December 31, 2017, and applied it prospectively to all periods presented. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
Recently issued accounting pronouncements
Update ASU
2016-02
Leases (Topic 842)
In February 2016, the FASB issued an update to its guidance on
lease accounting for lessees and lessors. This update revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability to make lease payments and an asset representing its right to use the
underlying asset for the lease term in the balance sheet. The distinction between finance and operating leases has not changed and the update does not significantly change the effect of finance and operating leases on the Consolidated Statements of
Operations and the Consolidated Statements of Cash Flows. Additionally, this update requires both qualitative and specific quantitative disclosures. For public entities, the amendments in this update are effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available.
We are currently assessing the
impact of adoption of this standard on our Consolidated Financial Statements. The Company is evaluating the standards applicability to our various contractual arrangements. We currently believe that the most significant changes relate to the
recognition of new right of use assets and lease liabilities for real estate and equipment leases, which will result in increases to our assets and liabilities on our Consolidated Balance Sheets. We believe that substantially all of our lessee lease
arrangements will continue to be classified as operating leases under the new standard. Additionally, we had $19.9 million of deferred gains at December 31, 2016 associated with sale-leaseback transactions which are currently being
amortized over the leaseback term. Upon adoption of this standard, we will be required to recognize the unamortized deferred gain at January 1, 2017 as a cumulative effect adjustment to equity. In addition, upon adoption of this standard,
deferred gains related to the sale-leaseback transactions completed in 2017 of $7.9 million at December 30, 2017 will be recognized in net income (loss) from discontinued operations, net of income taxes in the Consolidated Statement of
Operations for the year ended December 30, 2017.
The standard also requires lessors to classify leases as sales-type, direct
financing or operating leases, similar to existing guidance. We believe that substantially all of our lessor lease arrangements will continue to be classified as operating leases under the new standard.
Update ASU
2016-13
Financial Instruments Credit Losses (Topic 326)
In June 2016, the FASB amended its guidance to measure all expected credit losses for financial assets held at the reporting date based on
historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. The amended guidance also requires enhanced disclosures to help
financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entitys portfolio. The amendments in this update are effective for
fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption will be permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
This guidance will be applied using a prospective or modified retrospective transition method, depending on the area covered in this update. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
10
Update ASU
2017-08
ReceivablesNonrefundable Fees and
Other Costs (Subtopic
310-20)
In March 2017, the FASB amended its guidance on accounting for
debt securities. The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an
accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years, with early adoption permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. At
adoption, this update will be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should
provide disclosures about a change in accounting principle. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Update ASU
2018-02
Income StatementReporting Comprehensive Income (Topic 220)
In February 2018, the FASB amended its guidance which allows a reclassification from accumulated other comprehensive income to retained
earnings for stranded tax effects resulting from the comprehensive tax legislation enacted by the U.S. government on December 22, 2017 commonly referred to as the Tax Cuts and Jobs Act (the Tax Act) and requires certain disclosures
about stranded tax effects. For public entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted, and may be
applied in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate tax rate in the Tax Act is recognized. We are currently assessing the impact of adoption of this standard on our
Consolidated Financial Statements.
Update ASU
2018-05
Income TaxesAmendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118 (Topic 740)
In March 2018, the FASB amended its guidance regarding Accounting
Standards Codification 740,
Income Taxes
(ASC 740). On December 22, 2017, the U.S. government enacted the Tax Act, which makes broad and complex changes to the U.S. tax code that will affect the Companys fiscal year
2018. The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cut and Jobs Act
(SAB 118), which provides guidance on accounting for the
tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for entities to complete the accounting under ASC 740. In accordance with SAB 118, an entity must reflect the
income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that an entitys accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a
reasonable estimate, it must record a provisional estimate in its financial statements. If an entity cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the
provisions of the tax laws that were in effect immediately before the enactment of the Tax Act. The Company has applied SAB 118, and has recorded a provisional estimate related to certain 2017 effects of the Tax Act, and has provided the required
disclosures (see Note 5 of the Consolidated Financial Statements).
Note 2Discontinued Operations
On January 30, 2018, the Company completed the sale of the Traditional Business to Refresco Group N.V., a Dutch public company
(Refresco). The Transaction was structured as a sale of the assets of the Canadian business and a sale of the stock of the operating subsidiaries engaged in the Traditional Business in the other jurisdictions after the Company completed
an internal reorganization. The aggregate deal consideration was approximately $1.25 billion, paid at closing in cash, subject to adjustment for indebtedness, working capital, and other customary post-closing adjustments. As of March 31,
2018, $12.5 million of the total sale proceeds are being held in escrow by a third party escrow agent to secure potential indemnification claims. The remaining balance in the escrow account will be released, subject to any amounts for pending
indemnification claims, on the eighteen month anniversary of the closing date of the Transaction. These funds are included in cash & cash equivalents on the Consolidated Balance Sheet as of March 31, 2018. The Traditional Business
excludes our Companys Route Based Services (which includes our DS Services of America, Inc. (DSS), Aquaterra Corporation (Aquaterra) and Eden Springs Europe B.V. (Eden) businesses) and Coffee, Tea and
Extract Solutions (which includes our S. & D. Coffee, Inc. (S&D) business) reporting segments, our Aimia Foods (Aimia), Decantae Mineral Water Ltd. (Decantae) and RCI concentrate businesses, and our
Columbus, Georgia manufacturing facility.
11
The Company and Refresco have entered into a Transition Services Agreement pursuant to which the
Company and Refresco will provide certain services to each other for various service periods, with the longest service period being 18 months, including tax and accounting services, certain human resources services, communications systems and
support, and insurance/risk management. Each party will be compensated for services rendered as set forth in the Transition Services Agreement. Each service period may be extended as set forth in the Transition Services Agreement, up to a maximum
extension of 180 days.
In addition, the Company and Refresco have entered into certain
Co-pack
Manufacturing Agreements pursuant to which the Company and Refresco will manufacture and supply certain beverage products for each other, and a Concentrate Supply Agreement pursuant to which the Company will supply concentrates to Refresco. Each
party will be compensated for the products they supply as set forth in the applicable agreements. The
Co-pack
Manufacturing Agreements have a term of 36 months and the Concentrate Supply Agreement has a term
that is coterminous with the term of the Transition Services Agreement. During the three months ended March 31, 2018, the Company has paid Refresco $2.2 million for the contract manufacture of beverage products. In addition, during the
three months ended March 31, 2018, we have reimbursed Refresco $12.8 million for various operational expenses that were paid by Refresco on our behalf.
The Company used a portion of the sale proceeds to (i) retire $525.0 million aggregate principal amount of the 5.375% senior notes
due 2022 (the 2022 Notes), (ii) retire the remaining $250.0 million aggregate principal amount of the 10.000% senior secured notes due 2021 (the DSS Notes), (iii) repay $262.5 million outstanding balance on the
asset-based lending facility (the ABL facility), and (iv) repay $1.9 million in aggregate principal outstanding on the capital lease finance arrangement with General Electric Capital Corporation (the GE Term Loan).
The major components of net income (loss) from discontinued operations, net of income taxes in the accompanying Consolidated Statements of
Operations include the following:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
(in millions of U.S. dollars)
|
|
March 31, 2018
|
|
|
April 1, 2017
|
|
Revenue, net
|
|
$
|
111.2
|
|
|
$
|
371.8
|
|
Cost of sales
|
|
|
98.4
|
|
|
|
330.0
|
|
Operating income from discontinued operations
|
|
|
2.0
|
|
|
|
5.6
|
|
Gain on sale of discontinued operations
|
|
|
429.4
|
|
|
|
|
|
Net income (loss) from discontinued operations, before income taxes
|
|
|
404.0
|
|
|
|
(24.8
|
)
|
Income tax expense (benefit)
1
|
|
|
46.6
|
|
|
|
(0.6
|
)
|
Net income (loss) from discontinued operations, net of income taxes
|
|
|
357.4
|
|
|
|
(24.2
|
)
|
Less: Net income attributable to
non-controlling
interests
|
|
|
0.6
|
|
|
|
2.0
|
|
Net income (loss) attributable to Cott Corporation discontinued operations
2
|
|
$
|
356.8
|
|
|
$
|
(26.2
|
)
|
1.
|
Overall the net income from discontinued operations, before income taxes for the three months ended March 31, 2018 resulted in income tax expense of
$46.6 million. The Transaction resulted in a taxable gain on sale in the U.S., which utilized a significant portion of the existing U.S. net operating loss carry forwards. As a result, the Company is in a net deferred tax liability position in
the U.S. and thus a tax benefit of approximately $25.0 million related to a release of the U.S. valuation allowance was recorded and is offsetting the overall income tax expense related to discontinued operations.
|
2.
|
Net income (loss) attributable to Cott Corporation discontinued operations is inclusive of interest expense on short-term borrowings and debt required to be
repaid or extinguished as part of divestiture of $3.4 million and $20.4 million for the three months ended March 31, 2018 and April 1, 2017, respectively.
|
Cash flows from discontinued operations included borrowings and payments under the ABL facility of $262.4 million and
$482.8 million, respectively, for the three months ended March 31, 2018 and $772.9 million and $832.7 million, respectively, for the three months ended April 1, 2017.
12
Note 3Revenue
We are a water, coffee, tea, extracts and filtration service company. Our principal source of revenue is from bottled water delivery to
residential and business customers in North America and Europe and manufacture and distribution of coffee, tea and extracts to institutional and commercial customers in the United States. Revenue is recognized, net of sales returns, when a customer
obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based on the consideration specified in the client arrangement, and revenue
is recognized when the performance obligations in the client arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each
distinct performance obligation and recognized as revenue when the customer receives the benefit of the performance obligation. Clients typically receive the benefit of our services as they are performed. Substantially all our client contracts
require that we be compensated for services performed to date. This may be upon shipment of goods or upon delivery to the customer, depending on contractual terms. Shipping and handling costs paid by the customer to us are included in revenue and
costs incurred by us for shipping and handling activities that are performed after a customer obtains control of the product are accounted for as fulfillment costs. In addition, we exclude from net revenue and cost of sales taxes assessed by
governmental authorities on revenue-producing transactions. Although we occasionally accept returns of products from our customers, historically returns have not been material.
Contract Estimates
The nature of certain
of the Companys contracts give rise to variable consideration including cash discounts, volume-based rebates, point of sale promotions, and other promotional discounts to certain customers. For all promotional programs and discounts, the
Company estimates the rebate or discount that will be granted to the customer and records an accrual upon invoicing. These estimated rebates or discounts are included in the transaction price of the Companys contracts with customers as a
reduction to net revenues and are included as accrued sales incentives in accounts payable and accrued liabilities in the Consolidated Balance Sheets. This methodology is consistent with the manner in which the Company historically estimated and
recorded promotional programs and discounts.
We do not disclose the value of unsatisfied performance obligations for contracts
(i) with an original expected length of one year or less or (ii) for which the Company recognizes revenue at the amount in which it has the right to invoice as product is delivered.
Contract Balances
Contract liabilities
relate primarily to advances received from the Companys customers before revenue is recognized. These amounts are recorded as deferred revenue and are included in accounts payable and accrued liabilities in the Consolidated Balance Sheets. The
advances are expected to be earned as revenue within one year of receipt. Deferred revenues at March 31, 2018 and December 30, 2017 were $20.8 million and $21.8 million, respectively. The amount of revenue recognized in the three
months ended March 31, 2018 that was included in the December 30, 2017 deferred revenue balance was $13.8 million.
The
Company does not have any material contract assets as of March 31, 2018.
Disaggregated Revenue
In general, the Companys business segmentation is aligned according to the nature and economic characteristics of its products and
customer relationships and provides meaningful disaggregation of each business segments results of operations.
Further
disaggregation of net revenue to external customers by geographic area based on customer location is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
(in millions of U.S. dollars)
|
|
March 31, 2018
|
|
|
April 1, 2017
|
|
United States
|
|
$
|
418.6
|
|
|
$
|
409.6
|
|
United Kingdom
|
|
|
43.6
|
|
|
|
38.7
|
|
Canada
|
|
|
15.2
|
|
|
|
14.5
|
|
All other countries
|
|
|
83.4
|
|
|
|
74.1
|
|
|
|
|
|
|
|
|
|
|
Total
1
|
|
$
|
560.8
|
|
|
$
|
536.9
|
|
|
|
|
|
|
|
|
|
|
1.
|
Prior-period amounts are not adjusted under the modified-retrospective method of adoption.
|
13
Note 4Acquisitions
Crystal Rock Acquisition
On
March 21, 2018, the Company, through its wholly owned subsidiary, CR Merger Sub, Inc. (Purchaser), completed a cash tender offer for all outstanding shares of common stock of Crystal Rock Holdings, Inc.,
a direct-to-consumer home
and office water, coffee and filtration business serving customers throughout New York and New England (Crystal Rock). On
March 23, 2018 (Crystal Rock Acquisition Date), the Purchaser merged with and into Crystal Rock, with Crystal Rock becoming a wholly-owned indirect subsidiary of the Company (the Crystal Rock Acquisition). The aggregate
consideration was approximately $37.7 million and includes the purchase price paid by the Company to the Crystal Rock shareholders of $20.7 million, $0.8 million in costs paid on behalf of the sellers for the sellers transaction
costs and $16.2 million of assumed debt and accrued interest obligations of the acquired company that was paid by the Company.
The
total purchase price paid by Cott in the Crystal Rock Acquisition is summarized below:
|
|
|
|
|
(in millions of U.S. dollars)
|
|
|
|
Cash paid to sellers
|
|
$
|
20.7
|
|
Cash paid on behalf of sellers for sellers transaction expenses
|
|
|
0.8
|
|
|
|
|
|
|
Total consideration
|
|
$
|
21.5
|
|
|
|
|
|
|
The Crystal Rock Acquisition strengthens the Companys presence in New York and New England. The Company
has accounted for this transaction as a business combination.
The purchase price of $21.5 million, net of debt, was allocated to the
assets acquired and liabilities assumed based on their estimated fair values as of the Crystal Rock Acquisition Date. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities based on
managements estimates. The table below presents the preliminary purchase price allocation of the estimated acquisition date fair values of the assets acquired and liabilities assumed:
|
|
|
|
|
(in millions of U.S. dollars)
|
|
Acquired Value
|
|
Cash
|
|
$
|
1.6
|
|
Accounts receivable
|
|
|
6.5
|
|
Inventory
|
|
|
2.3
|
|
Prepaid expenses and other assets
|
|
|
1.2
|
|
Property, plant & equipment
|
|
|
9.4
|
|
Goodwill
|
|
|
16.7
|
|
Intangible assets
|
|
|
13.3
|
|
Other assets
|
|
|
0.8
|
|
Short-term borrowings
|
|
|
(4.1
|
)
|
Current maturities of long-term debt
|
|
|
(1.6
|
)
|
Accounts payable and accrued liabilities
|
|
|
(5.2
|
)
|
Long-term debt
|
|
|
(10.4
|
)
|
Deferred tax liabilities
|
|
|
(6.5
|
)
|
Other long-term liabilities
|
|
|
(2.5
|
)
|
|
|
|
|
|
Total
|
|
$
|
21.5
|
|
|
|
|
|
|
14
The assets and liabilities acquired with the Crystal Rock Acquisition are recorded at their
estimated fair values per managements estimates and are subject to change when formal valuations and other studies are finalized.
The amount of revenues and net income related to the Crystal Rock Acquisition included in the Companys Consolidated Statement of
Operations for the period from the Crystal Rock Acquisition Date through March 31, 2018 were $1.0 million and $0.2 million, respectively. During the three months ended March 31, 2018, the Company incurred $0.6 million of
acquisition-related costs associated with the Crystal Rock Acquisition, which are included within acquisition and integration expenses in the Consolidated Statement of Operations.
Intangible Assets
In our
preliminary determination of the fair value of the intangible assets, we considered, among other factors, the best use of acquired assets, analysis of historic financial performance and estimates of future performance of Crystal Rocks
products. The estimated fair values of identified intangible assets were calculated considering market participant expectations and using an income approach and estimates and assumptions provided by management. The following table sets forth the
components of identified intangible assets associated with the Crystal Rock Acquisition and their estimated weighted average useful lives:
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
|
Estimated Fair
Market Value
|
|
|
Estimated
Useful Life
|
|
Customer relationships
|
|
$
|
9.4
|
|
|
|
11 years
|
|
Trademarks and trade names
|
|
|
3.9
|
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships represent future projected revenue that will be derived from sales to existing
customers of Crystal Rock.
Trademark and trade names represent the future projected cost savings associated with the premium and brand
image obtained as a result of owning the trademark or trade name rather than through a royalty or rental fee.
Goodwill
The principal factor that resulted in recognition of goodwill was that the purchase price for the Crystal Rock Acquisition
was based in part on cash flow projections assuming the reduction of administrative costs and the integration of acquired customers and products into our operations, which is of greater value than on a standalone basis. The goodwill recognized as
part of the Crystal Rock Acquisition was allocated to the Route Based Services reporting segment, none of which is expected to be tax deductible.
Note
5Income Taxes
Income tax expense was $0.9 million on
pre-tax
income from continuing
operations of $5.5 million for the three months ended March 31, 2018, as compared to an income tax expense of $1.7 million on
pre-tax
loss from continuing operations of $8.5 million for the
three months ended April 1, 2017, respectively. The effective income tax rates were 16.4% and (20.0%) for the three months ended March 31, 2018 and April 1, 2017, respectively. The effective tax rate for the three months ended
March 31, 2018 varied from the effective tax rate for the three months ended April 1, 2017 due primarily to losses incurred in the United States for which we have recognized a tax benefit in 2018.
On December 22, 2017, the U.S. government enacted the Tax Act, which significantly revised the U.S. corporate income tax regime by, among
other things, lowering the U.S. corporate tax rate from 35% to 21%, limiting various business deductions and repealing the corporate alternative minimum tax. Many provisions in the Tax Act are generally effective in tax years beginning after
December 31, 2017. GAAP requires the impact of tax legislation to be recognized in the period in which the law was enacted. As a result of the Tax Act, the Company recorded tax benefits in the fourth quarter of 2017 of $32.2 million due to
a
re-measurement
of the U.S deferred tax assets and liabilities and $1.3 million due to the repeal of the corporate alternative minimum tax. The tax benefits represent provisional amounts and our current
best estimates. We have not made adjustments to our provisional estimate during the first quarter of 2018. The provisional amounts incorporate assumptions made based upon our current interpretation of the Tax Act and in accordance with SAB 118 may
be refined through the fourth quarter of 2018 as we receive additional clarification and implementation guidance. As we finalize the accounting for the tax effects of the enactment of the Tax Act during the measurement period, we will reflect
adjustments to the provisional amounts recorded and record additional tax effects in the periods such adjustments are identified.
15
Note 6Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to Cott Corporation by the weighted average
number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to Cott Corporation by the weighted average number of common shares outstanding
adjusted to include the effect, if dilutive, of the exercise of
in-the-money
Stock Options, Performance-based RSUs, and Time-based RSUs during the periods presented.
Set forth below is a reconciliation of the numerator and denominator for the diluted net income (loss) per common share computations for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
April 1, 2017
|
|
Numerator (in millions):
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cott Corporation
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
4.6
|
|
|
$
|
(10.2
|
)
|
Discontinued operations
|
|
|
356.8
|
|
|
|
(26.2
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
361.4
|
|
|
$
|
(36.4
|
)
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic
|
|
|
139,953
|
|
|
|
138,735
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.03
|
|
|
$
|
(0.07
|
)
|
Discontinued operations
|
|
|
2.55
|
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2.58
|
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic
|
|
|
139,953
|
|
|
|
138,735
|
|
Dilutive effect of Stock Options
|
|
|
1,339
|
|
|
|
|
|
Dilutive effect of Performance based RSUs
|
|
|
821
|
|
|
|
|
|
Dilutive effect of Time-based RSUs
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingdiluted
|
|
|
142,335
|
|
|
|
138,735
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.03
|
|
|
$
|
(0.07
|
)
|
Discontinued operations
|
|
|
2.51
|
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2.54
|
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
The following table summarizes anti-dilutive securities excluded from the computation of diluted net income
(loss) per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
(in thousands)
|
|
March 31, 2018
|
|
|
April 1, 2017
|
|
Stock Options
|
|
|
914
|
|
|
|
4,474
|
|
Performance-based RSUs
1
|
|
|
627
|
|
|
|
1,824
|
|
Time-based RSUs
|
|
|
90
|
|
|
|
721
|
|
1.
|
Performance-based RSUs represent the number of shares expected to be issued based primarily on the estimated achievement of cumulative
pre-tax
income targets for these awards.
|
16
Note 7Segment Reporting
Our broad portfolio of products includes bottled water, coffee, brewed tea, water dispensers, coffee and tea brewers, speciality coffee, liquid
coffee or tea concentrate, single cup coffee, cold brewed coffee, iced blend coffee or tea beverages, blended teas, hot tea, sparkling tea, coffee or tea extract solutions, filtration equipment, hot chocolate, soups, malt drinks, creamers/whiteners,
cereals, beverage concentrates and mineral water.
Our business operates through three reporting segments: Route Based Services; Coffee,
Tea and Extract Solutions; and All Other. Our corporate oversight function is not treated as a segment; it includes certain general and administrative costs that are not allocated to any of the reporting segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2018
|
|
(in millions of U.S. dollars)
|
|
Route
Based
Services
|
|
|
Coffee, Tea
and Extract
Solutions
|
|
|
All
Other
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue, net
1
|
|
$
|
371.1
|
|
|
$
|
146.1
|
|
|
$
|
44.7
|
|
|
$
|
|
|
|
$
|
(1.1
|
)
|
|
$
|
560.8
|
|
Depreciation and amortization
|
|
|
39.8
|
|
|
|
5.7
|
|
|
|
1.8
|
|
|
|
0.1
|
|
|
|
|
|
|
|
47.4
|
|
Operating income (loss)
|
|
|
12.4
|
|
|
|
4.1
|
|
|
|
1.4
|
|
|
|
(11.8
|
)
|
|
|
|
|
|
|
6.1
|
|
Additions to property, plant & equipment
|
|
|
27.1
|
|
|
|
2.1
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
29.8
|
|
As of March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
2
|
|
|
2,392.8
|
|
|
|
459.9
|
|
|
|
237.9
|
|
|
|
121.2
|
|
|
|
|
|
|
|
3,211.8
|
|
1.
|
Intersegment revenue between the Coffee, Tea and Extract Solutions and the Route Based Services reporting segments was $1.1 million for the three months ended
March 31, 2018. In addition, All Other includes $4.2 million of related party concentrate sales to discontinued operations for the three months ended March 31, 2018.
|
2.
|
Excludes intersegment receivables, investments and notes receivable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended April 1, 2017
|
|
(in millions of U.S. dollars)
|
|
Route
Based
Services
|
|
|
Coffee, Tea
and Extract
Solutions
|
|
|
All
Other
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue, net
1
|
|
$
|
352.3
|
|
|
$
|
143.3
|
|
|
$
|
41.3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
536.9
|
|
Depreciation and amortization
|
|
|
36.0
|
|
|
|
5.5
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
43.6
|
|
Operating income (loss)
|
|
|
9.4
|
|
|
|
5.6
|
|
|
|
0.4
|
|
|
|
(10.2
|
)
|
|
|
|
|
|
|
5.2
|
|
Additions to property, plant & equipment
|
|
|
23.1
|
|
|
|
5.0
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
28.2
|
|
As of December 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
2
|
|
|
2,343.4
|
|
|
|
455.7
|
|
|
|
207.8
|
|
|
|
|
|
|
|
|
|
|
|
3,006.9
|
|
1.
|
All Other includes $10.3 million of related party concentrate sales to discontinued operations for the three months ended April 1, 2017.
|
2.
|
Excludes intersegment receivables, investments and notes receivable.
|
|
|
|
|
|
(in millions of U.S. dollars)
|
|
December 30, 2017
|
|
Segment assets
1
|
|
$
|
3,006.9
|
|
Assets of discontinued operations
1
|
|
|
1,086.2
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,093.1
|
|
|
|
|
|
|
1.
|
Excludes intersegment receivables, investments and notes receivable.
|
17
Credit risk arises from the potential default of a customer in meeting its financial obligations
to us. Concentrations of credit exposure may arise with a group of customers that have similar economic characteristics or that are located in the same geographic region. The ability of such customers to meet obligations would be similarly affected
by changing economic, political or other conditions. We are not currently aware of any facts that would create a material credit risk.
Revenues by channel by reporting segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2018
|
|
(in millions of U.S. dollars)
|
|
Route
Based
Services
|
|
|
Coffee, Tea
and Extract
Solutions
|
|
|
All
Other
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home and office bottled water delivery
|
|
$
|
228.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
228.9
|
|
Coffee and tea services
|
|
|
46.3
|
|
|
|
117.2
|
|
|
|
0.7
|
|
|
|
(1.0
|
)
|
|
|
163.2
|
|
Retail
|
|
|
54.7
|
|
|
|
|
|
|
|
15.4
|
|
|
|
|
|
|
|
70.1
|
|
Other
|
|
|
41.2
|
|
|
|
28.9
|
|
|
|
28.6
|
|
|
|
(0.1
|
)
|
|
|
98.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
371.1
|
|
|
$
|
146.1
|
|
|
$
|
44.7
|
|
|
$
|
(1.1
|
)
|
|
$
|
560.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended April 1, 2017
|
|
(in millions of U.S. dollars)
|
|
Route
Based
Services
|
|
|
Coffee, Tea
and Extract
Solutions
|
|
|
All
Other
|
|
|
Eliminations
|
|
|
Total
|
|
Revenue, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home and office bottled water delivery
|
|
$
|
218.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
218.0
|
|
Coffee and tea services
|
|
|
45.9
|
|
|
|
119.7
|
|
|
|
0.6
|
|
|
|
|
|
|
|
166.2
|
|
Retail
|
|
|
51.8
|
|
|
|
|
|
|
|
11.7
|
|
|
|
|
|
|
|
63.5
|
|
Other
|
|
|
36.6
|
|
|
|
23.6
|
|
|
|
29.0
|
|
|
|
|
|
|
|
89.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
352.3
|
|
|
$
|
143.3
|
|
|
$
|
41.3
|
|
|
$
|
|
|
|
$
|
536.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8Inventories
The following table summarizes inventories as of March 31, 2018 and December 30, 2017:
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
|
March 31, 2018
|
|
|
December 30, 2017
|
|
Raw materials
|
|
$
|
77.0
|
|
|
$
|
68.1
|
|
Finished goods
|
|
|
39.7
|
|
|
|
34.3
|
|
Resale items
|
|
|
20.6
|
|
|
|
21.8
|
|
Other
|
|
|
2.4
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
139.7
|
|
|
$
|
127.6
|
|
|
|
|
|
|
|
|
|
|
18
Note 9Intangible Assets, Net
The following table summarizes intangible assets as of March 31, 2018 and December 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 30, 2017
|
|
(in millions of U.S. dollars)
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights
|
|
$
|
24.5
|
|
|
$
|
|
|
|
$
|
24.5
|
|
|
$
|
24.5
|
|
|
$
|
|
|
|
$
|
24.5
|
|
Trademarks
|
|
|
269.6
|
|
|
|
|
|
|
|
269.6
|
|
|
|
264.1
|
|
|
|
|
|
|
|
264.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets not subject to amortization
|
|
$
|
294.1
|
|
|
$
|
|
|
|
$
|
294.1
|
|
|
$
|
288.6
|
|
|
$
|
|
|
|
$
|
288.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
601.3
|
|
|
|
170.0
|
|
|
|
431.3
|
|
|
|
583.4
|
|
|
|
154.7
|
|
|
|
428.7
|
|
Patents
|
|
|
15.2
|
|
|
|
1.4
|
|
|
|
13.8
|
|
|
|
15.2
|
|
|
|
1.0
|
|
|
|
14.2
|
|
Software
|
|
|
30.8
|
|
|
|
15.0
|
|
|
|
15.8
|
|
|
|
28.8
|
|
|
|
13.0
|
|
|
|
15.8
|
|
Other
|
|
|
8.1
|
|
|
|
4.7
|
|
|
|
3.4
|
|
|
|
8.0
|
|
|
|
4.2
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization
|
|
$
|
655.4
|
|
|
$
|
191.1
|
|
|
$
|
464.3
|
|
|
$
|
635.4
|
|
|
$
|
172.9
|
|
|
$
|
462.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles assets
|
|
$
|
949.5
|
|
|
$
|
191.1
|
|
|
$
|
758.4
|
|
|
$
|
924.0
|
|
|
$
|
172.9
|
|
|
$
|
751.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangible assets was $17.0 million and $15.5 million for the three months
ended March 31, 2018 and April 1, 2017, respectively.
The estimated amortization expense for intangible assets over the next
five years is:
|
|
|
|
|
(in millions of U.S. dollars)
|
|
|
|
Remainder of 2018
|
|
$
|
52.9
|
|
2019
|
|
|
62.5
|
|
2020
|
|
|
53.7
|
|
2021
|
|
|
46.4
|
|
2022
|
|
|
40.5
|
|
Thereafter
|
|
|
208.3
|
|
|
|
|
|
|
Total
|
|
$
|
464.3
|
|
|
|
|
|
|
Note 10Debt
Our total debt as of March 31, 2018 and December 30, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 30, 2017
|
|
(in millions of U.S. dollars)
|
|
Principal
|
|
|
Unamortized
Debt
Costs
|
|
|
Net
|
|
|
Principal
|
|
|
Unamortized
Debt
Costs
|
|
|
Net
|
|
10.000% senior notes due in 2021
1
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
269.9
|
|
|
$
|
|
|
|
$
|
269.9
|
|
5.375% senior notes due in 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525.0
|
|
|
|
6.0
|
|
|
|
519.0
|
|
5.500% senior notes due in 2024
|
|
|
554.4
|
|
|
|
8.8
|
|
|
|
545.6
|
|
|
|
539.1
|
|
|
|
9.5
|
|
|
|
529.6
|
|
5.500% senior notes due in 2025
|
|
|
750.0
|
|
|
|
10.7
|
|
|
|
739.3
|
|
|
|
750.0
|
|
|
|
11.0
|
|
|
|
739.0
|
|
ABL facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220.3
|
|
|
|
|
|
|
|
220.3
|
|
GE Term Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Short-term borrowings
|
|
|
3.7
|
|
|
|
|
|
|
|
3.7
|
|
|
|
0.8
|
|
|
|
|
|
|
|
0.8
|
|
Capital leases
|
|
|
5.9
|
|
|
|
|
|
|
|
5.9
|
|
|
|
6.4
|
|
|
|
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,314.0
|
|
|
|
19.5
|
|
|
|
1,294.5
|
|
|
|
2,313.5
|
|
|
|
26.5
|
|
|
|
2,287.0
|
|
Less: Short-term borrowings and current debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABL facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220.3
|
|
|
|
|
|
|
|
220.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings required to be repaid or extinguished as part of
divestiture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220.3
|
|
|
|
|
|
|
|
220.3
|
|
GE Term Loancurrent maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
|
|
|
|
2.0
|
|
Short-term borrowings
|
|
|
3.7
|
|
|
|
|
|
|
|
3.7
|
|
|
|
0.8
|
|
|
|
|
|
|
|
0.8
|
|
Capital leasescurrent maturities
|
|
|
2.1
|
|
|
|
|
|
|
|
2.1
|
|
|
|
2.3
|
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current debt
|
|
|
5.8
|
|
|
|
|
|
|
|
5.8
|
|
|
|
225.4
|
|
|
|
|
|
|
|
225.4
|
|
Less: Debt required to be repaid or extinguished as part of divestiture 5.375% senior notes due in
2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525.0
|
|
|
|
6.0
|
|
|
|
519.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt required to be repaid or extinguished as part of divestiture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525.0
|
|
|
|
6.0
|
|
|
|
519.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,308.2
|
|
|
$
|
19.5
|
|
|
$
|
1,288.7
|
|
|
$
|
1,563.1
|
|
|
$
|
20.5
|
|
|
$
|
1,542.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
Includes unamortized premium of $19.9 million at December 30, 2017.
|
10.000% Senior Notes due in 2021
On
January 30, 2018, we used a portion of the proceeds from the Transaction to redeem the remaining $250.0 million aggregate principal amount of the DSS Notes. The redemption of the DSS Notes included $12.5 million in premium payments,
accrued interest of $10.3 million and the
write-off
of $19.6 million of unamortized premium.
5.375%
Senior Notes due in 2022
On January 30, 2018, we used a portion of the proceeds from the Transaction to redeem the 2022 Notes.
The redemption of the 2022 Notes included $21.2 million in premium payments, $2.2 million in accrued interest and the
write-off
of $5.9 million of deferred financing fees.
GE Term Loan
On January 30, 2018,
we used a portion of the proceeds from the Transaction to pay the remaining $1.9 million outstanding balance of the GE Term Loan.
ABL Facility
On January 30, 2018, we used a portion of the proceeds from the Transaction to repay $262.5 million of our outstanding
balance on the ABL facility.
On January 30, 2018, we amended and restated the Amended and Restated Credit Agreement, dated as of
August 3, 2016, as amended, which governed our prior ABL facility. Under the credit agreement governing the ABL facility, as amended and restated, Cott and its restricted subsidiaries are subject to a number of business and financial covenants,
including a minimum fixed charge coverage ratio, which measures our ability to cover financing expenses. The minimum fixed charge coverage ratio of 1.0 to 1.0 is effective if and when there exists an event of default or aggregate availability is
less than the greater of 10% of the Line Cap under the ABL facility or $22.5 million. Line Cap is defined as an amount equal to the lesser of the lenders commitments or the borrowing base at such time. If an event of default exists or the
excess availability is less than the greater of 10% of the aggregate availability under the ABL facility or $22.5 million, the lenders will take dominion over the cash and will apply excess cash to reduce amounts owing under the facility.
20
The amendment to the ABL facility was considered to be a modification of the original agreement
under GAAP. We wrote off $2.5 million of existing deferred financing fees and the remaining $2.5 million of unamortized deferred financing costs along with $1.5 million of deferred financing costs incurred in connection with the
amendment to the ABL facility are being amortized using the straight-line method over the duration of the ABL facility.
Note 11Accumulated Other
Comprehensive (Loss) Income
With the disposition of the Traditional Business in 2018, the foreign currency translation balances
associated with the Traditional Business were recognized in earnings in the period of disposition. Changes in accumulated other comprehensive (loss) income (AOCI) by component for the three months ended March 31, 2018 and
April 1, 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
1
|
|
Gains and Losses
on Derivative
Instruments
|
|
|
Pension
Benefit
Plan Items
|
|
|
Currency
Translation
Adjustment Items
|
|
|
Total
|
|
Beginning balance December 31, 2016
|
|
$
|
(0.1
|
)
|
|
$
|
(14.4
|
)
|
|
$
|
(103.4
|
)
|
|
$
|
(117.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
|
|
3.1
|
|
|
|
|
|
|
|
9.7
|
|
|
|
12.8
|
|
Amounts reclassified from AOCI
|
|
|
(0.7
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period OCI
|
|
|
2.4
|
|
|
|
0.1
|
|
|
|
9.7
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance April 1, 2017
|
|
$
|
2.3
|
|
|
$
|
(14.3
|
)
|
|
$
|
(93.7
|
)
|
|
$
|
(105.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance December 30, 2017
|
|
$
|
(1.4
|
)
|
|
$
|
(16.8
|
)
|
|
$
|
(76.2
|
)
|
|
$
|
(94.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
9.2
|
|
|
|
4.5
|
|
Amounts reclassified from AOCI
|
|
|
0.9
|
|
|
|
16.9
|
|
|
|
9.4
|
|
|
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period OCI
|
|
|
(3.8
|
)
|
|
|
16.9
|
|
|
|
18.6
|
|
|
|
31.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance March 31, 2018
|
|
$
|
(5.2
|
)
|
|
$
|
0.1
|
|
|
$
|
(57.6
|
)
|
|
$
|
(62.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
All amounts are net of tax. Amounts in parentheses indicate debits.
|
The following table summarizes the amounts reclassified from AOCI for the three months ended March 31, 2018 and April 1, 2017,
respectively.
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
|
For the Three Months Ended
|
|
|
|
Details About AOCI
Components
1
|
|
March 31,
2018
|
|
|
April 1,
2017
|
|
|
Affected Line Item in the Statement
Where Net Income Is Presented
|
Gains and losses on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign currency and commodity hedges
|
|
$
|
(0.9
|
)
|
|
$
|
0.7
|
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
0.7
|
|
|
Total before taxes
|
|
|
|
|
|
|
|
|
|
|
Tax expense or (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.9
|
)
|
|
$
|
0.7
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of pension benefit plan items
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
2
|
|
$
|
(16.9
|
)
|
|
$
|
|
|
|
Gain on sale of discontinued operations
|
Prior service costs
3
|
|
|
|
|
|
|
(0.1
|
)
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.9
|
)
|
|
|
(0.1
|
)
|
|
Total before taxes
|
|
|
|
|
|
|
|
|
|
|
Tax expense or (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(16.9
|
)
|
|
$
|
(0.1
|
)
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
(9.4
|
)
|
|
$
|
|
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(27.2
|
)
|
|
$
|
0.6
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
Amounts in parenthesis indicate debits.
|
2.
|
Net of $3.6 million of associated tax impact that resulted in an increase to the gain on sale of discontinued operations for the three months ended March 31, 2018.
|
3.
|
These AOCI components are included in the computation of net periodic pension cost.
|
21
Note 12Commitments and Contingencies
We are subject to various claims and legal proceedings with respect to matters such as governmental regulations 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, results of operations, or cash flow.
We had $43.0 million in standby letters of credit outstanding as of March 31, 2018 ($46.0 millionDecember 30, 2017).
Guarantees
After completion of the
Transaction, the Company continues to provide contractual payment guarantees to three third-party lessors of certain real property used in the Traditional Business. The leases were conveyed to Refresco as part of the Transaction, but the
Companys guarantee was not released by the landlord. The three lease agreements mature in 2027, 2028 and 2029. The maximum potential amount of undiscounted future payments under the guarantee of approximately $35.3 million as of
March 31, 2018 ($42.0 millionDecember 30, 2017) was calculated based on the minimum lease payments of the leases over the remaining term of the agreements. The Transaction documents require Refresco to pay all post-closing obligations
under these conveyed leases, and to reimburse the Company if the landlord calls on a guarantee. Refresco has also agreed to a covenant to negotiate with the landlords for a release of the Companys guarantees. Discussions with the landlords are
ongoing. The Company currently does not believe it is probable it would be required to perform under any of these guarantees or any of the underlying obligations.
Note 13Hedging Transactions and Derivative Financial Instruments
We are directly and indirectly affected by changes in foreign currency market conditions. These changes in market conditions may adversely
impact our financial performance and are referred to as market risks. When deemed appropriate by management, we use derivatives as a risk management tool to mitigate the potential impact of foreign currency market risks.
We use various types of derivative instruments including, but not limited to, forward contracts and swap agreements for certain commodities.
Forward contracts are agreements to buy or sell a quantity of a currency at a predetermined future date, and at a predetermined rate or price. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying
notional amounts, assets and/or indices.
All derivatives are carried at fair value in the Consolidated Balance Sheets in the line item
accounts receivable, net or accounts payable and accrued liabilities. The carrying values of the derivatives reflect the impact of legally enforceable agreements with the same counterparties. These agreements allow us to net settle positive and
negative positions (assets and liabilities) arising from different transactions with the same counterparty.
The accounting for gains and
losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the types of hedging relationships. Derivatives can be designated as fair
value hedges, cash flow hedges or hedges of net investments in foreign operations. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded in the same line item in our
Consolidated Statements of Operations as the changes in the fair value of the hedged items attributable to the risk being hedged. The changes in fair values of derivatives that have been designated and qualify as cash flow hedges are recorded in
AOCI and are reclassified into the line item in the Consolidated Statements of Operations in which the hedged items are recorded in the same period the hedged items affect earnings. Due to the high degree of effectiveness between the hedging
instruments and the underlying exposures being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. The changes in fair values of
derivatives that were not designated and/or did not qualify as hedging instruments are immediately recognized into earnings. We classify cash inflows and outflows related to derivative and hedging instruments within the appropriate cash flows
section associated with the item being hedged.
22
For derivatives that will be accounted for as hedging instruments, we formally designate and
document, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the strategy for undertaking the hedge transaction. In addition, we formally assess both at the inception and at least
quarterly thereafter, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair values or cash flows of the related underlying exposures.
We estimate the fair values of our derivatives based on quoted market prices or pricing models using current market rates (see Note 14 to the
Consolidated Financial Statements). The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described
above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or other financial indices. We do not view the fair values of our
derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying hedged transactions. All of our derivatives are
over-the-counter
instruments with liquid markets.
Credit Risk Associated with Derivatives
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.
Cash Flow Hedging Strategy
We used cash
flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in commodity prices. The changes in fair values of hedges that are determined to be ineffective are immediately
reclassified from AOCI into earnings. We did not discontinue any cash flow hedging relationships during the three months ended March 31, 2018 or April 1, 2017, respectively. Substantially all outstanding hedges as of March 31, 2018
are expected to settle in the next 16 months.
We have entered into coffee futures contracts to hedge exposure to price fluctuations on
green coffee associated with fixed-price sales contracts with customers, which generally range from three to 16 months in length. These derivative instruments have been designated and qualified as a part of our commodity cash flow hedging program
effective January 1, 2017. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of green coffee.
The notional amount for the coffee futures contracts that were designated and qualified for our commodity cash flow hedging program was 35.4
and 48.1 million pounds as of March 31, 2018 and December 30, 2017, respectively. Approximately $0.9 million of realized losses and $0.7 million of realized gains, representing the effective portion of the cash-flow hedge,
were subsequently reclassified from AOCI to earnings and recognized in cost of sales in the Consolidated Statements of Operations for the three months ended March 31, 2018 and April 1, 2017, respectively.
The fair value of the Companys derivative liabilities included in accounts payable and accrued liabilities was $2.6 million and
$1.2 million as of March 31, 2018 and December 30, 2017, respectively. We had no derivative assets as of March 31, 2018 or December 30, 2017. Set forth below is a reconciliation of the Companys derivatives by contract
type for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
|
March 31, 2018
|
|
|
December 30, 2017
|
|
Derivative Contract
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Coffee futures
1
|
|
$
|
|
|
|
$
|
2.6
|
|
|
$
|
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
2.6
|
|
|
$
|
|
|
|
$
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
The fair value of the coffee futures excludes amounts in the related margin accounts. As of March 31, 2018 and December 30, 2017, the aggregate margin
account balances were $3.1 million and $5.3 million, respectively, and are included in cash & cash equivalents on the Consolidated Balance Sheets.
|
23
Coffee futures are subject to enforceable master netting arrangements and are presented net in
the reconciliation above. The fair value of the coffee futures assets and liabilities which are shown on a net basis are reconciled in the table below:
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
|
March 31, 2018
|
|
|
December 30, 2017
|
|
Coffee futures assets
|
|
$
|
1.8
|
|
|
$
|
0.6
|
|
Coffee futures liabilities
|
|
|
(4.4
|
)
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
$
|
(2.6
|
)
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
The location and amount of gains or losses recognized in the Consolidated Statements of Operations for cash
flow hedging relationships, presented on a
pre-tax
basis, for the three months ended March 31, 2018 and April 1, 2017, respectively, is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
April 1, 2017
|
|
(in millions of U.S. dollars)
|
|
Cost of sales
|
|
Total amounts of income and expense line items presented in the Consolidated Statements of
Operations in which the effects of cash flow hedges are recorded
|
|
$
|
287.3
|
|
|
$
|
268.1
|
|
Loss (gain) on cash flow hedging relationship
|
|
|
|
|
|
|
|
|
Coffee futures:
|
|
|
|
|
|
|
|
|
Loss (gain) reclassified from AOCI into expense
|
|
$
|
0.9
|
|
|
$
|
(0.7
|
)
|
The settlement of our derivative instruments resulted in a debit to cost of sales of $0.9 million and a
credit to cost of sales of $0.7 million for the three months ended March 31, 2018 and April 1, 2017, respectively.
Note 14Fair
Value Measurements
ASC No. 820 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.
The three levels of inputs used to measure fair value are as follows:
|
|
|
Level 1Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2Observable 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 3Unobservable 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.
|
We have certain assets and liabilities such
as our derivative instruments that are required to be recorded at fair value on a recurring basis in accordance with GAAP.
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 derivative liabilities as of
March 31, 2018 and December 30, 2017 was $2.6 million and $1.2 million, respectively. We had no derivative assets as of March 31, 2018 or April 1, 2017.
24
Fair Value of Financial Instruments
The carrying amounts reflected in the Consolidated Balance Sheets for cash & 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 March 31, 2018 and December 30, 2017 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
December 30, 2017
|
|
(in millions of U.S. dollars)
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
10.000% senior notes due in 2021
1,2
|
|
$
|
|
|
|
$
|
|
|
|
$
|
269.9
|
|
|
$
|
283.4
|
|
5.375% senior notes due in 2022
1,3
|
|
|
|
|
|
|
|
|
|
|
519.0
|
|
|
|
539.9
|
|
5.500% senior notes due in 2024
1,3
|
|
|
545.6
|
|
|
|
579.7
|
|
|
|
529.6
|
|
|
|
574.0
|
|
5.500% senior notes due in 2025
1,3
|
|
|
739.3
|
|
|
|
730.1
|
|
|
|
739.0
|
|
|
|
759.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,284.9
|
|
|
$
|
1,309.8
|
|
|
$
|
2,057.5
|
|
|
$
|
2,156.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
The fair values were based on the trading levels and bid/offer prices observed by a market participant and are considered Level 2 financial instruments.
|
2.
|
Includes unamortized premium of $19.9 million at December 30, 2017.
|
3.
|
Carrying value of our significant outstanding debt is net of unamortized debt issuance costs as of March 31, 2018 and December 30, 2017 (see Note 10 to the
Consolidated Financial Statements).
|
Note 15Subsequent Events
On May 1, 2018, our board of directors approved a share repurchase program for up to $50 million of Cotts outstanding common
shares over a
12-month
period commencing on May 7, 2018. We are unable to predict the number of common shares that ultimately will be repurchased under the share repurchase program, or the aggregate
dollar amount of the common shares actually purchased. We may discontinue purchases at any time, subject to compliance with applicable regulatory requirements. Common shares purchased under the share repurchase program will be cancelled.
On May 1, 2018, our board of directors declared a dividend of $0.06 per share on common shares, payable in cash on June 13, 2018 to
shareowners of record at the close of business on June 1, 2018.
25