Notes to the Consolidated Financial Statements
Unaudited
Note 1—Business and Recent Accounting Pronouncements
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, iced tea blending, and extract solutions for the U.S. foodservice industry. Our platform reaches over
2.5 million
customers or delivery points across North America and Europe and is 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
(our “
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
Our corporate oversight function is not treated as a segment; it includes certain general and administrative costs that are not allocated to any of our reporting segments. During the second quarter of
2018
, we combined and disclosed the corporate oversight function in the All Other category. Our segment reporting results have been recast to reflect these changes for all periods presented. See Note 9 to the Consolidated Financial Statements for segment reporting.
On January 30, 2018, we sold our carbonated soft drinks and juice businesses via the sale of our North America, United Kingdom 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 (loss) income from discontinued operations, net of income taxes in the Consolidated Statements of Operations
for the three and nine months ended
September 30, 2017
. Cash flows from the Company’s discontinued operations are presented in the Consolidated Statements of Cash Flows
for the three and nine months ended
September 30, 2017
. See Note 3 to the Consolidated Financial Statements for additional information on discontinued operations.
Subsequent to the completion of the Transaction, management re-evaluated the measure of profit for our reportable segments and determined that excluding corporate allocations from segment operating income was appropriate as these costs are not considered by management when evaluating performance. Operating income for the prior periods have been recast to reflect this change. See Note 9 to the Consolidated Financial Statements for segment reporting.
Significant Accounting Policies
Included in Note 1 of our
2017
Annual Report is a summary of the Company’s 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 the shipment of products from our production facilities to customer locations are reflected in cost of sales. Shipping and handling costs included in SG&A expenses were
$121.8 million
and
$358.6 million
for the
three and nine
months ended
September 29, 2018
, respectively, and
$123.2 million
and
$339.0 million
for the
three and nine
months ended
September 30, 2017
, respectively. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production.
Goodwill
Goodwill represents the excess purchase price of acquired businesses over the fair value of the net assets acquired. Goodwill is not amortized, but instead is tested for impairment at least annually. The following table summarizes our goodwill on a reporting segment basis as of
September 29, 2018
:
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Reporting Segment
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(in millions of U.S. dollars)
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Route
Based
Services
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Coffee, Tea
and Extract
Solutions
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All Other
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Total
|
Balance at December 30, 2017
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$
|
936.7
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|
|
$
|
117.8
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|
$
|
50.2
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|
$
|
1,104.7
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Goodwill acquired during the year
|
30.2
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|
—
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|
7.5
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|
|
37.7
|
|
Adjustments
1
|
(2.7
|
)
|
|
—
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|
|
—
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|
(2.7
|
)
|
Foreign exchange
|
(9.0
|
)
|
|
—
|
|
|
(1.6
|
)
|
|
(10.6
|
)
|
Balance at September 29, 2018
|
$
|
955.2
|
|
|
$
|
117.8
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$
|
56.1
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$
|
1,129.1
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______________________
1
During the nine months ended September 29, 2018, we recorded adjustments to goodwill allocated to the Route Based Services segment in connection with the acquisitions of Crystal Rock (see Note 5 to the Consolidated Financial Statements).
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 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 and nine
months ended September 29, 2018 (see Note 4 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.
Update ASU 2017-07 – Compensation—Retirement 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. Adoption of this standard resulted in a
$4.9 million
decrease to operating income for the three and nine months ended September 30, 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 standard’s 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 future 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 entity’s 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.
Update ASU 2017-08 – Receivables—Nonrefundable 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 Statement—Reporting 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 Taxes—Amendments 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 Topic 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 Company’s fiscal year 2018. The U.S. Securities and Exchange Commission 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 entity’s 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 7 to the Consolidated Financial Statements).
Update ASU 2018-07 – Compensation—Improvements to Nonemployee Share-Based Payment Accounting (Topic 718)
In June 2018, the FASB amended its guidance to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amended guidance also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
Update ASU 2018-11 – Leases—Targeted Improvements (Topic 842)
In July 2018, the FASB amended its guidance on lease accounting for lessees and lessors. The amended guidance provides entities with an additional and optional transition method to adopt ASC 842, where the entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amended guidance also provides lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component, instead to account for those components as a single component if the non-lease components otherwise would be accounted for under ASC 606
and both of the following are met: 1) the timing and pattern of transfer of the non-lease component or components and associated lease component are the same; and 2) the lease component, if accounted for separately, would be classified as an operating lease. If the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with ASC 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with ASC 842. For public entities that have not adopted ASC 842, 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. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Update ASU 2018-13 – Fair Value Measurement (Topic 820)
In August 2018, the FASB amended its guidance on disclosure requirements for fair value measurement. The update amends existing fair value measurement disclosure requirements by adding, changing, or removing certain disclosures. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this update while delaying adoption of the additional disclosures until their effective date. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Update ASU 2018-14 – Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)
In August 2018, the FASB amended its guidance on disclosure requirements for defined benefit plans. The update amends existing annual disclosure requirements applicable to all employers that sponsor defined benefit pension and other postretirement plans by adding, removing, and clarifying certain disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and are to be applied on a retrospective basis to all periods presented. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Update ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)
In August 2018, the FASB amended its guidance on customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted, including adoption in any interim period. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently assessing the impact of adoption of this standard on our Consolidated Financial Statements.
Note 2
—
Revision of Previously Reported Financial Information
On January 30, 2018, the Company completed the sale of the Traditional Business (the "Transaction") to Refresco Group N.V., a Dutch 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. See Note 3 to the Consolidated Financial Statements for additional information. The aggregate deal consideration was approximately
$1.25 billion
, paid in cash at closing, resulting in a gain on sale of
$427.6 million
. During the third quarter of 2018, we identified an error in the entries recorded as part of the Transaction which resulted in an understatement of accounts payable and accrued liabilities and overstatement of currency translation adjustment, a component of accumulated other comprehensive loss, on our Consolidated Balance Sheet as of March 31, 2018 and June 30, 2018 of
$10.3 million
. The misstatement in these balances also impacted the currency translation adjustment reported on our Condensed Consolidated Statements of Comprehensive Income (Loss) and net cash provided by operating activities from continuing operations and operating activities of discontinued operations as reported in our Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and the six months ended June 30, 2018 as well as accumulated other comprehensive loss as reported in our Consolidated Statements of Equity as of March 31, 2018 and June 30, 2018. The error in the Consolidated Statement of Cash Flows resulted from incorrectly presenting cash from operations of continued operations as discontinued operations for the three months ended March 31, 2018 and six months ended June 30, 2018. No other financial statement line items were impacted by this error.
We have evaluated the error and determined it is not material to the previously issued financial statements and have elected to revise our previously issued consolidated statements as follows:
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Consolidated Balance Sheets
|
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March 31, 2018
|
|
June 30, 2018
|
(in millions of U.S. dollars)
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
Accounts payable and accrued liabilities
|
|
439.8
|
|
|
10.3
|
|
|
450.1
|
|
|
421.5
|
|
|
10.3
|
|
|
431.8
|
|
Total current liabilities
|
|
445.6
|
|
|
10.3
|
|
|
455.9
|
|
|
430.2
|
|
|
10.3
|
|
|
440.5
|
|
Total liabilities
|
|
1,948.0
|
|
|
10.3
|
|
|
1,958.3
|
|
|
1,896.3
|
|
|
10.3
|
|
|
1,906.6
|
|
Accumulated other comprehensive loss
|
|
(62.7
|
)
|
|
(10.3
|
)
|
|
(73.0
|
)
|
|
(80.2
|
)
|
|
(10.3
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)
|
|
(90.5
|
)
|
Total Cott Corporation Equity
|
|
1,263.8
|
|
|
(10.3
|
)
|
|
1,253.5
|
|
|
1,238.9
|
|
|
(10.3
|
)
|
|
1,228.6
|
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|
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Condensed Consolidated Statements of Comprehensive (Loss) Income
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For the Three Months Ended
March 31, 2018
|
|
For the Six Months Ended
June 30, 2018
|
(in millions of U.S. dollars)
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
Currency translation adjustment
|
|
18.6
|
|
|
(10.3
|
)
|
|
8.3
|
|
|
1.6
|
|
|
(10.3
|
)
|
|
(8.7
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)
|
Total other comprehensive income
|
|
31.7
|
|
|
(10.3
|
)
|
|
21.4
|
|
|
14.2
|
|
|
(10.3
|
)
|
|
3.9
|
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Consolidated Statements of Cash Flows
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For the Three Months Ended
March 31, 2018
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For the Six Months Ended
June 30, 2018
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(in millions of U.S. dollars)
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|
As Previously Reported
|
|
Adjustments
|
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As Revised
|
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As Previously Reported
|
|
Adjustments
|
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As Revised
|
Change in accounts payable and accrued liabilities
|
|
(2.6
|
)
|
|
10.3
|
|
|
7.7
|
|
|
(16.5
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)
|
|
10.3
|
|
|
(6.2
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)
|
Net cash provided by operating activities from continuing operations
|
|
22.6
|
|
|
10.3
|
|
|
32.9
|
|
|
57.6
|
|
|
10.3
|
|
|
67.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities of discontinued operations
|
|
(74.4
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)
|
|
(10.3
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)
|
|
(84.7
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)
|
|
(77.7
|
)
|
|
(10.3
|
)
|
|
(88.0
|
)
|
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|
|
|
|
|
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Consolidated Statement of Equity
|
|
|
|
|
|
|
|
|
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|
March 31, 2018
|
|
June 30, 2018
|
(in millions of U.S. dollars)
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
Currency translation adjustment
|
|
18.6
|
|
|
(10.3
|
)
|
|
8.3
|
|
|
1.6
|
|
|
(10.3
|
)
|
|
(8.7
|
)
|
Accumulated other comprehensive loss
|
|
(62.7
|
)
|
|
(10.3
|
)
|
|
(73.0
|
)
|
|
(80.2
|
)
|
|
(10.3
|
)
|
|
(90.5
|
)
|
Total Cott Corporation equity
|
|
1,263.8
|
|
|
(10.3
|
)
|
|
1,253.5
|
|
|
1,238.9
|
|
|
(10.3
|
)
|
|
1,228.6
|
|
We will continue to revise interim periods in future filings for certain amounts in the consolidated financial statements to correct these misstatements.
Note 3
—
Discontinued Operations
On January 30, 2018, the Company completed the sale of the Traditional Business to 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 in cash at closing, subject to adjustment for indebtedness, working capital, and other customary post-closing adjustments. As of
September 29, 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 escrow 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 and cash equivalents on the Consolidated Balance Sheet as of
September 29, 2018
. The Traditional Business excludes our Route Based Services (which includes our DS Services of America, Inc. (“DSS”), Aquaterra Corporation and Eden Springs Europe B.V. businesses) and Coffee, Tea and Extract Solutions (which includes our S. & D. Coffee, Inc. business) reporting segments, our Aimia Foods, Decantae Mineral Water Ltd. and RCI concentrate businesses, and our Columbus, Georgia manufacturing facility.
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 the same as the term of the Transition Services Agreement.
During the
three and nine
months ended
September 29, 2018
, the Company has paid Refresco
$2.4 million
and
$6.6 million
, respectively, for the contract manufacture of beverage products. In addition, during the
three and nine
months ended
September 29, 2018
, the Company has reimbursed Refresco
$12.8 million
and
$47.2 million
, respectively, for various operational expenses that were paid by Refresco on its behalf. During the
three and nine
months ended
September 29, 2018
, Refresco has paid the Company
$21.1 million
and
$29.2 million
, respectively, for the contract manufacture of beverage products.
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 the
$262.5 million
outstanding balance on the asset-based lending facility (the “ABL facility”), and (iv) repay the remaining
$1.9 million
outstanding balance on the capital lease finance arrangement with General Electric Capital Corporation (the “GE Term Loan”).
The major components of net income from discontinued operations, net of income taxes in the accompanying Consolidated Statements of Operations include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
(in millions of U.S. dollars)
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
Revenue, net
|
$
|
—
|
|
|
$
|
425.6
|
|
|
$
|
111.2
|
|
|
$
|
1,244.7
|
|
Cost of sales
|
—
|
|
|
371.3
|
|
|
98.4
|
|
|
1,093.4
|
|
Operating income from discontinued operations
|
—
|
|
|
13.9
|
|
|
2.0
|
|
|
33.6
|
|
Gain on sale of discontinued operations
|
0.6
|
|
|
—
|
|
|
427.6
|
|
|
—
|
|
Income (loss) from discontinued operations, before income taxes
|
0.6
|
|
|
12.1
|
|
|
402.2
|
|
|
(27.5
|
)
|
Income tax (benefit) expense
1
|
(0.9
|
)
|
|
(30.9
|
)
|
|
44.7
|
|
|
(28.5
|
)
|
Net income from discontinued operations, net of income taxes
|
1.5
|
|
|
43.0
|
|
|
357.5
|
|
|
1.0
|
|
Less: Net income attributable to non-controlling interests
|
—
|
|
|
2.1
|
|
|
0.6
|
|
|
6.4
|
|
Net income (loss) attributable to Cott Corporation – discontinued operations
2
|
$
|
1.5
|
|
|
$
|
40.9
|
|
|
$
|
356.9
|
|
|
$
|
(5.4
|
)
|
______________________
|
|
1
|
The net income (loss) from discontinued operations, before income taxes resulted in income tax benefit of
$0.9 million
and income tax expense of
$44.7 million
for the
three and nine
months ended
September 29, 2018
, respectively. The Transaction resulted in a taxable gain on sale in the United States, 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 United States and thus a tax benefit of approximately
$25.0 million
related to a release of the U.S. valuation allowance was recorded in the first quarter of 2018 and is offsetting the overall income tax expense related to discontinued operations. The Transaction resulted in a non-taxable gain on sale in the United Kingdom. No tax benefit resulted from the Transaction related to the taxable loss on sale in Canada due to the Company's valuation allowance position.
|
|
|
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
for the
nine months ended
September 29, 2018
and
$8.4 million
and
$38.5 million
for the
three and nine
months ended
September 30, 2017
, respectively.
|
Cash flows from discontinued operations included borrowings and payments under the ABL facility of
$262.4 million
and
$482.8 million
for the
nine
months ended
September 29, 2018
,
$789.0 million
and
$796.3 million
for the three months ended
September 30, 2017
, and
$2,246.3 million
and
$2,205.6 million
for the
nine
months ended
September 30, 2017
, respectively.
Note 4—Revenue
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 primarily in North America and Europe and the 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 Company’s 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 Company’s 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. Accrued sales incentives were
$8.6 million
and
$6.9 million
at
September 29, 2018
and
December 30, 2017
, respectively.
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 the product is delivered.
Contract Balances
Contract liabilities relate primarily to advances received from the Company’s 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
September 29, 2018
and
December 30, 2017
were
$19.1 million
and
$21.8 million
, respectively. The amount of revenue recognized in the
three and nine
months ended
September 29, 2018
that was included in the
December 30, 2017
deferred revenue balance was
$3.2 million
and
$21.3 million
, respectively.
The Company does not have any material contract assets as of
September 29, 2018
.
Disaggregated Revenue
In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment’s 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
|
|
For the Nine Months Ended
|
(in millions of U.S. dollars)
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
United States
|
$
|
457.8
|
|
|
$
|
431.1
|
|
|
$
|
1,330.0
|
|
|
$
|
1,278.7
|
|
United Kingdom
|
41.7
|
|
|
40.5
|
|
|
126.8
|
|
|
118.1
|
|
Canada
|
16.7
|
|
|
16.8
|
|
|
48.8
|
|
|
47.0
|
|
All other countries
|
93.1
|
|
|
92.5
|
|
|
268.1
|
|
|
254.6
|
|
Total
1
|
$
|
609.3
|
|
|
$
|
580.9
|
|
|
$
|
1,773.7
|
|
|
$
|
1,698.4
|
|
______________________
1
Prior-period amounts are not adjusted under the modified-retrospective method of adoption.
Note 5—Acquisitions
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 seller’s 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 Company’s 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. Measurement period adjustments recorded during the
nine
months ended
September 29, 2018
included adjustments to property, plant and equipment and intangible assets based on the preliminary valuations, adjustments to deferred taxes and other long-term liabilities based on a preliminary analysis of certain tax positions, as well as adjustments to accounts receivable, inventory, prepaid expenses, other assets and accounts payable and accrued liabilities based on review of their fair values as of the Crystal Rock Acquisition Date. The measurement period adjustments did not have a material effect on our results of operations in prior periods.
The table below summarizes the originally reported estimated acquisition date fair values, measurement period adjustments recorded and the adjusted purchase price allocation of the assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Originally
Reported
|
|
Measurement
Period
Adjustments
|
|
Acquired
Value
|
Cash
|
$
|
1.6
|
|
|
$
|
—
|
|
|
$
|
1.6
|
|
Accounts receivable
|
6.5
|
|
|
(0.1
|
)
|
|
6.4
|
|
Inventory
|
2.3
|
|
|
(0.1
|
)
|
|
2.2
|
|
Prepaid expenses and other assets
|
1.2
|
|
|
0.3
|
|
|
1.5
|
|
Property, plant and equipment
|
9.4
|
|
|
(0.1
|
)
|
|
9.3
|
|
Goodwill
|
16.7
|
|
|
(2.7
|
)
|
|
14.0
|
|
Intangible assets
|
13.3
|
|
|
0.6
|
|
|
13.9
|
|
Other assets
|
0.8
|
|
|
(0.7
|
)
|
|
0.1
|
|
Short-term borrowings
|
(4.1
|
)
|
|
—
|
|
|
(4.1
|
)
|
Current maturities of long-term debt
|
(1.6
|
)
|
|
—
|
|
|
(1.6
|
)
|
Accounts payable and accrued liabilities
|
(5.2
|
)
|
|
(2.2
|
)
|
|
(7.4
|
)
|
Long-term debt
|
(10.4
|
)
|
|
—
|
|
|
(10.4
|
)
|
Deferred tax liabilities
|
(6.5
|
)
|
|
3.4
|
|
|
(3.1
|
)
|
Other long-term liabilities
|
(2.5
|
)
|
|
1.6
|
|
|
(0.9
|
)
|
Total
|
$
|
21.5
|
|
|
$
|
—
|
|
|
$
|
21.5
|
|
The assets and liabilities acquired with the Crystal Rock Acquisition are recorded at their estimated fair values per management’s estimates and are subject to change when formal valuations and other studies are finalized. The fair values of acquired property, plant and equipment, customer relationships, trademarks and trade names, and deferred taxes are provisional pending validation and receipt of the final valuations for those assets. In addition, consideration for potential loss contingencies, including uncertain tax positions, are still under review.
The amount of revenues related to the Crystal Rock Acquisition included in the Company’s Consolidated Statement of Operations for the period from the Crystal Rock Acquisition Date through
September 29, 2018
was
$30.5 million
. During the
nine
months ended
September 29, 2018
, the Company incurred
$2.9 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. During the second quarter of 2018, Crystal Rock was integrated within our DSS business, therefore it is impracticable to determine the amount of net income related to the Crystal Rock Acquisition included in the Company's Statement of Operations for the period from the Crystal Rock Acquisition Date through
September 29, 2018
.
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 Rock’s 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
|
|
$
|
9.7
|
|
|
11 years
|
Trademarks and trade names
|
|
4.2
|
|
|
Indefinite
|
Total
|
|
$
|
13.9
|
|
|
|
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 6—Share-based Compensation
During the
nine
months ended
September 29, 2018
, the Company granted
61,736
common shares with an aggregate grant date fair value of approximately
$1.0 million
to the non-management members of our Board of Directors under the Amended and Restated Cott Corporation Equity Incentive Plan. The common shares were issued in consideration of the directors’ annual board retainer fee and are fully vested upon issuance.
On August 1, 2018, in connection with the appointment of the Company’s chief executive officer to executive chairman of the Board effective December 30, 2018, the Board approved the modification of certain outstanding awards issued to the chief executive officer. The modified awards will continue to vest in accordance with their normal applicable vesting schedules regardless of continued service. The total incremental compensation expense associated with the modification was
$5.5 million
for the three and nine months ended
September 29, 2018
.
Note 7—Income Taxes
Income tax expense was
$1.0 million
and
$4.0 million
on pre-tax income from continuing operations of
$9.5 million
and
$29.3 million
for the
three and nine
months ended
September 29, 2018
, respectively, as compared to income tax expense of
$0.9 million
on pre-tax income from continuing operations of
$2.5 million
and income tax expense of
$1.0 million
on pre-tax loss from continuing operations of
$12.1 million
in the comparable prior year periods. The effective income tax rates for the
three and nine
months ended
September 29, 2018
were
10.5%
and
13.7%
, respectively, compared to
36.0%
and
(8.3)%
in the comparable prior year periods.
The effective tax rates for the
three and nine
months ended
September 29, 2018
varied from the effective tax rates for the
three and nine
months ended
September 30, 2017
primarily due 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 nine months 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.
Note 8—Common Shares and Net Income (Loss) per Common Share
Common Shares
On May 1, 2018, our Board of Directors approved a share repurchase program for up to
$50.0 million
of Cott’s outstanding common shares over a
12
-month period commencing on May 7, 2018. Since that date, during the
three and nine
months ended
September 29, 2018
, we repurchased
1,560,736
and
2,556,117
common shares, respectively, for approximately
$24.0 million
and
$40.0 million
, respectively, through open market transactions. We are unable to predict the number of shares that ultimately will be repurchased under the share repurchase program, or the aggregate dollar amount of the shares to be purchased in future periods. We may discontinue purchases at any time, subject to compliance with applicable regulatory requirements. Shares purchased under the share repurchase program were canceled.
Net 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
|
|
For the Nine Months Ended
|
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
Numerator (in millions of U.S. dollars):
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cott Corporation
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
8.5
|
|
|
$
|
1.6
|
|
|
$
|
25.3
|
|
|
$
|
(13.1
|
)
|
Discontinued operations
|
1.5
|
|
|
40.9
|
|
|
356.9
|
|
|
(5.4
|
)
|
Net income (loss)
|
10.0
|
|
|
42.5
|
|
|
382.2
|
|
|
(18.5
|
)
|
Basic Earnings Per Share
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
138,787
|
|
|
139,205
|
|
|
139,503
|
|
|
138,980
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
Continuing operations
|
0.06
|
|
|
0.01
|
|
|
0.18
|
|
|
(0.09
|
)
|
Discontinued operations
|
0.01
|
|
|
0.29
|
|
|
2.56
|
|
|
(0.04
|
)
|
Net income (loss)
|
0.07
|
|
|
0.30
|
|
|
2.74
|
|
|
(0.13
|
)
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
|
Denominator (in thousands):
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
138,787
|
|
|
139,205
|
|
|
139,503
|
|
|
138,980
|
|
Dilutive effect of Stock Options
|
1,212
|
|
|
1,158
|
|
|
1,260
|
|
|
—
|
|
Dilutive effect of Performance-based RSUs
|
918
|
|
|
154
|
|
|
954
|
|
|
—
|
|
Dilutive effect of Time-based RSUs
|
259
|
|
|
486
|
|
|
246
|
|
|
—
|
|
Weighted average common shares outstanding - diluted
|
141,176
|
|
|
141,003
|
|
|
141,963
|
|
|
138,980
|
|
Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
Continuing operations
|
0.06
|
|
|
0.01
|
|
|
0.18
|
|
|
(0.09
|
)
|
Discontinued operations
|
0.01
|
|
|
0.29
|
|
|
2.51
|
|
|
(0.04
|
)
|
Net income (loss)
|
0.07
|
|
|
0.30
|
|
|
2.69
|
|
|
(0.13
|
)
|
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
|
|
For the Nine Months Ended
|
(in thousands)
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
Stock Options
|
1,141
|
|
|
198
|
|
|
1,086
|
|
|
4,286
|
|
Performance-based RSUs
1
|
327
|
|
|
—
|
|
|
327
|
|
|
1,703
|
|
Time-based RSUs
|
—
|
|
|
—
|
|
|
—
|
|
|
660
|
|
______________________
|
|
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.
|
Note 9—Segment Reporting
Our broad portfolio of products includes bottled water, coffee, brewed tea, water dispensers, coffee and tea brewers, specialty coffee, liquid coffee or tea concentrate, single cup coffee, cold brewed coffee, iced blend coffee or tea, 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. During the second quarter of
2018
, we combined and disclosed the corporate oversight function in the All Other category. Our segment reporting results have been recast to reflect these changes for all periods presented.
Subsequent to the completion of the Transaction, management re-evaluated the measure of profit for our reportable segments and determined that excluding corporate allocations from segment operating income was appropriate as these costs are not considered by management when evaluating performance. Operating income (loss) for the prior periods have been recast to reflect this change and resulted in a
$0.1 million
decrease and a
$0.5 million
increase to operating income
for the three and nine months ended
September 30, 2017
in our Route Based Services reporting segment, a
$0.2 million
decrease to operating income
for the three and nine months ended
September 30, 2017
in our Coffee, Tea and Extract Solutions reporting segment, and a
$0.3 million
increase and a
$0.3 million
decrease to operating loss
for the three and nine months ended
September 30, 2017
in the All Other category, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Route
Based
Services
|
|
Coffee, Tea
and Extract
Solutions
|
|
All
Other
|
|
Eliminations
|
|
Total
|
For the Three Months Ended September 29, 2018
|
|
|
|
|
|
|
|
|
|
Revenue, net
1
|
$
|
423.7
|
|
|
$
|
140.2
|
|
|
$
|
47.1
|
|
|
$
|
(1.7
|
)
|
|
$
|
609.3
|
|
Depreciation and amortization
|
41.9
|
|
|
5.8
|
|
|
1.9
|
|
|
—
|
|
|
49.6
|
|
Operating income (loss)
|
37.5
|
|
|
5.0
|
|
|
(14.7
|
)
|
|
—
|
|
|
27.8
|
|
Additions to property, plant and equipment
|
29.5
|
|
|
4.4
|
|
|
2.4
|
|
|
—
|
|
|
36.3
|
|
For the Nine Months Ended September 29, 2018
|
|
|
|
|
|
|
|
|
|
Revenue, net
1
|
$
|
1,207.4
|
|
|
$
|
431.8
|
|
|
$
|
138.8
|
|
|
$
|
(4.3
|
)
|
|
$
|
1,773.7
|
|
Depreciation and amortization
|
122.8
|
|
|
17.2
|
|
|
5.7
|
|
|
—
|
|
|
145.7
|
|
Operating income (loss)
|
77.6
|
|
|
12.3
|
|
|
(35.3
|
)
|
|
—
|
|
|
54.6
|
|
Additions to property, plant and equipment
|
81.5
|
|
|
9.0
|
|
|
4.5
|
|
|
—
|
|
|
95.0
|
|
As of September 29, 2018
|
|
|
|
|
|
|
|
|
|
Total assets
2
|
$
|
2,411.6
|
|
|
$
|
461.7
|
|
|
$
|
286.8
|
|
|
$
|
—
|
|
|
$
|
3,160.1
|
|
______________________
|
|
1
|
Intersegment revenue between the Coffee, Tea and Extract Solutions and the Route Based Services reporting segments was
$1.4 million
and
$4.0 million
for the three and nine months ended
September 29, 2018
, respectively. Intersegment revenue between the All Other and the Route Based Services reporting segments was
$0.3 million
for the three and nine months ended
September 29, 2018
. All Other includes
$4.2 million
of related party concentrate sales to discontinued operations for the
nine
months ended
September 29, 2018
.
|
|
|
2
|
Excludes intersegment receivables, investments and notes receivable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
Route
Based
Services
|
|
Coffee, Tea
and Extract
Solutions
|
|
All
Other
|
|
Eliminations
|
|
Total
|
For the Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Revenue, net
1
|
$
|
397.3
|
|
|
$
|
143.4
|
|
|
$
|
40.2
|
|
|
$
|
—
|
|
|
$
|
580.9
|
|
Depreciation and amortization
|
41.7
|
|
|
6.0
|
|
|
1.7
|
|
|
—
|
|
|
49.4
|
|
Operating income (loss)
3
|
29.6
|
|
|
3.5
|
|
|
(10.8
|
)
|
|
—
|
|
|
22.3
|
|
Additions to property, plant and equipment
|
34.8
|
|
|
3.3
|
|
|
0.1
|
|
|
—
|
|
|
38.2
|
|
For the Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Revenue, net
1
|
$
|
1,134.9
|
|
|
$
|
440.2
|
|
|
$
|
123.3
|
|
|
$
|
—
|
|
|
$
|
1,698.4
|
|
Depreciation and amortization
|
119.1
|
|
|
17.2
|
|
|
5.5
|
|
|
—
|
|
|
141.8
|
|
Operating income (loss)
3
|
61.9
|
|
|
13.1
|
|
|
(31.0
|
)
|
|
—
|
|
|
44.0
|
|
Additions to property, plant and equipment
|
85.9
|
|
|
10.6
|
|
|
0.6
|
|
|
—
|
|
|
97.1
|
|
As of December 30, 2017
|
|
|
|
|
|
|
|
|
|
Total assets
2
|
$
|
2,343.4
|
|
|
$
|
455.7
|
|
|
$
|
207.8
|
|
|
$
|
—
|
|
|
$
|
3,006.9
|
|
______________________
|
|
1
|
All Other includes
$9.6 million
and
$31.4 million
of related party concentrate sales to discontinued operations for the
three and nine
months ended
September 30, 2017
, respectively.
|
|
|
2
|
Excludes intersegment receivables, investments and notes receivable, as well as assets of discontinued operations.
|
|
|
3
|
Operating income in our Route Based Services reporting segment for the three and nine months ended September 30, 2017 decreased
$4.9 million
as a result of adopting ASU 2017-07 (see Note 1 to the Consolidated Financial Statements).
|
|
|
|
|
|
Reconciliation of Segment Assets to Total Assets
|
|
(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.
|
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 September 29, 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
|
$
|
271.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
271.1
|
|
Coffee and tea services
|
45.4
|
|
|
113.0
|
|
|
0.9
|
|
|
(1.4
|
)
|
|
157.9
|
|
Retail
|
61.3
|
|
|
—
|
|
|
16.9
|
|
|
(0.3
|
)
|
|
77.9
|
|
Other
|
45.9
|
|
|
27.2
|
|
|
29.3
|
|
|
—
|
|
|
102.4
|
|
Total
|
$
|
423.7
|
|
|
$
|
140.2
|
|
|
$
|
47.1
|
|
|
$
|
(1.7
|
)
|
|
$
|
609.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 29, 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
|
$
|
759.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
759.5
|
|
Coffee and tea services
|
139.8
|
|
|
349.0
|
|
|
2.5
|
|
|
(3.9
|
)
|
|
487.4
|
|
Retail
|
177.1
|
|
|
—
|
|
|
49.1
|
|
|
(0.3
|
)
|
|
225.9
|
|
Other
|
131.0
|
|
|
82.8
|
|
|
87.2
|
|
|
(0.1
|
)
|
|
300.9
|
|
Total
|
$
|
1,207.4
|
|
|
$
|
431.8
|
|
|
$
|
138.8
|
|
|
$
|
(4.3
|
)
|
|
$
|
1,773.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 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
|
$
|
252.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
252.5
|
|
Coffee and tea services
|
44.2
|
|
|
120.9
|
|
|
0.7
|
|
|
—
|
|
|
165.8
|
|
Retail
|
58.6
|
|
|
—
|
|
|
11.7
|
|
|
—
|
|
|
70.3
|
|
Other
|
42.0
|
|
|
22.5
|
|
|
27.8
|
|
|
—
|
|
|
92.3
|
|
Total
|
$
|
397.3
|
|
|
$
|
143.4
|
|
|
$
|
40.2
|
|
|
$
|
—
|
|
|
$
|
580.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 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
|
$
|
715.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
715.5
|
|
Coffee and tea services
|
134.9
|
|
|
369.6
|
|
|
2.0
|
|
|
—
|
|
|
506.5
|
|
Retail
|
165.7
|
|
|
—
|
|
|
33.9
|
|
|
—
|
|
|
199.6
|
|
Other
|
118.8
|
|
|
70.6
|
|
|
87.4
|
|
|
—
|
|
|
276.8
|
|
Total
|
$
|
1,134.9
|
|
|
$
|
440.2
|
|
|
$
|
123.3
|
|
|
$
|
—
|
|
|
$
|
1,698.4
|
|
Note 10—Inventories
The following table summarizes inventories as of
September 29, 2018
and
December 30, 2017
:
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
September 29, 2018
|
|
December 30, 2017
|
Raw materials
|
$
|
71.5
|
|
|
$
|
68.1
|
|
Finished goods
|
41.7
|
|
|
34.3
|
|
Resale items
|
20.4
|
|
|
21.8
|
|
Other
|
3.0
|
|
|
3.4
|
|
Total
|
$
|
136.6
|
|
|
$
|
127.6
|
|
Note 11—Intangible Assets, Net
The following table summarizes intangible assets, net as of
September 29, 2018
and
December 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 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
|
266.4
|
|
|
—
|
|
|
266.4
|
|
|
264.1
|
|
|
—
|
|
|
264.1
|
|
Total intangible assets not subject to amortization
|
290.9
|
|
|
—
|
|
|
290.9
|
|
|
288.6
|
|
|
—
|
|
|
288.6
|
|
Subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
599.3
|
|
|
197.4
|
|
|
401.9
|
|
|
583.4
|
|
|
154.7
|
|
|
428.7
|
|
Patents
|
15.2
|
|
|
2.2
|
|
|
13.0
|
|
|
15.2
|
|
|
1.0
|
|
|
14.2
|
|
Software
|
34.4
|
|
|
19.0
|
|
|
15.4
|
|
|
28.8
|
|
|
13.0
|
|
|
15.8
|
|
Other
|
17.0
|
|
|
5.8
|
|
|
11.2
|
|
|
8.0
|
|
|
4.2
|
|
|
3.8
|
|
Total intangible assets subject to amortization
|
665.9
|
|
|
224.4
|
|
|
441.5
|
|
|
635.4
|
|
|
172.9
|
|
|
462.5
|
|
Total intangible assets
|
$
|
956.8
|
|
|
$
|
224.4
|
|
|
$
|
732.4
|
|
|
$
|
924.0
|
|
|
$
|
172.9
|
|
|
$
|
751.1
|
|
Amortization expense of intangible assets was
$18.4 million
and
$52.9 million
for the
three and nine
months ended
September 29, 2018
, respectively, and
$17.9 million
and
$50.7 million
for the
three and nine
months ended
September 30, 2017
, respectively.
The estimated amortization expense for intangible assets over the next five years is:
|
|
|
|
|
(in millions of U.S. dollars)
|
|
Remainder of 2018
|
$
|
19.0
|
|
2019
|
65.7
|
|
2020
|
56.5
|
|
2021
|
48.2
|
|
2022
|
40.9
|
|
Thereafter
|
211.2
|
|
Total
|
$
|
441.5
|
|
Note 12—Debt
Our total debt as of
September 29, 2018
and
December 30, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
December 30, 2017
|
(in millions of U.S. dollars)
|
Principal
|
|
Unamortized
Debt Issuance
Costs
|
|
Net
|
|
Principal
|
|
Unamortized
Debt Issuance
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
|
526.2
|
|
|
7.7
|
|
|
518.5
|
|
|
539.1
|
|
|
9.5
|
|
|
529.6
|
|
5.500% senior notes due in 2025
|
750.0
|
|
|
10.1
|
|
|
739.9
|
|
|
750.0
|
|
|
11.0
|
|
|
739.0
|
|
ABL facility
|
—
|
|
|
—
|
|
|
—
|
|
|
220.3
|
|
|
—
|
|
|
220.3
|
|
GE Term Loan
|
—
|
|
|
—
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Short-term borrowings
|
9.0
|
|
|
—
|
|
|
9.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital leases
|
5.3
|
|
|
—
|
|
|
5.3
|
|
|
6.4
|
|
|
—
|
|
|
6.4
|
|
Other debt financing
|
2.3
|
|
|
—
|
|
|
2.3
|
|
|
0.8
|
|
|
—
|
|
|
0.8
|
|
Total debt
|
1,292.8
|
|
|
17.8
|
|
|
1,275.0
|
|
|
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 Loan - current maturities
|
—
|
|
|
—
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Short-term borrowings
|
9.0
|
|
|
—
|
|
|
9.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital leases - current maturities
|
1.7
|
|
|
—
|
|
|
1.7
|
|
|
2.3
|
|
|
—
|
|
|
2.3
|
|
Other debt financing
|
1.4
|
|
|
—
|
|
|
1.4
|
|
|
0.8
|
|
|
—
|
|
|
0.8
|
|
Total current debt
|
12.1
|
|
|
—
|
|
|
12.1
|
|
|
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
|
$
|
1,280.7
|
|
|
$
|
17.8
|
|
|
$
|
1,262.9
|
|
|
$
|
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.
The amendment to the ABL facility was considered to be a modification of the original agreement. We wrote off
$2.5 million
of existing deferred financing fees. 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 13—Accumulated 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
nine
months ended
September 29, 2018
and
September 30, 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
|
1.2
|
|
|
(0.5
|
)
|
|
26.1
|
|
|
26.8
|
|
Amounts reclassified from AOCI
|
(1.7
|
)
|
|
0.1
|
|
|
—
|
|
|
(1.6
|
)
|
Net current-period OCI
|
(0.5
|
)
|
|
(0.4
|
)
|
|
26.1
|
|
|
25.2
|
|
Ending balance September 30, 2017
|
$
|
(0.6
|
)
|
|
$
|
(14.8
|
)
|
|
$
|
(77.3
|
)
|
|
$
|
(92.7
|
)
|
Beginning balance December 30, 2017
|
$
|
(1.4
|
)
|
|
$
|
(16.8
|
)
|
|
$
|
(76.2
|
)
|
|
$
|
(94.4
|
)
|
OCI before reclassifications
|
(13.8
|
)
|
|
—
|
|
|
(13.0
|
)
|
|
(26.8
|
)
|
Amounts reclassified from AOCI
|
3.8
|
|
|
16.9
|
|
|
9.4
|
|
|
30.1
|
|
Net current-period OCI
|
(10.0
|
)
|
|
16.9
|
|
|
(3.6
|
)
|
|
3.3
|
|
Ending balance September 29, 2018
|
$
|
(11.4
|
)
|
|
$
|
0.1
|
|
|
$
|
(79.8
|
)
|
|
$
|
(91.1
|
)
|
______________________
|
|
1
|
All amounts are net of tax. Amounts in parentheses indicate debits.
|
The following table summarizes the amounts reclassified from AOCI for the
three and nine
months ended
September 29, 2018
and
September 30, 2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
Affected Line Item in the Statement Where Net Income Is Presented
|
Details About AOCI Components
1
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
|
Gains and losses on derivative instruments
|
|
|
|
|
|
|
|
|
|
Foreign currency and commodity hedges
|
$
|
(2.4
|
)
|
|
$
|
0.2
|
|
|
$
|
(3.8
|
)
|
|
$
|
1.7
|
|
|
Cost of sales
|
|
(2.4
|
)
|
|
0.2
|
|
|
(3.8
|
)
|
|
1.7
|
|
|
Total before taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Tax expense or (benefit)
|
|
$
|
(2.4
|
)
|
|
$
|
0.2
|
|
|
$
|
(3.8
|
)
|
|
$
|
1.7
|
|
|
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
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
Cost of sales
|
|
—
|
|
|
(0.3
|
)
|
|
(16.9
|
)
|
|
(0.1
|
)
|
|
Total before taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Tax expense or (benefit)
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
(16.9
|
)
|
|
$
|
(0.1
|
)
|
|
Net of tax
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
(9.4
|
)
|
|
—
|
|
|
Gain on sale of discontinued operations
|
Total reclassifications for the period
|
$
|
(2.4
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(30.1
|
)
|
|
$
|
1.6
|
|
|
Net of tax
|
______________________
|
|
1
|
Amounts in parentheses indicate debits.
|
|
|
2
|
Net of
$3.6 million
of associated tax impact that resulted in an increase to the gain on the sale of discontinued operations for the
nine months ended
September 29, 2018
.
|
|
|
3
|
These AOCI components are included in the computation of net periodic pension cost.
|
Note 14—Commitments 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. In addition, the Israeli Ministry of Environmental Protection (the "Ministry") has alleged that a non-profit recycling corporation, which collects and recycles bottles sold by manufacturers, including Eden, failed to meet recycling quotas in 2016, in violation of Israeli law. The law imposes liability directly on manufacturers, and the Ministry has asserted that the manufacturers involved with the corporation owe a fine. Eden received a notice from the Ministry on June 21, 2018. Although we cannot predict the outcome of any potential proceedings at this early stage, Eden may be subject to a fine in excess of
$0.1 million
. Management believes, however, that the resolution of this matter will not be material to our financial position, results of operations, or cash flows.
We had $
44.3 million
in standby letters of credit outstanding as of
September 29, 2018
($
46.0 million
—
December 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 Company’s 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
$33.5 million
as of
September 29, 2018
(
$42.0 million
—
December 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 Company’s 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 15—Hedging 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, futures contracts and swap agreements for certain commodities. Forward and futures contracts are agreements to buy or sell a quantity of a currency at a predetermined future date, and at a predetermined rate or price. Forward contracts are traded over-the-counter whereas future contracts are traded on an exchange. 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.
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 highly 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 16 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 use 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
nine
months ended
September 29, 2018
or
September 30, 2017
, respectively.
We have entered into coffee futures contracts to hedge our exposure to price fluctuations on green coffee associated with fixed-price sales contracts with customers, which generally range from
3
to
15
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
83.4 million
pounds and
48.1 million
pounds as of
September 29, 2018
and
December 30, 2017
, respectively. Approximately
$2.4 million
and
$3.8 million
of realized losses, 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 and nine
months ended
September 29, 2018
, respectively. Approximately
$0.2 million
and
$1.7 million
of realized gains were reclassified from AOCI to earnings and recognized in cost of sales in the Consolidated Statements of Operations
for the three and nine months ended
September 30, 2017
, respectively. As of
September 29, 2018
, the estimated net amount of losses reported in AOCI that is expected to be reclassified to the Consolidated Statements of Operations within the next twelve months is
$9.7 million
.
The fair value of the Company’s net derivative liabilities included in accounts payable and accrued liabilities was
$10.7 million
and
$1.2 million
as of
September 29, 2018
and
December 30, 2017
, respectively. We had
no
derivative assets as of
September 29, 2018
and
December 30, 2017
. Set forth below is a reconciliation of the Company’s derivatives by contract type for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of U.S. dollars)
|
September 29, 2018
|
|
December 30, 2017
|
Derivative Contract
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Coffee futures
1
|
$
|
—
|
|
|
$
|
10.7
|
|
|
$
|
—
|
|
|
$
|
1.2
|
|
______________________
|
|
1
|
The fair value of the coffee futures excludes amounts in the related margin accounts. We are required to maintain margin accounts in accordance with futures market and broker regulations. As of
September 29, 2018
and
December 30, 2017
, the aggregate margin account balances were
$15.4 million
and
$5.3 million
, respectively, and are included in cash and cash equivalents on the Consolidated Balance Sheets.
|
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)
|
September 29, 2018
|
|
December 30, 2017
|
Coffee futures assets
|
$
|
2.1
|
|
|
$
|
0.6
|
|
Coffee futures liabilities
|
(12.8
|
)
|
|
(1.8
|
)
|
Net asset (liability)
|
$
|
(10.7
|
)
|
|
$
|
(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 and nine
months ended
September 29, 2018
and
September 30, 2017
, respectively, is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
September 29, 2018
|
|
September 30, 2017
|
|
September 29, 2018
|
|
September 30, 2017
|
(in millions of U.S. dollars)
|
Cost of sales
|
|
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
|
$
|
298.8
|
|
|
$
|
288.1
|
|
|
$
|
888.3
|
|
|
$
|
849.7
|
|
Loss (gain) on cash flow hedging relationship
|
|
|
|
|
|
|
|
Coffee futures:
|
|
|
|
|
|
|
|
Loss (gain) reclassified from AOCI into expense
|
$
|
2.4
|
|
|
$
|
(0.2
|
)
|
|
$
|
3.8
|
|
|
$
|
(1.7
|
)
|
The settlement of our derivative instruments resulted in a debit to cost of sales of
$2.4 million
and
$3.8 million
for the
three and nine
months ended
September 29, 2018
, respectively, and a credit to cost of sales of
$0.2 million
and
$1.7 million
for the
three and nine
months ended
September 30, 2017
, respectively.
Note 16—Fair Value Measurements
FASB Accounting Standards Codification Topic 820,
Fair Value Measurements and Disclosures
, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are as follows:
|
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
•
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
|
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 net derivative liabilities as of
September 29, 2018
and
December 30, 2017
was $
10.7 million
and $
1.2 million
, respectively. We had
no
derivative assets as of
September 29, 2018
and
December 30, 2017
.
Fair Value of Financial Instruments
The carrying amounts reflected in the Consolidated Balance Sheets for cash and cash equivalents, receivables, payables, short-term borrowings and long-term debt approximate their respective fair values, except as otherwise indicated. The carrying values and estimated fair values of our significant outstanding debt as of
September 29, 2018
and
December 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 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
|
518.5
|
|
|
550.3
|
|
|
529.6
|
|
|
574.0
|
|
5.500% senior notes due in 2025
1, 3
|
739.9
|
|
|
722.4
|
|
|
739.0
|
|
|
759.3
|
|
Total
|
$
|
1,258.4
|
|
|
$
|
1,272.7
|
|
|
$
|
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
September 29, 2018
and
December 30, 2017
(see Note 12 to the Consolidated Financial Statements).
|
Note 17—Subsequent Events
On October 15, 2018, DSS, a wholly-owned subsidiary of Cott, acquired The Mountain Valley Spring Company ("Mountain Valley"), a growing American brand of spring and sparkling bottled water delivered to homes and offices throughout the U.S., for approximately
$78.5 million
on a debt and cash free basis. The acquisition was funded using cash on hand as well as borrowings under our ABL facility. Due to the limited time since the Mountain Valley acquisition closing date, the Company is unable to provide actual amounts recognized related to the Mountain Valley assets acquired and liabilities assumed as the accounting for the purchase price allocation has not yet been completed. As a result, certain required disclosures relative to the Mountain Valley acquisition, including those related to any goodwill or bargain purchase amounts to be recognized, have not been made. Mountain Valley will become a part of our Route Based Services reporting segment.
On
November 6, 2018
, our Board of Directors declared a dividend of
$0.06
per share on common shares, payable in cash on
December 7, 2018
to shareowners of record at the close of business on
November 27, 2018
.