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Table of Contents

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: October 1, 2016

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________

Commission File Number: 001-31410

 

 

COTT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

CANADA   98-0154711

(State or Other Jurisdiction

of Incorporation or Organization)

 

(IRS Employer

Identification No.)

6525 VISCOUNT ROAD

MISSISSAUGA, ONTARIO, CANADA

  L4V 1H6

5519 WEST IDLEWILD AVENUE

TAMPA, FLORIDA, UNITED STATES

  33634
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (905) 672-1900 and (813) 313-1800

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at November 3, 2016

Common Shares, no par value per share    138,373,690 shares

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

     3   

Item 1. Financial Statements (unaudited)

     3   

Consolidated Statements of Operations

     3   

Condensed Consolidated Statements of Comprehensive Loss

     4   

Consolidated Balance Sheets

     5   

Consolidated Statements of Cash Flows

     6   

Consolidated Statements of Equity

     7   

Notes to the Consolidated Financial Statements

     8   

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

     49   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     64   

Item 4. Controls and Procedures

     64   

PART II. OTHER INFORMATION

     65   

Item 1. Legal Proceedings

     65   

Item 1A. Risk Factors

     65   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     65   

Item 6. Exhibits

     65   

SIGNATURES

     66   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

Cott Corporation

Consolidated Statements of Operations

(in millions of U.S. dollars, except share and per share amounts)

Unaudited

 

     For the Three Months Ended     For the Nine Months Ended  
     October 1,     October 3,     October 1,     October 3,  
     2016     2015     2016     2015  

Revenue, net

   $ 885.1      $ 755.6      $ 2,348.5      $ 2,245.2   

Cost of sales

     579.3        523.1        1,576.1        1,570.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     305.8        232.5        772.4        674.4   

Selling, general and administrative expenses

     263.0        196.2        662.1        574.9   

Loss on disposal of property, plant & equipment, net

     0.8        1.1        3.9        2.7   

Acquisition and integration expenses

     7.4        6.6        20.5        15.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     34.6        28.6        85.9        81.4   

Other (income) expense, net

     (3.2     0.6        (2.4     (8.8

Interest expense, net

     34.4        27.4        89.2        83.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     3.4        0.6        (0.9     7.2   

Income tax expense (benefit)

     5.8        (5.8     (5.5     (16.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (2.4   $ 6.4      $ 4.6      $ 23.5   

Less: Net income attributable to non-controlling interests

     1.5        1.6        4.4        4.6   

Less: Accumulated dividends on convertible preferred shares

     —          —          —          4.5   

Less: Accumulated dividends on non-convertible preferred shares

     —          —          —          1.4   

Less: Foreign exchange impact on redemption of preferred shares

     —          —          —          12.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributed to Cott Corporation

   $ (3.9   $ 4.8      $ 0.2      $ 1.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per common share attributed to Cott Corporation

        

Basic

   $ (0.03   $ 0.04      $ 0.00      $ 0.01   

Diluted

   $ (0.03   $ 0.04      $ 0.00      $ 0.01   

Weighted average common shares outstanding (in thousands)

        

Basic

     138,195        109,686        124,900        100,818   

Diluted

     138,195        110,410        125,967        101,387   

Dividends declared per share

   $ 0.06      $ 0.06      $ 0.18      $ 0.18   

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

Cott Corporation

Condensed Consolidated Statements of Comprehensive Loss

(in millions of U.S. dollars)

Unaudited

 

     For the Three Months Ended     For the Nine Months Ended  
     October 1,     October 3,     October 1,     October 3,  
     2016     2015     2016     2015  

Net (loss) income

   $ (2.4   $ 6.4      $ 4.6      $ 23.5   

Other comprehensive (loss) income:

        

Currency translation adjustment

     (5.9     (11.5     (23.8     (12.8

Pension benefit plan, net of tax 1

     —          0.2        0.2        0.7   

Unrealized gain (loss) on derivative instruments, net of tax 2

     0.7        (2.1     3.8        (4.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

     (5.2     (13.4     (19.8     (17.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (7.6   $ (7.0   $ (15.2   $ 6.5   

Less: Comprehensive income attributable to non-controlling interests

     1.5        1.9        4.4        4.9   

Less: Accumulated dividends on convertible preferred shares

     —          —          —          4.5   

Less: Accumulated dividends on non-convertible preferred shares

     —          —          —          1.4   

Less: Foreign exchange impact on redemption of preferred shares

     —          —          —          12.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributed to Cott Corporation

   $ (9.1   $ (8.9   $ (19.6   $ (16.3
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1. Net of the effect of $0.1 million and $0.3 million tax expense for the three and nine months ended October 1, 2016, respectively, and net of the effect of $0.3 million and $0.5 million tax expense for the three and nine months ended October 3, 2015, respectively.
2. Net of the effect of $0.8 million and $2.3 million tax expense for the three and nine months ended October 1, 2016, respectively, and net of the effect of $1.5 million and $2.5 million tax benefit for the three and nine months ended October 3, 2015, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

Cott Corporation

Consolidated Balance Sheets

(in millions of U.S. dollars, except share amounts)

Unaudited

 

     October 1, 2016     January 2, 2016  

ASSETS

    

Current assets

    

Cash & cash equivalents

   $ 118.9      $ 77.1   

Accounts receivable, net of allowance of $8.9 ($9.2 as of January 2, 2016)

     463.3        293.3   

Income taxes recoverable

     0.6        1.6   

Inventories

     320.1        249.4   

Prepaid expenses and other current assets

     33.9        17.2   
  

 

 

   

 

 

 

Total current assets

     936.8        638.6   

Property, plant & equipment, net

     951.4        769.8   

Goodwill

     1,186.7        759.6   

Intangibles and other assets, net

     1,019.9        711.7   

Deferred tax assets

     19.6        7.6   
  

 

 

   

 

 

 

Total assets

   $ 4,114.4      $ 2,887.3   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Current liabilities

    

Short-term borrowings

   $ 264.1      $ 122.0   

Current maturities of long-term debt

     5.0        3.4   

Accounts payable and accrued liabilities

     598.7        437.6   
  

 

 

   

 

 

 

Total current liabilities

     867.8        563.0   

Long-term debt

     2,019.1        1,525.4   

Deferred tax liabilities

     169.4        76.5   

Other long-term liabilities

     81.8        76.5   
  

 

 

   

 

 

 

Total liabilities

     3,138.1        2,241.4   

Equity

    

Common shares, no par - 138,345,805 (January 2, 2016 - 109,695,435) shares issued

     907.4        534.7   

Additional paid-in-capital

     53.1        51.2   

Retained earnings

     106.7        129.6   

Accumulated other comprehensive loss

     (96.0     (76.2
  

 

 

   

 

 

 

Total Cott Corporation equity

     971.2        639.3   

Non-controlling interests

     5.1        6.6   
  

 

 

   

 

 

 

Total equity

     976.3        645.9   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 4,114.4      $ 2,887.3   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

Cott Corporation

Consolidated Statements of Cash Flows

(in millions of U.S. dollars)

Unaudited

 

     For the Three Months Ended     For the Nine Months Ended  
     October 1,     October 3,     October 1,     October 3,  
     2016     2015     2016     2015  

Operating Activities

        

Net (loss) income

   $ (2.4   $ 6.4      $ 4.6      $ 23.5   

Depreciation & amortization

     63.2        58.1        169.2        173.7   

Amortization of financing fees

     1.5        1.2        4.0        3.6   

Amortization of senior notes premium

     (1.5     (1.3     (4.4     (4.2

Share-based compensation expense

     (0.5     2.3        5.7        8.4   

Expense (benefit) for deferred income taxes

     5.4        (4.7     (7.5     (21.6

Loss on disposal of property, plant & equipment, net

     0.8        1.1        3.9        2.7   

Other non-cash items

     5.3        4.7        6.2        (11.8

Change in operating assets and liabilities, net of acquisitions:

        

Accounts receivable

     25.1        37.8        (22.3     (22.9

Inventories

     10.7        10.5        12.0        5.6   

Prepaid expenses and other current assets

     0.6        2.9        (7.2     28.7   

Other assets

     (5.5     (3.8     (4.3     (7.5

Accounts payable and accrued liabilities, and other liabilities

     (11.4     (24.3     3.2        (14.3

Income taxes recoverable

     0.3        0.9        (2.6     2.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     91.6        91.8        160.5        166.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing Activities

        

Acquisitions, net of cash received

     (912.5     (22.0     (958.7     (22.5

Additions to property, plant & equipment

     (38.7     (28.3     (101.4     (85.5

Additions to intangibles and other assets

     (1.7     (0.5     (5.0     (2.7

Proceeds from sale of property, plant & equipment and sale-leaseback

     1.6        0.4        4.5        40.9   

Proceeds from insurance recoveries

     1.4        —          1.4        —     

Decrease in restricted cash

     2.8        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (947.1     (50.4     (1,059.2     (69.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

        

Payments of long-term debt

     (1.8     (1.0     (3.3     (2.9

Issuance of long-term debt

     498.7        —          498.7        —     

Borrowings under ABL facility

     814.5        52.4        1,435.6        801.3   

Payments under ABL facility

     (550.6     (97.3     (1,296.6     (874.5

Distributions to non-controlling interests

     (2.7     (3.2     (6.0     (6.8

Issuance of common shares

     2.4        0.5        366.6        143.1   

Financing fees

     (11.9     (0.1     (11.9     (0.3

Preferred shares repurchased and cancelled

     —          —          —          (148.8

Common shares repurchased and cancelled

     (3.4     (0.1     (4.5     (0.8

Dividends to common and preferred shareholders

     (8.4     (6.5     (23.1     (24.5

Payment of deferred consideration for acquisitions

     (10.8     —          (10.8     (2.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     726.0        (55.3     944.7        (116.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (1.1     (1.4     (4.2     (2.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash & cash equivalents

     (130.6     (15.3     41.8        (22.5

Cash & cash equivalents, beginning of period

     249.5        79.0        77.1        86.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash & cash equivalents, end of period

   $ 118.9      $ 63.7      $ 118.9      $ 63.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental Non-cash Investing and Financing Activities:

        

Additions to property, plant & equipment through accounts payable and accrued liabilities

   $ 6.9      $ 3.2      $ 8.4      $ 5.3   

Accrued deferred financing fees

     0.7        —          0.7        0.2   

Supplemental Disclosures of Cash Flow Information:

        

Cash paid for interest

   $ 18.7      $ 19.0      $ 74.0      $ 67.6   

Cash paid for income taxes, net

   $ 0.2      $ 0.5      $ 4.3      $ 2.6   

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

Cott Corporation

Consolidated Statements of Equity

(in millions of U.S. dollars, except share amounts)

Unaudited

 

     Cott Corporation Equity              
     Number of
Common
Shares

(In thousands)
    Common
Shares
    Additional
Paid-in-
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss) Income
    Non-
Controlling
Interests
    Total
Equity
 

Balance at January 3, 2015

     93,073      $ 388.3      $ 46.6      $ 158.1      $ (51.0   $ 6.9      $ 548.9   

Common shares repurchased and cancelled

     (92     (0.8     —          —          —          —          (0.8

Common shares issued - Equity Incentive Plan

     488        2.5        (2.0     —          —          —          0.5   

Common shares issued - Equity issuance

     16,215        142.6        —          —          —          —          142.6   

Common shares issued - Dividend Reinvestment Plan

     6        —          —          —          —          —          —     

Share-based compensation

     —          —          8.4        —          —          —          8.4   

Common shares dividend

     —          —          —          (18.6     —          —          (18.6

Redemption of preferred shares

     —          —          —          (12.0     —          —          (12.0

Distributions to non-controlling interests

     —          —          —          —          —          (6.8     (6.8

Comprehensive (loss) income

              

Currency translation adjustment

     —          —          —          —          (13.1     0.3        (12.8

Pension benefit plan, net of tax

     —          —          —          —          0.7        —          0.7   

Unrealized loss on derivative instruments, net of tax

     —          —          —          —          (4.9     —          (4.9

Preferred shares dividend

     —          —          —          (5.9     —          —          (5.9

Net income

     —          —          —          18.9        —          4.6        23.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 3, 2015

     109,690      $ 532.6      $ 53.0      $ 140.5      $ (68.3   $ 5.0      $ 662.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 2, 2016

     109,695      $ 534.7      $ 51.2      $ 129.6      $ (76.2   $ 6.6      $ 645.9   

Common shares repurchased and cancelled

     (302     (4.5     —          —          —          —          (4.5

Common shares issued - Equity Incentive Plan

     1,012        12.5        (3.7     —          —          —          8.8   

Common shares issued - Equity issuance

     27,853        363.6        —          —          —          —          363.6   

Common shares issued - Dividend Reinvestment Plan

     14        0.2        —          —          —          —          0.2   

Common shares issued - Employee Stock Purchase Plan

     74        0.9        (0.1     —          —          —          0.8   

Share-based compensation

     —          —          5.7        —          —          —          5.7   

Common shares dividend

     —          —          —          (23.1     —          —          (23.1

Distributions to non-controlling interests

     —          —          —          —          —          (5.9     (5.9

Comprehensive (loss) income

              

Currency translation adjustment

     —          —          —          —          (23.8     —          (23.8

Pension benefit plan, net of tax

     —          —          —          —          0.2        —          0.2   

Unrealized gain on derivative instruments, net of tax

     —          —          —          —          3.8        —          3.8   

Net income

     —          —          —          0.2        —          4.4        4.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at October 1, 2016

     138,346      $ 907.4      $ 53.1      $ 106.7      $ (96.0   $ 5.1      $ 976.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


Table of Contents

Cott Corporation

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 diversified beverage company with a leading volume-based national presence in the North America and European home and office delivery (“HOD”) industry for bottled water, a leader in custom coffee roasting and blending of iced tea for the U.S. foodservice industry, and one of the world’s largest producers of beverages on behalf of retailers, brand owners and distributors. Our platform reaches over 2.3 million customers or delivery points across North America and Europe supported by strategically located sales and distribution facilities and fleets, as well as wholesalers and distributors. This enables us to efficiently service residences, businesses, restaurant chains, hotels and motels, small and large retailers, and healthcare facilities.

During the third quarter of 2016, we completed the S&D Acquisition and the Eden Acquisition (as each term is defined below). These businesses were added to our existing DSS reporting segment, which was renamed “Water & Coffee Solutions” to reflect the increased scope of our offering. Other than the change in name, there was no impact on prior period results for this reporting segment. The Water & Coffee Solutions reporting segment produces a product category consisting primarily of HOD bottled water, coffees, teas and filtration services.

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 accruals) 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 January 2, 2016 included herein was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016 (“2015 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 2015 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.

Significant Accounting Policies

Included in Note 1 of the 2015 Annual Report is a summary of the Company’s significant accounting policies. Additional accounting policies that are significant to the financial results of the Company are provided below.

Cost of sales

We record costs associated with the manufacturing of our products in costs 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. Costs incurred in shipment of products from our production facilities to customer locations are also reflected in cost of sales, with the exception of shipping and handling costs incurred to deliver products from our Water & Coffee Solutions reporting segment branch locations to the end-user consumer of those products which are recorded in selling, general and administrative (“SG&A”) expenses. These shipping and handling costs were $92.4 million and $240.3 million for the three and nine months ended October 1, 2016 and $72.8 million and $207.5 million for the three and nine months ended October 3, 2015, respectively. Finished goods inventory costs include the cost of direct labor and materials and the applicable share of overhead expense chargeable to production.

Recently Issued Accounting Pronouncements

Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) or the issuance of new standards to the FASB’s Accounting Standards Codification (“ASC”). The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on these consolidated financial statements.

 

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Update ASU 2014-09 – Revenue from Contracts with Customers (Topic 606)

In May 2014, the 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. We are currently assessing the impact of adoption of this standard on our consolidated financial statements.

Update ASU 2016-02 – Leases (Topic 842)

In February 2016, the FASB issued an update to its guidance on lease accounting. 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. At adoption, this update will be applied using a modified retrospective approach. We are currently assessing the impact of adoption of this standard on our consolidated financial statements.

Update ASU 2016-09 – Compensation—Stock Compensation (Topic 718)

In March 2016, the FASB amended its guidance to simplify several areas of accounting for share-based compensation arrangements. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the consolidated statements of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the consolidated statements of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. This guidance will be applied either prospectively, retrospectively or using a 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 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 2016-15 – Statement of Cash Flows (Topic 230)

In August 2016, the FASB issued an update to its guidance on the classification and presentation of certain cash receipts and cash payments in the statement of cash flows. This update addresses specific issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned

 

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and bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. This guidance will be applied either prospectively or using a retrospective transition method, depending on the practicality of application. We are currently assessing the impact of adoption of this standard on our consolidated financial statements.

Note 2—Acquisitions

S&D Acquisition

On August 11, 2016 (the “S&D Acquisition Date”), the Company acquired 100% of the outstanding stock of S&D Coffee Holding Company (“Holdings”) and 100% of the outstanding membership interests of Arabica, L.L.C. (“Arabica”) pursuant to a Stock and Membership Interest Purchase Agreement dated August 3, 2016 (the “S&D Acquisition”). Holdings is the parent company of S. & D. Coffee, Inc. (“S&D”), a premium coffee roaster and provider of customized coffee, tea and extract solutions, and Arabica owns real estate that it leases to S&D. The purchase price paid by the Company in the S&D Acquisition was $354.1 million on a debt- and cash-free basis, subject to adjustments for closing date cash, working capital, indebtedness and certain expenses. The S&D Acquisition was funded through a combination of incremental borrowings under the Company’s asset-based lending facility (“ABL facility”) and proceeds from our June 2016 Offering (defined below).

The total consideration paid by us in the S&D Acquisition is summarized below:

 

(in millions of U.S. dollars)

      

Cash paid to sellers

   $ 232.1   

Cash paid on behalf of sellers for sellers’ transaction expenses

     84.2   

Cash paid to retire outstanding debt on behalf of sellers

     37.8   
  

 

 

 

Total consideration

   $ 354.1   
  

 

 

 

The S&D Acquisition supports the Company’s strategy to become a more diversified beverage provider across multiple channels and geographies, as well as expanding the Company’s existing coffee and tea categories. The Company has accounted for this transaction as a business combination in accordance with authoritative accounting guidance.

The purchase price of $354.1 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the S&D Acquisition Date. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities based on management’s estimates. The table below presents the preliminary purchase price allocation of the estimated acquisition date fair values of the assets acquired and the liabilities assumed:

 

(in millions of U.S. dollars)

   Acquired Value  

Cash

   $ 1.7   

Accounts receivable

     49.8   

Inventory

     61.0   

Prepaid expenses and other assets

     2.3   

Property, plant and equipment

     94.6   

Goodwill

     127.5   

Intangibles and other assets

     114.1   

Accounts payable and accrued liabilities

     (44.9

Deferred tax liabilities

     (51.5

Other long-term liabilities

     (0.5
  

 

 

 

Total

   $ 354.1   
  

 

 

 

 

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The assets and liabilities acquired with the S&D Acquisition are recorded at their estimated fair values per preliminary valuations and management estimates and are subject to change when formal valuations and other studies are finalized. Estimated fair values for deferred tax balances are preliminary and are also subject to change based on the final valuation results. In addition, consideration for potential loss contingencies are still under review.

The amount of revenues and net loss related to the S&D Acquisition included in the Company’s consolidated statement of operations for the period from the S&D Acquisition Date through October 1, 2016 were $87.3 million and $0.4 million, respectively. During the nine months ended October 1, 2016, the Company incurred $2.3 million of acquisition-related costs associated with the S&D Acquisition, which are included in acquisition and integration expenses in the consolidated statements of operations. In connection with the S&D Acquisition, the Company granted 416,951 common shares to certain of our S&D employees which had an aggregate grant date fair value of approximately $7.1 million and fully vested upon issuance.

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 S&D’s products. The estimated fair values of identified intangible assets were calculated using the income valuation approach and with consideration to market participant expectations and assumptions of S&D and Company management. The following table sets forth the components of identified intangible assets associated with the S&D Acquisition and their estimated weighted average useful lives:

 

(in millions of U.S. dollars)

   Estimated Fair
Market Value
     Weighted Average
Estimated

Useful Life
 

Customer relationships

   $ 108.9         17 years   

Non-competition agreements

     3.0         4 years   
  

 

 

    

Total

   $ 111.9      
  

 

 

    

Customer relationships represent projected future revenue that will be derived from sales to existing customers of S&D. Non-compete agreements represent the value derived from preventing S&D executives from entering into or starting a similar, competing business with S&D.

Goodwill

The principal driver of the goodwill recognized in the acquisition was that the purchase price for the S&D Acquisition was based, in part, on cash flow projections that assume a reduction of administrative costs and the integration of acquired customers and products into our existing operations. The cost savings and integration into our existing operations are of greater value to the Company than on a standalone basis. The goodwill recognized as part of the S&D Acquisition was allocated to the Water & Coffee Solutions reporting segment, and is not expected to be tax deductible.

Eden Acquisition

On August 2, 2016 (the “Eden Acquisition Date”), the Company acquired the sole issued and outstanding share in the share capital of Hydra Dutch Holdings 1 B.V., the indirect parent company of Eden Springs Europe B.V., a leading provider of water and coffee solutions in Europe (“Eden”) pursuant to a Share Purchase Agreement dated June 7, 2016 (the “Eden Acquisition”). The purchase price paid by the Company was €517.9 million (U.S. $578.5 million at exchange rates in effect on the Eden Acquisition Date), which represented the €470.0 million stated purchase price, €17.5 million of cash on hand, estimated working capital of €15.4 million, and other items of €15.0 million, paid at closing in cash. The purchase price is subject to adjustments for closing date cash, working capital, indebtedness and certain expenses. The Company obtained committed financing to support the Eden Acquisition. The Eden Acquisition was ultimately funded through a combination of proceeds from the issuance of €450 million (U.S. $504.5 million at exchange rates in effect on October 1, 2016) of 5.50% senior notes due July 1, 2024 (“2024 Notes”) and cash on hand.

 

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The total consideration paid by us in the Eden Acquisition is summarized below:

 

(in millions of U.S. dollars)

      

Cash paid to sellers

   $ 86.5   

Cash paid on behalf of sellers to retire outstanding indebtedness

     420.2   

Cash paid to retire sellers financing payables, net

     71.8   
  

 

 

 

Total consideration

   $ 578.5   
  

 

 

 

The Eden Acquisition supports the Company’s strategy to become a more diversified beverage provider across multiple channels and geographies, as well as the Company’s continuing strategy to acquire higher margin HOD bottled water and coffee and tea categories. The Company has accounted for this transaction as a business combination in accordance with authoritative accounting guidance.

The purchase price of $578.5 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the Eden Acquisition Date. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities based on management’s estimates. The table below presents the preliminary purchase price allocation of the estimated acquisition date fair values of the assets acquired and the liabilities assumed:

 

(in millions of U.S. dollars)

   Acquired Value  

Cash

   $ 19.6   

Accounts receivable

     104.3   

Inventories

     23.7   

Prepaid expenses and other current assets

     7.3   

Property, plant & equipment

     98.4   

Goodwill

     277.2   

Intangibles and other assets

     227.2   

Deferred tax assets

     18.2   

Current maturities of long-term debt

     (2.7

Accounts payable and accrued liabilities

     (129.5

Long-term debt

     (3.1

Deferred tax liabilities

     (55.1

Other long-term liabilities

     (7.0
  

 

 

 

Total

   $ 578.5   
  

 

 

 

The assets and liabilities acquired with the Eden Acquisition are recorded at their estimated fair values per preliminary valuations and management estimates and are subject to change when formal valuations and other studies are finalized. Estimated fair values for deferred tax balances are preliminary and are also subject to change based on the final valuation results. In addition, consideration for potential loss contingencies are still under review.

The amount of revenues and net income related to the Eden Acquisition included in the Company’s consolidated statements of operations for the period from the Eden Acquisition Date through October 1, 2016 were $69.9 million and $1.0 million, respectively. During the nine months ended October 1, 2016, the Company incurred $11.4 million of acquisition-related costs associated with the Eden Acquisition, which are included in acquisition and integration expenses in the consolidated statements of operations.

Intangible Assets

In our preliminary determination of the fair value of the intangible assets, we considered, among other factors, the best use of acquired assets, analysis of historic financial performance and estimates of future performance of Eden’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 Eden’s and our management. The following table sets forth the components of identified intangible assets associated with the Eden Acquisition and their estimated weighted average useful lives:

 

(in millions of U.S. dollars)

   Estimated Fair
Market Value
     Estimated
Useful Life
 

Customer relationships

   $ 150.9         15 years   

Trade names

     68.2         Indefinite   
  

 

 

    

Total

   $ 219.1      
  

 

 

    

 

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Customer relationships represent projected future revenue that will be derived from sales to existing customers of Eden.

Trade names represent the projected future cost savings associated with the premium and brand image obtained as a result of owning the trade name as opposed to obtaining the benefit of the trade name through a royalty or rental fee.

Goodwill

The principal factor that resulted in recognition of goodwill was that the purchase price for the Eden Acquisition was based in part on cash flow projections assuming the reduction of administration 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 Eden Acquisition was allocated to the Water & Coffee Solutions reporting segment, and is not expected to be tax deductible.

Aquaterra Acquisition

On January 4, 2016 (the “Aquaterra Acquisition Date”), the Company acquired 100% of the share capital of Aquaterra Corporation (“Aquaterra”) pursuant to a Share Purchase Agreement dated December 7, 2015 (the “Aquaterra Acquisition”). Aquaterra operates a Canadian direct-to-consumer HOD bottled water and office coffee services business. The aggregate purchase price paid by the Company in the Aquaterra Acquisition was C$61.2 million (U.S. $44.0 million). The purchase price was paid at closing in cash and was subject to a customary post-closing adjustment of actual working capital. The post-closing adjustment was completed in May 2016 and resulted in the payment of $0.5 million by the former owners of Aquaterra to the Company.

This acquisition supports the Company’s strategy to become a more diversified beverage provider across multiple channels and geographies, as well as the Company’s strategy to acquire higher margin HOD bottled water and coffee and tea services categories. The Company has accounted for this transaction as a business combination in accordance with authoritative accounting guidance.

The adjusted purchase consideration of $44.0 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the Aquaterra Acquisition Date. A preliminary allocation of the purchase price has been made to major categories of assets and liabilities based on management’s estimates. The table below presents the preliminary purchase price allocation of the estimated acquisition date fair values of the assets acquired and the liabilities assumed and shows the allocation after the post-closing adjustment. The allocation of the purchase price is based on preliminary valuations that are expected to be completed by the end of the Company’s fiscal year 2016.

 

(in millions of U.S. dollars)

   Acquired Value      Adjustments      As reported at
October 1, 2016
 

Cash

   $ 1.3       $ —         $ 1.3   

Accounts receivable

     6.2         0.9         7.1   

Inventories

     2.1         —           2.1   

Prepaid expenses and other current assets

     1.3         (0.9      0.4   

Property, plant & equipment

     13.4         (1.1      12.3   

Goodwill

     19.2         2.0 1       21.2   

Intangible and other assets

     17.4         (0.8      16.6   

Accounts payable and accrued liabilities

     (15.8      (0.5      (16.3

Long-term debt

     (0.3      (0.1      (0.4

Other long-term liabilities

     (0.3      —           (0.3
  

 

 

    

 

 

    

 

 

 

Total

   $ 44.5       $ (0.5    $ 44.0   
  

 

 

    

 

 

    

 

 

 

 

1. The working capital adjustment was reflected in the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as reported at April 2, 2016. When the post-closing adjustment was completed in May 2016, an adjustment to goodwill was made.

 

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The amount of revenues and net income related to the Aquaterra Acquisition included in the Company’s consolidated statements of operations for the period from the Aquaterra Acquisition Date through October 1, 2016 were $48.0 million and $2.9 million, respectively. During the nine months ended October 1, 2016, the Company incurred $0.5 million of acquisition-related costs associated with the Aquaterra Acquisition, which are included in acquisition and integration expenses in the consolidated statements of operations.

Intangible Assets

In our preliminary determination of the fair value of the intangible assets, we considered, among other factors, the best use of acquired assets, analysis of historic financial performance and estimates of future performance of Aquaterra’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 Aquaterra’s and our management. The following table sets forth the components of identified intangible assets associated with the Aquaterra Acquisition and their estimated weighted average useful lives:

 

(in millions of U.S. dollars)

   Estimated Fair
Market Value
     Estimated
Useful Life
 

Customer relationships

   $ 11.4         12 years   

Trademarks and trade names

     4.4         Indefinite   
  

 

 

    

Total

   $ 15.8      
  

 

 

    

Customer relationships represent future projected revenue that will be derived from sales to existing customers of Aquaterra.

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 as opposed to obtaining the benefit of the trademark or trade name through a royalty or rental fee.

Goodwill

The principal factor that resulted in recognition of goodwill was that the purchase price for the Aquaterra Acquisition was based in part on cash flow projections assuming the reduction of administration 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 Aquaterra Acquisition was allocated to the Water & Coffee Solutions reporting segment, none of which is expected to be tax deductible.

Supplemental Pro Forma Data (unaudited)

The following unaudited pro forma financial information for the three and nine months ended October 1, 2016 and October 3, 2015, respectively, represent the combined results of our operations as if the Eden Acquisition and S&D Acquisition had occurred on January 3, 2015. Unaudited pro forma consolidated results of operations for the Aquaterra Acquisition are not included in the combined results of our operations for the three and nine months ended October 3, 2015 as the Company determined they are immaterial. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had we operated as a single entity during such periods.

 

     For the Three Months Ended      For the Nine Months Ended  
     October 1,      October 3,      October 1,      October 3,  

(in millions of U.S. dollars, except share amounts)

   2016      2015      2016      2015  

Revenue

   $ 997.0       $           1,033.4       $ 2,910.8       $ 2,979.6   

Net income (loss)

     12.6            (2.5      21.6         (40.6

Net income (loss) per common share, diluted

   $ 0.08       $           (0.02    $ 0.15       $ (0.35

During the nine months ended October 1, 2016, the Company incurred approximately $19.4 million of acquisition and integration expenses related to the S&D Acquisition and Eden Acquisition which are included in SG&A expenses in the Company’s consolidated statement of operations and are reflected in pro forma net loss for the nine months ended October 3, 2015 in the table above.

 

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Other HOD Water Business Acquisitions

During the nine months ended October 1, 2016, the Company, through its Water & Coffee Solutions reporting segment, acquired eight HOD water businesses for cash purchase prices aggregating $4.7 million. The Company has accounted for these transactions as business combinations in accordance with GAAP. These tuck-in acquisitions support the Company’s ongoing objective of leveraging its assets and further strengthening its customer density. Net assets, including goodwill, acquired have been allocated to the Water & Coffee Solutions reporting segment. All of the goodwill recorded is expected to be tax deductible.

Note 3—Share-Based Compensation

During the nine months ended October 1, 2016, the Company granted 914,160 Performance-based RSUs, 318,644 Time-based RSUs, and 1,346,987 Stock Options.

The Performance-based RSUs are restricted share units with performance-based vesting granted under the Amended and Restated Cott Corporation Equity Incentive Plan (the “Equity Incentive Plan”). The Company granted 386,104 Performance-based RSUs, which vest on the last day of our 2018 fiscal year, and 46,351 Performance-based RSUs, which vest on the last day of our 2019 fiscal year. The number of shares ultimately awarded will be based upon the performance percentage, which can range from 0% to 200% of the awards granted. The Performance-based RSUs vest primarily on the Company’s achievement of a specified level of cumulative pre-tax income for the applicable performance period. The weighted-average grant date fair value of $11.91 per share for the Performance-based RSUs was based on the closing market price of the Company’s common shares on the date of grant on the New York Stock Exchange (“NYSE”).

The Time-based RSUs are restricted share units with time-based vesting granted under the Equity Incentive Plan. The Company granted 234,444 Time-based RSUs, which vest ratably in three equal annual installments on the first, second and third anniversaries of the date of grant and are based upon a service condition. The weighted-average grant date fair value of $12.07 per share for the Time-based RSUs was based on the closing market price of the Company’s common shares on the date of grant on the NYSE.

The Stock Options are non-qualified stock options granted under the Equity Incentive Plan and will vest ratably in three equal installments on the first, second and third anniversaries of the date of grant, are based upon a service condition and have a ten year contractual term. The weighted-average fair value of $3.15 per option for the Stock Options was based on the estimate of fair value on the date of grant using the Black-Scholes option pricing model and related assumptions.

In connection with the S&D Acquisition, the Company granted 376,692 Performance-based RSUs to certain of our employees under the Equity Incentive Plan. The Performance-based RSUs vest on the last day of our 2019 fiscal year. The number of shares ultimately awarded will be based upon the performance percentage, which can range from 0% to 200% of the awards granted and is calculated based upon the achievement of specified level of S&D EBITDA (weighted 70%), S&D revenue (weighted 15%) and S&D free cash flow (which is net cash provided by operating activities, less capital expenditures, adjusted to exclude the impact of certain items)(weighted 15%) for the performance period. The grant date fair value of $16.99 per share for the Performance-based RSUs was based on the closing market price of the Company’s common shares on the date of grant on the NYSE.

In connection with the Eden Acquisition, the Company granted 105,013 Performance-based RSUs and 84,200 Time-based RSUs to certain of our employees under the Equity Incentive Plan. The Performance-based RSUs vest on the last day of our 2019 fiscal year. The number of shares ultimately awarded will be based upon the performance percentage, which can range from 0% to 125% of the awards granted and is calculated based upon the achievement of specified level of Eden EBITDA (weighted 70%), Eden revenue (weighted 15%) and Eden free cash flow (which is net cash provided by operating activities, less capital expenditures, adjusted to exclude the impact of certain items)(weighted 15%) for the performance period. Of the 84,200 Time-based RSUs granted in connection with the Eden Acquisition, 12,299 vest ratably in three equal annual installments on the first, second and third anniversaries of the date of grant, while 71,901 vest ratably in two equal annual installments on the first and second anniversaries of the date of grant, with all Time-based RSUs being based upon a service condition. The grant date fair value of $14.79 per share for the Performance-based RSUs and Time-based RSUs was based on the closing market price of the Company’s common shares on the date of grant on the NYSE.

During the nine months ended October 1, 2016, the Company also granted 62,046 common shares to the non-management members of our board of directors under the Equity Incentive Plan with an aggregate grant date fair value of approximately $0.9 million. The common shares were issued in consideration of the directors’ annual board retainer fee and vested upon issuance.

 

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The Company’s share-based compensation expense was $5.7 million and $8.4 million for the nine months ended October 1, 2016 and October 3, 2015, respectively, and was recorded in SG&A expenses in our consolidated statements of operations.

Note 4—Income Taxes

Income tax benefit was $5.5 million on pre-tax loss of $0.9 million for the nine months ended October 1, 2016, as compared to an income tax benefit of $16.3 million on pre-tax income of $7.2 million for the nine months ended October 3, 2015. The Company recognized an income tax benefit on pre-tax losses in certain jurisdictions that is not offset by income tax expense in other jurisdictions with pre-tax income. The decrease in the income tax benefit for 2016, as compared to 2015, primarily relates to the Canadian valuation allowance recorded in the third quarter of fiscal year 2016 (see below).

As we have significant global permanent book to tax differences that exceed our estimated income before taxes on an annual basis, small changes in our estimated income before taxes or changes in year to date income before taxes between jurisdictions can cause material fluctuations in our estimated effective tax rate on a quarterly basis. We have therefore calculated our quarterly income tax provision for the fiscal periods ended October 1, 2016 and October 3, 2015 on a discrete basis for the United States rather than using the estimated annual effective tax rate for the year, in accordance with ASC 740, Income Taxes.

The Company evaluates positive and negative evidence on a regular basis to determine if a valuation allowance should be established in our various tax jurisdictions. The interest expense generated by the issuance of our 2024 Notes in connection with the Eden Acquisition during the third quarter of 2016 has lowered current and future projections of Canadian taxable income. Due to the changes in Canadian taxable income, the Company has established a valuation allowance of approximately $8.5 million in the third quarter of 2016 against its Canadian tax assets.

Note 5— Common Shares and Net (Loss) Income Per Common Share

Common Shares

On June 29, 2016, we completed a public offering, on a bought deal basis, of 15,088,000 common shares at a price of $15.25 per share for total gross proceeds to us of $230.1 million (the “June 2016 Offering”). We incurred and recorded $9.2 million of underwriter commissions and $1.1 million in professional fees in connection with the June 2016 Offering. The net proceeds of the June 2016 Offering were used to repay borrowings under our ABL facility, to finance the S&D Acquisition and for general corporate purposes.

On March 9, 2016, we completed a public offering, on a bought deal basis, of 12,765,000 common shares at a price of $11.80 per share for total gross proceeds to us of $150.6 million (the “March 2016 Offering”). We incurred and recorded $6.0 million of underwriter commissions and $0.8 million in professional fees in connection with the March 2016 Offering. The net proceeds of the March 2016 Offering were used to repay borrowings under our ABL facility and for general corporate purposes.

Net (Loss) Income Per Common Share

Basic net (loss) income per common share is calculated by dividing net (loss) income attributed to Cott Corporation by the weighted average number of common shares outstanding during the periods presented. Diluted net (loss) income per common share is calculated by dividing diluted net (loss) income attributed 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, Time-based RSUs and convertible preferred shares issued as part of the acquisition of DSS (“Convertible Preferred Shares”) during the periods presented. The dilutive effect of the Convertible Preferred Shares was calculated using the if-converted method. In applying the if-converted method, the Convertible Preferred Shares are assumed to have been converted at the beginning of the period (or at the time of issuance, if later). Set forth below is a reconciliation of the numerator and denominator for the diluted net (loss) income per common share computations for the periods indicated:

 

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Table of Contents
     For the Three Months Ended      For the Nine Months Ended  
     October 1,      October 3,      October 1,      October 3,  

(in millions of U.S. dollars)

   2016      2015      2016      2015  

Diluted net (loss) income attributed to Cott Corporation (numerator)

   $ (3.9    $ 4.8       $ 0.2       $ 1.0   

Weighted average number of shares outstanding - basic

     138,195         109,686         124,900         100,818   

Dilutive effect of Stock Options

     —           236         597         146   

Dilutive effect of Time-based RSUs

     —           488         470         423   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted weighted average number of shares outstanding - diluted (denominator)

     138,195         110,410         125,967         101,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes anti-dilutive securities excluded from the computation of diluted net (loss) income per common share for the periods indicated:

 

     For the Three Months Ended      For the Nine Months Ended  
     October 1,      October 3,      October 1,      October 3,  

(in thousands)

   2016      2015      2016      2015  

Stock Options

     2,846         —           178         —     

Performance-based RSUs 1

     1,574         1,739         1,574         1,739   

Time-based RSUs

     882         —           —           —     

Convertible Preferred Shares

     —           —           —           18,480   

 

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 6—Segment Reporting

Our broad portfolio of products include bottled water, coffee, brewed tea, water dispensers, coffee and tea brewers, filtration equipment, carbonated soft drinks (“CSDs”), 100% shelf stable juice and juice-based products, clear, still and sparkling flavored waters, energy drinks and shots, sports products, new age beverages, ready-to-drink teas, liquid enhancers, freezables, ready-to-drink alcoholic beverages, hot chocolate, coffee, malt drinks, creamers/whiteners, cereals and beverage concentrates.

During the third quarter of 2016, we completed the S&D Acquisition and the Eden Acquisition. These businesses were added to our existing DSS reporting segment, which was renamed “Water & Coffee Solutions” to reflect the increased scope of our offering. Other than the change in name, there was no impact on prior period results for this reporting segment. The Water & Coffee Solutions reporting segment produces a product category consisting primarily of HOD bottled water, coffees, teas and filtration services.

Our business operates through four reporting segments: Water & Coffee Solutions, Cott North America, Cott U.K. and All Other (which includes our Mexico operating segment, Royal Crown International operating segment and other miscellaneous expenses). We refer to our Cott North America, Cott U.K. and All Other reporting segments together as our “traditional business.” Our corporate oversight function (“Corporate”) is not treated as a segment; it includes certain general and administrative costs that are not allocated to any of the reporting segments.

 

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Table of Contents

(in millions of U.S. dollars)

   Water &
Coffee
Solutions
     Cott
North
America
     Cott
U.K.
     All
Other
     Corporate     Eliminations     Total  

For the Three Months Ended October 1, 2016

                  

Revenue, net 1

   $ 436.5       $ 326.2       $ 116.1       $ 11.9       $ —        $ (5.6   $ 885.1   

Depreciation and amortization

     39.6         18.4         5.0         0.2         —          —          63.2   

Operating income (loss)

     21.1         12.0         5.3         1.9         (5.7     —          34.6   

Additions to property, plant and equipment

     28.9         8.0         1.5         0.3         —          —          38.7   

For the Nine Months Ended October 1, 2016

                  

Revenue, net 1

   $ 969.5       $ 988.7       $ 369.0       $ 40.3       $ —        $ (19.0   $ 2,348.5   

Depreciation and amortization

     97.3         55.3         15.9         0.7         —          —          169.2   

Operating income (loss)

     44.6         31.0         26.9         7.8         (24.4     —          85.9   

Additions to property, plant and equipment

     69.4         24.0         7.3         0.7         —          —          101.4   

As of October 1, 2016

                  

Total assets 2

     2,854.8         891.8         340.1         27.7         —          —          4,114.4   

 

1. Intersegment revenue between Cott North America and the other reporting segments was $5.6 million and $19.0 million for the three and nine months ended October 1, 2016, respectively.
2. Excludes intersegment receivables, investments and notes receivable.

 

(in millions of U.S. dollars)

   Water &
Coffee
Solutions
     Cott
North
America
     Cott
U.K.
     All
Other
     Corporate     Eliminations     Total  

For the Three Months Ended October 3, 2015

                  

Revenue, net 1

   $ 268.1       $ 338.5       $ 139.9       $ 15.4       $ —        $ (6.3   $ 755.6   

Depreciation and amortization

     32.3         19.4         5.9         0.5         —          —          58.1   

Operating income (loss)

     14.0         8.3         7.0         3.1         (3.8     —          28.6   

Additions to property, plant and equipment

     18.0         8.4         1.5         0.4         —          —          28.3   

For the Nine Months Ended October 3, 2015

                  

Revenue, net 1

   $ 765.4       $ 1,026.2       $ 425.9       $ 44.8       $ —        $ (17.1   $ 2,245.2   

Depreciation and amortization

     94.3         61.3         16.8         1.3         —          —          173.7   

Operating income (loss)

     25.7         33.8         25.5         8.4         (12.0     —          81.4   

Additions to property, plant and equipment

     56.8         20.1         7.7         0.9         —          —          85.5   

As of January 2, 2016

                  

Total assets 2

     1,513.1         943.1         402.5         28.6         —          —          2,887.3   

 

1. Intersegment revenue between Cott North America and the other reporting segments was $6.3 million and $17.1 million for the three and nine months ended October 3, 2015, respectively.
2. Excludes intersegment receivables, investments and notes receivable.

For the three and nine months ended October 1, 2016, sales to Walmart accounted for 14.4% and 16.6% of our total revenue (October  3, 2015 – 17.9%  and  18.1%),  1.4%  and  1.8%  of  our  Water  &  Coffee  Solutions  reporting  segment  revenue  (October 3, 2015 – 2.2% and 2.2%), 33.9% and 33.8% of our Cott North America reporting segment revenue (October 3, 2015 – 33.3% and 32.9%), 9.6% and 10.1% of our Cott U.K. reporting segment revenue (October 3, 2015 – 11.4% and 11.8%), and 3.6% and 2.5% of our All Other reporting segment revenue (October 3, 2015 – 5.4% and 4.1%).

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.

 

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Revenues by channel by reporting segment were as follows:

 

     For the Three Months Ended October 1, 2016  
     Water &      Cott                             
     Coffee      North      Cott      All               

(in millions of U.S. dollars)

   Solutions      America      U.K.      Other      Eliminations     Total  

Revenue, net

                

Private label retail

   $ 21.6       $ 263.9       $ 52.2       $ 1.0       $ (0.4   $ 338.3   

Branded retail

     21.3         25.4         32.9         0.7         (0.3     80.0   

Contract packaging

     —           30.7         25.2         3.9         (1.9     57.9   

Home and office bottled water delivery

     235.9         —           —           —           —          235.9   

Coffee and tea services

     110.9         —           2.0         —           —          112.9   

Concentrate and other

     46.8         6.2         3.8         6.3         (3.0     60.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 436.5       $ 326.2       $ 116.1       $ 11.9       $ (5.6   $ 885.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     For the Nine Months Ended October 1, 2016  
     Water &      Cott                             
     Coffee      North      Cott      All               

(in millions of U.S. dollars)

   Solutions      America      U.K.      Other      Eliminations     Total  

Revenue, net

                

Private label retail

   $ 59.2       $ 793.3       $ 158.2       $ 2.6       $ (1.1   $ 1,012.2   

Branded retail

     68.5         77.0         111.2         2.5         (1.0     258.2   

Contract packaging

     —           97.8         84.5         13.6         (6.5     189.4   

Home and office bottled water delivery

     575.1         —           —           —           —          575.1   

Coffee and tea services

     172.4         —           2.0         —           —          174.4   

Concentrate and other

     94.3         20.6         13.1         21.6         (10.4     139.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 969.5       $ 988.7       $ 369.0       $ 40.3       $ (19.0   $ 2,348.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     For the Three Months Ended October 3, 2015  
     Water &      Cott                             
     Coffee      North      Cott      All               

(in millions of U.S. dollars)

   Solutions      America      U.K.      Other      Eliminations     Total  

Revenue, net

                

Private label retail

   $ 17.0       $ 270.4       $ 65.1       $ 0.9       $ (0.4   $ 353.0   

Branded retail

     22.9         30.0         41.6         0.9         (0.3     95.1   

Contract packaging

     —           31.1         30.3         5.7         (2.4     64.7   

Home and office bottled water delivery

     173.3         —           —           —           —          173.3   

Coffee and tea services

     28.1         —           0.8         —           —          28.9   

Concentrate and other

     26.8         7.0         2.1         7.9         (3.2     40.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 268.1       $ 338.5       $ 139.9       $ 15.4       $ (6.3   $ 755.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     For the Nine Months Ended October 3, 2015  
     Water &      Cott                             
     Coffee      North      Cott      All               

(in millions of U.S. dollars)

   Solutions      America      U.K.      Other      Eliminations     Total  

Revenue, net

                

Private label retail

   $ 49.7       $ 827.8       $ 197.4       $ 3.7       $ (1.6   $ 1,077.0   

Branded retail

     63.2         87.9         130.0         3.3         (1.2     283.2   

Contract packaging

     —           88.0         89.6         16.4         (4.0     190.0   

Home and office bottled water delivery

     487.7         —           —           —           —          487.7   

Coffee and tea services

     89.8         —           2.4         —           —          92.2   

Concentrate and other

     75.0         22.5         6.5         21.4         (10.3     115.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 765.4       $ 1,026.2       $ 425.9       $ 44.8       $ (17.1   $ 2,245.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Note 7—Inventories

The following table summarizes inventories as of October 1, 2016 and January 2, 2016:

 

(in millions of U.S. dollars)

   October 1, 2016      January 2, 2016  

Raw materials

   $ 123.0       $ 95.3   

Finished goods

     152.1         118.4   

Resale items

     19.8         15.8   

Other

     25.2         19.9   
  

 

 

    

 

 

 

Total

   $ 320.1       $ 249.4   
  

 

 

    

 

 

 

Note 8—Intangibles and Other Assets

The following table summarizes intangibles and other assets as of October 1, 2016 and January 2, 2016:

 

     October 1, 2016      January 2, 2016  
            Accumulated                    Accumulated         

(in millions of U.S. dollars)

   Cost      Amortization      Net      Cost      Amortization      Net  

Intangibles

                 

Not subject to amortization

                 

Rights 1

   $ 45.0       $ —         $ 45.0       $ 45.0       $ —         $ 45.0   

Trademarks

     256.2         —           256.2         183.1         —           183.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total intangibles not subject to amortization

     301.2         —           301.2         228.1         —           228.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subject to amortization

                 

Customer relationships

     925.8         287.5         638.3         663.9         241.0         422.9   

Trademarks

     32.0         28.0         4.0         33.0         28.1         4.9   

Information technology

     64.3         35.2         29.1         54.0         29.1         24.9   

Other

     10.4         5.0         5.4         7.8         4.5         3.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total intangibles subject to amortization

     1,032.5         355.7         676.8         758.7         302.7         456.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Intangibles

     1,333.7         355.7         978.0         986.8         302.7         684.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Assets

                 

Financing costs

     13.6         8.2         5.4         12.6         8.5         4.1   

Deposits

     11.4         0.4         11.0         10.3         0.4         9.9   

Other

     27.6         2.1         25.5         15.2         1.6         13.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Assets

     52.6         10.7         41.9         38.1         10.5         27.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Intangibles and Other Assets

   $ 1,386.3       $ 366.4       $ 1,019.9       $ 1,024.9       $ 313.2       $ 711.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1. Relates to the 2001 acquisition of intellectual property from Royal Crown Company, Inc., including the right to manufacture our concentrates, with all related inventions, processes, technologies, technical and manufacturing information, know-how and the use of the Royal Crown brand outside of North America and Mexico.

 

 

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Amortization expense of intangibles and other assets was $22.8 million and $61.1 million for the three and nine months ended October 1, 2016, compared to $19.9 million and $58.7 million for the three and nine months ended October 3, 2015, respectively.

The estimated amortization expense for intangibles over the next five years is:

 

(in millions of U.S. dollars)

      

Remainder of 2016

   $ 22.5   

2017

     86.2   

2018

     82.3   

2019

     72.7   

2020

     65.3   

Thereafter

     347.8   
  

 

 

 

Total

   $ 676.8   
  

 

 

 

Note 9—Accounts Payable and Accrued Liabilities

The following table summarizes accounts payable and accrued liabilities as of October 1, 2016 and January 2, 2016:

 

(in millions of U.S. dollars)

   October 1, 2016      January 2, 2016  

Trade payables

   $ 297.7       $ 227.2   

Accrued compensation

     68.3         49.8   

Accrued sales incentives

     23.0         25.2   

Accrued interest

     28.0         12.2   

Payroll, salaries and other taxes

     23.4         13.3   

Accrued deposits

     55.3         28.6   

Other accrued liabilities

     103.0         81.3   
  

 

 

    

 

 

 

Total

   $ 598.7       $ 437.6   
  

 

 

    

 

 

 

Note 10—Debt

Our total debt as of October 1, 2016 and January 2, 2016 was as follows:

 

     October 1, 2016      January 2, 2016  
            Unamortized                    Unamortized         
            Debt                    Debt         

(in millions of U.S. dollars)

   Principal      Costs      Net      Principal      Costs      Net  

6.750% senior notes due in 2020

   $ 625.0       $ 10.1       $ 614.9       $ 625.0       $ 12.0       $ 613.0   

10.000% senior notes due in 20211

     385.7         —           385.7         390.1         —           390.1   

5.375% senior notes due in 2022

     525.0         7.4         517.6         525.0         8.2         516.8   

5.500% senior notes due in 2024

     504.5         10.1         494.4         —           —           —     

ABL facility

     264.1         —           264.1         122.0         —           122.0   

GE Term Loan

     4.8         0.2         4.6         6.4         0.4         6.0   

Capital leases and other debt financing

     6.9         —           6.9         2.9         —           2.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

     2,316.0         27.8         2,288.2         1,671.4         20.6         1,650.8   

 

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Less: Short-term borrowings and current debt:    

                 

ABL facility

     264.1         —           264.1         122.0         —           122.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total short-term borrowings

     264.1         —           264.1         122.0         —           122.0   

GE Term Loan - current maturities

     2.2         —           2.2         2.2         —           2.2   

Capital leases and other debt financing - current maturities

     2.8         —           2.8         1.2         —           1.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current debt

     269.1         —           269.1         125.4         —           125.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 2,046.9       $ 27.8       $ 2,019.1       $ 1,546.0       $ 20.6       $ 1,525.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1. The outstanding aggregate principal amount of $350.0 million of our 10.000% senior secured notes (“DSS Notes”) was assumed by Cott at a fair value of $406.0 million in connection with Cott’s acquisition of DSS. The premium of $56.0 million is being amortized as an adjustment to interest expense using the effective interest method over the remaining contractual term of the DSS Notes. The remaining unamortized premium is $35.7 million and $40.1 million at October 1, 2016 and January 2, 2016, respectively.

Asset-Based Lending Facility

On June 7, 2016, in connection with the Eden Acquisition, we amended the ABL facility to permit, among other things, (1) the Eden Acquisition, (2) issuance of the 2024 Notes to finance the Eden Acquisition, (3) the sale and leaseback of certain property located in the United Kingdom, and (4) certain other miscellaneous and technical changes.

On August 3, 2016, we amended and restated the ABL facility. As amended and restated, the ABL facility is a five-year revolving facility of up to $500 million and subject to certain conditions, may be increased by up to an additional $100 million at our option if agreed upon by the lenders. The ABL facility provides the Company and its subsidiaries, Cott Beverages Inc. (“CBI”), Cott Beverages Limited, DSS, Cliffstar LLC and S&D, with financing in the United States, Canada, the United Kingdom, Luxembourg and the Netherlands. JPMorgan Chase Bank, N.A. serves as administrative agent and administrative collateral agent and JPMorgan Chase Bank, N.A., London Branch serves as U.K. security trustee. Availability under the ABL facility is dependent on a borrowing base calculated as a percentage of the value of eligible inventory, accounts receivable and property, plant and equipment in the manner set forth in the credit agreement governing the ABL facility. The debt under the ABL facility is guaranteed by most of the Company’s U.S., Canadian, U.K. and Luxembourg subsidiaries and certain of the Company’s Dutch subsidiaries. We incurred approximately $2.3 million of financing fees in connection with the ABL facility and are being amortized using the straight-line method over the duration of the ABL facility.

Debt Issuance

On June 30, 2016, we issued €450.0 million (U.S. $504.5 million at exchange rates in effect on October 1, 2016) of our 2024 Notes to qualified purchasers in a private placement offering under Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. purchasers pursuant to Regulation S under the Securities Act and other applicable laws. The 2024 Notes were initially issued by our wholly-owned subsidiary Cott Finance Corporation. In connection with the closing of the Eden Acquisition, Cott Finance Corporation amalgamated with the Company and the combined company, “Cott Corporation”, assumed all of the obligations of Cott Finance Corporation under the 2024 Notes, and most of Cott’s U.S., Canadian, U.K. Luxembourg and Dutch subsidiaries that are currently obligors under the 2022 Notes and the 2020 Notes entered into a supplemental indenture to guarantee the 2024 Notes. The 2024 Notes will mature on July 1, 2024 and interest is payable semi-annually on January 1st and July 1st of each year commencing on January 1, 2017. The proceeds of the 2024 Notes were used to fund a portion of the purchase price of the Eden Acquisition and to pay related fees and expenses.

We incurred approximately $10.3 million of financing fees for the issuance of the 2024 Notes and $10.6 million of bridge financing commitment fees and professional fees in connection with the Eden Acquisition. The financing fees are being amortized using the effective interest method over an eight-year period, which represents the term to maturity of the 2024 Notes. The bridge financing commitment fees and professional fees were recorded in SG&A expenses in our consolidated statements of operations.

 

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Note 11—Accumulated Other Comprehensive (Loss) Income

Changes in accumulated other comprehensive (loss) income (“AOCI”) by component for the nine months ended October 1, 2016 were as follows:

 

     October 1, 2016  
     Gains and Losses     Pension     Currency        
     on Derivative     Benefit     Translation        

(in millions of U.S. dollars)1

   Instruments     Plan Items     Adjustment Items     Total  

Beginning balance January 2, 2016

   $ (4.7   $ (10.1   $ (61.4   $ (76.2
  

 

 

   

 

 

   

 

 

   

 

 

 

OCI before reclassifications

     7.4        —          (23.8     (16.4

Amounts reclassified from AOCI

     (3.6     0.2        —          (3.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period OCI

     3.8        0.2        (23.8     (19.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance October 1, 2016

   $ (0.9   $ (9.9   $ (85.2   $ (96.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

1. All amounts are net of tax.

The following table summarizes the amounts reclassified from AOCI for the three and nine months ended October 1, 2016 and October 3, 2015, respectively.

 

(in millions of U.S. dollars)

   For the Three Months Ended     For the Nine Months Ended     Affected Line Item in  
Details About AOCI    October 1,     October 3,     October 1,     October 3,     the Statement Where  

Components1

   2016     2015     2016     2015     Net Income Is Presented  

Gains and losses on derivative instruments

          

Foreign currency and commodity hedges

   $ 1.5      $ (0.9   $ 5.5      $ (0.7     Cost of sales   
     (0.6     0.4        (1.9     0.4        Tax (expense) benefit   
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ 0.9      $ (0.5   $ 3.6      $ (0.3     Net of tax   
  

 

 

   

 

 

   

 

 

   

 

 

   

Amortization of pension benefit plan items

          

Prior service costs 2

   $ —        $ (0.2   $ (0.2   $ (0.7     Cost of sales   
  

 

 

   

 

 

   

 

 

   

 

 

   
     —          (0.2     (0.2     (0.7     Total before taxes   
     —          —          —          —          Tax (expense) benefit   
  

 

 

   

 

 

   

 

 

   

 

 

   
   $ —        $ (0.2   $ (0.2   $ (0.7     Net of tax   
  

 

 

   

 

 

   

 

 

   

 

 

   

Total reclassifications for the period

   $ 0.9      $ (0.7   $ 3.4      $ (1.0     Net of tax   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

1. Amounts in parentheses indicate debits.
2. These AOCI components are included in the computation of net periodic pension cost.

Note 12—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.

We had $42.4 million in standby letters of credit outstanding as of October 1, 2016 (October 3, 2015 - $41.2 million).

In May 2014, our Cott U.K. reporting segment acquired 100% of the share capital of Aimia Foods Holdings Limited (the “Aimia Acquisition”), which included its operating subsidiary company, Aimia Foods Limited (together referred to as “Aimia”) pursuant to a Share Purchase Agreement dated May 30, 2014. The terms of the transaction included aggregate contingent consideration of up to £16.0 million, which is payable upon achievement of certain measures related to Aimia’s performance during the twelve months ended July 1, 2016. The final aggregate contingent consideration was calculated to be £12.0 million and was paid during the third quarter of 2016, offset by an existing liability of £3.9 million, for a total cash payment of £8.1 million (U.S. $10.6 million at exchange rates in effect on date of payment).

 

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Note 13—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 and swap agreements for certain commodities. Forward contracts are agreements to buy or sell a quantity of a currency at a predetermined future date, and at a predetermined rate or price. A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices.

All derivatives are carried at fair value in the consolidated balance sheets in the line item accounts receivable, net or accounts payable and accrued liabilities. The carrying values of the derivatives reflect the impact of legally enforceable agreements with the same counterparties. These 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 with 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 effective at offsetting changes in either the fair values or cash flows of the related underlying exposures. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized into earnings.

We estimate the fair values of our derivatives based on quoted market prices or pricing models using current market rates (see Note 14 to the consolidated financial statements). The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or other financial indices. We do not view the fair values of our derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying hedged transactions. All of our derivatives are over-the-counter instruments with liquid markets.

Credit Risk Associated with Derivatives

We have established strict counterparty credit guidelines and enter into transactions only with financial institutions of investment grade or better. We monitor counterparty exposures regularly and review promptly any downgrade in counterparty credit rating. We mitigate pre-settlement risk by being permitted to net settle for transactions with the same counterparty. To minimize the concentration of credit risk, we enter into derivative transactions with a portfolio of financial institutions. Based on these factors, we consider the risk of counterparty default to be minimal.

Cash Flow Hedging Strategy

We use cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates and 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

 

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hedging relationships during the nine months ended October 1, 2016 or October 3, 2015, respectively. Foreign exchange contracts typically have maturities of less than twelve months and commodity contracts typically have maturities of less than 27 months. All outstanding hedges as of October 1, 2016 are expected to settle in the next twelve months.

We maintain a foreign currency cash flow hedging program to reduce the risk that our procurement activities will be adversely affected by changes in foreign currency exchange rates. We enter into forward contracts to hedge certain portions of forecasted cash flows denominated in foreign currencies. The total notional values of derivatives that were designated and qualified for our foreign currency cash flow hedging program were $12.8 million and $4.5 million as of October 1, 2016 and January 2, 2016, respectively. Approximately $0.4 million of unrealized losses net of tax and $0.8 million of unrealized gains net of tax related to the foreign currency cash flow hedges were included in AOCI as of October 1, 2016 and October 3, 2015, respectively. The hedge ineffectiveness for these cash flow hedging instruments was not material during the periods presented.

We have entered into commodity swaps on aluminum to mitigate the price risk associated with forecasted purchases of materials used in our manufacturing process. These derivative instruments have been designated and qualify as a part of our commodity cash flow hedging program. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of aluminum. The total notional values of derivatives that were designated and qualified for our commodity cash flow hedging program were $11.6 million and $49.3 million as of October 1, 2016 and January 2, 2016, respectively. Approximately $0.5 million and $5.7 million of unrealized losses net of tax related to the commodity swaps were included in AOCI as of October 1, 2016 and October 3, 2015, respectively. The cumulative hedge ineffectiveness for these hedging instruments was not material for the nine months ended October 1, 2016 and October 3, 2015, respectively.

We have entered into forward and option contracts designed to mitigate the price risk associated with forecasted purchases of green coffee used in our manufacturing process. These derivative instruments have not been designated and do not qualify as a part of our commodity cash flow hedging program. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of green coffee. The notional values for the coffee derivative instruments that did not designate and qualify for our commodity cash flow hedging program was $57.5 million and nil as of October 1, 2016 and January 2, 2016, respectively. Approximately $1.0 million of unrealized gains net of tax related to the coffee derivate instruments were recognized into other (income) expense, net in the consolidated statement of operations for the three and nine months ended October 1, 2016, respectively, compared with nil for the comparable prior year period.

The fair value of the Company’s derivative assets included within other receivables as a component of accounts receivable, net was $4.7 million and $0.6 million as of October 1, 2016 and January 2, 2016, respectively. The fair value of the Company’s derivative liabilities included in accrued liabilities was $1.2 million and $8.0 million as of October 1, 2016 and January 2, 2016, respectively. Set forth below is a reconciliation of the Company’s derivatives by contract type for the periods indicated:

 

(in millions of U.S. dollars)

   October 1, 2016      January 2, 2016  

Derivative Contract

  

Assets

     Liabilities      Assets      Liabilities  

Foreign currency hedge

   $ —         $ 0.4       $ 0.6       $ —     

Aluminum swaps

     0.1         0.8         —           8.0   

Coffee futures

     4.6         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4.7       $ 1.2       $ 0.6       $ 8.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Aluminum swaps subject to enforceable master netting arrangements are presented on a net basis in the reconciliation above. The fair value of the aluminum swap assets and liabilities which are shown on a net basis are reconciled in the table below:

 

(in millions of U.S. dollars)

   October 1, 2016      January 2, 2016  

Aluminum swap assets

   $ 0.1       $ —     

Aluminum swap liabilities

     (0.8      (8.0
  

 

 

    

 

 

 

Net asset (liability)

   $ (0.7    $ (8.0
  

 

 

    

 

 

 

The settlement of our derivative instruments resulted in an increase to cost of sales of $1.5 million and $5.4 million for the three and nine months ended October 1, 2016, respectively, compared with an increase to cost of sales of $0.9 million and $0.7 million for the comparable prior year periods.

 

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Note 14—Fair Value Measurements

ASC No. 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Additionally, the inputs used to measure fair value are prioritized based on a three-level hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:

 

    Level 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 derivative assets was $4.7 million and $0.6 million as of October 1, 2016 and January 2, 2016, respectively. The fair value for the derivative liabilities was $1.2 million and $8.0 million as of October 1, 2016 and January 2, 2016, respectively.

Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred. Other than the transfer of the contingent consideration liability from Level 3 to Level 1 during the nine months ended October 1, 2016, no transfers between levels occurred during the three and nine months ended October 1, 2016 and October 3, 2015.

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 October 1, 2016 and January 2, 2016 were as follows:

 

     October 1, 2016      January 2, 2016  
     Carrying      Fair      Carrying      Fair  

(in millions of U.S. dollars)

   Value      Value      Value      Value  

6.750% senior notes due in 2020 1, 3

     614.9         651.6         613.0         641.4   

10.000% senior notes due in 2021 1, 2

     385.7         390.3         390.1         397.3   

5.375% senior notes due in 2022 1, 3

     517.6         540.8         516.8         522.4   

5.500% senior notes due in 2024 1, 3

     494.4         531.6         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,012.6       $ 2,114.3       $ 1,519.9       $ 1,561.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

1. The fair values were based on the trading levels and bid/offer prices observed by a market participant and are considered Level 1 financial instruments.
2. The outstanding aggregate principal amount of $350.0 million of our DSS Notes was assumed by Cott at a fair value of $406.0 million in connection with Cott’s acquisition of DSS. The premium of $56.0 million is being amortized as an adjustment to interest expense using the effective interest method over the remaining contractual term of the DSS Notes. The remaining unamortized premium is $35.7 million and $40.1 million at October 1, 2016 and January 2, 2016, respectively.
3. The carrying value of our significant outstanding debt is net of unamortized debt issuance costs of $27.8 million and $20.6 million as of October 1, 2016 and January 2, 2016, respectively.

 

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Note 15—Guarantor Subsidiaries

Guarantor Subsidiaries of DSS Notes

The DSS Notes assumed as part of the acquisition of DSS are guaranteed on a senior secured basis by Cott Corporation and certain of its 100% owned direct and indirect subsidiaries (the “DSS Guarantor Subsidiaries”). DSS and each DSS Guarantor Subsidiary is 100% owned by Cott Corporation. The DSS Notes are fully and unconditionally, jointly and severally, guaranteed by Cott Corporation and the DSS Guarantor Subsidiaries. The Indenture governing the DSS Notes (“DSS Indenture”) requires any 100% owned domestic restricted subsidiary (i) that guarantees or becomes a borrower under the Credit Agreement (as defined in the DSS Indenture) or the ABL facility or (ii) that guarantees any other indebtedness of Cott Corporation, DSS or any of the DSS Guarantor Subsidiaries (other than junior lien obligations) secured by collateral (other than Excluded Property (as defined in the DSS Indenture)) to guarantee the DSS Notes. The guarantees of Cott Corporation and the DSS Guarantor Subsidiaries may be released in limited circumstances only upon the occurrence of certain customary conditions set forth in the Indenture governing the DSS Notes.

We have not presented separate financial statements and separate disclosures have not been provided concerning the DSS Guarantor Subsidiaries due to the presentation of condensed consolidating financial information set forth in this Note, consistent with Securities and Exchange Commission (“SEC”) rules governing reporting of subsidiary financial information.

The following summarized condensed consolidating financial information of the Company sets forth on a consolidating basis: our Balance Sheets, Statements of Operations and Cash Flows for Cott Corporation, DSS, the DSS Guarantor Subsidiaries and our other non-guarantor subsidiaries (the “DSS Non-Guarantor Subsidiaries”). This supplemental financial information reflects our investments and those of DSS in their respective subsidiaries using the equity method of accounting.

The 2024 Notes were initially issued on June 30, 2016 by Cott Finance Corporation, which was not a DSS Guarantor Subsidiary. Cott Finance Corporation was declared an unrestricted subsidiary under the Indenture governing the DSS Notes. As a result, such entity is reflected as a DSS Non-Guarantor Subsidiary in the following summarized condensed consolidating financial information through August 2, 2016. Substantially simultaneously with the closing of the acquisition of Eden on August 2, 2016, Cott Finance Corporation combined with Cott Corporation by way of an amalgamation and the combined company, “Cott Corporation,” assumed all of the obligations of Cott Finance Corporation as issuer under the 2024 Notes, and Cott Corporation’s U.S., Canadian, U.K., Luxembourg and Dutch subsidiaries that are currently obligors under the 2022 Notes and the 2020 Notes (including Cott Beverages Inc.) entered into a supplemental indenture to guarantee the 2024 Notes. Currently, the obligors under the 2024 Notes are different than the obligors under the DSS Notes, but identical to the obligors under the 2022 Notes and the 2020 Notes. The 2024 Notes are listed on the official list of the Irish Stock Exchange and are traded on the Global Exchange Market thereof.

 

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Condensed Consolidating Statements of Operations

 

(in millions of U.S. dollars)

Unaudited

 

     For the Three Months Ended October 1, 2016  
                 DSS     DSS              
     Cott     DS Services of     Guarantor     Non-Guarantor     Elimination        
     Corporation     America, Inc.     Subsidiaries     Subsidiaries     Entries     Consolidated  

Revenue, net

   $ 42.9      $ 262.2      $ 495.8      $ 99.8      $ (15.6   $ 885.1   

Cost of sales

     35.2        101.2        409.9        48.6        (15.6     579.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     7.7        161.0        85.9        51.2        —          305.8   

Selling, general and administrative expenses

     6.3        143.9        69.1        43.7        —          263.0   

(Gain) loss on disposal of property, plant & equipment, net

     (0.8     1.6        —          —          —          0.8   

Acquisition and integration expenses

     —          (1.4     7.4        1.4        —          7.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2.2        16.9        9.4        6.1        —          34.6   

Other (income) expense, net

     (2.4     (0.3     (1.6     1.1        —          (3.2

Intercompany interest expense (income), net

     —          10.8        (10.8     —          —          —     

Interest expense (income), net

     7.4        7.4        19.8        (0.2     —          34.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax expense (benefit) and equity income

     (2.8     (1.0     2.0        5.2        —          3.4   

Income tax expense (benefit)

     8.6        (0.2     (3.0     0.4        —          5.8   

Equity income

     7.5        —          1.7        —          (9.2     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (3.9   $ (0.8   $ 6.7      $ 4.8      $ (9.2   $ (2.4

Less: Net income attributable to non-controlling interests

     —          —          —          1.5        —          1.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributed to Cott Corporation

   $ (3.9   $ (0.8   $ 6.7      $ 3.3      $ (9.2   $ (3.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributed to Cott Corporation

   $ (9.1   $ (0.8   $ 110.3      $ 7.2      $ (116.7   $ (9.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statements of Operations

 

(in millions of U.S. dollars)

Unaudited

 

     For the Nine Months Ended October 1, 2016  
                 DSS     DSS              
     Cott     DS Services of     Guarantor     Non-Guarantor     Elimination        
     Corporation     America, Inc.     Subsidiaries     Subsidiaries     Entries     Consolidated  

Revenue, net

   $ 124.9      $ 764.3      $ 1,339.9      $ 163.5      $ (44.1   $ 2,348.5   

Cost of sales

     103.8        297.5        1,118.7        100.2        (44.1     1,576.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     21.1        466.8        221.2        63.3        —          772.4   

Selling, general and administrative expenses

     28.6        422.3        161.8        49.4        —          662.1   

(Gain) loss on disposal of property, plant & equipment, net

     (0.8     4.8        (0.1     —          —          3.9   

Acquisition and integration expenses

     —          0.6        18.5        1.4        —          20.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (6.7     39.1        41.0        12.5        —          85.9   

Other (income) expense, net

     (2.2     (1.6     0.2        1.2        —          (2.4

Intercompany interest expense (income), net

     —          32.4        (32.4     —          —          —     

Interest expense (income), net

     7.8        22.0        59.6        (0.2     —          89.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax expense (benefit) and equity income

     (12.3     (13.7     13.6        11.5        —          (0.9

Income tax expense (benefit)

     8.6        (4.8     (9.8     0.5        —          (5.5

Equity income

     21.1        —          5.0        —          (26.1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 0.2      $ (8.9   $ 28.4      $ 11.0      $ (26.1   $ 4.6   

Less: Net income attributable to non-controlling interests

     —          —          —          4.4        —          4.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributed to Cott Corporation

   $ 0.2      $ (8.9   $ 28.4      $ 6.6      $ (26.1   $ 0.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributed to Cott Corporation

   $ (19.6   $ (8.9   $ 216.5      $ 10.6      $ (218.2   $ (19.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statements of Operations

 

(in millions of U.S. dollars)

Unaudited

 

     For the Three Months Ended October 3, 2015  
                 DSS     DSS              
     Cott     DS Services of     Guarantor     Non-Guarantor     Elimination        
     Corporation     America, Inc.     Subsidiaries     Subsidiaries     Entries     Consolidated  

Revenue, net

   $ 37.0      $ 268.1      $ 431.3      $ 33.3      $ (14.1   $ 755.6   

Cost of sales

     31.4        104.3        375.2        26.3        (14.1     523.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5.6        163.8        56.1        7.0        —          232.5   

Selling, general and administrative expenses

     6.0        142.5        44.2        3.5        —          196.2   

Loss on disposal of property, plant & equipment

     —          0.9        0.2        —          —          1.1   

Acquisition and integration expenses

     —          6.4        0.2        —          —          6.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (0.4     14.0        11.5        3.5        —          28.6   

Other expense (income), net

     0.8        (0.6     0.3        0.1        —          0.6   

Intercompany interest expense (income), net

     —          10.8        (10.8     —          —          —     

Interest expense, net

     —          7.4        20.0        —          —          27.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax benefit and equity income

     (1.2     (3.6     2.0        3.4        —          0.6   

Income tax benefit

     (0.2     (1.2     (4.3     (0.1     —          (5.8

Equity income

     5.8        —          1.0        —          (6.8     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4.8      $ (2.4   $ 7.3      $ 3.5      $ (6.8   $ 6.4   

Less: Net income attributable to non-controlling interests

     —          —          —          1.6        —          1.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributed to Cott Corporation

   $ 4.8      $ (2.4   $ 7.3      $ 1.9      $ (6.8   $ 4.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributed to Cott Corporation

   $ (8.9   $ (2.4   $ (19.8   $ 3.9      $ 18.3      $ (8.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

Condensed Consolidating Statements of Operations

 

(in millions of U.S. dollars)

Unaudited

 

     For the Nine Months Ended October 3, 2015  
                 DSS     DSS               
     Cott     DS Services of     Guarantor     Non-Guarantor      Elimination        
     Corporation     America, Inc.     Subsidiaries     Subsidiaries      Entries     Consolidated  

Revenue, net

   $ 113.9      $ 765.4      $ 1,307.1      $ 103.0       $ (44.2   $ 2,245.2   

Cost of sales

     96.8        305.5        1,129.6        83.1         (44.2     1,570.8   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     17.1        459.9        177.5        19.9         —          674.4   

Selling, general and administrative expenses

     16.4        418.8        130.1        9.6         —          574.9   

Loss (gain) on disposal of property, plant & equipment

     —          2.9        (0.2     —           —          2.7   

Acquisition and integration expenses

     —          12.5        2.9        —           —          15.4   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     0.7        25.7        44.7        10.3         —          81.4   

Other (income) expense, net

     (9.0     (1.0     1.1        0.1         —          (8.8

Intercompany interest (income) expense, net

     (4.9     32.7        (27.8     —           —          —     

Interest expense, net

     0.1        22.2        60.7        —           —          83.0   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax expense (benefit) and equity income

     14.5        (28.2     10.7        10.2         —          7.2   

Income tax expense (benefit)

     2.8        (10.2     (9.0     0.1         —          (16.3

Equity income

     7.2        —          4.0        —           (11.2     —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 18.9      $ (18.0   $ 23.7      $ 10.1       $ (11.2   $ 23.5   

Less: Net income attributable to non-controlling interests

     —          —          —          4.6         —          4.6   

Less: Accumulated dividends on convertible preferred shares

     4.5        —          —          —           —          4.5   

Less: Accumulated dividends on non-convertible preferred shares

     1.4        —          —          —           —          1.4   

Less: Foreign exchange impact on redemption of preferred shares

     12.0        —          —          —           —          12.0   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) attributed to Cott Corporation

   $ 1.0      $ (18.0   $ 23.7      $ 5.5       $ (11.2   $ 1.0   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive (loss) income attributed to Cott Corporation

   $ (16.3   $ (18.0   $ 23.7      $ 8.7       $ (14.4   $ (16.3
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

31


Table of Contents

Consolidating Balance Sheets

 

(in millions of U.S. dollars)

Unaudited

 

     As of October 1, 2016  
                 DSS     DSS              
     Cott     DS Services of     Guarantor     Non-Guarantor     Elimination        
     Corporation     America, Inc.     Subsidiaries     Subsidiaries     Entries     Consolidated  

ASSETS

            

Current assets

            

Cash & cash equivalents

   $ 1.3      $ 35.4      $ 40.3      $ 41.9      $ —        $ 118.9   

Accounts receivable, net of allowance

     24.5        121.4        281.6        112.6        (76.8     463.3   

Income taxes recoverable

     0.1        0.7        0.1        0.3        (0.6     0.6   

Inventories

     14.3        28.8        249.4        27.6        —          320.1   

Prepaid expenses and other assets

     1.0        10.2        15.9        6.8        —          33.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     41.2        196.5        587.3        189.2        (77.4     936.8   

Property, plant & equipment, net

     29.0        377.3        440.4        104.7        —          951.4   

Goodwill

     20.8        581.6        303.8        280.5        —          1,186.7   

Intangibles and other assets, net

     11.6        379.1        402.9        226.3        —          1,019.9   

Deferred tax assets

     —          —          47.4        19.6        (47.4     19.6   

Due from affiliates

     992.6        —          544.3        —          (1,536.9     —     

Investments in subsidiaries

     446.7        —          400.1        —          (846.8     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,541.9      $ 1,534.5      $ 2,726.2      $ 820.3      $ (2,508.5   $ 4,114.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities

            

Short-term borrowings

   $ —        $ —        $ 264.1      $ —        $ —        $ 264.1   

Current maturities of long-term debt

     —          —          3.0        2.0        —          5.0   

Accounts payable and accrued liabilities

     63.6        158.1        321.6        132.8        (77.4     598.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     63.6        158.1        588.7        134.8        (77.4     867.8   

Long-term debt

     504.5        385.7        1,126.0        2.9        —          2,019.1   

Deferred tax liabilities

     1.0        92.9        67.1        55.8        (47.4     169.4   

Other long-term liabilities

     0.5        36.4        36.7        8.2        —          81.8   

Due to affiliates

     1.1        543.3        471.3        521.2        (1,536.9     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     570.7        1,216.4        2,289.8        722.9        (1,661.7     3,138.1   

Equity

            

Common shares, no par

     907.4        355.4        645.5        149.7        (1,150.6     907.4   

Additional paid-in-capital

     53.1        —          —          —          —          53.1   

Retained earnings (deficit)

     106.7        (37.1     (411.5     (70.4     519.0        106.7   

Accumulated other comprehensive (loss) income

     (96.0     (0.2     202.4        13.0        (215.2     (96.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cott Corporation equity

     971.2        318.1        436.4        92.3        (846.8     971.2   

Non-controlling interests

     —          —          —          5.1        —          5.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     971.2        318.1        436.4        97.4        (846.8     976.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,541.9      $ 1,534.5      $ 2,726.2      $ 820.3      $ (2,508.5   $ 4,114.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

Consolidating Balance Sheets

 

(in millions of U.S. dollars)

 

     As of January 2, 2016  
                 DSS     DSS              
     Cott     DS Services of     Guarantor     Non-Guarantor     Elimination        
     Corporation     America, Inc.     Subsidiaries     Subsidiaries     Entries     Consolidated  

ASSETS

            

Current assets

            

Cash & cash equivalents

   $ 20.8      $ 12.8      $ 38.4      $ 5.1      $ —        $ 77.1   

Accounts receivable, net of allowance

     18.3        122.6        184.6        13.0        (45.2     293.3   

Income taxes recoverable

     —          0.5        0.9        0.2        —          1.6   

Inventories

     13.0        31.4        199.4        5.6        —          249.4   

Prepaid expenses and other assets

     2.2        4.8        10.0        0.2        —          17.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     54.3        172.1        433.3        24.1        (45.2     638.6   

Property, plant & equipment, net

     29.7        372.6        360.8        6.7        —          769.8   

Goodwill

     19.8        579.1        160.7        —          —          759.6   

Intangibles and other assets, net

     0.8        402.5        305.6        2.8        —          711.7   

Deferred tax assets

     7.4        —          38.2        0.2        (38.2     7.6   

Due from affiliates

     400.1        —          544.3        —          (944.4     —     

Investments in subsidiaries

     176.3        —          400.0        —          (576.3     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 688.4      $ 1,526.3      $ 2,242.9      $ 33.8      $ (1,604.1   $ 2,887.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities

            

Short-term borrowings

   $ —        $ —        $ 122.0      $ —        $ —        $ 122.0   

Current maturities of long-term debt

     —          —          3.0        0.4        —          3.4   

Accounts payable and accrued liabilities

     47.6        131.8        295.1        8.3        (45.2     437.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     47.6        131.8        420.1        8.7        (45.2     563.0   

Long-term debt

     —          390.1        1,135.3        —          —          1,525.4   

Deferred tax liabilities

     —          97.7        17.0        —          (38.2     76.5   

Other long-term liabilities

     0.5        36.2        38.7        1.1        —          76.5   

Due to affiliates

     1.0        543.3        371.9        28.2        (944.4     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     49.1        1,199.1        1,983.0        38.0        (1,027.8     2,241.4   

Equity

            

Common shares, no par

     534.7        355.5        683.1        38.6        (1,077.2     534.7   

Additional paid-in-capital

     51.2        —          —          —          —          51.2   

Retained earnings (deficit)

     129.6        (28.1     (437.5     (58.4     524.0        129.6   

Accumulated other comprehensive (loss) income

     (76.2     (0.2     14.3        9.0        (23.1     (76.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cott Corporation equity

     639.3        327.2        259.9        (10.8     (576.3     639.3   

Non-controlling interests

     —          —          —          6.6        —          6.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     639.3        327.2        259.9        (4.2     (576.3     645.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 688.4      $ 1,526.3      $ 2,242.9      $ 33.8      $ (1,604.1   $ 2,887.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

Consolidating Statements of Condensed Cash Flows

 

(in millions of U.S. dollars)

Unaudited

 

     For the Three Months Ended October 1, 2016  
                 DSS     DSS              
     Cott     DS Services of     Guarantor     Non-Guarantor     Elimination        
     Corporation     America, Inc.     Subsidiaries     Subsidiaries     Entries     Consolidated  

Net cash provided by (used in) operating activities

   $ 250.7      $ 32.8      $ (233.2   $ 57.8      $ (16.5   $ 91.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing Activities

            

Acquisitions, net of cash received

     (911.3     (1.2     —          —          —          (912.5

Additions to property, plant & equipment

     (0.4     (21.5     (12.4     (4.4     —          (38.7

Additions to intangibles and other assets

     —          (1.2     (0.5     —          —          (1.7

Proceeds from sale of property, plant & equipment

     0.8        0.1        0.3        0.4        —          1.6   

Proceeds from insurance recoveries

     —          —          1.4        —          —          1.4   

Decrease in restricted cash

     2.8        —          —          —          —          2.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (908.1     (23.8     (11.2     (4.0     —          (947.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

            

Payments of long-term debt

     —          —          (1.2     (0.6     —          (1.8

Issue of long-term debt

     498.7        —          —          —          —          498.7   

Borrowings under ABL

     —          —          814.5        —          —          814.5   

Payments under ABL

     —          —          (550.6     —          —          (550.6

Distributions to non-controlling interests

     —          —          —          (2.7     —          (2.7

Issuance of common shares

     2.4        —          —          —          —          2.4   

Financing fees

     (11.9     —          —          —          —          (11.9

Common shares repurchased and cancelled

     (3.4     —          —          —          —          (3.4

Dividends paid to common shareowners

     (8.4     —          —          —          —          (8.4

Payment of deferred consideration for acquisitions

     —          —          (10.8     —          —          (10.8

Intercompany dividends

     —          —          —          (16.5     16.5        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     477.4        —          251.9        (19.8     16.5        726.0   

Effect of exchange rate changes on cash

     (1.3     —          (0.4     0.6        —          (1.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash & cash equivalents

     (181.3     9.0        7.1        34.6        —          (130.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash & cash equivalents, beginning of period

     182.6        26.4        33.2        7.3        —          249.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash & cash equivalents, end of period

   $ 1.3      $ 35.4      $ 40.3      $ 41.9      $ —        $ 118.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

Consolidating Statements of Condensed Cash Flows

 

(in millions of U.S. dollars)

Unaudited

 

     For the Nine Months Ended October 1, 2016  
                 DSS     DSS              
     Cott     DS Services of     Guarantor     Non-Guarantor     Elimination        
     Corporation     America, Inc.     Subsidiaries     Subsidiaries     Entries     Consolidated  

Net cash provided by (used in) operating activities

   $ 113.6      $ 88.5      $ (76.3   $ 67.7      $ (33.0   $ 160.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing Activities

            

Acquisitions, net of cash received

     (954.0     (4.7     —          —          —          (958.7

Additions to property, plant & equipment

     (1.3     (59.1     (36.0     (5.0     —          (101.4

Additions to intangibles and other assets

     (0.1     (2.3     (2.6     —          —          (5.0

Proceeds from sale of property, plant & equipment

     0.8        0.2        3.1        0.4        —          4.5   

Proceeds from insurance recoveries

     —          —          1.4        —          —          1.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (954.6     (65.9     (34.1     (4.6     —          (1,059.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing Activities

            

Payments of long-term debt

     —          —          (2.5     (0.8     —          (3.3

Issue of long-term debt

     498.7        —          —          —          —          498.7   

Borrowings under ABL

     144.8        —          1,290.8        —          —          1,435.6   

Payments under ABL

     (147.7     —          (1,148.9     —          —          (1,296.6

Distributions to non-controlling interests

     —          —          —          (6.0     —          (6.0

Issuance of common shares

     366.6        —          —          —          —          366.6   

Financing fees

     (11.9     —          —          —          —          (11.9

Common shares repurchased and cancelled

     (4.5     —          —          —          —          (4.5

Dividends paid to common shareowners

     (23.1     —          —          —          —          (23.1

Payment of deferred consideration for acquisitions

     —          —          (10.8     —          —          (10.8

Intercompany dividends

     —          —          (13.0     (20.0     33.0        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     822.9        —          115.6        (26.8     33.0        944.7   

Effect of exchange rate changes on cash

     (1.4     —          (3.3     0.5        —          (4.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash & cash equivalents

     (19.5     22.6        1.9        36.8        —          41.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash & cash equivalents, beginning of period

     20.8        12.8        38.4        5.1        —          77.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash & cash equivalents, end of period

   $ 1.3      $ 35.4      $ 40.3      $ 41.9      $ —        $ 118.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

Consolidating Statements of Condensed Cash Flows

 

(in millions of U.S. dollars)

Unaudited

 

     For the Three Months Ended October 3, 2015  
    </