##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 001-34850
 PRIMO WATER CORPORATION
 (Exact name of registrant as specified in its charter)
 Delaware(State of incorporation)
    
    30-0278688(I.R.S. Employer Identification No.)
 104 Cambridge Plaza Drive, Winston-Salem, NC 27104  (Address of principal executive office)
 (336) 331-4000  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if smaller reporting company)
 o þ




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##### 



PRIMO WATER CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2011
INDEX
 Page numberPart I. Financial InformationItem 1. Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24Part II. Other InformationItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25EX-10.1EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 PRIMO WATER CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except par value information)
 December 31,
    
    
    March 31,2010
    
    
    2011Assets
    
    
    
    
    
    (unaudited)Current assets:Cash
    
    $
    443
    
    
    $
    1,073Accounts receivable, net
    
    
    6,605
    
    
    
    9,297Inventories
    
    
    3,651
    
    
    
    5,006Prepaid expenses and other current assets
    
    
    1,838
    
    
    
    1,827Total current assets
    
    
    12,537
    
    
    
    17,203Bottles, net
    
    
    2,505
    
    
    
    2,965Property and equipment, net
    
    
    34,890
    
    
    
    37,490Intangible assets, net
    
    
    11,039
    
    
    
    11,980Goodwill
    
    
    77,415
    
    
    
    81,341Other assets
    
    
    1,225
    
    
    
    1,149Total assets
    
    $
    139,611
    
    
    $
    152,128Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    4,547
    
    
    $
    10,834Accrued expenses and other current liabilities
    
    
    2,923
    
    
    
    4,514Current portion of long-term debt, capital leases and notes payable
    
    
    11
    
    
    
    11Total current liabilities
    
    
    7,481
    
    
    
    15,359Long-term debt, capital leases and notes payable, net of current portion
    
    
    17,945
    
    
    
    20,613Other long-term liabilities
    
    
    748
    
    
    
    938Total liabilities
    
    
    26,174
    
    
    
    36,910Commitments and contingenciesStockholders equityCommon stock, $0.001 par value -70,000 shares authorized, 19,021 and
19,362 shares issued and outstanding at December 31, 2010 and March
31, 2011, respectively
    
    
    19
    
    
    
    19Preferred stock, $0.001 par value - 65,000 shares authorized,
no shares issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    220,125
    
    
    
    223,532Common stock warrants
    
    
    6,966
    
    
    
    6,966Accumulated deficit
    
    
    (113,723
    )
    
    
    (115,836
    )Accumulated other comprehensive income
    
    
    50
    
    
    
    537Total stockholders equity
    
    
    113,437
    
    
    
    115,218Total liabilities and stockholders equity
    
    $
    139,611
    
    
    $
    152,128
  3




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##### Table of Contents



PRIMO WATER CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS 
(Unaudited) 
(In thousands, except per share amounts)
 Three months ended March 31,2010
    
    
    2011Net sales
    
    $
    8,829
    
    
    $
    17,139Operating costs and expenses:Cost of sales
    
    
    6,922
    
    
    
    12,113Selling, general and administrative expenses
    
    
    2,733
    
    
    
    4,059Acquisition-related costs
    
    
    
    
    
    
    703Depreciation and amortization
    
    
    995
    
    
    
    1,901Total operating costs and expenses
    
    
    10,650
    
    
    
    18,776Loss from operations
    
    
    (1,821
    )
    
    
    (1,637
    )Interest expense
    
    
    (698
    )
    
    
    (287
    )Other expense, net
    
    
    (22
    )
    
    
    Loss from operations before income taxes
    
    
    (2,541
    )
    
    
    (1,924
    )Provision for income taxes
    
    
    
    
    
    
    (190
    )Net loss
    
    
    (2,541
    )
    
    
    (2,114
    )Preferred dividends
    
    
    (582
    )
    
    
    Net loss attributable to common shareholders
    
    $
    (3,123
    )
    
    $
    (2,114
    )Basic and diluted loss per common share:Net loss attributable to common shareholders
    
    $
    (2.15
    )
    
    $
    (0.11
    )Basic and diluted weighted average common shares outstanding
    
    
    1,453
    
    
    
    19,115
  4




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PRIMO WATER CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Unaudited) 
(In thousands)
 Three months ended March 31,2010
    
    
    2011Operating activitiesNet loss
    
    $
    (2,541
    )
    
    $
    (2,114
    )Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:Depreciation and amortization
    
    
    995
    
    
    
    1,901Stock-based compensation expense
    
    
    158
    
    
    
    188Non-cash interest expense
    
    
    138
    
    
    
    94Deferred income tax expense
    
    
    
    
    
    
    190Bad debt expense
    
    
    10
    
    
    
    75Other
    
    
    22
    
    
    
    294Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,155
    )
    
    
    (2,096
    )Inventories
    
    
    (137
    )
    
    
    (1,334
    )Prepaid expenses and other assets
    
    
    (68
    )
    
    
    (295
    )Accounts payable
    
    
    1,009
    
    
    
    5,657Accrued expenses and other liabilities
    
    
    (97
    )
    
    
    (140
    )Net cash (used in) provided by operating activities
    
    
    (1,666
    )
    
    
    2,420Investing activitiesPurchases of property and equipment
    
    
    (216
    )
    
    
    (2,239
    )Purchases of bottles, net of disposals
    
    
    (347
    )
    
    
    (564
    )Proceeds from the sale of property and equipment
    
    
    
    
    
    
    18Acquisition of business
    
    
    
    
    
    
    (1,576
    )Additions to and acquisitions of intangible assets
    
    
    (8
    )
    
    
    (108
    )Net cash used in investing activities
    
    
    (571
    )
    
    
    (4,469
    )Financing activitiesNet borrowings from prior revolving line of credit
    
    
    3,927
    
    
    
    Borrowings under senior revolving credit facility
    
    
    
    
    
    
    3,972Payments under senior revolving credit facility
    
    
    
    
    
    
    (1,302
    )Notes payable and capital lease payments
    
    
    (2
    )
    
    
    (3
    )Debt issuance costs
    
    
    (46
    )
    
    
    Net change in book overdraft
    
    
    (64
    )
    
    
    Prepaid equity issuance costs
    
    
    (878
    )
    
    
    Proceeds from exercise of stock options
    
    
    47
    
    
    
    Dividends paid
    
    
    (225
    )
    
    
    Net cash provided by financing activities
    
    
    2,759
    
    
    
    2,667Net increase in cash
    
    
    522
    
    
    
    618Cash, beginning of period
    
    
    
    
    
    
    443Effect of exchange rate changes on cash
    
    
    
    
    
    
    12Cash, end of period
    
    $
    522
    
    
    $
    1,073
  5




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PRIMO WATER CORPORATION
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands, except per share amounts)
 1. Description of Business and Significant Accounting Policies
 Business
  Initial Public Offering and Acquisition
   Unaudited Interim Financial Information
  Revenue Recognition
   6




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Goodwill and Intangible Assets
   Fair Value Measurements
 Fair
Value Measurements and Disclosures,
  
    
    Level 1  quoted prices in active markets for identical assets and liabilities.
    
    Level 2  observable inputs other than quoted prices in active markets for identical
assets and liabilities.
    
    Level 3  unobservable inputs in which there is little or no market data available,
which require the reporting entity to develop its own assumptions.
  7




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Concentrations of Risk
   Basic and Diluted Net loss Per Share
   Recent Accounting Pronouncements
   8




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2. Acquisitions
 Refill Business
    Aggregate purchase price:Cash consideration
    
    $
    74,474Common stock issued
    
    
    34,621Purchase price
    
    $
    109,095Purchase price allocation:Net assets acquiredNet current assets
    
    $
    3,728Property and equipment
    
    
    18,984Identifiable intangible assets
    
    
    10,300Goodwill
    
    
    77,452Liabilities assumed
    
    
    (1,369
    )Aggregate purchase price
    
    $
    109,095
  Three MonthsEndedMarch 31,2010Net Sales
    
    $
    14,938Net loss
from operations
    
    $
    (530
    )Basic and diluted loss per common share:Net loss attributable to common shareholders
    
    $
    (0.08
    )Basic and diluted weighted average common shares outstanding
    
    
    18,915
 9




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Canada
Bulk Water Exchange Business
  Omnifrio Single-Serve Beverage Business
  2
 3. Goodwill and Intangible Assets
  Balance at December 31, 2010
    
    $
    77,415Acquisition of Canada Bulk Water Exchange Business
    
    
    3,515Effect of foreign currency translation
    
    
    341Other
    
    
    70Balance at March 31, 2011
    
    $
    81,341
 10




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4. Accrued expenses and other current liabilities
  December 31,
    
    
    March 31,2010
    
    
    2011Accrued payroll and related items
    
    $
    968
    
    
    $
    695Accrued severance
    
    
    370
    
    
    
    240Accrued professional and other expenses
    
    
    829
    
    
    
    1,093Accrued interest
    
    
    6
    
    
    
    3Accrued sales tax payable
    
    
    173
    
    
    
    95Customer bottle deposits
    
    
    
    
    
    
    640Accrued receipts not invoiced
    
    
    207
    
    
    
    1,513Other
    
    
    370
    
    
    
    235$
    2,923
    
    
    $
    4,514
 5. Long-Term Debt, Capital Leases and Notes Payable
  December 31,
    
    
    March 31,2010
    
    
    2011Senior revolving credit facility
    
    $
    17,912
    
    
    $
    20,582Notes payable and capital leases
    
    
    44
    
    
    
    4217,956
    
    
    
    20,624Less current portion
    
    
    (11
    )
    
    
    (11
    )Long-term debt, notes payable and capital leases, net of current portion
    
    $
    17,945
    
    
    $
    20,613
    11




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6. Stock-Based Compensation
 2004 Stock Plan
  2010 Omnibus Long-Term Incentive Plan
  Stock Option Activity
  Expected life of options in years
    
    
    6.0Risk-free interest rate
    
    
    2.5
    %Expected volatility
    
    
    48.0
    %Dividend yield
    
    
    0.0
    %
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber of
    
    
    Price per
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Share
    
    
    Life (Years)
    
    
    ValueOutstanding at December 31, 2010
    
    
    304
    
    
    $
    13.14Granted
    
    
    162
    
    
    
    12.33Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2011
    
    
    466
    
    
    
    12.86
    
    
    
    6.90
    
    
    $
    253Exercisable at March 31, 2011
    
    
    304
    
    
    $
    13.14
    
    
    
    5.62
    
    
    $
    253
 12




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Restricted Stock Award Activity
  Weighed AverageGrant Date FairNumber of Shares
    
    
    ValueUnvested at December 31, 2010
    
    
    116
    
    
    $
    12.75Granted
    
    
    81
    
    
    
    12.33Vested
    
    
    (47
    )
    
    
    12.62Forfeited
    
    
    
    
    
    
    Unvested at March 31, 2011
    
    
    150
    
    
    $
    12.56
  Employee Stock Purchase Plan
  7. Commitments and Contingencies
  8. Income Taxes
   13




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9. Segments
        14




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2010
    
    
    2011Segment net salesWater
    
    $
    5,920
    
    
    $
    13,146Products
    
    
    2,909
    
    
    
    3,993Total net revenues
    
    $
    8,829
    
    
    $
    17,139Segment income (loss) from operationsWater
    
    $
    792
    
    
    $
    3,194Products
    
    
    (61
    )
    
    
    (430
    )Corporate
    
    
    (1,557
    )
    
    
    (2,500
    )Depreciation and amortization
    
    
    (995
    )
    
    
    (1,901
    )Loss from operations
    
    $
    (1,821
    )
    
    $
    (1,637
    )Depreciation and amortization expense:Water
    
    $
    854
    
    
    $
    1,703Products
    
    
    34
    
    
    
    93Corporate
    
    
    107
    
    
    
    105$
    995
    
    
    $
    1,901Capital expenditures:Water
    
    $
    467
    
    
    
    2,698Products
    
    
    
    
    
    
    93Corporate
    
    
    96
    
    
    
    12$
    563
    
    
    $
    2,803Identifiable assets:Water
    
    
    
    
    
    $
    142,618Products
    
    
    
    
    
    
    7,107Corporate
    
    
    
    
    
    
    2,403$
    152,128
 15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our historical consolidated financial statements and related
notes thereto in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the
year ended December 31, 2010. The discussion below contains forward-looking statements that are
based upon our current expectations and are subject to uncertainty and changes in circumstances.
Actual results may differ materially from these expectations due to inaccurate assumptions and
known or unknown risks and uncertainties, including those identified in Uncertainty of
Forward-Looking Statements and Information below in this Item 2 and in Risk Factors in Item 1A
of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010.
 Overview
   Business Segments
    16




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Recent Transactions
 Canada Bulk Water Exchange Business
  Omnifrio Single-Serve Beverage Business
  2
 17




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Results of Operations
  Three months ended March 31,2010
    
    
    2011Net sales
    
    $
    8,829
    
    
    $
    17,139Operating costs and expenses:Cost of sales
    
    
    6,922
    
    
    
    12,113Selling, general and administrative expenses
    
    
    2,733
    
    
    
    4,059Acquisition-related costs
    
    
    
    
    
    
    703Depreciation and amortization
    
    
    995
    
    
    
    1,901Total operating costs and expenses
    
    
    10,650
    
    
    
    18,776Loss from operations
    
    
    (1,821
    )
    
    
    (1,637
    )Interest expense
    
    
    (698
    )
    
    
    (287
    )Other expense, net
    
    
    (22
    )
    
    
    Loss from operations before income taxes
    
    
    (2,541
    )
    
    
    (1,924
    )Provision for income taxes
    
    
    
    
    
    
    (190
    )Net loss
    
    $
    (2,541
    )
    
    $
    (2,114
    )
  Three months ended March 31,2010
    
    
    2011Net sales
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Cost of sales
    
    
    78.4
    
    
    
    70.7Selling, general and administrative expenses
    
    
    31.0
    
    
    
    23.7Acquisition-related costs
    
    
    
    
    
    
    4.1Depreciation and amortization
    
    
    11.2
    
    
    
    11.1Total operating costs and expenses
    
    
    120.6
    
    
    
    109.6Loss from operations
    
    
    (20.6
    )
    
    
    (9.6
    )Interest expense
    
    
    (7.9
    )
    
    
    (1.6
    )Other expense, net
    
    
    (0.3
    )
    
    
    Loss from operations before income taxes
    
    
    (28.8
    )
    
    
    (11.2
    )Provision for income taxes
    
    
    
    
    
    
    (1.1
    )Net loss
    
    
    (28.8
    )%
    
    
    (12.3
    )%
  Three months endedMarch 31,2010
    
    
    2011Segment net salesWater
    
    $
    5,920
    
    
    $
    13,146Products
    
    
    2,909
    
    
    
    3,993Total net revenues
    
    $
    8,829
    
    
    $
    17,139Segment income (loss) from operationsWater
    
    $
    792
    
    
    $
    3,194Products
    
    
    (61
    )
    
    
    (430
    )Corporate
    
    
    (1,557
    )
    
    
    (2,500
    )Depreciation and amortization
    
    
    (995
    )
    
    
    (1,901
    )Loss from operations
    
    $
    (1,821
    )
    
    $
    (1,637
    )
 18




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Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
 Net Sales
 Water.
 Products.
 Gross Margin
 Water.
 Products.
 19




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Selling, General and Administrative Expenses.
 Water.
 Products.
 Corporate.
 Acquisition Related Costs.
 Depreciation and Amortization.
 Interest Expense and Other Income, Net.
 Preferred Dividends.
 20




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Liquidity and Capital Resources
  Three Months Ended March 31,2010
    
    
    2011Net cash provided by (used in):Operating activities
    
    $
    (1,666
    )
    
    $
    2,420Investing activities
    
    
    (571
    )
    
    
    (4,469
    )Financing activities
    
    
    2,759
    
    
    
    2,667
   Net Cash Flows from Operating Activities
  Net Cash Flows from Investing Activities
  Net Cash Flows from Financing Activities
  21




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Senior Revolving Credit Facility
   Adequacy of Capital Resources
     22




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Legal Proceedings
  Off-Balance Sheet Arrangements
  Seasonality; Fluctuations of Results
  Critical Accounting Policies and Estimates
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  23




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  24




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 5. Other Information
   
 Item 6. Exhibits
 Exhibit
    
    Description3.1
    
    Fifth Amended and Restated Certificate of Incorporation of Primo
Water Corporation (incorporated by reference to Exhibit 3.4 to
Amendment No. 9 to the Companys Registration Statement on Form
S-1 (Registration No. 333-165452) filed November 3, 2010)3.2
    
    Amended and Restated Bylaws of Primo Water Corporation
(incorporated by reference to Exhibit 3.1 to the Companys Form
8-K filed November 16, 2010)10.1
    
    Second Amendment to
Registration Rights Agreement dated May 12, 2011 between Primo
Water Corporation and Culligan International Company (filed herewith)31.1
    
    Certification of Periodic Report by Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)31.2
    
    Certification of Periodic Report by Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14a and pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (filed herewith)32.1
    
    Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer pursuant to U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
 25




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SIGNATURES
  PRIMO WATER CORPORATION
(Registrant)Date: May 13, 2011
    By:
    /s/ Billy D. PrimBilly D. PrimChairman, Chief Executive Officer and PresidentDate: May 13, 2011
    By:
    /s/ Mark CastanedaMark CastanedaChief Financial Officer 26