Primo Water Corp

In August 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815) – Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU 2018-16 is intended alleviate concerns about the sustainability of the London Inter-Bank Offered Rate (“LIBOR”), allowing SOFR to be considered eligible as a benchmark interest rate for purposes of applying hedge accounting under Topic 815. The adoption of the standard in the second quarter of 2019 did not have an impact on our consolidated financial statements as LIBOR will continue to be used until it is phased out by financial institutions.

During the third quarter ended September 30, 2018, we decided to discontinue the use of the Glacier Water Services, Inc. (“Glacier”) trade name acquired as part of the acquisition of Glacier (the “Acquisition”) in December 2016, in order to more effectively and efficiently focus our brand building and marketing efforts in Refill around the Primo brand (the “Re-branding Strategy”). In connection with the initial accounting for the Acquisition, $62,900 of the purchase price was allocated to the indefinite-lived trade name related to the Refill segment. As a result of the Re-branding Strategy, as of September 30, 2018, we recorded a pre-tax, non-cash intangible asset impairment charge of $60,750 to reduce the carrying value of the trade name to its estimated fair value, which is recorded in impairment charges and other on the condensed consolidated statements of operations. The fair value of the trade name was estimated based on the future discounted cash flows expected to be generated under the trade name prior to its complete phase-out. Based on the change in circumstances arising from the Re-branding Strategy, the Glacier trade name was determined to have a finite life and will be amortized straight line over 18 month useful life, in-line with the expected roll-out of the Re-Branding Strategy. The following table provides a rollforward of the discontinued Glacier trade name:

The U.S. government currently imposes a 25% tariff on specified imported products originating from China set forth on so-called List 1 (“List 1 Tariffs”), List 2 (“List 2 Tariffs”) and List 3 (“List 3 Tariffs”). The U.S. government also currently imposes a 15% tariff on specified imported products originating from China set forth on so-called List 4A (“List 4A Tariffs”).  On December 15, 2019, unless the effective date is extended, the U.S. government will impose a 15% tariff on specified imported products originating from China on so-called List 4B (the “List 4B Tariffs” and, together with the List 1 Tariffs, the List 2 Tariffs, the List 3 Tariffs and the List 4A Tariffs, the “Tariffs”). The Tariffs have been imposed pursuant to an investigation regarding unfair trade practices by the Office of the United States Trade Representative (the “USTR”) pursuant to Section 301 of the Trade Act of 1974.  Self-contained drinking water coolers, including our Dispensers, are included on List 1 and subject to the List 1 Tariffs.

In July 2018, we applied to the USTR for a request for exclusion from the List 1 Tariffs for our Dispensers. Our Request for Exclusion was granted by the USTR in December 2018 (the “Granted Exclusion”). The Granted Exclusion was retroactive to July 6, 2018, and any amounts we paid in respect of such June 2018 Tariffs between the time of their implementation and the Granted Exclusion have been or will be reimbursed. However, the Granted Exclusion is temporary and expires in December 2019. In October 2019, the USTR announced a process for requesting extension of previously granted exclusions, including our Granted Exclusion (the “Extension Process”).  At this time, the process is limited to exclusions granted on products subject to the List 1 Tariffs in December 2018, which includes the Granted Exclusion for self-contained drinking water coolers, including our Dispensers. We are currently evaluating the Extension Process.

Any suspension, revocation, expiration, non-renewal, non-extension or other loss of our temporary exemption from the List 1 Tariffs, or the extension of the Granted Exclusion beyond the expiration date of our temporary exemption, could adversely affect, in a potentially material manner, our business, financial condition, cash flows and results of operations. We have also worked with our suppliers and secured a reduction in the amount we pay for Dispensers, and we have worked with our customers to increase our prices to include the remaining incremental cost associated with the List 1 Tariff as implemented in the Notice. We believe the cost reduction and increased pricing are offsetting the impact of the List 1 Tariff as implemented in the Notice and would continue to offset such impact in the event our Request for Exclusion expires or is otherwise not renewed, however, if retailers increase prices to consumers, consumer demand may be reduced, and any increases in the rate of the List 1 Tariff or any additional tariffs may adversely affect us in a manner where we cannot negotiate cost reductions or price increases to offset any potential impact.

On November 1, 2019, our Board of Directors terminated our President and Chief Executive Officer, Matthew T. Sheehan, and appointed our Executive Chairman, Billy D. Prim, to serve as Interim President and Chief Executive Officer while the Board conducts a search for a permanent President and Chief Executive Officer. The Board has an active search process underway; however, such leadership transitions can be inherently difficult to manage, and an inadequate transition to a permanent President and Chief Executive Officer may cause disruption to our business due to, among other things, diverting management’s attention away from the Company’s financial and operational goals, negatively affecting relationships with our key retail partners and employees, or causing a deterioration in morale. In addition, we may incur substantial costs in connection with the leadership transition, including third-party consulting costs, bonuses and equity awards, relocation payments and other expenses.   If we are unable to attract and retain a qualified candidate to become our permanent President and Chief Executive Officer in a timely manner, our ability to meet our financial and operational goals and strategic plans may be adversely impacted and our business and financial performance may suffer.