Primo Water Corp. Reports 20.6 Percent Sales Increase In Second Quarter

Primo Water Corp., a provider of multi-gallon purified bottled water, self-serve filtered drinking water, water dispensers, sparkling beverage appliances and related consumables, today announced financial results for the second quarter ended June 30, 2012.

"We are pleased with our ability to increase net sales in-line with our expectations for the second quarter as we continue to add new dispenser households and grow our water sales," commented Billy D. Prim, Primo Water's president and chief executive officer in a prepared statement. "Despite this sales growth, the Flavorstation business is progressing at a slower rate than we expected. Consequently, after further review of our business segments, we made the decision to focus more on the growth of our core water and dispenser businesses going forward, and we will pursue shareholder-enhancing strategic alternatives including potential Flavorstation appliance brand licensing partnerships or the sale of certain Flavorstation appliance assets. We believe this strategy, combined with the attractive beverage industry dynamics should provide Primo Water with a strong opportunity to increase sales, expand margins and improve profitability long-term."

Total net sales increased 20.6 percent to $25.0 million from $20.7 million in the second quarter of 2011. This increase was due to growth in both water and dispenser sales.

Sales in the dispenser segment for the second quarter of 2012 increased 58.0 percent to $9.3 million compared to $5.9 million in the second quarter of 2011. The increase was due primarily to new locations that offer dispensers as well as sell-thru growth at existing locations. Sell-thru to consumers increased 36.7 percent compared to the second quarter of 2011 to a record 96,500 units. The company believes that increased water dispenser penetration will lead to increased recurring water sales.

Water segment sales for the second quarter of 2012 increased 3.6 percent to $15.4 million compared to $14.8 million in the second quarter of 2011.

Sales in the water segment consist of sales of multi-gallon purified bottled water (exchange) and self-serve filtered drinking water vending services (refill). The water segment sales increase was primarily due to a 14.2 percent increase in U.S. exchange sales that resulted from acceleration in same-store unit growth of 14.7 percent for the second quarter compared to 5.0 percent for the first quarter of 2012 and 2.5 percent in the prior year's second quarter. The increase in U.S. exchange sales was partially offset by reductions in refill sales, primarily due to lower empty bottle sales as well as reduced Canadian exchange sales.

Gross margin decreased to 17.5 percent for the second quarter from 27.1 percent for the second quarter of 2011. Gross margin was impacted by the negative gross margin in our Flavorstation business as a result of a $0.5 million charge related to flavor inventory obsolescence, a decrease in dispenser gross margin and to a lesser extent by a higher mix of lower margin dispenser sales.

Gross margin in the water segment decreased to 31.8 percent compared to 34.6 percent in the same period in the prior year primarily due to an increased mix of lower margin exchange sales as well as increased refill costs related to consolidation in the service provider network. Gross margin for the dispenser segment decreased to 0.7 percent from 8.3 percent in the prior year, primarily due to increased third-party manufacturing costs. The company initiated price increases and expects increased dispenser margins for the remainder of the year.

The GAAP net loss for the second quarter of 2012 was $(26.3) million or $(1.11) per share, compared to $(2.0) million or $(0.10) per share for the same period in the prior year. The GAAP net loss was primarily driven by non-cash impairment charges of $24.9 million related to goodwill and other intangible assets.

Non-GAAP pro forma fully-taxed net loss was $(0.7) million or $(0.03) per share for the second quarter of 2012 compared to $(0.3) million or $(0.01) per share for the same period in the prior year. The primary differences in GAAP and non-GAAP earnings are the $24.9 million non-cash impairment charges. The company does not expect to pay U.S. income taxes in the near future as it has sufficient net operating loss carryforwards to offset taxable income.

The non-cash impairment charges include $6.4 million and $7.0 million related to goodwill and developed technology related to the Omnifrio acquisition, respectively. Due to delays in development and manufacturing, the company determined that the Omnifrio appliance would not be available for sale this 2012 holiday season.

Additionally, the company examined indicators of impairment due to its stock price being significantly lower than book value, which resulted in an impairment charge of $11.5 million for goodwill related to its water segment.

The company's water segment continues to perform well with solid sales growth and profitability. The water segment's operating income for the second quarter of 2012 increased 4.2 percent to $3.8 million compared to the prior year. The appliance segments including both Flavorstation and dispensers have generated increased sales; however, they reported operating losses in the second quarter.

As a result of this operating performance, the company's business strategy will focus on the core water and dispenser businesses going forward. The company plans to explore shareholder-enhancing strategic alternatives during the second half of 2012 for its Flavorstation business, including but not limited to a brand licensing partnership or the sale of certain assets and technologies. The company will provide interim updates as appropriate.

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