Note 2—Discontinued Operations

On January 30, 2018, the Company completed the sale of the Traditional Business to Refresco Group N.V., a Dutch public company (“Refresco”). The Transaction was structured as a sale of the assets of the Canadian business and a sale of the stock of the operating subsidiaries engaged in the Traditional Business in the other jurisdictions after the Company completed an internal reorganization. The aggregate deal consideration was approximately $1.25 billion, paid at closing in cash, subject to adjustment for indebtedness, working capital, and other customary post-closing adjustments. As of March 31, 2018, $12.5 million of the total sale proceeds are being held in escrow by a third party escrow agent to secure potential indemnification claims. The remaining balance in the escrow account will be released, subject to any amounts for pending indemnification claims, on the eighteen month anniversary of the closing date of the Transaction. These funds are included in cash & cash equivalents on the Consolidated Balance Sheet as of March 31, 2018. The Traditional Business excludes our Company’s Route Based Services (which includes our DS Services of America, Inc. (“DSS”), Aquaterra Corporation (“Aquaterra”) and Eden Springs Europe B.V. (“Eden”) businesses) and Coffee, Tea and Extract Solutions (which includes our S. & D. Coffee, Inc. (“S&D”) business) reporting segments, our Aimia Foods (“Aimia”), Decantae Mineral Water Ltd. (“Decantae”) and RCI concentrate businesses, and our Columbus, Georgia manufacturing facility.

The Company and Refresco have entered into a Transition Services Agreement pursuant to which the Company and Refresco will provide certain services to each other for various service periods, with the longest service period being 18 months, including tax and accounting services, certain human resources services, communications systems and support, and insurance/risk management. Each party will be compensated for services rendered as set forth in the Transition Services Agreement. Each service period may be extended as set forth in the Transition Services Agreement, up to a maximum extension of 180 days.

In addition, the Company and Refresco have entered into certain Co-pack Manufacturing Agreements pursuant to which the Company and Refresco will manufacture and supply certain beverage products for each other, and a Concentrate Supply Agreement pursuant to which the Company will supply concentrates to Refresco. Each party will be compensated for the products they supply as set forth in the applicable agreements. The Co-pack Manufacturing Agreements have a term of 36 months and the Concentrate Supply Agreement has a term that is coterminous with the term of the Transition Services Agreement. During the three months ended March 31, 2018, the Company has paid Refresco $2.2 million for the contract manufacture of beverage products. In addition, during the three months ended March 31, 2018, we have reimbursed Refresco $12.8 million for various operational expenses that were paid by Refresco on our behalf.

The Company used a portion of the sale proceeds to (i) retire $525.0 million aggregate principal amount of the 5.375% senior notes due 2022 (the “2022 Notes”), (ii) retire the remaining $250.0 million aggregate principal amount of the 10.000% senior secured notes due 2021 (the “DSS Notes”), (iii) repay $262.5 million outstanding balance on the asset-based lending facility (the “ABL facility”), and (iv) repay $1.9 million in aggregate principal outstanding on the capital lease finance arrangement with General Electric Capital Corporation (the “GE Term Loan”).

The major components of net income (loss) from discontinued operations, net of income taxes in the accompanying Consolidated Statements of Operations include the following:


	For the Three Months Ended
(in millions of U.S. dollars)	March 31, 2018		April 1, 2017
Revenue, net	$	111.2	$	371.8
Cost of sales		98.4		330.0
Operating income from discontinued operations		2.0		5.6
Gain on sale of discontinued operations		429.4		—
Net income (loss) from discontinued operations, before income taxes		404.0		(24.8	)
Income tax expense (benefit)¹		46.6		(0.6	)
Net income (loss) from discontinued operations, net of income taxes		357.4		(24.2	)
Less: Net income attributable to non-controlling interests		0.6		2.0
Net income (loss) attributable to Cott Corporation – discontinued operations²	$	356.8	$	(26.2	)

^1.

Overall the net income from discontinued operations, before income taxes for the three months ended March 31, 2018 resulted in income tax expense of $46.6 million. The Transaction resulted in a taxable gain on sale in the U.S., which utilized a significant portion of the existing U.S. net operating loss carry forwards. As a result, the Company is in a net deferred tax liability position in the U.S. and thus a tax benefit of approximately $25.0 million related to a release of the U.S. valuation allowance was recorded and is offsetting the overall income tax expense related to discontinued operations.

^2.

Net income (loss) attributable to Cott Corporation – discontinued operations is inclusive of interest expense on short-term borrowings and debt required to be repaid or extinguished as part of divestiture of $3.4 million and $20.4 million for the three months ended March 31, 2018 and April 1, 2017, respectively.

Cash flows from discontinued operations included borrowings and payments under the ABL facility of $262.4 million and $482.8 million, respectively, for the three months ended March 31, 2018 and $772.9 million and $832.7 million, respectively, for the three months ended April 1, 2017.