NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six
Months Ended
June 30, 2017
and
2016
(Unaudited)
1. General
Nature of Our Business
— We are a leading food and beverage company and the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products in the United States, with a vision to be the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion.
We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our portfolio includes
DairyPure
®
, the country's first and largest fresh, white milk national brand, and
TruMoo
®
, the leading national flavored milk brand, along with well-known regional dairy brands such as
Alta Dena
®
,
Berkeley Farms
®
,
Country Fresh
®
,
Dean’s
®
,
Friendly's
®
,
Garelick Farms
®
,
LAND O LAKES
®
milk and cultured products (licensed brand),
Lehigh Valley Dairy Farms
®
,
Mayfield
®
,
McArthur
®
,
Meadow Gold
®
,
Oak Farms
®
,
PET
®
(licensed brand),
T.G. Lee
®
,
Tuscan
®
and more. In all, we have more than
50
national, regional and local dairy brands, as well as private labels. Additionally, with our acquisition of Uncle Matt's Organic, Inc., which was completed on June 22, 2017, we now sell and distribute organic juice, probiotic-infused juices, and fruit-infused waters under the
Uncle Matt's Organic
®
brand. Dean Foods also makes and distributes ice cream, cultured products, juices, teas and bottled water. Due to the perishable nature of our products, we deliver the majority of our products directly to our customers’ locations in refrigerated trucks or trailers that we own or lease. We believe that we have one of the most extensive refrigerated direct-to-store delivery systems in the United States. We sell our products primarily on a local or regional basis through our local and regional sales forces, and in some instances, with the assistance of national brokers. Some national customer relationships are coordinated by our centralized corporate sales department or national brokers.
Basis of Presentation
— The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q have been prepared on the same basis as the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2016
(the “
2016
Annual Report on Form 10-K”), which we filed with the Securities and Exchange Commission on
February 22, 2017
. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. Our results of operations for the
three and six
month periods ended
June 30, 2017
may not be indicative of our operating results for the full year. The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements contained in our
2016
Annual Report on Form 10-K.
Unless otherwise indicated, references in this report to “we,” “us,” “our” or "the Company" refer to Dean Foods Company and its subsidiaries, taken as a whole.
Recently Adopted Accounting Pronouncements
Accounting Standards Update ("ASU") No. 2016-09 — In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-09, Compensation — Stock Compensation — Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, the accounting for forfeitures, the classification of awards as either equity or liabilities, and the classification of certain share-based payment transactions on the statement of cash flows. We adopted this ASU effective January 1, 2017, and it has been applied in accordance with the transition methods specified in the guidance. As permitted by the standard, we have not changed our accounting policy for forfeitures of share-based awards and will continue estimating forfeitures when determining compensation cost to be recognized over the vesting period. The presentation of excess tax benefits of share-based awards on the statement of cash flows has been applied prospectively; therefore, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. In addition, we are now recording on a prospective basis excess tax benefits and tax deficiencies related to share-based payments within the provision for income taxes on the statement of operations rather than on the consolidated balance sheet within additional paid-in capital.
ASU No. 2015-17 — In November 2015, the FASB issued ASU No. 2015-17, Income Taxes — Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments eliminate the guidance in Accounting Standards Codification ("ASC") Topic 740 that requires an entity to separate deferred tax liabilities and
assets into a current amount and a noncurrent amount in a classified statement of financial position. We adopted this ASU on a prospective basis effective January 1, 2017.
Recently Issued Accounting Pronouncements
Effective in 2018
ASU No. 2017-09 — In May 2017, the FASB issued ASU No. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance is intended to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: 1) The fair value (or calculated value or intrinsic value) of the modified award is the same as the fair value (or calculated value or intrinsic value) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, 2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and 3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The amendments should be applied prospectively to an award modified on or after the adoption date. We do not intend to early adopt this ASU. We are currently evaluating the effect that the adoption of this standard will have on the presentation of our financial statements.
ASU No. 2017-07 — In March 2017, the FASB issued ASU No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) are to be reported separately and outside a subtotal of operating income, if one is presented. Currently, we record all components of net periodic benefit cost on the same line item as the employees' respective compensation expense. Beginning in the first quarter of 2018, we will be required to present net periodic cost for pension and postretirement benefits in accordance with the new guidance described above. For public companies, this guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The amendment should be applied on a retrospective basis. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. We do not intend to early adopt this ASU. We are currently evaluating the effect that the adoption of this standard will have on the presentation of our financial statements.
ASU No. 2017-03 — In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections and Investments — Equity Method and Joint Ventures: Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force ("EITF") Meetings. The new guidance is intended to provide clarity in relation to the disclosure of the impact that ASU 2014-09 and ASU 2016-02, which are described below, will have on our financial statements when adopted. The effective date for this guidance is the same as the effective date for ASU 2014-09 and ASU 2016-02. We are currently evaluating the effect that the adoption of this standard will have on our financial statements.
ASU No. 2017-01 — In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business. The new guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective date. Early application of the amendments is allowed with certain restrictions. We do not expect the adoption of ASU 2017-01 to have a material impact on our financial statements and will prospectively apply the guidance to applicable transactions.
ASU No. 2016-16 — In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 reduces complexity by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer (other than inventory) when the transfer occurs. The new guidance is intended to reduce the complexity of GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers,
particularly those involving intellectual property. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the effect that the adoption of this standard will have on our financial statements.
ASU No. 2016-15 — In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for all entities, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. We do not expect the adoption of ASU 2016-15 to have a material impact on our financial statements.
ASU No. 2016-01 — In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities. ASU 2016-01 supersedes existing guidance to classify equity securities with readily determinable fair values into different categories and requires equity securities to be measured at fair value with changes in the fair value recognized through net income. An entity’s equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this amended guidance. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this ASU should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the ASU. Early application of certain amendments in this standard to financial statements of fiscal years and interim periods that have not yet been issued is permitted as of the beginning of the fiscal year of adoption. Except for the early application of certain amendments discussed above, early adoption of the standard is not permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our financial statements.
ASU No. 2014-09 — In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. Additionally, the new standard requires enhanced disclosures, including information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The new standard was originally effective for reporting periods beginning after December 15, 2016 and early adoption was not permitted. On August 12, 2015, the FASB approved a one year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for ASU 2014-09.
We are currently evaluating the overall impact this guidance will have on our consolidated financial statements. We have formed a steering committee comprised of subject matter experts within the Company to help assess the impact the guidance may have on the classification of bulk cream sales, which are currently presented as a reduction to cost of sales within our unaudited Condensed Consolidated Statements of Operations as we believe this presentation allows us to report our true cost of fluid milk production. The steering committee is in the process of gathering and evaluating quantitative and qualitative information with respect to the Company’s bulk cream sales, which will assist in informing our conclusion with respect to the appropriate income statement presentation of such amounts under ASU 2014-09. Our assessment is ongoing and no final determinations have been made at this time.
Additionally, our evaluation includes the impact of the new standard on certain common practices currently employed by us and by other manufacturers of consumer products, such as slotting fees, co-operative advertising, rebates and other pricing allowances, merchandising funds and consumer coupons. We currently expect to adopt the ASU consistent with the deferred mandatory effective date of January 1, 2018 and to utilize the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts in process as of the adoption date. Under this method, we would not restate the prior financial statements presented; however, we would be required to provide
additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the prior guidance. Based on our findings to date, we do not expect the standard to have a material impact on our results of operations or financial position; however, our assessment is not yet complete. Throughout the remainder of 2017, we plan to finalize our review and method of adoption.
Effective in 2019
ASU No. 2016-02 — In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires lessees to recognize lease assets and lease liabilities in the balance sheet and disclose key information about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. The amended guidance will require both operating and finance leases to be recognized in the balance sheet. Additionally, the amended guidance aligns lessor accounting to comparable guidance in ASC Topic 606, Revenue from Contracts with Customers. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be adopted using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. We do not intend to early adopt this ASU. We anticipate the impact of this standard to be significant to our Consolidated Balance Sheet due to the amount of our lease commitments. See Note 17 to the Consolidated Financial Statements contained in our
2016
Annual Report on Form 10-K for further information regarding these commitments. We are currently evaluating the other impacts that ASU 2016-02 will have on our consolidated financial statements.
Effective in 2020
ASU No. 2017-04 — In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds a reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. For public companies, this guidance is effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not intend to early adopt this ASU. We do not expect the adoption of ASU 2017-04 to have a material impact on our financial statements.
2. Acquisitions and Investments in Unconsolidated Affiliates
Acquisitions
Uncle Matt's Organic
—
On June 22, 2017, we completed the acquisition of Uncle Matt's Organic, Inc. ("Uncle Matt's"). Uncle Matt's is a leading organic juice company offering a wide range of organic juices, including probiotic-infused juices and fruit-infused waters. The total purchase price was $
22.0 million
. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values and include identifiable intangible assets of $
8.4 million
, of which $
6.6 million
relates to an indefinite-lived trademark and $
1.8 million
relates to customer relationships that are subject to amortization over a period of
10 years
.
We recorded goodwill of $
13.4 million
in connection with the acquisition, which consists of the excess of the net purchase price over the fair value of the net assets acquired. This goodwill represents the expected value attributable to our expansion into the organic juice category. The goodwill is not deductible for tax purposes.
The acquisition was funded through a combination of cash on hand and borrowings under our receivables securitization facility. The values reflected above may change as we finalize our assessment of the acquired assets and liabilities. A change in these valuations may also impact the income tax related accounts and goodwill. The pro forma impact of the acquisition on consolidated net earnings would not have materially changed reported net earnings. Uncle Matt's results of operations will be included in our Consolidated Statements of Operations from the date of acquisition.
Friendly's
—
On June 20, 2016, we completed the acquisition of Friendly’s Ice Cream Holdings Corp. (“Friendly’s Holdings”), including its wholly-owned subsidiary, Friendly’s Manufacturing and Retail, LLC (“Friendly’s Manufacturing,” and together with Friendly’s Holdings, “Friendly’s”), the
Friendly’s
®
trademark and all intellectual property associated with the ice cream business. Friendly’s develops, produces, manufactures, markets, distributes and sells ice cream and other frozen dessert-related products, as well as toppings. The total purchase price was $
158.2 million
. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values and include identifiable intangible assets of
$81.7 million
, of which
$29.7 million
relates to customer relationships that are subject to amortization over a period of
15 years
. Additionally, we assumed an unfavorable lease contract with a fair value of
$5.4 million
, which will be amortized as a reduction of rent expense over the term of the lease agreement.
We recorded goodwill of
$67.3 million
in connection with the acquisition, which consists of the excess of the net purchase price over the fair value of the net assets acquired. This goodwill represents the expected value attributable to an anticipated increased competitive position in the ice cream market in the Northeastern United States. The goodwill is not deductible for tax purposes.
The acquisition was funded through a combination of cash on hand and borrowings under our senior secured revolving credit facility and receivables securitization facility. Friendly's results of operations have been included in our unaudited Condensed Consolidated Statements of Operations from the date of acquisition. The purchase accounting and the final fair value assessments are complete.
Investment in Unconsolidated Affiliate
Good Karma
— On May 4, 2017, we acquired a non-controlling interest in, and entered into a distribution agreement with, Good Karma Foods, Inc. (“Good Karma”), the leading producer of flax-based milk and yogurt products. This investment allows us to diversify our portfolio to include plant-based dairy alternatives and provides Good Karma the ability to more rapidly expand distribution across the U.S., as well as increase investments in brand building and product innovation. We do not expect our equity in the earnings of this investment to materially impact our consolidated financial statements. We are accounting for this investment under the equity method of accounting based upon our ability to exercise significant influence over the investee through our ownership interest and representation on Good Karma's board of directors.
3
. Inventories
Inventories at
June 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Raw materials and supplies
|
$
|
110,616
|
|
|
$
|
110,095
|
|
Finished goods
|
176,606
|
|
|
174,389
|
|
Total
|
$
|
287,222
|
|
|
$
|
284,484
|
|
4
. Goodwill and Intangible Assets
As of
June 30, 2017
, the gross carrying value of goodwill was
$2.24 billion
and accumulated goodwill impairment was
$2.08 billion
. We recorded a goodwill impairment charge of
$2.08 billion
in 2011 with
no
goodwill impairment charges in subsequent years.
The changes in the net carrying amounts of goodwill as of
June 30, 2017
and
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2016
|
$
|
154,112
|
|
Acquisitions (Note 2)
|
13,423
|
|
Balance at June 30, 2017
|
$
|
167,535
|
|
The net carrying amounts of our intangible assets other than goodwill as of
June 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Acquisition Costs(1)
|
|
Impairment
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Acquisition Costs
|
|
Impairment
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
(In thousands)
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
58,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,600
|
|
|
$
|
52,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52,000
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related and other
|
80,685
|
|
|
—
|
|
|
(39,211
|
)
|
|
41,474
|
|
|
78,925
|
|
|
—
|
|
|
(37,050
|
)
|
|
41,875
|
|
Trademarks
|
230,709
|
|
|
(109,910
|
)
|
|
(49,973
|
)
|
|
70,826
|
|
|
229,777
|
|
|
(109,910
|
)
|
|
(41,824
|
)
|
|
78,043
|
|
Total
|
$
|
369,994
|
|
|
$
|
(109,910
|
)
|
|
$
|
(89,184
|
)
|
|
$
|
170,900
|
|
|
$
|
360,702
|
|
|
$
|
(109,910
|
)
|
|
$
|
(78,874
|
)
|
|
$
|
171,918
|
|
|
|
(1)
|
The increase in the carrying amount of intangible assets from
December 31, 2016
to
June 30, 2017
is related in part to an indefinite-lived trademark of
$6.6 million
and a finite-lived customer-related intangible of
$1.8 million
we recorded as a part of the Uncle Matt's acquisition. See Note
2
. Additionally, we acquired a finite-lived trademark of a regional artisan ice cream brand for
$0.9 million
during the period.
|
Our trademark values will be amortized on a straight-line basis over their remaining useful lives, which range from approximately
3
to
9 years
. Amortization expense on intangible assets for the three months ended
June 30, 2017
and
2016
was
$5.2 million
and
$4.1 million
, respectively. Amortization expense on intangible assets for the
six
months ended
June 30, 2017
and
2016
was
$10.3 million
and
$10.4 million
, respectively. The amortization of intangible assets is reported on a separate line item in our unaudited Condensed Consolidated Statements of Operations.
Estimated aggregate intangible asset amortization expense for the next five years is as follows (in millions):
|
|
|
|
|
2017
|
$
|
20.7
|
|
2018
|
20.3
|
|
2019
|
20.3
|
|
2020
|
12.2
|
|
2021
|
10.5
|
|
5
. Debt
Our long-term debt as of
June 30, 2017
and
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
Amount
|
|
Interest
Rate
|
|
|
Amount
|
|
Interest
Rate
|
|
|
(In thousands, except percentages)
|
|
Dean Foods Company debt obligations:
|
|
|
|
|
|
|
|
|
|
Senior secured revolving credit facility
|
$
|
1,300
|
|
|
3.06
|
% *
|
|
$
|
9,100
|
|
|
2.94
|
% *
|
Senior notes due 2023
|
700,000
|
|
|
6.50
|
|
|
700,000
|
|
|
6.50
|
|
|
701,300
|
|
|
|
|
|
709,100
|
|
|
|
|
Subsidiary debt obligations:
|
|
|
|
|
|
|
|
|
|
Senior notes due 2017
|
142,000
|
|
|
6.90
|
|
|
142,000
|
|
|
6.90
|
|
Receivables securitization facility
|
65,000
|
|
|
2.18
|
*
|
|
40,000
|
|
|
1.87
|
*
|
Capital lease and other
|
3,148
|
|
|
—
|
|
|
3,980
|
|
|
—
|
|
|
210,148
|
|
|
|
|
|
185,980
|
|
|
|
|
Subtotal
|
911,448
|
|
|
|
|
|
895,080
|
|
|
|
|
Unamortized discounts and debt issuance costs
|
(7,150
|
)
|
|
|
|
|
(9,029
|
)
|
|
|
|
Total debt
|
904,298
|
|
|
|
|
|
886,051
|
|
|
|
|
Less current portion
|
(142,173
|
)
|
|
|
|
|
(140,806
|
)
|
|
|
|
Total long-term portion
|
$
|
762,125
|
|
|
|
|
|
$
|
745,245
|
|
|
|
|
* Represents a weighted average rate, including applicable interest rate margins.
The scheduled debt maturities at
June 30, 2017
were as follows (in thousands):
|
|
|
|
|
2017
|
$
|
142,457
|
|
2018
|
1,125
|
|
2019
|
1,174
|
|
2020
|
65,392
|
|
2021
|
—
|
|
Thereafter
|
701,300
|
|
Subtotal
|
911,448
|
|
Less unamortized discounts and debt issuance costs
|
(7,150
|
)
|
Total debt
|
$
|
904,298
|
|
Senior Secured Revolving Credit Facility
— In
March 2015
, we entered into a credit agreement, as amended on January 4, 2017 and as described below (as amended, the "Credit Agreement") pursuant to which the lenders provided us with a senior secured revolving credit facility in the amount of up to
$450 million
(the “Credit Facility”). Under the Credit Agreement, we have the right to request an increase of the aggregate commitments under the Credit Facility by up to
$200 million
, which we may request to be made available as either term loans or revolving loans, without the consent of any lenders not participating in such increase, subject to specified conditions. The Credit Facility is available for the issuance of up to
$75 million
of letters of credit and up to
$100 million
of swing line loans.
On
January 4, 2017
, we amended the Credit Agreement to, among other things, (i) extend the maturity date of the Credit Facility to
January 4, 2022
; (ii) modify the leverage ratio covenant to add a requirement that we comply with a maximum total net leverage ratio (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility) not to exceed
4.25
to 1.00 and to eliminate the maximum senior secured net leverage ratio requirement; (iii) modify the definition of “Consolidated EBITDA” to permit certain pro forma cost savings add-backs in connection with permitted acquisitions and dispositions; (iv) modify the definition of “Applicable Rate” to reduce the interest rate margins such that loans outstanding under the Credit Facility will bear interest, at our option, at either (x) the LIBO Rate (as defined in the Credit Agreement) plus a
margin of between
1.75%
and
2.50%
(
2.00%
as of
June 30, 2017
) based on our total net leverage ratio, or (y) the Alternate Base Rate (as defined in the Credit Agreement) plus a margin of between
0.75%
and
1.50%
(
1.00%
as of
June 30, 2017
) based on our total net leverage ratio; (v) modify certain negative covenants to provide additional flexibility for the incurrence of debt, the payment of dividends and the making of certain permitted acquisitions and other investments; (vi) eliminate and release all real property as collateral for loans under the Credit Facility; and (vii) provide the Company the ability to request that increases in the aggregate commitments under the Credit Facility be made available as either revolving loans or term loans.
In connection with the execution of the amendment to the Credit Agreement, we paid certain arrangement fees of approximately
$0.7 million
to lenders and other fees of approximately
$0.3 million
, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off
$0.9 million
of unamortized deferred financing costs in connection with this amendment.
We may make optional prepayments of loans under the Credit Facility, in whole or in part, without premium or penalty (other than applicable breakage costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, but without a corresponding commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds. The Credit Facility is guaranteed by our existing and future domestic material restricted subsidiaries (as defined in the Credit Agreement), which are substantially all of our wholly-owned U.S. subsidiaries other than the receivables securitization facility subsidiaries (the “Guarantors”).
The Credit Facility is secured by a first priority perfected security interest in substantially all of our assets and the assets of the Guarantors, whether consisting of personal, tangible or intangible property, including a pledge of, and a perfected security interest in, (i) all of the shares of capital stock of the Guarantors and (ii)
65%
of the shares of capital stock of our and the Guarantors' first-tier foreign subsidiaries that are material restricted subsidiaries, in each case subject to certain exceptions as set forth in the Credit Agreement. The collateral does not include, among other things, (a) any of our real property, (b) the capital stock and any assets of any unrestricted subsidiary, (c) any capital stock of any direct or indirect subsidiary of Dean Holding Company ("Legacy Dean"), a wholly owned subsidiary of the Company, which owns any real property, or (d) receivables sold pursuant to the receivables securitization facility.
The Credit Agreement contains customary representations, warranties and covenants, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments during a default or non-compliance with the financial covenants, investments, loans and advances, transactions with affiliates and sale and leaseback transactions. The Credit Agreement also contains customary events of default and related cure provisions. We are required to comply with (a) a maximum total net leverage ratio of
4.25
x (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility); and (b) a minimum consolidated interest coverage ratio of
2.25
x. In addition, the Credit Agreement imposes certain restrictions on our ability to pay dividends and make other restricted payments if our total net leverage ratio (including borrowings under our receivables securitization facility) is in excess of
3.50
x.
At
June 30, 2017
, we had outstanding borrowings of
$1.3 million
under the Credit Facility. Our average daily balance under the Credit Facility during the
six
months ended
June 30, 2017
was
$1.7 million
. There were
no
letters of credit issued under the Credit Facility as of
June 30, 2017
.
Dean Foods Receivables Securitization Facility
— We have a
$450 million
receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to
two
wholly-owned entities intended to be bankruptcy-remote. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our unaudited Condensed Consolidated Balance Sheets, and the securitization is treated as a borrowing for accounting purposes.
On
January 4, 2017
, we amended the purchase agreement governing the receivables securitization facility to, among other things, (i) extend the liquidity termination date to
January 4, 2020
, (ii) reduce the maximum size of the receivables securitization facility to
$450 million
, (iii) replace the senior secured net leverage ratio with a total net leverage ratio to be consistent with the amended leverage ratio covenant under the amended Credit Agreement described above, and (iv) modify certain pricing terms such that advances outstanding under the receivables securitization facility will bear interest between
0.90%
and
1.05%
, and the Company will pay an unused fee between
0.40%
and
0.55%
on undrawn amounts, in each case based on the Company's total net leverage ratio.
In connection with the amendment to the receivables purchase agreement, we paid certain arrangement fees of approximately
$0.6 million
to lenders and other fees of approximately
$0.1 million
, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off
$0.2 million
of unamortized deferred financing costs in connection with the amendment.
The receivables purchase agreement contains covenants consistent with those contained in the Credit Agreement.
Based on the monthly borrowing base formula, we had the ability to borrow up to
$448.4 million
of the total commitment amount under the receivables securitization facility as of
June 30, 2017
. The total amount of receivables sold to these entities as of
June 30, 2017
was
$561.5 million
. During the first
six
months of
2017
, we borrowed
$1.1 billion
and repaid
$1.1 billion
under the facility with a remaining balance of
$65.0 million
as of
June 30, 2017
. In addition to letters of credit in the aggregate amount of
$117.2 million
that were issued but undrawn, the remaining available borrowing capacity was
$266.2 million
at
June 30, 2017
. Our average daily balance under this facility during the
six
months ended
June 30, 2017
was
$44.2 million
. The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.
Dean Foods Company Senior Notes due 2023
— On February 25, 2015, we issued
$700 million
in aggregate principal amount of
6.50%
senior notes due 2023 (the “2023 Notes”) at an issue price of
100%
of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act.
In connection with the issuance of the 2023 Notes, we paid certain arrangement fees of approximately
$7.0 million
to initial purchasers and other fees of approximately
$1.8 million
, which were deferred and netted against the outstanding debt balance, and will be amortized to interest expense over the remaining term of the 2023 Notes.
The 2023 Notes are our senior unsecured obligations. Accordingly, the 2023 Notes rank equally in right of payment with all of our existing and future senior obligations and are effectively subordinated in right of payment to all of our existing and future secured obligations, including obligations under our Credit Facility and receivables securitization facility, to the extent of the value of the collateral securing such obligations. The 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by our subsidiaries that guarantee obligations under the Credit Facility.
The 2023 Notes will mature on March 15, 2023 and bear interest at an annual rate of
6.50%
. Interest on the 2023 Notes is payable semi-annually in arrears in March and September of each year.
We may, at our option, redeem all or a portion of the 2023 Notes at any time on or after March 15, 2018 at the applicable redemption prices specified in the indenture governing the 2023 Notes (the "Indenture"), plus any accrued and unpaid interest to, but excluding, the applicable redemption date. We are also entitled to redeem up to
40%
of the aggregate principal amount of the 2023 Notes before March 15, 2018 with the net cash proceeds that we receive from certain equity offerings at a redemption price equal to
106.5%
of the principal amount of the 2023 Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, prior to March 15, 2018, we may redeem all or a portion of the 2023 Notes, at a redemption price equal to
100%
of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
If we undergo certain kinds of changes of control, holders of the 2023 Notes have the right to require us to repurchase all or any portion of such holder’s 2023 Notes at
101%
of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit our ability to: (i) create certain liens; (ii) enter into sale and lease-back transactions; (iii) assume, incur or guarantee indebtedness for borrowed money that is secured by a lien on certain principal properties (or on any shares of capital stock of our subsidiaries that own such principal properties) without securing the 2023 Notes on a pari passu basis; and (iv) consolidate with or merge with or into, or sell, transfer, convey or lease all or substantially all of our properties and assets, taken as a whole, to another person.
The carrying value under the 2023 Notes at
June 30, 2017
was
$693.8 million
, net of unamortized debt issuance costs of
$6.2 million
.
Subsidiary Senior Notes due 2017
— Legacy Dean had certain senior notes outstanding at the time of its acquisition, of which one series remains outstanding (
$142 million
aggregate principal amount)
and matures on
October 15, 2017
. The carrying value under these notes at
June 30, 2017
was
$141.1 million
, net of unamortized discounts of
$0.9 million
, at
6.90
% interest. The indenture governing the Legacy Dean senior notes does not contain financial covenants but does contain certain restrictions, including a prohibition against Legacy Dean and its subsidiaries granting liens on certain of their real property interests and a prohibition against Legacy Dean granting liens on the stock of its subsidiaries. The Legacy Dean senior notes are not guaranteed by Dean Foods Company or Legacy Dean’s wholly-owned subsidiaries.
See Note
6
for information regarding the fair value of the 2023 Notes and the subsidiary senior notes due 2017 as of
June 30, 2017
.
Capital Lease Obligations and Other
— Capital lease obligations of
$3.1 million
and
$4.0 million
as of
June 30, 2017
and
December 31, 2016
, respectively, were primarily comprised of our leases for information technology equipment.
6
. Derivative Financial Instruments and Fair Value Measurements
Derivative Financial Instruments
Commodities
— We are exposed to commodity price fluctuations, including in the prices of milk, butterfat, sweeteners and other commodities used in the manufacturing, packaging and distribution of our products, such as natural gas, resin and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from
one month
’s to
one year
’s anticipated requirements, depending on the ingredient or commodity. These contracts are considered normal purchases.
In addition to entering into forward purchase contracts, from time to time we may purchase over-the-counter contracts from qualified financial institutions or enter into exchange-traded commodity futures contracts for raw materials that are ingredients of our products or components of such ingredients. All commodities contracts are marked to market in our income statement at each reporting period and a derivative asset or liability is recorded on our balance sheet.
Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. At
June 30, 2017
and
December 31, 2016
, our derivatives recorded at fair value in our unaudited Condensed Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
June 30, 2017
|
|
December 31, 2016
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Commodities contracts — current(1)
|
$
|
6,945
|
|
|
$
|
2,416
|
|
|
$
|
2,037
|
|
|
$
|
12
|
|
Commodities contracts — non-current(2)
|
1
|
|
|
—
|
|
|
10
|
|
|
—
|
|
Total derivatives
|
$
|
6,946
|
|
|
$
|
2,416
|
|
|
$
|
2,047
|
|
|
$
|
12
|
|
|
|
(1)
|
Derivative assets and liabilities that have settlement dates equal to or less than 12 months from the respective balance sheet date are included in prepaid expenses and other current assets and accounts payable and accrued expenses, respectively, in our unaudited Condensed Consolidated Balance Sheets.
|
|
|
(2)
|
Derivative assets and liabilities that have settlement dates greater than 12 months from the respective balance sheet date are included in identifiable intangible and other assets, net and other long-term liabilities, respectively, in our unaudited Condensed Consolidated Balance Sheets.
|
Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, we follow a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
•
|
Level 1 — Quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
|
|
|
•
|
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of
June 30, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Asset — Commodities contracts
|
$
|
6,946
|
|
|
$
|
—
|
|
|
$
|
6,946
|
|
|
$
|
—
|
|
Liability — Commodities contracts
|
2,047
|
|
|
—
|
|
|
2,047
|
|
|
—
|
|
A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of
December 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Asset — Commodities contracts
|
$
|
2,416
|
|
|
$
|
—
|
|
|
$
|
2,416
|
|
|
$
|
—
|
|
Liability — Commodities contracts
|
12
|
|
|
—
|
|
|
12
|
|
|
—
|
|
Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on our Credit Facility, receivables securitization facility, and certain other debt are variable, their fair values approximate their carrying values.
The fair values of the 2023 Notes and subsidiary senior notes were determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined these fair values to be Level 2 measurements as all significant inputs into the quotes provided by our pricing source are observable in active markets. The following table presents the outstanding principal amounts and fair values of the 2023 Notes and subsidiary senior notes at
June 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Amount Outstanding
|
|
Fair Value
|
|
Amount Outstanding
|
|
Fair Value
|
|
(In thousands)
|
Dean Foods Company senior notes due 2023
|
$
|
700,000
|
|
|
$
|
736,750
|
|
|
$
|
700,000
|
|
|
$
|
736,750
|
|
Subsidiary senior notes due 2017
|
142,000
|
|
|
143,775
|
|
|
142,000
|
|
|
146,615
|
|
Additionally, we maintain a Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified deferred compensation arrangement for our executive officers and other employees earning compensation in excess of the maximum compensation that can be taken into account with respect to our 401(k) plan. The SERP is designed to provide these employees with retirement benefits from us that are equivalent, as a percentage of total compensation, to the benefits provided to other employees. The assets related to the SERP are primarily invested in money market and mutual funds and are held at fair value. We classify these assets as Level 2 as fair value can be corroborated based on quoted market prices for identical or similar instruments in markets that are not active. The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of
June 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Money market
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
—
|
|
Mutual funds
|
1,754
|
|
|
—
|
|
|
1,754
|
|
|
—
|
|
The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Money market
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
—
|
|
Mutual funds
|
1,673
|
|
|
—
|
|
|
1,673
|
|
|
—
|
|
7
. Common Stock and Share-Based Compensation
Our authorized shares of capital stock include
one million
shares of preferred stock and
250 million
shares of common stock with a par value of
$0.01
per share.
Cash Dividends
— In November 2013, we announced that our Board of Directors had adopted a cash dividend policy. Under the policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. Beginning in 2015, all awards of restricted stock units, performance stock units and phantom shares provide for cash dividend equivalent units, which vest in cash at the same time as the underlying award. Quarterly dividends of
$0.09
per share were paid in March and June of
2017
and
2016
, totaling approximately
$16.4 million
and
$16.5 million
for the first
six
months of
2017
and
2016
, respectively. We expect to pay quarterly dividends of
$0.09
per share (
$0.36
per share annually) for the remainder of
2017
. Our cash dividend policy is subject to modification, suspension or cancellation in any manner and at any time. Dividends are presented as a reduction to retained earnings in our unaudited Condensed Consolidated Statement of Stockholders’ Equity unless we have an accumulated deficit as of the end of the period, in which case they are reflected as a reduction to additional paid-in capital.
Stock Repurchase Program
— Since 1998, our Board of Directors has from time to time authorized the repurchase of our common stock up to an aggregate of
$2.38 billion
, excluding fees and commissions. We made
no
share repurchases during the
three and six
months ended
June 30, 2017
. We repurchased
1,371,185
shares for
$25.0 million
during the
three and six
months ended
June 30, 2016
. As of
June 30, 2017
,
$197.1 million
remained available for repurchases under this program (excluding fees and commissions). Our management is authorized to purchase shares from time to time through open market transactions at prevailing prices or in privately-negotiated transactions, subject to market conditions and other factors. Shares, when repurchased, are retired.
Restricted Stock Units
— We issue restricted stock units ("RSUs") to certain senior employees and non-employee directors as part of our long-term incentive compensation program. An RSU represents the right to receive one share of common stock in the future. RSUs have no exercise price. RSUs granted to employees generally vest ratably over
three years
, subject to certain accelerated vesting provisions based primarily on a change of control, or in certain cases upon death or qualified disability. RSUs granted to non-employee directors vest ratably over
three years
.
The following table summarizes RSU activity during the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
Non-Employee Directors
|
|
Total
|
RSUs outstanding at January 1, 2017
|
872,785
|
|
|
80,207
|
|
|
952,992
|
|
RSUs granted
|
395,097
|
|
|
45,528
|
|
|
440,625
|
|
Shares issued upon vesting of RSUs
|
(221,992
|
)
|
|
(37,204
|
)
|
|
(259,196
|
)
|
RSUs canceled or forfeited(1)
|
(296,696
|
)
|
|
(2,112
|
)
|
|
(298,808
|
)
|
RSUs outstanding at June 30, 2017
|
749,194
|
|
|
86,419
|
|
|
835,613
|
|
Weighted average grant date fair value
|
$
|
17.91
|
|
|
$
|
18.46
|
|
|
$
|
17.97
|
|
|
|
(1)
|
Pursuant to the terms of our plans, employees have the option of forfeiting RSUs to cover their minimum statutory tax withholding when shares are issued. Any RSUs surrendered or canceled in satisfaction of participants’ tax withholding obligations are not available for future grants under the plans.
|
Performance Stock Units
— Beginning in 2016, performance share units ("PSUs") were granted as part of our long-term incentive compensation program. PSUs will cliff vest and be settled in shares of our common stock at the end of a
three
-year performance period contingent upon the achievement of specific performance goals established for each calendar year during the respective performance periods. The number of shares that may be earned at the end of the vesting period may range from
zero
to
200
percent of the target award amount based on the achievement of the performance goals. The fair value of PSUs is estimated using the market price of our common stock on the date of grant, and we recognize compensation expense ratably over the vesting period for the portion of the awards that are expected to vest. The following table summarizes PSU activity during the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
PSUs
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at January 1, 2017
|
90,583
|
|
|
$
|
19.13
|
|
Granted
|
158,402
|
|
|
18.84
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited or canceled
|
(81,217
|
)
|
|
19.29
|
|
Outstanding at June 30, 2017
|
167,768
|
|
|
$
|
18.78
|
|
Phantom Shares
— We grant phantom shares as part of our long-term incentive compensation program, which are similar to RSUs in that they are based on the price of our stock and vest ratably over a
three
-year period, but are cash-settled based upon the value of our stock at each vesting date. The fair value of the awards is remeasured at each reporting period. Compensation expense is recognized over the vesting period with a corresponding liability, which is recorded in accounts payable and accrued expenses in our unaudited Condensed Consolidated Balance Sheets. The following table summarizes the phantom share activity during the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at January 1, 2017
|
1,361,062
|
|
|
$
|
17.78
|
|
Granted
|
767,521
|
|
|
18.47
|
|
Converted/paid
|
(600,346
|
)
|
|
17.00
|
|
Forfeited
|
(140,783
|
)
|
|
18.27
|
|
Outstanding at June 30, 2017
|
1,387,454
|
|
|
$
|
18.45
|
|
Stock Options
— The following table summarizes stock option activity during the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
Options outstanding and exercisable at January 1, 2017
|
2,038,829
|
|
|
$
|
19.78
|
|
|
|
|
|
Forfeited and canceled
|
(557,329
|
)
|
|
26.18
|
|
|
|
|
|
Exercised
|
(49,879
|
)
|
|
15.12
|
|
|
|
|
|
Options outstanding and exercisable at June 30, 2017
|
1,431,621
|
|
|
$
|
17.45
|
|
|
1.15
|
|
$
|
2,709,128
|
|
We recognize share-based compensation expense for stock options ratably over the vesting period. The fair value of each option award is estimated on the date of grant using a Black-Scholes valuation model. We did not grant any stock options during
2016
or
2017
, nor do we currently plan to in the future. At
June 30, 2017
, there was
no
remaining unrecognized stock option expense related to unvested awards.
Share-Based Compensation Expense
— The following table summarizes the share-based compensation expense recognized during the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
RSUs
|
$
|
1,046
|
|
|
$
|
2,068
|
|
|
$
|
2,654
|
|
|
$
|
3,437
|
|
PSUs
|
(1,051
|
)
|
|
451
|
|
|
(551
|
)
|
|
839
|
|
Phantom shares
|
2,707
|
|
|
3,210
|
|
|
4,556
|
|
|
7,521
|
|
Total
|
$
|
2,702
|
|
|
$
|
5,729
|
|
|
$
|
6,659
|
|
|
$
|
11,797
|
|
8
. Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is based on the weighted average number of common shares outstanding during each period. Diluted EPS is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands, except share data)
|
Basic earnings (loss) per share computation:
|
|
|
|
Numerator:
|
|
|
|
Income
|
$
|
17,647
|
|
|
$
|
33,371
|
|
|
$
|
7,888
|
|
|
$
|
72,572
|
|
Denominator:
|
|
|
|
|
|
|
|
Average common shares
|
90,882,415
|
|
|
91,244,745
|
|
|
90,796,585
|
|
|
91,406,969
|
|
Basic earnings per share
|
$
|
0.19
|
|
|
$
|
0.37
|
|
|
$
|
0.09
|
|
|
$
|
0.79
|
|
Diluted earnings (loss) per share computation:
|
|
|
|
Numerator:
|
|
|
|
Income
|
$
|
17,647
|
|
|
$
|
33,371
|
|
|
$
|
7,888
|
|
|
$
|
72,572
|
|
Denominator:
|
|
|
|
|
|
|
|
Average common shares — basic
|
90,882,415
|
|
|
91,244,745
|
|
|
90,796,585
|
|
|
91,406,969
|
|
Stock option conversion(1)
|
220,318
|
|
|
232,113
|
|
|
232,495
|
|
|
258,164
|
|
RSUs and PSUs(2)
|
266,297
|
|
|
202,955
|
|
|
336,866
|
|
|
329,945
|
|
Average common shares — diluted
|
91,369,030
|
|
|
91,679,813
|
|
|
91,365,946
|
|
|
91,995,078
|
|
Diluted earnings per share
|
$
|
0.19
|
|
|
$
|
0.36
|
|
|
$
|
0.09
|
|
|
$
|
0.79
|
|
(1) Anti-dilutive options excluded
|
655,700
|
|
|
1,282,259
|
|
|
776,710
|
|
|
1,349,300
|
|
(2) Anti-dilutive stock units excluded
|
8,959
|
|
|
5,911
|
|
|
4,504
|
|
|
—
|
|
9
. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended
June 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Other
Postretirement
Benefits Items
|
|
Foreign
Currency
Items
|
|
Total
|
Balance at March 31, 2017
|
$
|
(83,208
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(87,989
|
)
|
Other comprehensive income before reclassifications
|
3,278
|
|
|
—
|
|
|
3,278
|
|
Amounts reclassified from accumulated other comprehensive income(1)
|
(1,646
|
)
|
|
—
|
|
|
(1,646
|
)
|
Net current-period other comprehensive income
|
1,632
|
|
|
—
|
|
|
1,632
|
|
Balance at June 30, 2017
|
$
|
(81,576
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(86,357
|
)
|
|
|
(1)
|
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note
10
.
|
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended
June 30, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Other
Postretirement
Benefits Items
|
|
Foreign
Currency
Items
|
|
Total
|
Balance at March 31, 2016
|
$
|
(81,794
|
)
|
|
$
|
(2,371
|
)
|
|
$
|
(84,165
|
)
|
Other comprehensive income (loss) before reclassifications
|
3,015
|
|
|
(1,208
|
)
|
|
1,807
|
|
Amounts reclassified from accumulated other comprehensive income(1)
|
(1,465
|
)
|
|
—
|
|
|
(1,465
|
)
|
Net current-period other comprehensive income (loss)
|
1,550
|
|
|
(1,208
|
)
|
|
342
|
|
Balance at June 30, 2016
|
$
|
(80,244
|
)
|
|
$
|
(3,579
|
)
|
|
$
|
(83,823
|
)
|
|
|
(1)
|
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note
10
.
|
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the
six
months ended
June 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Other
Postretirement
Benefits Items
|
|
Foreign
Currency
Items
|
|
Total
|
Balance at December 31, 2016
|
$
|
(84,852
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(89,633
|
)
|
Other comprehensive income before reclassifications
|
6,569
|
|
|
—
|
|
|
6,569
|
|
Amounts reclassified from accumulated other comprehensive income(1)
|
(3,293
|
)
|
|
—
|
|
|
(3,293
|
)
|
Net current-period other comprehensive income
|
3,276
|
|
|
—
|
|
|
3,276
|
|
Balance at June 30, 2017
|
$
|
(81,576
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(86,357
|
)
|
|
|
(1)
|
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note
10
.
|
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the
six
months ended
June 30, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Other
Postretirement
Benefits Items
|
|
Foreign
Currency
Items
|
|
Total
|
Balance at December 31, 2015
|
$
|
(83,279
|
)
|
|
$
|
(2,524
|
)
|
|
$
|
(85,803
|
)
|
Other comprehensive income (loss) before reclassifications
|
5,964
|
|
|
(1,055
|
)
|
|
4,909
|
|
Amounts reclassified from accumulated other comprehensive income(1)
|
(2,929
|
)
|
|
—
|
|
|
(2,929
|
)
|
Net current-period other comprehensive income (loss)
|
3,035
|
|
|
(1,055
|
)
|
|
1,980
|
|
Balance at June 30, 2016
|
$
|
(80,244
|
)
|
|
$
|
(3,579
|
)
|
|
$
|
(83,823
|
)
|
|
|
(1)
|
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note
10
.
|
10
. Employee Retirement and Postretirement Benefits
We sponsor various defined benefit and defined contribution retirement plans, including various employee savings and profit sharing plans, and contribute to various multiemployer pension plans on behalf of our employees. All full-time union and non-union employees who have met requirements pursuant to the plans are eligible to participate in one or more of these plans.
Defined Benefit Plans
— The benefits under our defined benefit plans are based on years of service and employee compensation. The following table sets forth the components of net periodic benefit cost for our defined benefit plans during the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
752
|
|
|
$
|
793
|
|
|
$
|
1,504
|
|
|
$
|
1,586
|
|
Interest cost
|
2,927
|
|
|
3,043
|
|
|
5,854
|
|
|
6,086
|
|
Expected return on plan assets
|
(4,758
|
)
|
|
(4,633
|
)
|
|
(9,516
|
)
|
|
(9,266
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
Prior service cost
|
176
|
|
|
214
|
|
|
352
|
|
|
428
|
|
Unrecognized net loss
|
2,581
|
|
|
2,206
|
|
|
5,162
|
|
|
4,412
|
|
Net periodic benefit cost
|
$
|
1,678
|
|
|
$
|
1,623
|
|
|
$
|
3,356
|
|
|
$
|
3,246
|
|
On April 3, 2017, we made a discretionary contribution of
$38.5 million
to our company-sponsored pension plans. We expect to contribute an additional
$0.8 million
to the company-sponsored pension plans during the remainder of 2017.
Postretirement Benefits
— Certain of our subsidiaries provide health care benefits to certain retirees who are covered under specific group contracts. The following table sets forth the components of net periodic benefit cost for our postretirement benefit plans during the
three and six
months ended
June 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
146
|
|
|
$
|
160
|
|
|
$
|
292
|
|
|
$
|
320
|
|
Interest cost
|
240
|
|
|
271
|
|
|
480
|
|
|
542
|
|
Amortizations:
|
|
|
|
|
|
|
|
Prior service cost
|
23
|
|
|
23
|
|
|
46
|
|
|
46
|
|
Unrecognized net gain
|
(114
|
)
|
|
(61
|
)
|
|
(228
|
)
|
|
(122
|
)
|
Net periodic benefit cost
|
$
|
295
|
|
|
$
|
393
|
|
|
$
|
590
|
|
|
$
|
786
|
|
11
. Asset Impairment Charges and Facility Closing and Reorganization Costs
Asset Impairment Charges
We evaluate our finite-lived intangible and long-lived assets for impairment when circumstances indicate that the carrying value may not be recoverable. Indicators of impairment could include, among other factors, significant changes in the business environment or the planned closure of a facility. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows.
Testing the assets for recoverability involves developing estimates of future cash flows directly associated with, and that are expected to arise as a direct result of, the use and eventual disposition of the assets. Other inputs are based on assessment of an individual asset’s alternative use within other production facilities, evaluation of recent market data and historical liquidation sales values for similar assets. As the inputs for testing recoverability are largely based on management’s judgments and are not generally observable in active markets, we consider such measurements to be Level 3 measurements in the fair value hierarchy. See Note
6
.
The results of our analysis indicated
no
impairment of our property, plant and equipment, outside of facility closing and reorganization costs, for the
three and six
months ended
June 30, 2017
and
2016
. We can provide no assurance that we will not have impairment charges in future periods as a result of changes in our business environment, operating results or the assumptions and estimates utilized in our impairment tests.
Facility Closing and Reorganization Costs
Costs associated with approved plans within our ongoing network optimization strategies are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
Six Months Ended June 30
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Closure of facilities, net(1)
|
$
|
4,203
|
|
|
$
|
(1,400
|
)
|
|
$
|
7,689
|
|
|
$
|
(234
|
)
|
Organizational Effectiveness(2)
|
1,614
|
|
|
—
|
|
|
7,414
|
|
|
—
|
|
Facility closing and reorganization costs, net
|
$
|
5,817
|
|
|
$
|
(1,400
|
)
|
|
$
|
15,103
|
|
|
$
|
(234
|
)
|
|
|
(1)
|
Reflects charges, net of gains on the sales of assets, associated with closed facilities that were incurred in
2017
and
2016
. These charges are primarily related to facility closures in Orem, Utah; New Orleans, Louisiana; Rochester, Indiana; Riverside, California; Delta, Colorado; Denver, Colorado; Springfield, Virginia; Buena Park, California; and Sheboygan, Wisconsin, as well as other approved closures that have not yet been announced. We have incurred net charges to date of
$57.5 million
related to these facility closures through
June 30, 2017
. We expect to incur additional charges related to these facility closures of approximately
$6.9 million
related to shutdown, contract termination and other costs. As we continue the evaluation of our supply chain and distribution network, it is likely that we will close additional facilities in the future.
|
|
|
(2)
|
During the first six months of 2017, we embarked on a company-wide, multi-phase organizational effectiveness initiative to better align each key function of the Company with our strategic plan. This initiative has resulted in headcount reductions due to changes to our organizational structure, and the charges shown in the table above are primarily comprised of severance benefits and other employee-related costs associated with these organizational changes. Efforts with respect to our organizational effectiveness initiative are ongoing and we expect that we will incur additional costs in the coming months associated with the approval and implementation of additional phases of the plan; however, as specific details of these phases have not been finalized and approved, future costs are not yet estimable.
|
Activity with respect to facility closing and reorganization costs during the
six
months ended
June 30, 2017
is summarized below and includes items expensed as incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Charges at December 31, 2016
|
|
Charges and Adjustments
|
|
Payments
|
|
Accrued Charges at June 30, 2017
|
|
(In thousands)
|
Cash charges:
|
|
|
|
|
|
|
|
Workforce reduction costs
|
$
|
3,610
|
|
|
$
|
7,464
|
|
|
$
|
(3,572
|
)
|
|
$
|
7,502
|
|
Shutdown costs
|
—
|
|
|
2,557
|
|
|
(2,557
|
)
|
|
—
|
|
Lease obligations after shutdown
|
3,932
|
|
|
166
|
|
|
(814
|
)
|
|
3,284
|
|
Other
|
—
|
|
|
163
|
|
|
(163
|
)
|
|
—
|
|
Subtotal
|
$
|
7,542
|
|
|
10,350
|
|
|
$
|
(7,106
|
)
|
|
$
|
10,786
|
|
Other charges:
|
|
|
|
|
|
|
|
Write-down of assets(1)
|
|
|
4,678
|
|
|
|
|
|
Loss on sale of related assets
|
|
|
67
|
|
|
|
|
|
Other, net
|
|
|
8
|
|
|
|
|
|
Subtotal
|
|
|
4,753
|
|
|
|
|
|
Total
|
|
|
$
|
15,103
|
|
|
|
|
|
|
|
(1)
|
The write-down of assets relates primarily to owned buildings, land and equipment of those facilities identified for closure. The assets were tested for recoverability at the time the decision to close the facilities was more likely than not to occur. Over time, refinements to our estimates used in testing for recoverability may result in additional asset write-downs. The write-down of assets can include accelerated depreciation recorded for those facilities identified for closure. Our methodology for testing the recoverability of the assets is consistent with the methodology described in the “Asset Impairment Charges” section above.
|
12
. Commitments and Contingencies
Contingent Obligations Related to Divested Operations
— We have divested certain businesses in recent years. In each case, we have retained certain known contingent obligations related to those businesses and/or assumed an obligation to indemnify the purchasers of the businesses for certain unknown contingent liabilities, including environmental liabilities. We believe that we have established adequate reserves, which are immaterial to the financial statements, for potential liabilities and indemnifications related to our divested businesses. Moreover, we do not expect any liability that we may have for these retained liabilities, or any indemnification liability, to materially exceed amounts accrued.
Contingent Obligations Related to Milk Supply Arrangements
— On December 21, 2001, in connection with our acquisition of Legacy Dean, we purchased Dairy Farmers of America’s (“DFA”)
33.8%
interest in our operations. In connection with that transaction, we issued a contingent, subordinated promissory note to DFA in the original principal amount of
$40 million
. The promissory note has a
20
-year term that bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of
$96 million
. We may prepay the note in whole or in part at any time, without penalty. The note will become payable only if we materially breach or terminate one of our related milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire in
2021
, without any obligation to pay any portion of the principal or interest. Payments made under the note, if any, would be expensed as incurred. We have not terminated, and we have not materially breached, any of our milk supply agreements with DFA related to the promissory note. We have previously terminated unrelated supply agreements with respect to several plants that were supplied by DFA. In connection with our continued focus on cost control and increased supply chain efficiency, we continue to evaluate our sources of raw milk supply.
Insurance
— We use a combination of insurance and self-insurance for a number of risks, including property, workers’ compensation, general liability, automobile liability, product liability and employee health care utilizing high deductibles. Deductibles vary due to insurance market conditions and risk. Liabilities associated with these risks are estimated considering historical claims experience and other actuarial assumptions. Based on current information, we believe that we have established adequate reserves to cover these claims.
Lease and Purchase Obligations
— We lease certain property, plant and equipment used in our operations under both capital and operating lease agreements. Such leases, which are primarily for machinery, equipment and vehicles, including our distribution fleet, have lease terms ranging from
one
to
20
years. Certain of the operating lease agreements require the payment of additional rentals for maintenance, along with additional rentals based on miles driven or units produced. Certain leases require us to guarantee a minimum value of the leased asset at the end of the lease. Our maximum exposure under those guarantees is not a material amount.
We have entered into various contracts, in the normal course of business, obligating us to purchase minimum quantities of raw materials used in our production and distribution processes, including conventional raw milk, diesel fuel, sugar and other ingredients that are inputs into our finished products. We enter into these contracts from time to time to ensure a sufficient supply of raw ingredients. In addition, we have contractual obligations to purchase various services that are part of our production process.
Litigation, Investigations and Audits
—
On August 9, 2007,
two
plaintiffs filed a putative class action antitrust complaint against Dean Foods and other milk processors in the United States District Court for the Eastern District of Tennessee. Plaintiffs alleged generally that we, either acting alone or in conjunction with others in the milk industry, lessened competition in the Southeastern United States for the sale of processed fluid Grade A milk to retail outlets and other customers. Plaintiffs further alleged that the defendants’ conduct artificially inflated wholesale prices paid by direct milk purchasers. On January 25, 2016, the district court denied plaintiffs’ motion for class certification. On February 8, 2016, plaintiffs filed a petition for permission to appeal the district court’s order denying class certification. That petition was denied by the Sixth Circuit on June 14, 2016. Although the courts refused to certify the case as a class action, the two original plaintiffs decided to pursue their individual claims for damages. The case was scheduled for trial on March 28, 2017. Prior to trial, the plaintiffs agreed with us to settle the lawsuit. We agreed to pay settlements to the plaintiffs and the parties resolved all outstanding claims in the litigation and agreed to voluntarily dismiss the litigation. The litigation was dismissed on March 21, 2017 with respect to one plaintiff, and on March 26, 2017 with respect to the other plaintiff. We recorded a charge and a corresponding liability in connection with the settlements in the first quarter of 2017.
In addition to the legal proceeding described above, we are party from time to time to certain claims, litigations, audits and investigations. Potential liabilities associated with these other matters are not expected to have a material adverse impact on our financial position, results of operations, or cash flows.
13
. Segment, Geographic and Customer Information
We operate as a single reportable segment in manufacturing, marketing, selling and distributing a wide variety of branded and private label dairy and dairy case products. We operate
66
manufacturing facilities which are geographically located largely based on local and regional customer needs and other market factors. We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our products are primarily delivered through what we believe to be one of the most extensive refrigerated direct-to-store delivery (“DSD”) systems in the United States. Our Chief Executive Officer evaluates the performance of our business based on sales and operating income or loss before facility closing and reorganization costs, litigation settlements, impairments of long-lived assets, gains and losses on the sale of businesses and certain other non-recurring gains and losses.
Geographic Information
— Net sales related to our foreign operations comprised less than
1%
of our consolidated net sales during each of the
three and six
months ended
June 30, 2017
and
2016
. None of our long-lived assets are associated with our foreign operations.
Significant Customers
— Our largest customer accounted for approximately
17.0%
and
16.2%
of our consolidated net sales in the three months ended
June 30, 2017
and
2016
, respectively, and accounted for approximately
17.1%
and
16.3%
of our consolidated net sales in the six months ended
June 30, 2017
and
2016
, respectively.