NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three
Months Ended
March 31, 2019
and
2018
(Unaudited)
1. Basis of Presentation and Recently Adopted Accounting Pronouncements
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.
Basis of Presentation
— The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information as well as instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have reflected all material adjustments of a normal and recurring nature necessary for the fair presentation of the results for the periods presented.
For further information, refer to the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31,
2018
.
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
ASU No. 2016-02 — We adopted ASU 2016-02,
Leases (Topic 842) (the New Lease Standard)
as of January 1, 2019. The New Lease Standard requires lessees to recognize a right-of-use (ROU) asset and a lease liability on the balance sheet for operating leases. Accounting for finance leases is substantially unchanged.
We adopted the New Lease Standard using the comparative reporting at adoption method. Under this method, financial results reported in periods prior to January 1, 2019 are unchanged. We also elected the package of practical expedients which among other things, does not require reassessment of lease classification. We have implemented processes and a lease accounting system to ensure adequate internal controls are in place to assess our contracts and enable proper accounting and reporting of financial information.
The adoption of this standard had a significant impact to our condensed consolidated balance sheet due to the recognition of approximately
$358 million
of operating lease liabilities with corresponding operating lease ROU assets as of January 1, 2019. See Note
6
for further discussion.
Recently Issued Accounting Pronouncements
Effective in 2020
ASU No. 2018-13
— In August 2018, the FASB issued ASU 2018-13,
Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement
, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments were issued as a part of the FASB's disclosure framework project, which seeks to improve the effectiveness of disclosures in the notes to the financial statements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of this guidance. We do not intend to early adopt this ASU. We do not expect the adoption of ASU 2018-13 to have a material impact on our financial statements.
ASU No. 2018-15 — In August 2018, the FASB issued ASU 2018-15,
Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new guidance is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact ASU 2018-15 will have on our financial statements.
Effective in 2021
ASU No. 2018-14 — In August 2018, the FASB issued ASU 2018-14,
Compensation — Retirement Benefits —Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans
, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures, and adding disclosure requirements identified as relevant. The amendments were issued as a part of the FASB's disclosure framework project, which seeks to improve the effectiveness of disclosures in the notes to the financial statements. The new guidance is effective for public entities for fiscal years beginning after December 15, 2020. Early adoption is permitted. We do not intend to early adopt this ASU. The amendments should be applied retrospectively. We do not expect the adoption of ASU 2018-14 to have a material impact on our financial statements.
2
. Revenue Recognition
Disaggregation of Net Sales
The following table presents a disaggregation of our net sales by product type and revenue source. We believe these categories most appropriately depict the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with our customers.
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|
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|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2019
|
|
March 31, 2018
|
|
|
(In thousands)
|
|
Fluid milk
|
$
|
1,134,896
|
|
|
$
|
1,259,934
|
|
|
Ice cream(1)
|
225,200
|
|
|
239,598
|
|
|
Fresh cream(2)
|
96,375
|
|
|
91,950
|
|
|
Extended shelf life and other dairy products(3)
|
43,584
|
|
|
45,242
|
|
|
Cultured
|
61,907
|
|
|
64,166
|
|
|
Other beverages(4)
|
68,410
|
|
|
70,344
|
|
|
Other(5)
|
18,896
|
|
|
32,304
|
|
|
Subtotal
|
1,649,268
|
|
|
1,803,538
|
|
|
Sales of excess raw materials(6)
|
118,393
|
|
|
151,802
|
|
|
Sales of other bulk commodities
|
27,773
|
|
|
25,167
|
|
|
Total net sales
|
$
|
1,795,434
|
|
|
$
|
1,980,507
|
|
|
|
|
|
(1)
|
Includes ice cream, ice cream mix and ice cream novelties.
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|
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(2)
|
Includes half-and-half and whipping creams.
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(3)
|
Includes creamers and other extended shelf life fluids.
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(4)
|
Includes fruit juice, fruit flavored drinks, iced tea, water and flax-based milk.
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(5)
|
Includes items for resale such as butter, cheese, eggs and milkshakes.
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|
(6)
|
Historically, we presented sales of excess raw materials as a reduction of cost of sales within our Consolidated Statements of Operations; however, upon further evaluation of these sales in connection with our implementation of ASC 606, we have determined that it is appropriate to present these sales as revenue. Therefore, on a prospective basis, effective January 1, 2018, we began reporting these sales within the net sales line of our unaudited Condensed Consolidated Statements of Operations.
|
The following table presents a disaggregation of our net product sales between sales of Company-branded products versus sales of private label products:
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Three Months Ended
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|
March 31, 2019
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|
March 31, 2018
|
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(In thousands)
|
|
Branded products
|
$
|
851,496
|
|
|
$
|
892,126
|
|
|
Private label products
|
797,772
|
|
|
911,412
|
|
|
Subtotal
|
1,649,268
|
|
|
1,803,538
|
|
|
Sales of excess raw materials
|
118,393
|
|
|
151,802
|
|
|
Sales of other bulk commodities
|
27,773
|
|
|
25,167
|
|
|
Total net sales
|
$
|
1,795,434
|
|
|
$
|
1,980,507
|
|
Revenue Recognition and Nature of Products and Services
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. Revenue is recognized upon transfer of control of promised goods or services to our customers’ facility in an amount that reflects the consideration we expect to ultimately receive in exchange for those promised goods or services. Revenue is recognized net of allowances for product returns, trade promotions and prompt pay and other discounts.
The substantial majority of our revenue is derived from the sale of fluid milk, ice cream and other dairy products, which includes sales of both Company-branded products as well as private label products. In addition, we derive revenue from the sale of excess raw materials and the sale of other bulk commodities.
Our portfolio of products includes fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy and dairy case products. We sell these products under national, regional and local proprietary or licensed brands, or under private labels. Our sales of excess raw materials consist primarily of bulk cream sales. As a result of the purchase of raw milk, we obtain more butterfat than is needed in our production process. Excess butterfat is sold, primarily in the form of bulk cream, to third parties. Additionally, in certain cases we may be required to externally purchase bulk cream in order to fulfill minimum supply requirements for our customers. In these cases, we purchase bulk cream from other processors or suppliers and resell it to our customers to fulfill our contractual requirements with them.
In all cases, we recognize revenue upon delivery to our customers as we have determined that this is the point at which control is transferred, our performance obligation is complete, and we are entitled to consideration.
Contractual Arrangements with Customers
The majority of our sales are to retailers, warehouse clubs, distributors, foodservice outlets, educational institutions and governmental entities with whom we have contractual agreements. Our sales of excess raw materials and other bulk commodities are primarily to dairy cooperatives, dairy processors or other manufacturers for use as a raw ingredient in their respective manufacturing processes. Our customer contracts typically contain standard terms and conditions and a term sheet. In some cases, upon expiration, these arrangements may continue with the same terms and may not be formally renewed. Additionally, we have a number of informal sales arrangements with certain local and regional customers, which we consider to be contracts based on the criteria outlined in ASC 606. Payment terms and conditions vary by customer, but we generally provide credit terms to customers ranging up to
30
days; therefore, we have determined that our contracts do not include a significant financing component. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses based on our historical experience.
We have determined that we satisfy our performance obligations related to our customer contracts at a point in time, as opposed to over time, and, accordingly, revenue is recognized at a point in time across all of our revenue streams. Therefore, we do not have any contract balances with our customers recorded on our unaudited Condensed Consolidated Balance Sheets.
Sales Incentives and Other Promotional Programs
We routinely offer sales incentives and discounts through various regional and national programs to our customers and consumers. These programs include scan backs, product rebates, product returns, trade promotions and co-op advertising, product discounts, product coupons and amounts paid to customers for shelf space in retail stores. The expenses associated with these programs are accounted for as reductions to the transaction price of our products and are therefore recorded as reductions to gross sales.
Some of our sales incentives are recorded by estimating incentive costs or redemption rates based on our historical experience and expected levels of performance of the trade promotion or other program. We maintain liabilities at the end of each period for the estimated incentive costs incurred but unpaid for these programs. Differences between estimated and actual incentive costs are normally not material and are recognized in earnings in the period such differences are determined.
3
. Investment in Affiliates
Unconsolidated Affiliate and Related Party
Organic Valley Fresh Joint Venture
—
In the third quarter of 2017, we commenced the operations of our 50/50 strategic joint venture with Cooperative Regions of Organic Producer Pools (“CROPP”), an independent farmer cooperative that distributes organic milk and other organic dairy products under the
Organic Valley
®
brand. The joint venture, called Organic Valley Fresh, combines our processing plants and refrigerated DSD system with CROPP's portfolio of recognized brands and products, marketing expertise, and access to an organic milk supply from America's largest cooperative of organic dairy farmers to bring the
Organic Valley
®
brand to retailers. We and CROPP each made a capital contribution of
$2.0 million
to the joint venture during the third quarter of 2017.
We have concluded that Organic Valley Fresh is a variable interest entity, but we have determined that we are not the primary beneficiary of the Organic Valley Fresh joint venture because we do not have the power to direct the activities that most significantly affect the economic performance of the joint venture; therefore, the financial results of the joint venture have not been consolidated in our unaudited Condensed Consolidated Financial Statements. We are accounting for this investment under the equity method of accounting. Our equity in the earnings of the joint venture is included as a component of operating income as we have determined that the joint venture's operations are integral to, and an extension of, our business operations. Our equity in the earnings of the joint venture was
$2.0 million
and
$1.9 million
for the
three
months ended
March 31, 2019
and
2018
, respectively.
Controlling Interest in Consolidated 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 beverage 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.
On June 29, 2018, we increased our ownership interest in Good Karma to
67%
with an additional investment of
$15.0 million
, resulting in control under acquisition method accounting. Good Karma’s results of operations have been consolidated in our unaudited Condensed Consolidated Statements of Operations from the date of acquisition.
Prior to the June 29, 2018 step-acquisition, we accounted for our investment in Good Karma 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. Our equity in the earnings of this investment was not material to our unaudited Condensed Consolidated Financial Statements for the
three
months ended
March 31, 2018
.
On October 12, 2018, we made a capital contribution to Good Karma of
$3 million
. Our current ownership interest in Good Karma is
69%
.
4
. Inventories
Inventories at
March 31, 2019
and
December 31, 2018
consisted of the following:
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|
March 31, 2019
|
|
December 31, 2018
|
|
|
(In thousands)
|
|
Raw materials and supplies
|
$
|
113,060
|
|
|
$
|
101,620
|
|
|
Finished goods
|
177,316
|
|
|
153,864
|
|
|
Total
|
$
|
290,376
|
|
|
$
|
255,484
|
|
5
. Goodwill and Intangible Assets
As of
March 31, 2019
and December 31, 2018, the net carrying value of goodwill was
zero
. We recorded a total goodwill impairment charge of
$190.7 million
in December 2018 in connection with our quantitative impairment analysis. We have not acquired additional goodwill in the
three months ended March 31, 2019
.
The net carrying amounts of our intangible assets other than goodwill as of
March 31, 2019
and
December 31, 2018
were as follows:
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
Acquisition Costs
|
|
Impairment
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Acquisition Costs
|
|
Impairment
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
(In thousands)
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
69,315
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,315
|
|
|
$
|
69,315
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,315
|
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related and other
|
83,545
|
|
|
—
|
|
|
(46,465
|
)
|
|
37,080
|
|
|
83,545
|
|
|
—
|
|
|
(45,423
|
)
|
|
38,122
|
|
|
Trademarks
|
230,709
|
|
|
(109,910
|
)
|
|
(78,729
|
)
|
|
42,070
|
|
|
230,709
|
|
|
(109,910
|
)
|
|
(74,621
|
)
|
|
46,178
|
|
|
Total
|
$
|
383,569
|
|
|
$
|
(109,910
|
)
|
|
$
|
(125,194
|
)
|
|
$
|
148,465
|
|
|
$
|
383,569
|
|
|
$
|
(109,910
|
)
|
|
$
|
(120,044
|
)
|
|
$
|
153,615
|
|
Our finite-lived trademarks will be amortized on a straight-line basis over their remaining useful lives, which range from approximately
1
to
7 years
, with a weighted-average remaining useful life of approximately
5 years
. Amortization expense on intangible assets for the three months ended
March 31, 2019
and
2018
was
$5.2 million
and
$5.1 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):
|
|
|
|
|
|
|
|
2019
|
$
|
20.6
|
|
|
2020
|
12.5
|
|
|
2021
|
10.8
|
|
|
2022
|
8.1
|
|
|
2023
|
7.3
|
|
6
. Leases
We determine if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities and long-term operating lease liabilities in our condensed consolidated balance sheet. Finance leases are included in property, plant, and equipment, the current maturities of long-term debt and finance leases, as well as long-term debt, net in our condensed consolidated balance sheet. Our finance leases are not material.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate derived from information available at the lease commencement date to determine the present value of our lease payments if a discount rate is not stated within the lease agreement. To estimate the incremental borrowing rate, we utilize a risk-free rate plus our incremental interest rate spread for collateralized debt, which is updated on a quarterly basis. We use multiple incremental borrowing rates that correspond to term of the lease.
We lease certain property, vehicles used in the distribution of our product, and equipment. As of
March 31, 2019
, we had approximately
1,650
leases with remaining terms ranging from less than
one year
to
20 years
. Our leases primarily consist of:
•
Land and buildings of our manufacturing facilities and corporate office
•
Leased vehicles within our direct-to-store delivery (“DSD”) system
•
Leased equipment primarily related to equipment used in the production of our products.
We also have certain storage service agreements that may be treated as real estate leases. Storage agreements providing us with both fully dedicated square footage and the right to designate how the space is utilized are classified as a lease and included in the ROU asset and corresponding lease liability. To determine if a storage agreement has an embedded real estate lease we analyze the agreement to determine if the facility has space that is fully dedicated to storing and managing our products. If the space is fully dedicated to our products, we analyze whether or not we have the right and ability to dictate how the designated space will be utilized to manage our refrigerated and frozen products. Fixed payment amounts related to those agreements are included in the determination of the ROU asset and lease liability.
Our senior secured revolving credit facility and our receivables backed securitization facility contain certain restrictions on finance lease activities as these are treated as indebtedness and subject to the indebtedness covenants pursuant to these credit agreements. See further discussion of debt facilities and covenant restrictions in Note
7
.
Our lease terms may include options to extend or terminate the lease. We include options to extend the lease when it is reasonably certain that we will exercise that option based on the individual lease and our business objectives at lease inception. We have elected to not record leases with a term of 12 months or less on the balance sheet. Certain vehicle leases contain residual value guarantees (“RVG”). We continue to monitor whether amounts related to RVGs are probable of being owed. As of
March 31, 2019
and December 31, 2018, we do not expect to make any payments related to RVGs, and our maximum exposure under those guarantees is not a material amount; therefore, we have excluded from the determination of lease payments.
We have elected the practical expedient to combine the lease and non-lease components for all asset classes, except vehicles. For vehicles, we have three separate full service agreements, wherein the agreements provide for certain maintenance services to be included in the overall cost to lease the asset. We determined the stand-alone prices for each of the lease and non-lease components based on comparisons to similar supplier arrangements (such as the cost to lease a vehicle without maintenance services and the cost to obtain maintenance services for a non-leased vehicle). The total transaction price is allocated to the lease and non-lease components on a relative stand-alone price basis.
The components of lease expenses were as follows (in thousands):
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|
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|
|
|
|
|
|
Quarter ended
|
|
|
March 31, 2019
|
|
Operating lease cost
|
$
|
31,395
|
|
|
Finance lease cost
|
306
|
|
|
Amortization of ROU assets
|
285
|
|
|
Interest on lease liability
|
21
|
|
|
Short term lease cost (1)
|
$
|
4,846
|
|
|
Variable lease cost (2)
|
2,830
|
|
|
Sublease income
|
(1,580
|
)
|
|
Total net lease cost
|
$
|
37,797
|
|
(1)
Related to leases with a term of 12 months or less that are not recorded on the balance sheet.
|
|
|
|
(2)
|
Certain operating lease agreements require the payment of additional payments for maintenance, along with additional rentals based on miles driven or units produced.
|
Supplemental balance sheet information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
As of
|
|
|
March 31, 2019
|
|
Operating leases:
|
|
|
Operating lease ROU asset
|
$
|
316,831
|
|
|
|
|
|
Current operating lease liabilities
|
95,774
|
|
|
Long-term operating lease liabilities
|
236,366
|
|
|
Total operating lease liabilities
|
$
|
332,140
|
|
The weighted-average remaining lease term of our operating leases as of March 31, 2019 was
4.8 years
, and our weighted-average discount rate was
6.4%
.
Supplemental cash flow and other information related to leases was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
March 31, 2019
|
|
Operating cash flows information:
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
31,014
|
|
|
|
|
|
Non-cash activity:
|
|
|
Right of use assets obtained in exchange for lease obligations
|
$
|
15,260
|
|
Maturities of operating lease liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
2019 (excluding the three months ended March 31, 2019)
|
$
|
88,130
|
|
|
2020
|
91,969
|
|
|
2021
|
66,952
|
|
|
2022
|
47,742
|
|
|
2023
|
35,583
|
|
|
2024
|
23,792
|
|
|
Thereafter
|
32,605
|
|
|
Total lease payments
|
$
|
386,773
|
|
|
Less: imputed interest
|
(54,633
|
)
|
|
Total lease obligations
|
$
|
332,140
|
|
|
Less: current obligations
|
95,774
|
|
|
Long-term lease obligations
|
236,366
|
|
Disclosures related to periods prior to adoption of the New Lease Standard
Prior to the adoption of this standard, our future minimum payments under non-cancelable operating leases with terms in excess of one year were as follows (in thousands):
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
2019
|
$
|
118,827
|
|
|
2020
|
90,615
|
|
|
2021
|
64,501
|
|
|
2022
|
45,049
|
|
|
2023
|
32,771
|
|
|
Thereafter
|
50,998
|
|
|
Total minimum lease payments
|
$
|
402,761
|
|
7
. Debt
Our long-term debt as of
March 31, 2019
and
December 31, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
Amount
|
|
Interest
Rate
|
|
|
Amount
|
|
Interest
Rate
|
|
|
|
(In thousands, except percentages)
|
|
|
Dean Foods Company debt obligations:
|
|
|
|
|
|
|
|
|
|
|
Senior secured revolving credit facility
|
$
|
17,800
|
|
|
7.25
|
% *
|
|
$
|
19,300
|
|
|
4.65
|
% *
|
|
Senior notes due 2023
|
700,000
|
|
|
6.50
|
|
|
700,000
|
|
|
6.50
|
|
|
|
717,800
|
|
|
|
|
|
719,300
|
|
|
|
|
|
Subsidiary debt obligations:
|
|
|
|
|
|
|
|
|
|
|
Receivables securitization facility
|
295,000
|
|
|
3.98
|
*
|
|
190,000
|
|
|
3.54
|
*
|
|
Finance lease and other
|
1,180
|
|
|
—
|
|
|
1,618
|
|
|
—
|
|
|
|
296,180
|
|
|
|
|
|
191,618
|
|
|
|
|
|
Subtotal
|
1,013,980
|
|
|
|
|
|
910,918
|
|
|
|
|
|
Unamortized debt issuance costs
|
(4,299
|
)
|
|
|
|
|
(4,574
|
)
|
|
|
|
|
Total debt
|
1,009,681
|
|
|
|
|
|
906,344
|
|
|
|
|
|
Less current portion
|
(1,053
|
)
|
|
|
|
|
(1,174
|
)
|
|
|
|
|
Total long-term portion
|
$
|
1,008,628
|
|
|
|
|
|
$
|
905,170
|
|
|
|
|
* Represents a weighted average rate, including applicable interest rate margins.
The scheduled debt maturities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
2019
|
$
|
1,053
|
|
|
2020
|
127
|
|
|
2021
|
—
|
|
|
2022
|
295,000
|
|
|
2023
|
700,000
|
|
|
Thereafter(1)
|
17,800
|
|
|
Subtotal
|
1,013,980
|
|
|
Less unamortized debt issuance costs
|
(4,299
|
)
|
|
Total debt
|
$
|
1,009,681
|
|
(1) Our senior secured revolving credit facility was extended on February 22, 2019 to a maturity date of February 22, 2024 that springs to September 15, 2022 in the event we don’t repay or refinance the 2023 Notes on or prior to July 15, 2022.
Senior Secured Revolving Credit Facility
— On February 22, 2019, we entered into that certain Credit Agreement, by and among the Company, Coöperatieve Rabobank U.A., New York Branch, as administrative agent, and the lenders party thereto (the “Credit Agreement”), pursuant to which the lenders party thereto have provided us with a senior secured revolving borrowing base credit facility with a maximum facility amount of up to
$265 million
(the “Credit Facility”). Borrowings under the Credit Facility are limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount is equal to (i) on and following
February 22, 2019
and prior to the date on which certain conditions relating to the grant of security interest in certain of our equipment and real property and our election to include such equipment and real property in the borrowing base,
$175 million
and (ii) thereafter,
65%
of the value of such equipment and real property. The Credit Facility matures on
February 22, 2024
, with a
September 15, 2022
springing maturity date in the event the 2023 Notes are not refinanced or repaid on or prior to
July 15, 2022
. A portion of the Credit Facility is available for the issuance of up to
$25 million
of standby letters of credit and up to
$10 million
of swing line loans.
Loans outstanding under the Credit Facility bear interest, at our option, at either: (i) the Base Rate (as defined in the
Credit Agreement) or (ii) the Adjusted Eurodollar Rate (as defined in the Credit Agreement), plus a margin of between
1.25%
and
1.75%
(in the case of Base Rate loans) or
2.25%
and
2.75%
(in the case of Eurodollar Rate loans), in each case based on our total net leverage ratio.
We may make optional prepayments of the loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, and with a
50%
commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds relating to the assets not included in the borrowing base. The Credit Facility is guaranteed by our existing and future wholly owned material domestic subsidiaries, which are substantially all of our existing domestic subsidiaries other than the subsidiaries that are sellers under 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, voluntary payments of the 2023 Notes, 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. The Credit Agreement includes a fixed charge covenant that requires us to maintain a fixed charge coverage ratio of at least
1.05
to
1.00
at any time that our liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to
$25 million
for all such cash) at such time is less than
50%
of the borrowing base under the Credit Facility (or, at any time prior to inclusion of certain equipment and real property, less than
$100 million
).
In connection with the execution of this amendment to the Credit Agreement, we paid certain arrangement fees of approximately
$4.9 million
to lenders and other fees of approximately
$0.2 million
, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off
$3.3 million
of unamortized deferred financing costs in connection with the termination of that certain Credit Agreement, originally dated as of March 26, 2015, among the Company, Bank of America, N.A., as Administrative Agent and the lenders party thereto (as amended, the “prior credit agreement”).
At
March 31, 2019
, we had
$17.8 million
outstanding borrowings under the Credit Facility. Our average daily balance under the Credit Facility during the
three
months ended
March 31, 2019
, was
$1.9 million
. There were
no
letters of credit issued under the Credit Facility as of
March 31, 2019
.
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, as is customary for receivables securitization facilities. 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 Receivables Securitization Facility is treated as a borrowing for accounting purposes.
On
January 17, 2019
, we amended and restated the existing receivables purchase agreement ("Receivables Purchase Agreement") governing our Receivables Securitization Facility to, among other things, (i) waive compliance with the financial covenant in the Receivables Purchase Agreement requiring the Company to maintain a total net leverage ratio (as defined in the Receivables Purchase Agreement) of less than or equal to
4.25
to
1.00
for the test period ended
December 31, 2018
(the “Financial Covenant”) and (ii) any cross default under the Receivables Purchase Agreement arising from non-compliance with the Financial Covenant under the prior Credit Facility.
On
February 22, 2019
, we amended and restated the Receivables Purchase Agreement to, among other things, extend the liquidity termination date. The Receivables Purchase Agreement contains covenants consistent with those contained in the Credit Agreement.
In connection with the execution of this amendment and restatement of the Receivables Purchase Agreement, we paid certain arrangement fees of approximately
$2.2 million
to lenders and other fees of approximately
$0.2 million
, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off
$0.4 million
of unamortized deferred financing costs in connection with prior amendments to the Receivables Purchase Agreement.
Based on the monthly borrowing base formula, we had the ability to borrow up to
$425.8 million
of the total commitment amount under the Receivables Securitization Facility as of
March 31, 2019
. The total amount of receivables sold to these entities as of
March 31, 2019
was
$547.6 million
. During the first
three
months of
2019
, we borrowed
$0.4 billion
and repaid
$0.3 billion
under the facility with a remaining balance of
$295.0 million
as of
March 31, 2019
. In addition to letters of credit in the aggregate amount of
$111.9 million
that were issued but undrawn, the remaining available borrowing capacity was
$18.9 million
at
March 31,
2019
. Our average daily balance under this facility during the
three
months ended
March 31, 2019
was
$255.7 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 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. 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 unless certain customary conditions are met.
The carrying value under the 2023 Notes at
March 31, 2019
was
$695.7 million
, net of unamortized debt issuance costs of
$4.3 million
.
See Note
8
for information regarding the fair value of the 2023 Notes as of
March 31, 2019
.
Finance Lease Obligations and Other
— Finance lease obligations of
$1.2 million
and
$1.6 million
as of
March 31, 2019
and
December 31, 2018
, respectively, were primarily comprised of our leases for information technology equipment. See further discussion of our lease obligations in Note
6
.
8
. 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
March 31, 2019
and
December 31, 2018
, our derivatives recorded at fair value in our unaudited Condensed Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
(In thousands)
|
|
Commodities contracts — current(1)
|
$
|
190
|
|
|
$
|
11
|
|
|
$
|
1,070
|
|
|
$
|
4,328
|
|
|
Commodities contracts — non-current(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total derivatives
|
$
|
190
|
|
|
$
|
11
|
|
|
$
|
1,070
|
|
|
$
|
4,328
|
|
|
|
|
|
(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
March 31, 2019
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of March 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset — Commodities contracts
|
$
|
190
|
|
|
$
|
—
|
|
|
$
|
190
|
|
|
$
|
—
|
|
|
Liability — Commodities contracts
|
1,070
|
|
|
—
|
|
|
1,070
|
|
|
—
|
|
A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Asset — Commodities contracts
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
Liability — Commodities contracts
|
4,328
|
|
|
—
|
|
|
4,328
|
|
|
—
|
|
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 value of the 2023 Notes was 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 amount and fair value of the 2023 Notes at
March 31, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
Amount Outstanding
|
|
Fair Value
|
|
Amount Outstanding
|
|
Fair Value
|
|
|
(In thousands)
|
|
Dean Foods Company senior notes due 2023
|
$
|
700,000
|
|
|
$
|
456,869
|
|
|
$
|
700,000
|
|
|
$
|
560,000
|
|
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 similar instruments in active markets. The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of
March 31, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Money market
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
Mutual funds
|
1,819
|
|
|
—
|
|
|
1,819
|
|
|
—
|
|
The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Money market
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
Mutual funds
|
1,693
|
|
|
—
|
|
|
1,693
|
|
|
—
|
|
9
. 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 accordance with our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. In February 2019, our Board of Directors reviewed the Company's dividend policy and determined that it would be in the best interest of the stockholders to suspend dividend payments. Consequently,
no
dividends were paid in the first
three
months of
2019
. From 2015 through 2018, all awards of restricted stock units, performance stock units and phantom shares provided for cash dividend equivalent units, which vested in cash at the same time as the underlying award. A quarterly dividend of
$0.09
per share was paid in March
2018
, totaling approximately
$8.2 million
for the first
three
months of
2018
. 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
months ended
March 31, 2019
and
2018
. As of
March 31, 2019
,
$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
three
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
Non-Employee Directors
|
|
Total
|
|
RSUs outstanding at January 1, 2019
|
840,431
|
|
|
140,539
|
|
|
980,970
|
|
|
RSUs granted
|
1,318,897
|
|
|
268,373
|
|
|
1,587,270
|
|
|
Shares issued upon vesting of RSUs
|
(189,242
|
)
|
|
(58,938
|
)
|
|
(248,180
|
)
|
|
RSUs canceled or forfeited(1)
|
(276,589
|
)
|
|
(2,641
|
)
|
|
(279,230
|
)
|
|
RSUs outstanding at March 31, 2019
|
1,693,497
|
|
|
347,333
|
|
|
2,040,830
|
|
|
Weighted average grant date fair value
|
$
|
5.07
|
|
|
$
|
4.84
|
|
|
$
|
5.03
|
|
|
|
|
|
(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
— In 2016, we began granting performance stock units ("PSUs") as a part of our long-term incentive compensation program. PSUs cliff vest and settle 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 performance period. The PSUs are deemed granted in
three
separate
one
year tranches on the dates in which our Compensation Committee establishes the applicable annual performance goals. 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 fair value of the PSUs is remeasured at each reporting period. The following table summarizes PSU activity during the
three
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
PSUs
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at January 1, 2019
|
291,773
|
|
|
$
|
9.94
|
|
|
Granted
|
737,914
|
|
|
3.10
|
|
|
Vested
|
(26,734
|
)
|
|
18.93
|
|
|
Forfeited or canceled
|
(47,414
|
)
|
|
6.02
|
|
|
Performance adjustment(1)
|
(240,761
|
)
|
|
8.92
|
|
|
Outstanding at March 31, 2019
|
714,778
|
|
|
$
|
3.10
|
|
|
|
|
|
(1)
|
Represents an adjustment to the
2018
tranche of the
2016
,
2017
and
2018
PSU awards based on actual performance during the
2018
annual performance period in relation to the established performance goal for that period. The actual performance for the
2018
annual performance period was certified by the Compensation Committee of our Board of Directors in the first quarter of
2019
.
|
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
three
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at January 1, 2019
|
2,007,427
|
|
|
$
|
11.35
|
|
|
Granted
|
4,315,094
|
|
|
3.13
|
|
|
Converted/paid
|
(727,421
|
)
|
|
12.97
|
|
|
Forfeited
|
(92,542
|
)
|
|
11.26
|
|
|
Outstanding at March 31, 2019
|
5,502,558
|
|
|
$
|
4.69
|
|
Stock Options
— The following table summarizes stock option activity during the
three
months ended
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding and exercisable at January 1, 2019
|
385,538
|
|
|
$
|
14.55
|
|
|
|
|
|
|
Forfeited and canceled
|
(197,813
|
)
|
|
17.36
|
|
|
|
|
|
|
Options outstanding and exercisable at March 31, 2019
|
187,725
|
|
|
$
|
11.58
|
|
|
1.25
|
|
—
|
|
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
2018
or
2019
, nor do we currently plan to in the future. At
March 31, 2019
, 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
months ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
|
RSUs
|
$
|
738
|
|
|
$
|
1,146
|
|
|
PSUs
|
268
|
|
|
596
|
|
|
Phantom shares
|
889
|
|
|
413
|
|
|
Total
|
$
|
1,895
|
|
|
$
|
2,155
|
|
10
. 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. Stock option and stock unit conversions were not included in the computation of diluted loss per share for the
three
months ended
March 31, 2019
and
2018
as we incurred a loss from continuing operations for these periods and any effect on loss per share would have been anti-dilutive. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
|
(In thousands, except share data)
|
|
Basic loss per share computation:
|
|
|
|
|
Numerator:
|
|
|
|
|
Net loss
|
$
|
(61,827
|
)
|
|
$
|
(265
|
)
|
|
Net loss attributable to non-controlling interest
|
253
|
|
|
—
|
|
|
Net loss attributable to Dean Foods Company
|
$
|
(61,574
|
)
|
|
$
|
(265
|
)
|
|
Denominator:
|
|
|
|
|
Average common shares
|
91,526,266
|
|
|
91,192,013
|
|
|
Basic loss per share attributable to Dean Foods Company
|
$
|
(0.67
|
)
|
|
$
|
—
|
|
|
Diluted loss per share computation:
|
|
|
|
|
Numerator:
|
|
|
|
|
Net loss
|
$
|
(61,827
|
)
|
|
$
|
(265
|
)
|
|
Net loss attributable to non-controlling interest
|
253
|
|
|
—
|
|
|
Net loss attributable to Dean Foods Company
|
$
|
(61,574
|
)
|
|
$
|
(265
|
)
|
|
Denominator:
|
|
|
|
|
Average common shares — basic
|
91,526,266
|
|
|
91,192,013
|
|
|
Stock option conversion(1)
|
—
|
|
|
—
|
|
|
RSUs and PSUs(2)
|
—
|
|
|
—
|
|
|
Average common shares — diluted
|
91,526,266
|
|
|
91,192,013
|
|
|
Diluted loss per share attributable to Dean Foods Company
|
$
|
(0.67
|
)
|
|
$
|
—
|
|
|
(1) Anti-dilutive options excluded
|
285,110
|
|
|
503,462
|
|
|
(2) Anti-dilutive stock units excluded
|
1,700,699
|
|
|
897,745
|
|
11
. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended
March 31, 2019
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Other
Postretirement
Benefits Items
|
|
Foreign
Currency
Items
|
|
Total
|
|
Balance at December 31, 2018
|
$
|
(93,826
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(98,607
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss(1)
|
2,128
|
|
|
—
|
|
|
2,128
|
|
|
Net current-period other comprehensive income
|
2,128
|
|
|
—
|
|
|
2,128
|
|
|
Balance at March 31, 2019
|
$
|
(91,698
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(96,479
|
)
|
|
|
|
|
(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
12
.
|
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended
March 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and
Other
Postretirement
Benefits Items
|
|
Foreign
Currency
Items
|
|
Total
|
|
Balance at December 31, 2017
|
$
|
(73,629
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(78,410
|
)
|
|
Other comprehensive income before reclassifications
|
3,233
|
|
|
—
|
|
|
3,233
|
|
|
Amounts reclassified from accumulated other comprehensive loss(1)
|
(1,609
|
)
|
|
—
|
|
|
(1,609
|
)
|
|
Net current-period other comprehensive income
|
1,624
|
|
|
—
|
|
|
1,624
|
|
|
Reclassification of stranded tax effects related to the Tax Act(2)
|
(16,847
|
)
|
|
$
|
—
|
|
|
(16,847
|
)
|
|
Balance at March 31, 2018
|
$
|
(88,852
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(93,633
|
)
|
|
|
|
|
(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
12
.
|
|
|
|
|
(2)
|
See Note
1
for additional details on the adoption of ASU No. 2018-02 during the first quarter of 2018.
|
12
. 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
months ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
Service cost
|
$
|
672
|
|
|
$
|
732
|
|
|
Interest cost
|
3,084
|
|
|
2,828
|
|
|
Expected return on plan assets
|
(3,996
|
)
|
|
(4,411
|
)
|
|
Amortizations:
|
|
|
|
|
Prior service cost
|
108
|
|
|
108
|
|
|
Unrecognized net loss
|
2,440
|
|
|
2,130
|
|
|
Net periodic benefit cost
|
$
|
2,308
|
|
|
$
|
1,387
|
|
We do not expect to make any contributions to the company-sponsored pension plans in 2019.
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
months ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
Service cost
|
$
|
154
|
|
|
$
|
170
|
|
|
Interest cost
|
281
|
|
|
235
|
|
|
Amortizations:
|
|
|
|
|
Prior service cost
|
23
|
|
|
23
|
|
|
Unrecognized net gain
|
(151
|
)
|
|
(118
|
)
|
|
Net periodic benefit cost
|
$
|
307
|
|
|
$
|
310
|
|
13
. 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, the planned closure of a facility, or deteriorations in operating cash flows. 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
8
.
The results of our analysis indicated
no
impairment of our property, plant and equipment, outside of facility closing and reorganization costs for three months ended
March 31,
2019
and
2018
.
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 and reorganization strategies are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
2019
|
|
2018
|
|
|
(In thousands)
|
|
Closure of facilities, net(1)
|
$
|
3,023
|
|
|
$
|
2,363
|
|
|
Organizational effectiveness(2)
|
1,309
|
|
|
(331
|
)
|
|
Enterprise-wide cost productivity plan(3)
|
—
|
|
|
6,430
|
|
|
Facility closing and reorganization costs, net
|
$
|
4,332
|
|
|
$
|
8,462
|
|
|
|
|
|
(1)
|
Reflects charges, net of gains on the sales of assets, associated with closed facilities that were incurred in
2019
and
2018
. These charges are primarily related to facility closures in Braselton, GA; Louisville, KY; Erie, PA; Huntley, IL; Thief River Falls, MN; Lynn, MA; Livonia, MI; Richmond, Virginia; Orem, Utah; New Orleans, Louisiana; Rochester, Indiana; Riverside, California; Denver, Colorado; and Buena Park, California. The net gain during the three months ended
March 31, 2019
was primarily due to gains from the sale of properties for which we recognized restructuring charges in previous periods. We have incurred net charges to date of
$115.0 million
related to these facility closures through
March 31, 2019
. We expect to incur additional charges related to these facility closures of approximately
$4.6 million
related to shutdown, contract termination and other costs.
|
|
|
|
|
(2)
|
During 2017, we initiated a company-wide, multi-phase organizational effectiveness assessment 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. We do not expect to incur any material additional costs associated with this initiative.
|
|
|
|
|
(3)
|
In the fourth quarter of 2017, we announced an enterprise-wide cost productivity plan, which includes rescaling our supply chain, optimizing spend management and integrating our operating model. This plan 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 changes. Efforts with respect to the enterprise-wide cost productivity plan 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
three
months ended
March 31, 2019
is summarized below and includes items expensed as incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Charges at December 31, 2018
|
|
Charges and Adjustments
|
|
Payments
|
|
Accrued Charges at March 31, 2019
|
|
|
(In thousands)
|
|
Cash charges:
|
|
|
|
|
|
|
|
|
Workforce reduction costs
|
$
|
13,213
|
|
|
$
|
121
|
|
|
$
|
(4,238
|
)
|
|
$
|
9,096
|
|
|
Shutdown costs
|
|
|
|
3,210
|
|
|
(3,210
|
)
|
|
—
|
|
|
Lease obligations after shutdown
|
1,368
|
|
|
52
|
|
|
(353
|
)
|
|
1,067
|
|
|
Other
|
|
|
|
693
|
|
|
(693
|
)
|
|
—
|
|
|
Subtotal
|
$
|
14,581
|
|
|
4,076
|
|
|
$
|
(8,494
|
)
|
|
$
|
10,163
|
|
|
Non-cash charges:
|
|
|
|
|
|
|
|
|
Write-down of assets
|
|
|
—
|
|
|
|
|
|
|
Gain on sale/disposal of related assets
|
|
|
(1,026
|
)
|
|
|
|
|
|
Other, net
|
|
|
1,282
|
|
|
|
|
|
|
Subtotal
|
|
|
256
|
|
|
|
|
|
|
Total
|
|
|
$
|
4,332
|
|
|
|
|
|
14
. 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 our milk supply agreement 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, our milk supply agreement with DFA related to the promissory note. 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. See further discussion of our lease obligations within Note
6
.
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
—
We are party from time to time to certain pending or threatened legal proceedings in the ordinary course of our business. Potential liabilities associated with these matters are not expected to have a material adverse impact on our financial position, results of operations, or cash flows.
15
. 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
58
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 DSD systems in the United States. Our Chief Executive Officer evaluates the performance of our business based on operating income or loss and operating cash flows 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
months ended
March 31, 2019
and
2018
. None of our long-lived assets are associated with our foreign operations.
Significant Customers
— Our largest customer accounted for approximately
14.0%
and
16.6%
of our consolidated net sales in the three months ended
March 31, 2019
and
2018
. respectively.