Quarterly Report (10-q)

Date : 05/08/2019 @ 10:39AM
Source : Edgar (US Regulatory)
Stock : Dean Foods Company New (DF)
Quote : 0.8  0.0 (0.00%) @ 12:00AM
Dean Foods share price Chart

Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2019
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from              to             
Commission File Number 001-12755  
 
Dean Foods Company
(Exact name of the registrant as specified in its charter)
DEANLOGOA01.JPG
 
Delaware
 
75-2559681
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
2711 North Haskell Avenue, Suite 3400
Dallas, Texas 75204
(214) 303-3400
(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices)  
 
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
"DF"
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes   ¨     No   ý
As of  May 6, 2019 , the number of shares of the registrant's common stock outstanding was: 91,743,729 .



Table of Contents
 


2


Part I — Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
22,573

 
$
24,176

Receivables, net of allowances of $6,783 and $5,994
577,239

 
589,263

Inventories
290,376

 
255,484

Prepaid expenses and other current assets
38,487

 
34,885

Assets held for sale
6,587

 
8,472

Total current assets
935,262

 
912,280

Property, plant and equipment, net
991,825

 
1,006,182

Operating lease right of use assets
316,831

 

Identifiable intangible and other assets, net
198,382

 
197,512

Deferred income taxes

 
2,518

Total
$
2,442,300

 
$
2,118,492

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
669,962

 
$
699,661

Current maturities of long term debt and finance leases
1,053

 
1,174

Operating lease liabilities
95,774

 

Total current liabilities
766,789

 
700,835

Long-term debt, net
1,008,628

 
905,170

Deferred income taxes
7,619

 
13,707

Long-term operating lease liabilities
236,366

 

Other long-term liabilities
166,752

 
184,048

Commitments and contingencies (Note 14)

 

Stockholders’ equity:
 
 
 
Preferred stock, none issued

 

Common stock, 91,738,471 and 91,438,768 shares issued and outstanding, with a par value of $0.01 per share
917

 
914

Additional paid-in capital
662,707

 
661,630

Accumulated deficit
(322,490
)
 
(260,977
)
Accumulated other comprehensive loss
(96,479
)
 
(98,607
)
Total Dean Foods Company stockholders’ equity
244,655

 
302,960

Non-controlling interest
11,491

 
11,772

Total stockholders’ equity
256,146

 
314,732

Total
$
2,442,300

 
$
2,118,492

See Notes to unaudited Condensed Consolidated Financial Statements.

3


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
 
Three Months Ended 
 March 31
 
2019
 
2018
Net sales
$
1,795,434

 
$
1,980,507

Cost of sales
1,421,681

 
1,532,004

Gross profit
373,753

 
448,503

Operating costs and expenses:
 
 
 
Selling and distribution
337,712

 
345,996

General and administrative
73,085

 
75,522

Amortization of intangibles
5,150

 
5,078

Facility closing and reorganization costs, net
4,332

 
8,462

Equity in (earnings) loss of unconsolidated affiliate
(1,955
)
 
(1,900
)
Total operating costs and expenses
418,324

 
433,158

Operating income (loss)
(44,571
)
 
15,345

Other expense:
 
 
 
Interest expense
19,000

 
14,033

Other expense, net
212

 
470

Total other expense
19,212

 
14,503

Income (loss) before income taxes
(63,783
)
 
842

Income tax expense (benefit)
(1,956
)
 
1,107

Net loss
(61,827
)
 
(265
)
Net loss attributable to non-controlling interest
253

 

Net loss attributable to Dean Foods Company
$
(61,574
)
 
$
(265
)
Average common shares:
 
 
 
Basic
91,526,266

 
91,192,013

Diluted
91,526,266

 
91,192,013

Basic loss per common share:
 
 
 
Net loss attributable to Dean Foods Company
$
(0.67
)
 
$

Diluted loss per common share:
 
 
 
Net loss attributable to Dean Foods Company
$
(0.67
)
 
$

See Notes to unaudited Condensed Consolidated Financial Statements.

4


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
Three Months Ended 
 March 31
 
2019
 
2018
Net loss
$
(61,827
)
 
$
(265
)
Other comprehensive income (loss):
 
 
 
Pension and other postretirement liability adjustment, net of tax
2,128

 
1,624

Other comprehensive income
2,128

 
1,624

Reclassification of stranded tax effects related to the Tax Act


 
(16,847
)
Comprehensive loss
(59,699
)
 
(15,488
)
Comprehensive loss attributable to non-controlling interest
253

 

Comprehensive loss attributable to Dean Foods Company
$
(59,446
)
 
$
(15,488
)
See Notes to unaudited Condensed Consolidated Financial Statements.

5


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
Dean Foods Company Stockholders
 
 
 
Common Stock
 
 
 
 
 
 
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
Balance, January 1, 2018
91,123,759

 
$
911

 
$
659,227

 
$
74,219

 
$
(78,410
)
 
$
655,947

Issuance of common stock
208,568

 
2

 
(325
)
 

 

 
(323
)
Share-based compensation expense

 

 
1,742

 

 

 
1,742

Net income

 

 

 
(265
)
 

 
(265
)
Dividends

 

 

 
(8,365
)
 

 
(8,365
)
Reclassification of stranded tax effects related to the Tax Act(1)

 

 

 
16,847

 
(16,847
)
 

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liability adjustment, net of tax of $521

 

 

 

 
1,624

 
1,624

Balance, March 31, 2018
91,332,327

 
$
913

 
$
660,644

 
$
82,436

 
$
(93,633
)
 
$
650,360

(1)
Refer to Note 1 - Recently Adopted Accounting Pronouncements within our Notes to unaudited Condensed Consolidated Financial Statements for additional details on the adoption of ASU No. 2018-02 during the first quarter of 2018.
See Notes to unaudited Condensed Consolidated Financial Statements.


6


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
Dean Foods Company Stockholders
 
 
 
 
 
Common Stock
 
 
 
Retained Earnings (Accumulated Deficit)
 
Accumulated Other
Comprehensive
Income (Loss)
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity 
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
 
 
 
Balance, January 1, 2019
91,438,768

 
$
914

 
$
661,630

 
$
(260,977
)
 
$
(98,607
)
 
$
11,772

 
$
314,732

Issuance of common stock
299,703

 
3

 
(216
)
 

 

 

 
(213
)
Share-based compensation expense

 

 
1,293

 

 

 

 
1,293

Net loss attributable to Dean Foods Company

 

 

 
(61,574
)
 

 

 
(61,574
)
Fair value of non-controlling interest acquired

 

 

 

 

 


 

Net loss attributable to non-controlling interest

 

 

 

 

 
(253
)
 
(253
)
Repurchase of subsidiary's common stock
 
 
 
 
 
 
 
 
 
 
(28
)
 
(28
)
Dividends(1)

 

 

 
61

 

 

 
61

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liability adjustment, net of tax of $291

 

 

 

 
2,128

 

 
2,128

Balance, March 31, 2019
91,738,471

 
$
917

 
$
662,707

 
$
(322,490
)
 
$
(96,479
)
 
$
11,491

 
$
256,146

(1)
During the three months ended March 31, 2019 , participants forfeited accrued dividends related to previously-granted restricted share units ("RSUs") and performance share units ("PSUs"), causing a reduction to our accumulated deficit position. Under our long-term incentive compensation program, cash dividend equivalent units for RSUs and PSUs are accrued over time as our Board of Directors declares cash dividends and vest in cash at the same time as the underlying award. No dividends were declared or paid during the three months ended March 31, 2019 .
See Notes to unaudited Condensed Consolidated Financial Statements.

7


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended 
 March 31
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(61,827
)
 
$
(265
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
37,773

 
40,077

Share-based compensation expense
1,895

 
2,155

Non-cash facility closing and reorganization costs, net
284

 
1,091

Write-off of financing costs
3,755

 

Equity in (earnings) loss of unconsolidated affiliate
(1,955
)
 
(1,900
)
Deferred income taxes
(3,861
)
 
809

Other, net
(3,465
)
 
(291
)
Changes in operating assets and liabilities:
 
 
 
Receivables, net
12,024

 
38,535

Inventories
(34,892
)
 
(8,988
)
Prepaid expenses and other assets
(4,413
)
 
9,048

Accounts payable and accrued expenses
(17,364
)
 
(41,318
)
Net cash provided by (used in) operating activities
(72,046
)
 
38,953

Cash flows from investing activities:
 
 
 
Capital spending
(26,518
)
 
(16,508
)
Proceeds from sale of fixed assets
1,928

 
4,179

Net cash used in investing activities
(24,590
)
 
(12,329
)
Cash flows from financing activities:
 
 
 
Debt repayments
(438
)
 
(174
)
Payments of financing costs
(7,625
)
 

Proceeds from senior secured revolver
141,401

 
95,100

Payments for senior secured revolver
(142,901
)
 
(91,200
)
Proceeds from receivables securitization facility
400,000

 
665,000

Payments for receivables securitization facility
(295,000
)
 
(675,000
)
Repurchase of subsidiary's common stock
(28
)
 

Cash dividends paid

 
(8,218
)
Issuance of common stock, net of share repurchases for withholding taxes
(376
)
 
(519
)
Net cash provided by (used in) financing activities
95,033

 
(15,011
)
Change in cash and cash equivalents
(1,603
)
 
11,613

Cash and cash equivalents, beginning of period
24,176

 
16,512

Cash and cash equivalents, end of period
$
22,573

 
$
28,125

See Notes to unaudited Condensed Consolidated Financial Statements.

8


DEAN FOODS COMPANY
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.

9


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.
 
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.
(2)
Includes half-and-half and whipping creams.
(3)
Includes creamers and other extended shelf life fluids.
(4)
Includes fruit juice, fruit flavored drinks, iced tea, water and flax-based milk.
(5)
Includes items for resale such as butter, cheese, eggs and milkshakes.
(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.


10


The following table presents a disaggregation of our net product sales between sales of Company-branded products versus sales of private label products:
 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
 
(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.

11


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% .

12


4 . Inventories
Inventories at March 31, 2019 and December 31, 2018 consisted of the following:
 
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:
 
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


13


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.

14


The components of lease expenses were as follows (in thousands):
 
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


15


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


    

16


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

17


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,

18


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.

19


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.

20


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.

21


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 .

22


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


23


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


24


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.


25


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 .

26


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.

27


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 .

28


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.

29


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are predictions based on our current expectations and our projections about future events, and are not statements of historical fact. Forward-looking statements include statements concerning our business strategy, among other things, including anticipated trends and developments in, and management plans for, our business and the markets in which we operate. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue,” the negative or plural of these words and other comparable terminology. All forward-looking statements included in this Form 10-Q are based upon information available to us as of the filing date of this Form 10-Q, and we undertake no obligation to update any of these forward-looking statements for any reason. You should not place undue reliance on these forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 (the " 2018 Annual Report on Form 10-K"), as updated herein, and elsewhere in this Form 10-Q. You should carefully consider the risks and uncertainties described under these sections.
Results of Operations
Our key performance indicators are brand mix and achieving low cost, which are reflected in gross margin and operating income, respectively. We evaluate our financial performance based on operating income or loss and cash flow from operations before facility closing and reorganization costs, asset impairment charges and other nonrecurring gains and losses. The following table presents certain information concerning our financial results, including information presented as a percentage of net sales:
 
Three Months Ended March 31
 
2019
 
2018
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,795.4

 
100.0
 %
 
$
1,980.5

 
100.0
 %
Cost of sales
1,421.6

 
79.2

 
1,532.0

 
77.4

Gross profit(1)
373.8

 
20.8

 
448.5

 
22.6

Operating costs and expenses:
 
 
 
 
 
 
 
Selling and distribution
337.7

 
18.8

 
346.0

 
17.5

General and administrative
73.2

 
4.1

 
75.5

 
3.8

Amortization of intangibles
5.2

 
0.3

 
5.1

 
0.3

Facility closing and reorganization costs, net
4.3

 
0.2

 
8.5

 
0.4

Equity in (earnings) loss of unconsolidated affiliate
(2.0
)
 
(0.1
)
 
(1.9
)
 
(0.1
)
Total operating costs and expenses
418.4

 
23.3

 
433.2

 
21.9

Operating income (loss)
$
(44.6
)
 
(2.5
)%
 
$
15.3

 
0.7
 %
(1)
As disclosed in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales.

30


Quarter Ended March 31, 2019 Compared to Quarter Ended March 31, 2018
Net Sales — The change in net sales was due to the following:
 
Three Months Ended March 31, 2019 vs. 2018
 
(In millions)
Volume
$
(278.9
)
Pricing and product mix changes
89.1

Acquisitions
4.7

Total decrease
$
(185.1
)
Net sales decrease d $ 185.1 million , or 9.3 %, during the first quarter of 2019 as compared to the first quarter of 2018 , primarily due to fluid milk volume declines from year-ago levels, partly offset by increased pricing, as a result of increases in dairy commodity costs from year-ago levels and pricing actions taken during the first quarter of 2019 to offset inflation. On average, during the first quarter of 2019 , the Class I price was 7.8% above prior-year levels. Fluid milk volume declines were driven predominantly by the loss of volume from two large retailers, overall category declines and lower branded fluid milk volumes due to continued retailer investment in private label products.
We generally increase or decrease the prices of our private label fluid dairy products on a monthly basis in correlation with fluctuations in the costs of raw materials, packaging supplies and delivery costs. We manage the pricing of our branded fluid milk products on a longer-term basis, balancing consumer demand with net price realization, but in some cases, we are subject to the terms of our sales agreements with respect to the means and/or timing of price increases, which can negatively impact our profitability. The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for the first quarter of 2019 compared to the first quarter of 2018 :
 
Three Months Ended March 31*
 
2019
 
2018
 
% Change
Class I mover(1)
$
15.47

 
$
14.35

 
7.8
%
Class I raw skim milk mover(1)(2)
6.86

 
6.02

 
14.0

Class I butterfat mover(2)(3)
2.53

 
2.44

 
3.7

Class II raw skim milk minimum(1)(4)
7.56

 
5.54

 
36.5

Class II butterfat minimum(3)(4)
2.53

 
2.42

 
4.5

*
The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus producer premiums and a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes procurement costs and other related charges that vary by location and supplier. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” in our 2018 Annual Report on Form 10-K and “— Known Trends and Uncertainties — Conventional Raw Milk and Other Inputs” below for a more complete description of raw milk pricing.
(1)
Prices are per hundredweight.
(2)
We process Class I raw skim milk and butterfat into fluid milk products.
(3)
Prices are per pound.
(4)
We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.
Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Cost of sales decrease d $110.4 million , or 7.2% , in the first quarter of 2019 as compared to the first quarter of 2018 , primarily due to the volume declines discussed above. This overall decrease was partly offset by higher dairy commodity costs. On average, the Class I price was 7.8% above prior-year levels.
Gross Margin — Our gross margin decrease d to 20.8% in the first quarter of 2019 as compared to 22.6% in the first quarter of 2018 . The decrease was primarily due to the overall volume declines and Class I raw milk inflation discussed above.

31


Operating Costs and Expenses — Operating costs and expenses decrease d $14.8 million , or 3.4% , in the first quarter of 2019 as compared to the first quarter of 2018 . Significant changes to operating costs and expenses in the first quarter of 2019 as compared to the first quarter of 2018 include the following:
Selling and distribution costs decrease d by $8.3 million during the first quarter of 2019 primarily due to decreases in advertising and marketing costs of approximately $4.6 million and employee-related costs of approximately $4.1 million.
General and administrative costs decrease d by $2.3 million during the first quarter of 2019 primarily due to decreases in employee-related costs related to lower headcount.
Facility closing and reorganization costs, net decrease d by $4.2 million during the first quarter of 2019 . See Note 13 to our unaudited Condensed Consolidated Financial Statements.
We recorded $2.0 million of equity in the earnings of our Organic Valley Fresh joint venture during the first quarter of 2019 . See Note 3 to our unaudited Condensed Consolidated Financial Statements.

Other Expense — Other expense increase d $4.7 million during the first quarter of 2019 as compared to the first quarter of 2018 . This increase was primarily due to higher interest expense related to the write off of deferred financing costs $3.8 million and increased borrowings under our receivables securitization facility.
Income Taxes — Income tax benefit of $2.0 million was recorded at an effective rate of 3.1% for the first quarter of 2019 compared to income tax expense of $1.1 million at a 131.5% effective tax rate for the first quarter of 2018 . Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In the first quarter of 2019 , the Company recorded a discrete tax expense of $3.5 million, primarily related to the state valuation allowance. Excluding the impact of these discrete items, our effective tax rate for the first quarter of 2019 was 9.1%. Additional federal and state valuation allowances of $9.1 million were recorded as part of the annual effective tax rate.

Liquidity and Capital Resources
We believe that our cash on hand coupled with future cash flows from operations and other available sources of liquidity, including our senior secured revolving credit facility and our receivables securitization facility, will provide sufficient liquidity to allow us to meet our cash requirements for at least the next twelve months. Our anticipated uses of cash for the remainder of 2019 include costs to execute our enterprise-wide cost productivity plan and other strategic initiatives; capital expenditures; working capital; financial obligations, including tax payments and property and casualty insurance requirements; and other costs that may be necessary to invest, to operate, and to grow our business. We are also authorized to repurchase shares of our common stock pursuant to a stock repurchase program authorized by our Board of Directors. Additionally, on an ongoing basis, we evaluate and consider strategic acquisitions, divestitures, joint ventures, or other transactions to create shareholder value and enhance financial performance. Under our Credit Agreement, our borrowing base is limited to $175 million until we complete certain conditions relating to the grant of security interests in certain of our equipment and real property. Once these conditions are met, our borrowing base will be 65% of the value of such equipment and real property (up to the maximum facility amount of $265 million ). We expect to complete these conditions by the end of the second quarter of 2019, at which time we expect our borrowing base to be $265 million .
We may also, from time to time, raise additional funds through new debt facilities, borrowings, or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
As of March 31, 2019 , we had total cash and cash equivalents on hand of $22.6 million , of which $1.8 million was attributable to our foreign operations. Historically, the cash held by our foreign subsidiary was reinvested indefinitely and was generally subject to U.S. income tax only upon repatriation to the U.S. However, the Tax Cuts and Jobs Act (the "Tax Act") required us to pay a one-time transition tax in 2017 on cumulative undistributed foreign earnings for which we had not previously provided U.S. taxes. We analyzed our foreign working capital and cash requirements and the potential tax liabilities that would be attributable to a repatriation of previously taxed earnings. In the second quarter 2018, we repatriated $9.9 million of cash resulting in no additional tax expense. Additionally, we will not consider the future earnings of our foreign subsidiary to be permanently reinvested and have determined that any tax effects resulting from this change would be immaterial.
At March 31, 2019 , we had $ 1,014.0 million of long-term debt obligations, excluding unamortized debt issuance costs of $4.3 million , and $96.9 million of combined available future borrowing capacity under our senior secured revolving credit facility and receivables securitization facility, subject to compliance with the covenants in our credit agreements.

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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 to 2018, 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. 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. See Note 9 to our unaudited Condensed Consolidated Financial Statements.
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. We expect to complete these conditions by the end of the second quarter of 2019, at which time we expect our borrowing base to be $265 million . 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 the Company’s 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 ranging 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 the Company’s total net leverage ratio at such time.
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 who 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 ).
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 (the "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

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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 extend the liquidity termination date. 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 $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.
At May 7, 2019, we had $290.0 million of outstanding borrowings under the Credit Facility and the receivables securitization facility, excluding letters of credit in the aggregate amount of $141.9 million that were issued but undrawn.
Covenant Compliance — We are required to comply with a springing fixed charge coverage ratio set at 1.05 to 1.00, which is triggered and applicable in the event 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). As of March 31, 2019 , we are not subject to that fixed charge coverage covenant.
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.
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.