NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31,
2018
,
2017
and
2016
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. We process and distribute fluid milk and other dairy products, including ice cream, ice cream mix and cultured products, which are marketed under more than
50
national, regional and local dairy brands and a wide array of private labels. We also produce and distribute
DairyPure
®
, our national white milk brand, and
TruMoo
®
, our national flavored milk brand, as well as juices, teas, bottled water and other products.
Basis of Presentation and Consolidation
— Our Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of our wholly-owned subsidiaries.
We have aligned our leadership team, operating strategy, and sales, logistics and supply chain initiatives into a single operating and reportable segment. Unless stated otherwise, any reference to income statement items in these financial statements refers to results from continuing operations.
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.
Use of Estimates
— The preparation of our Consolidated Financial Statements in conformity with GAAP requires us to use our judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from these estimates under different assumptions or conditions.
Cash Equivalents
— We consider temporary investments with an original maturity of three months or less to be cash equivalents.
Inventories
— Inventories are stated at the lower of cost or market. Our products are valued using the first-in, first-out method. The costs of finished goods inventories include raw materials, direct labor and indirect production and overhead costs. Reserves for obsolete or excess inventory are not material.
Property, Plant and Equipment
— Property, plant and equipment are stated at acquisition cost, plus capitalized interest on borrowings during the actual construction period of major capital projects. Also included in property, plant and equipment are certain direct costs related to the implementation of computer software for internal use. Depreciation is calculated using the straight-line method typically over the following range of estimated useful lives of the assets:
|
|
|
|
|
|
|
Asset
|
|
Useful Life
|
|
Buildings
|
|
15 to 40 years
|
|
Machinery and equipment
|
|
3 to 20 years
|
|
Leasehold improvements
|
|
Over the shorter of their estimated useful lives or the terms of the applicable lease agreements
|
We test property, plant and equipment 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. See Note
17
. Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred.
Goodwill and Intangible Assets
— Identifiable intangible assets, other than indefinite-lived trademarks, are typically amortized over the following range of estimated useful lives:
|
|
|
|
|
|
|
Asset
|
|
Useful Life
|
|
Customer relationships
|
|
5 to 15 years
|
|
Finite-lived trademarks
|
|
5 to 10 years
|
|
Customer supply contracts
|
|
Over the shorter of the estimated useful lives or the terms of the agreements
|
|
Noncompetition agreements
|
|
Over the shorter of the estimated useful lives or the terms of the agreements
|
In accordance with Accounting Standards related to “Goodwill and Other Intangible Assets”, we do not amortize goodwill and other intangible assets determined to have indefinite useful lives. Instead, we assess our goodwill and indefinite-lived trademarks for impairment annually and when circumstances indicate that the carrying value may not be recoverable. See Note
7
.
Assets Held for Sale
— We classify assets as held for sale when management approves and commits to a formal plan of sale and our expectation is that the sale will be completed within one year. The net assets of the business held for sale are then recorded at the lower of their current carrying value or the fair market value, less costs to sell. As of
December 31, 2018
and
2017
, there were
$8.5 million
and
no
assets, respectively, classified as held for sale.
Share-Based Compensation
— Share-based compensation expense is recognized for equity awards over the vesting period based on their grant date fair value. The fair value of restricted stock unit awards and performance stock unit awards is equal to the closing price of our stock on the date of grant. The fair value of our phantom shares is remeasured at each reporting period based on the closing price of our common stock on the last day of the respective reporting period. Compensation expense is recognized only for equity awards expected to vest. We estimate forfeitures at the date of grant based on our historical experience and future expectations. Share-based compensation expense is included within general and administrative expenses in our Consolidated Statements of Operations. See Note
12
.
Revenue Recognition, Sales Incentives and Accounts Receivable
— Revenue is recognized upon delivery to our customers as we have determined that this is the point at which our sole performance obligation is met and control is transfered, as the customer can direct the use and obtain substantially all of the remaining benefits from the asset at this point in time. Revenue is recognized in an amount that reflects the consideration we expect to ultimately receive in exchange for those promised goods or services, net of allowances for product returns, trade promotions and prompt pay and other discounts. 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 costs associated with these programs are accounted for as reductions to the transaction price of our products and are therefore recorded as reductions to the gross sale, unless we receive a distinct good or service as defined under ASC 606. Specifically, a good or service is considered distinct when it is separately identifiable from other promises in the contract, we receive a benefit from the good or service, and the benefit is separable from the sale of our product to the customer. Depending on the specific type of sales incentive and other promotional program, we use either the expected value or most likely amount method to determine the variable consideration. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience and expected levels of performance of the trade promotion or other program. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration. 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 historically not material and are recognized in earnings in the period such differences are determined. Our reserve for product returns has not historically been material.
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 purchase bulk cream externally 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. We currently present the sales of these excess raw materials within net sales in our Consolidated Statements of Operations, whereas it was presented as a reduction of cost of sales within our Consolidated Statements of Operations prior to
December 31, 2017
. Sales of excess raw materials included within net sales were
$515.2 million
for the year-ended
December 31, 2018
. Sales of excess raw materials included as of as a reduction to cost of sales were
$606.9 million
and
$551.5 million
for the years ended
December 31, 2017
and
2016
, respectively.
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.
Income Taxes
— Deferred income taxes arise from temporary differences between amounts recorded in the Consolidated Financial Statements and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred tax assets, including the benefit of net operating loss and tax credit carryforwards, are evaluated based on the guidelines for realization and are reduced by a valuation allowance if deemed necessary.
We recognize the income tax benefit from an uncertain tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination, including resolutions of any related appeals or litigation processes. We
recognize accrued interest related to uncertain tax positions as a component of income tax expense, and penalties, if incurred, are recognized as a component of operating income.
In response to the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), the FASB issued a Staff Q&A stating that a company may elect, as an accounting policy, to either (1) treat taxes due on future U.S. inclusions in taxable income under the global intangible low-taxed income (“GILTI”) provision as a current period expense when incurred (“the period cost method”) or (2) factor such amounts into the company’s measurement of its deferred taxes (“the deferred method”). The Company is electing an accounting policy to treat any GILTI inclusion as a current period expense.
All of our consolidated U.S. operating subsidiaries, with the exception of Good Karma, are included in our U.S. federal consolidated income tax return. Our foreign subsidiary is required to file a local jurisdiction income tax return with respect to its operations. Prior to the enactment of the Tax Act on December 22, 2017, we considered these accumulated foreign earnings to be indefinitely reinvested and therefore no provision had been made for U.S. income taxes on such amounts. We analyzed our foreign working capital, cash requirements and the potential tax liabilities that would be attributable to a repatriation of previously taxed earnings. In the second quarter of 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.
Advertising Expense
— We market our products through advertising and other promotional activities, including media, agency, coupons and trade shows. Advertising expense is charged to income during the period incurred, except for expenses related to the development of a major commercial or media campaign which are charged to income during the period in which the advertisement or campaign is first presented by the media. Advertising expense totaled
$41.6 million
in
2018
,
$39.1 million
in
2017
and
$59.6 million
in
2016
. Prepaid advertising expense was
zero
in
2018
,
$0.5 million
in
2017
and
$1.9 million
in
2016
.
Shipping and Handling Fees
— Our shipping and handling costs are included in both cost of sales and selling and distribution expense, depending on the nature of such costs. Shipping and handling costs included in cost of sales reflect inventory warehouse costs and product loading and handling costs. Shipping and handling costs included in selling and distribution expense consist primarily of those costs associated with moving finished products from production facilities through our distribution network, including costs associated with its distribution centers, route delivery costs and the cost of shipping products to customers through third party carriers. Shipping and handling costs that were recorded as a component of selling and distribution expense were
$1.2 billion
in
2018
,
$1.2 billion
in
2017
and
$1.1 billion
in
2016
.
Insurance Accruals
— We retain selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims and other casualty losses. Many of these potential losses are covered under conventional insurance programs with third party insurers with high deductibles. In other areas, we are self-insured. Accrued liabilities related to these retained risks are calculated based upon loss development factors that contemplate a number of factors including claims history and expected trends.
Research and Development
— Our research and development activities primarily consist of generating and testing new product concepts, new flavors of products and packaging. Our total research and development expense was
$4.4 million
,
$3.5 million
and
$3.0 million
for
2018
,
2017
and
2016
, respectively. Research and development costs are primarily included in general and administrative expenses in our Consolidated Statements of Operations.
Recently Adopted Accounting Pronouncements
ASU No. 2017-04 — In January 2017, the FASB issued ASU 2017-04,
Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment
. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds a reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted the new standard on a prospective basis through our test for goodwill impairment in the fourth quarter of 2018. See Note
7
for further discussion and the results of our test for goodwill impairment.
ASU No. 2014-09 — As of January 1, 2018, we adopted ASU 2014-09,
Revenue from Contracts with Customers
. The comprehensive new standard supersedes existing revenue recognition guidance and requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The Company adopted the new standard using the modified retrospective approach. Under this method we have provided additional disclosures, including the amount by which each financial statement line item is affected in the current reporting period, as compared to the prior revenue recognition guidance. Additionally, we have provided a disaggregation of our revenue by source and product type and have also included certain qualitative information related to our revenue streams. See Note
2
. The adoption of ASU 2014-09 did not materially impact our results of operations or financial position, except with respect to the change in classification of sales of excess raw materials.
The following table summarizes the impact of adopting ASU 2014-09 on our Consolidated Statements of Operations for the twelve months ended
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2018
|
|
|
As Reported
|
As Without Adoption of ASU 2014-09
|
Impact of Adoption of ASU 2014-09
|
|
Net sales
|
$
|
7,755,283
|
|
$
|
7,240,121
|
|
$
|
515,162
|
|
|
Cost of sales
|
6,100,005
|
|
5,584,843
|
|
515,162
|
|
|
Gross profit
|
$
|
1,655,278
|
|
$
|
1,655,278
|
|
$
|
—
|
|
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 Consolidated Statements of Operations. An adjustment to opening retained earnings was not required as the change in classification of sales of excess raw materials illustrated in the table above did not result in a change to the earnings reported in prior periods.
ASU No. 2017-07 — As of January 1, 2018, we adopted ASU 2017-07,
Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires employers who offer defined benefit pension plans or other post-retirement benefit plans to report the service cost component within the same income statement caption as other compensation costs arising from services rendered by employees during the period. The ASU also requires the other components of net periodic benefit cost to be presented separately from the service cost component, in a caption outside of a subtotal of income from operations. Additionally, the ASU provides that only the service cost component is eligible for capitalization. See Note
15
and
16
for further information on our pension and postretirement plans.
The effect of the retrospective presentation change related to the net periodic cost for pension and postretirement benefits on our Consolidated Statements of Operations was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2017
|
|
Twelve Months Ended December 31, 2016
|
|
|
As Previously Reported
|
Adjustment for Adoption of ASU 2017-07
|
As Revised
|
|
As Previously Reported
|
Adjustment for Adoption of ASU 2017-07
|
As Revised
|
|
Cost of sales
|
$
|
5,977,348
|
|
$
|
(390
|
)
|
$
|
5,976,958
|
|
|
$
|
5,722,710
|
|
$
|
(598
|
)
|
$
|
5,722,112
|
|
|
Gross profit
|
1,817,677
|
|
390
|
|
1,818,067
|
|
|
1,987,516
|
|
598
|
|
1,988,114
|
|
|
Selling and distribution
|
1,346,948
|
|
(531
|
)
|
1,346,417
|
|
|
1,348,349
|
|
(502
|
)
|
1,347,847
|
|
|
General and administrative
|
311,176
|
|
(3,383
|
)
|
307,793
|
|
|
346,028
|
|
(3,463
|
)
|
342,565
|
|
|
Total operating costs and expenses
|
1,734,415
|
|
(3,914
|
)
|
1,730,501
|
|
|
1,723,848
|
|
(3,965
|
)
|
1,719,883
|
|
|
Operating income
|
83,262
|
|
4,304
|
|
87,566
|
|
|
263,668
|
|
4,563
|
|
268,231
|
|
|
Other (income) expense, net
|
(2,942
|
)
|
4,304
|
|
1,362
|
|
|
(5,778
|
)
|
4,563
|
|
(1,215
|
)
|
ASU No. 2018-02 — We early adopted ASU 2018-02,
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, effective January 1, 2018 and have applied the guidance as of the beginning of the period of adoption. Our accounting policy is to release the income tax effects from accumulated other comprehensive income when a pension or other postretirement benefit plan is liquidated or extinguished. As permitted under ASU 2018-02, we have elected to record a one-time reclassification for the stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings in the amount of
$16.8 million
on our Consolidated Balance Sheet during the first quarter of 2018. The only impact of stranded tax effects resulting from the Tax Act is with respect to our pension and other postretirement benefit plans.
Recently Issued Accounting Pronouncements
Effective in 2019
ASU No. 2016-02 — In February 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 requires lessees to recognize lease assets and lease liabilities in the balance sheet and disclose key information about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. The amended guidance will require both operating and finance leases to be recognized in the balance sheet. Additionally, the amended guidance aligns lessor accounting to comparable guidance in ASC Topic 606, Revenue from Contracts with Customers. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU can be adopted using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. Alternatively, this ASU can be adopted using comparative reporting at adoption, in which an entity applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We adopted this standard on January 1, 2019 using the comparative reporting at adoption method and elected certain practical expedients allowed under the standard.
We have implemented processes and a lease accounting system to ensure adequate internal controls were in place to assess our contracts and enable proper accounting and reporting of financial information upon adoption. While the Company is still finalizing the impact of adopting ASU 2016-02, the Company currently estimates recording right of use assets and lease liabilities of approximately
$330 million
to
$360 million
on its Consolidated Balance Sheets. The Company does not expect a material impact to the Company's Consolidated Statements of Operations or Cash Flows. See Note
19
for further information regarding our commitments.
Effective in 2020
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.
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. Although early adoption is permitted, we do not intend to early adopt this ASU, and we do not expect the eventual adoption to have a material impact on our financial statements.
Effective in 2021
ASU No. 2018-14 — In August 2018, the FASB issued ASU 2018-14,
Compensation — Retirement Benefits —Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans
, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that are no longer 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. The amendments should be applied retrospectively. Although early adoption is permitted, we do not intend to early adopt this ASU, and we do not expect the eventual adoption 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
December 31, 2018
|
|
December 31, 2017(1)
|
|
December 31, 2016(1)
|
|
|
(In thousands)
|
|
Fluid milk
|
$
|
4,756,360
|
|
|
$
|
5,315,731
|
|
|
$
|
5,338,789
|
|
|
Ice cream(2)
|
1,077,027
|
|
|
1,107,665
|
|
|
1,041,176
|
|
|
Fresh cream(3)
|
397,206
|
|
|
388,514
|
|
|
359,405
|
|
|
Extended shelf life and other dairy products(4)
|
189,860
|
|
|
196,374
|
|
|
230,832
|
|
|
Cultured
|
260,044
|
|
|
282,432
|
|
|
298,689
|
|
|
Other beverages(5)
|
278,838
|
|
|
290,970
|
|
|
308,020
|
|
|
Other(6)
|
123,062
|
|
|
114,898
|
|
|
116,675
|
|
|
Subtotal
|
7,082,397
|
|
|
7,696,584
|
|
|
7,693,586
|
|
|
Sales of excess raw materials(7)
|
515,162
|
|
|
—
|
|
|
—
|
|
|
Sales of other bulk commodities
|
157,724
|
|
|
98,441
|
|
|
16,640
|
|
|
Total net sales
|
$
|
7,755,283
|
|
|
$
|
7,795,025
|
|
|
$
|
7,710,226
|
|
|
|
|
|
(1)
|
Prior period amounts have not been restated as we have elected to adopt ASC 606 using the modified retrospective method. Sales of excess raw materials of $
606.9 million
and
$551.5 million
for the twelve months ended
December 31, 2017
and
2016
, respectively, were included as a reduction of cost of sales in our Consolidated Statements of Operations.
|
|
|
|
|
(2)
|
Includes ice cream, ice cream mix and ice cream novelties.
|
|
|
|
|
(3)
|
Includes half-and-half and whipping creams.
|
|
|
|
|
(4)
|
Includes creamers and other extended shelf life fluids.
|
|
|
|
|
(5)
|
Includes fruit juice, fruit flavored drinks, iced tea, water and flax-based beverages.
|
|
|
|
|
(6)
|
Includes items for resale such as butter, cheese, eggs and milkshakes.
|
|
|
|
|
(7)
|
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 Consolidated Statements of Operations.
|
The following table presents a disaggregation of our net product sales between sales of Company-branded products versus sales of private label products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
December 31, 2018
|
|
December 31, 2017(1)
|
|
December 31, 2016(1)
|
|
|
(In thousands)
|
|
Branded products
|
$
|
3,531,656
|
|
|
$
|
3,808,496
|
|
|
$
|
3,791,444
|
|
|
Private label products
|
3,550,741
|
|
|
3,888,088
|
|
|
3,902,142
|
|
|
Subtotal
|
7,082,397
|
|
|
7,696,584
|
|
|
7,693,586
|
|
|
Sales of excess raw materials
|
515,162
|
|
|
—
|
|
|
—
|
|
|
Sales of other bulk commodities
|
157,724
|
|
|
98,441
|
|
|
16,640
|
|
|
Total net sales
|
$
|
7,755,283
|
|
|
$
|
7,795,025
|
|
|
$
|
7,710,226
|
|
|
|
|
|
(1)
|
Prior period amounts have not been restated as we have elected to adopt ASC 606 using the modified retrospective method. Sales of excess raw materials of $
606.9 million
and
$551.5 million
for the twelve months ended
December 31, 2017
and
2016
, respectively, were included as a reduction of cost of sales in our Consolidated Statements of Operations.
|
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. In all cases, we recognize revenue upon delivery to our customers as we have determined that this is the point at which our sole performance obligation is met and control is transferred, as the customer can direct the use and obtain substantially all of the remaining benefits from the asset at this point in time. Revenue is recognized 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 estimated allowances for product returns, trade promotions, 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.
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 sole performance obligation 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. We continually evaluate whether our contractual arrangements with customers result in the recognition of contract assets or liabilities. No such assets or liabilities existed as of
December 31, 2018
, or
December 31, 2017
.
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 costs associated with these programs are accounted for as reductions to the transaction price of our products and are therefore recorded as reductions to the gross sale, unless we receive a distinct good or service as defined under ASC 606. Specifically, a good or service is considered distinct when it is separately identifiable from other promises in the contract, we receive a benefit from the good or service, and the benefit is separable from the sale of our product to the customer.
Depending on the specific type of sales incentive and other promotional program, we use either the expected value or most likely amount method to determine the variable consideration. The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience and expected levels of performance of the trade promotion or other program. Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration. We maintain liabilities at the end of each period for the estimated incentive costs incurred but unpaid for these programs. See Note
8
. Differences between estimated and actual incentive costs are historically not material and are recognized in earnings in the period such differences are determined.
3
. ACQUISITIONS AND DISCONTINUED OPERATIONS
Acquisitions
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 beverages 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. The acquisition was accounted for as a step-acquisition within a business combination. Our equity interest in Good Karma was remeasured to fair value of $
9.0 million
, resulting in a non-taxable gain of $
2.3 million
which was recognized during the year ended
December 31, 2018
, and is included in other operating income in our Consolidated Statements of Operation.
The aggregate fair value purchase price was $
35.7 million
. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values and include identifiable intangible assets of $
13.6 million
, of which $
10.7 million
relates to an indefinite-lived trademark and $
2.9 million
relates to customer relationships that are subject to amortization over a period of
10 years
.
We recorded goodwill of $
23.3 million
in connection with the acquisition, which consists of the excess of the net purchase price over the fair value of the net assets acquired. This goodwill represents the expected value attributable to our expansion into the plant-based dairy alternatives category. The goodwill is not deductible for tax purposes. As a result of our goodwill impairment analysis completed during the fourth quarter of 2018, we wrote off this goodwill as part of our full goodwill impairment charge of
$190.7 million
. See Note
7
. We recorded the fair-value of the non-controlling interest in Good Karma of $
11.8 million
in our Consolidated Balance Sheets.
The acquisition was funded through cash on hand. The pro forma impact of the acquisition on consolidated net earnings would not have materially changed reported net earnings. Good Karma's results of operations have been consolidated in our 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 on 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 Consolidated Financial Statements for the years ended
December 31, 2018
and
2017
.
On October 12, 2018, we made a capital contribution to Good Karma of
$3 million
. Our current ownership interest in Good Karma is
69%
.
Uncle Matt's Organic
—
On June 22, 2017, we completed the acquisition of Uncle Matt's Organic, Inc. ("Uncle Matt's"). Uncle Matt's is a leading organic juice company offering a wide range of organic juices, including probiotic-infused juices and fruit-infused waters. The total purchase price was $
22.0 million
. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values and include identifiable intangible assets of $
8.4 million
, of which $
6.6 million
relates to an indefinite-lived trademark and $
1.8 million
relates to customer relationships that are subject to amortization over a
period of
10 years
.
We recorded goodwill of $
13.3 million
in connection with the acquisition, which consists of the excess of the net purchase price over the fair value of the net assets acquired. This goodwill represents the expected value attributable to our expansion into the organic juice category. The goodwill is not deductible for tax purposes. As a result of our goodwill impairment analysis completed during the fourth quarter of 2018, we wrote off this goodwill as part of our full goodwill impairment charge of
$190.7 million
. See Note
7
.
The acquisition was funded through a combination of cash on hand and borrowings under our receivables securitization facility. The pro forma impact of the acquisition on consolidated net earnings would not have materially changed reported net earnings. Uncle Matt's results of operations have been included in our Consolidated Statements of Operations from the date of acquisition.
Friendly's
—
On June 20, 2016, we completed the acquisition of Friendly’s Ice Cream Holdings Corp. (“Friendly’s Holdings”), including its wholly-owned subsidiary, Friendly’s Manufacturing and Retail, LLC (“Friendly’s Manufacturing,” and together with Friendly’s Holdings, “Friendly’s”), the
Friendly’s
®
trademark and all intellectual property associated with the ice cream business. Friendly’s develops, produces, manufactures, markets, distributes and sells ice cream and other frozen dessert-related products, as well as toppings. The total purchase price was $
158.2 million
. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values and include identifiable intangible assets of
$81.7 million
, of which
$29.7 million
relates to customer relationships that are subject to amortization over a period of
15 years
. Additionally, we assumed an unfavorable lease contract with a fair value of
$5.4 million
, which will be amortized as a reduction of rent expense over the term of the lease agreement.
We recorded goodwill of $
67.3 million
in connection with the acquisition, which consists of the excess of the net purchase price over the fair value of the net assets acquired. This goodwill represents the expected value attributable to an anticipated increased competitive position in the ice cream market in the Northeastern United States. The goodwill is not deductible for tax purposes. As a result of our goodwill impairment analysis completed during the fourth quarter of 2018, we recorded a full goodwill impairment charge of
$190.7 million
. See Note
7
.
The acquisition was funded through a combination of cash on hand and borrowings under our senior secured revolving credit facility and receivables securitization facility. Friendly's results of operations have been included in our Consolidated Statements of Operations from the date of acquisition.
During the years ended
December 31, 2018
,
2017
and
2016
, we incurred an immaterial amount of expense related to other transactional activities, which is recorded in general and administrative expenses in our Consolidated Statements of Operations.
Discontinued Operations
During the year ended
December 31, 2018
, we recognized a net gain from the sale of discontinued operations of
$1.9 million
, net of tax, resulting from a tax refund received from the settlement of a state tax claim related to our 2013 sale of Morningstar Foods, LLC. Additionally, we recognized a gain from the sale of discontinued operations of
$3.0 million
, net of tax, primarily related to the release of an uncertain tax position reserve concerning a state filing methodology issue in connection with the sale of Morningstar Foods, LLC.
During the year ended
December 31, 2017
, we recognized net gains from discontinued operations of
$11.3 million
due to the lapse of a statute of limitation related to an unrecognized tax benefit previously established as a direct result of the spin-off of The WhiteWave Foods Company, which was completed on May 23, 2013. During the year ended
December 31, 2017
, we recognized net gains from the sale of discontinued operations of
$2.9 million
primarily related to the lapse of the statute of limitations related to unrecognized tax benefits previously established related to the sale of Morningstar Foods, LLC, which was completed on January 3, 2013.
During the year ended
December 31, 2016
, we recognized net losses from discontinued operations of
$0.3 million
and net losses on the sale of discontinued operations, net of tax, of
$0.4 million
, primarily related to interest expense on uncertain tax positions that we retained in connection with our spin-off of The WhiteWave Foods Company in 2013 and our sale of Morningstar Foods in 2013.
4
. INVESTMENT IN UNCONSOLIDATED AFFILIATE
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 received cash distributions from the joint venture of
$2.8 million
for the twelve months ended
December 31, 2018
. We made purchases from the joint venture of
$88.7 million
for the twelve months ended
December 31, 2018
, which are included in cost of sales within our Consolidated Statements of Operations.
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. We are accounting for this investment under the equity method of accounting. Our equity in the earnings of the joint venture are 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 earnings of the joint venture was
$7.9 million
for the year ended
December 31, 2018
, and was
no
t material for the year ended
December 31, 2017
.
5
. INVENTORIES
Inventories at
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Raw materials and supplies
|
$
|
101,620
|
|
|
$
|
106,814
|
|
|
Finished goods
|
153,864
|
|
|
171,249
|
|
|
Total
|
$
|
255,484
|
|
|
$
|
278,063
|
|
6
. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Land
|
$
|
162,326
|
|
|
$
|
175,243
|
|
|
Buildings
|
642,986
|
|
|
677,827
|
|
|
Leasehold improvements
|
84,320
|
|
|
83,366
|
|
|
Machinery and equipment
|
1,873,505
|
|
|
1,867,168
|
|
|
Construction in progress
|
45,349
|
|
|
29,952
|
|
|
|
2,808,486
|
|
|
2,833,556
|
|
|
Less accumulated depreciation
|
(1,802,304
|
)
|
|
(1,739,492
|
)
|
|
Total
|
$
|
1,006,182
|
|
|
$
|
1,094,064
|
|
Depreciation expense amounted to
$133.0 million
,
$145.1 million
and
$151.9 million
during the years ended
December 31, 2018
,
2017
and
2016
, respectively.
There was
no
material interest capitalized during the years ended
December 31, 2018
and
2017
.
See Note
17
for information regarding property, plant and equipment write-downs incurred in conjunction with our facility closings and certain other events.
7
. GOODWILL AND INTANGIBLE ASSETS
Our goodwill and intangible assets have resulted from acquisitions. Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including trademarks and customer-related intangible assets, with any remaining purchase price recorded as goodwill. Goodwill and intangible assets with indefinite lives are not amortized. Finite-lived intangible assets are amortized over their expected useful lives. Determining the expected life of an intangible asset is based on a number of factors including the competitive environment, history and anticipated future support.
We conduct impairment tests of goodwill and indefinite-lived intangible assets annually in the fourth quarter and on an interim basis when circumstances arise that indicate a possible impairment. We evaluate goodwill at the reporting unit level. In the fourth quarter of 2018, we early adopted ASU 2017-04,
Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment
, which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test.
In evaluating goodwill and indefinite-lived intangibles for impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not (that is, a likelihood of more than
50 percent
) that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a quantitative assessment to determine whether goodwill is impaired and to measure the amount of goodwill impairment to be recognized, if any. Under the accounting guidance, we also have an option at any time to bypass the qualitative assessment and immediately perform a quantitative step one assessment to estimate the fair value of our reporting unit and identify any potential impairment of goodwill. Due to declining operating results and a sustained decrease in our stock price, we completed a step one goodwill impairment analysis for our single reporting unit during the fourth quarter of
2018
.
Considerable management judgment is necessary to evaluate goodwill and indefinite-lived intangible assets for impairment. We estimate fair value using widely accepted valuation techniques including discounted cash flows and market multiples analysis with respect to our single reporting unit, and the relief-from-royalty method with respect to our indefinite-lived trademarks. These valuation approaches are dependent upon a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. Assumptions used in our valuations were consistent with our internal projections and operating plans, as well as other factors and assumptions, and utilized unobservable inputs (Level 3, as defined in Note
11
) and significant management judgment. Additionally, under the market approach analysis, we used significant other observable inputs (Level 2, as defined in Note
11
) including various guideline company comparisons. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Changes in these estimates or assumptions could materially affect the determination of fair value and the conclusions of the step one analysis for our reporting unit.
For purposes of the step one goodwill impairment analysis, we estimated the fair value of our reporting unit using an equal weighting of the income approach that analyzed projected discounted cash flows and a market approach that considered other comparable companies. Both approaches resulted in a fair value estimate for our reporting unit that was significantly below its carrying amount. As a result, we recorded a full goodwill impairment charge of
$190.7 million
during the fourth quarter of
2018
.
As of
December 31, 2018
, the gross carrying value of goodwill was
$2.26 billion
and accumulated goodwill impairment was
$2.26 billion
. We recorded a goodwill impairment charge of
$2.08 billion
in 2011 and a goodwill impairment charge of
$0.19 billion
in 2018.
The changes in the net carrying amount of goodwill for the years ended
December 31, 2018
,
2017
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
$
|
154,112
|
|
|
Acquisitions (Note 3)
|
13,423
|
|
|
Balance at December 31, 2017
|
$
|
167,535
|
|
|
Acquisitions (Note 3)
|
23,179
|
|
|
Goodwill impairment
|
(190,714
|
)
|
|
Balance at December 31, 2018
|
$
|
—
|
|
Based on the results of our annual impairment testing of our indefinite-lived trademarks completed during the fourth quarter of
2018
, we did not record any impairment charges.
We evaluate our finite-lived intangible assets for impairment upon a significant change in the operating environment or whenever circumstances indicate that the carrying value may not be recoverable. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows.
Prior to 2015, certain of our trademarks were not amortized as our intent was to continue to use these intangible assets indefinitely. During the first quarter of 2015, we approved the launch of
DairyPure
®
, our national white milk brand. In connection with the approval of the launch of
DairyPure
®
, we re-evaluated our indefinite-lived trademarks and determined them to be finite-lived, with remaining useful lives of 5 years. In the first quarter of 2016, we further evaluated the remaining useful life of our finite-lived trademarks in conjunction with our newly approved strategy around our ice cream brands. Based on our evaluation, we extended the useful lives of certain of our finite-lived trademarks. Our finite-lived trademarks are being 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
.
The net carrying amounts of our intangible assets other than goodwill as of
December 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
Acquisition Costs(1)
|
|
Impairment
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Acquisition Costs
|
|
Impairment
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
|
(In thousands)
|
|
Intangible assets with indefinite lives:
|
|
Trademarks
|
$
|
69,315
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,315
|
|
|
$
|
58,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,600
|
|
|
Intangible assets with finite lives:
|
|
Customer-related and other
|
83,545
|
|
|
—
|
|
|
(45,423
|
)
|
|
38,122
|
|
|
80,685
|
|
|
—
|
|
|
(41,398
|
)
|
|
39,287
|
|
|
Trademarks
|
230,709
|
|
|
(109,910
|
)
|
|
(74,621
|
)
|
|
46,178
|
|
|
230,709
|
|
|
(109,910
|
)
|
|
(58,189
|
)
|
|
62,610
|
|
|
Total
|
$
|
383,569
|
|
|
$
|
(109,910
|
)
|
|
$
|
(120,044
|
)
|
|
$
|
153,615
|
|
|
$
|
369,994
|
|
|
$
|
(109,910
|
)
|
|
$
|
(99,587
|
)
|
|
$
|
160,497
|
|
|
|
|
|
(1)
|
The increase in the gross amount of intangible assets from
December 31, 2017
to
December 31, 2018
is related to an indefinite-lived trademark of
$10.7 million
and a finite-lived customer-related intangible of
$2.9 million
we recorded as a part of the Good Karma acquisition. See Note
3
.
|
Amortization expense on intangible assets for the years ended
December 31, 2018
,
2017
and
2016
was
$20.5 million
,
$20.7 million
and
$20.8 million
, respectively. The amortization of intangible assets is reported on a separate line item in our 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
|
|
8
. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Accounts payable
|
$
|
434,827
|
|
|
$
|
424,140
|
|
|
Payroll and benefits, including incentive compensation
|
57,164
|
|
|
62,551
|
|
|
Health insurance, workers’ compensation and other insurance costs
|
58,706
|
|
|
60,068
|
|
|
Customer rebates
|
41,266
|
|
|
38,571
|
|
|
Other accrued liabilities
|
107,698
|
|
|
85,740
|
|
|
Total
|
$
|
699,661
|
|
|
$
|
671,070
|
|
9
. INCOME TAXES
The Tax Act, which was enacted on December 22, 2017, represents the most significant overhaul of the U.S. tax code in more than 30 years
.
In 2017, The Tax Act reduced the U.S. federal corporate tax rate from
35%
to
21%
, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign earnings. During the year ended December 31, 2017, we recognized the reasonably estimated (i) effects on our existing deferred tax balances and (ii) one-time transition tax, in accordance with SEC Staff Accounting Bulletin No. 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the new law. This resulted in a net tax benefit of
$43.7 million
recorded in our 2017 financial statements. As of December 31, 2018, we have completed our accounting for the 2017 tax effects related to enactment of the Tax Act. There were no material adjustments to the provisional amounts recorded at December 31, 2017 related to the Tax Act in our financial statements for the period ended December 31, 2018.
Prior to the enactment of the Tax Act on December 22, 2017, we considered the accumulated earnings of our foreign subsidiary to be indefinitely reinvested and, therefore, no provision had been made for U.S. income taxes on such amounts. 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 of 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.
The following table presents the
2018
,
2017
and
2016
income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018(1)
|
|
2017(2)
|
|
2016(3)
|
|
|
(In thousands)
|
|
Current income taxes:
|
|
|
|
|
|
|
Federal
|
$
|
(258
|
)
|
|
$
|
(1,315
|
)
|
|
$
|
49,529
|
|
|
State
|
33
|
|
|
1,317
|
|
|
5,728
|
|
|
Foreign
|
(554
|
)
|
|
844
|
|
|
879
|
|
|
Total current income tax expense (benefit)
|
(779
|
)
|
|
846
|
|
|
56,136
|
|
|
Deferred income taxes:
|
|
|
|
|
|
|
Federal
|
(49,115
|
)
|
|
(38,100
|
)
|
|
15,164
|
|
|
State
|
7,611
|
|
|
11,075
|
|
|
10,734
|
|
|
Total deferred income tax expense (benefit)
|
(41,504
|
)
|
|
(27,025
|
)
|
|
25,898
|
|
|
Total income tax expense (benefit)
|
$
|
(42,283
|
)
|
|
$
|
(26,179
|
)
|
|
$
|
82,034
|
|
|
|
|
|
(1)
|
Excludes
$5.9 million
of income tax benefit related to discontinued operations.
|
|
|
|
|
(2)
|
Excludes
$14.2 million
of income tax benefit related to discontinued operations.
|
|
|
|
|
(3)
|
Excludes
$0.5 million
of income tax expense related to discontinued operations.
|
The following is a reconciliation of income tax expense (benefit) computed at the U.S. federal statutory tax rate to income tax expense (benefit) reported in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
Amount
|
|
Percentage
|
|
Amount
|
|
Percentage
|
|
Amount
|
|
Percentage
|
|
|
(In thousands, except percentages)
|
|
Tax expense (benefit) at statutory rate
|
$
|
(78,648
|
)
|
|
21.0
|
%
|
|
$
|
7,435
|
|
|
35.0
|
%
|
|
$
|
70,928
|
|
|
35.0
|
%
|
|
State income taxes
|
(17,159
|
)
|
|
4.6
|
|
|
1,844
|
|
|
8.7
|
|
|
9,620
|
|
|
4.8
|
|
|
Corporate owned life insurance
|
(85
|
)
|
|
—
|
|
|
(933
|
)
|
|
(4.4
|
)
|
|
—
|
|
|
—
|
|
|
Nondeductible executive compensation
|
566
|
|
|
(0.1
|
)
|
|
371
|
|
|
1.8
|
|
|
1,130
|
|
|
0.6
|
|
|
Impairment
|
35,109
|
|
|
(9.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Change in valuation allowances
|
17,355
|
|
|
(4.6
|
)
|
|
5,851
|
|
|
27.5
|
|
|
1,080
|
|
|
0.5
|
|
|
Share-based compensation(1)
|
1,073
|
|
|
(0.3
|
)
|
|
2,995
|
|
|
14.1
|
|
|
—
|
|
|
—
|
|
|
Domestic production activities deduction
|
—
|
|
|
—
|
|
|
(244
|
)
|
|
(1.2
|
)
|
|
(4,393
|
)
|
|
(2.2
|
)
|
|
Transition tax on unrepatriated foreign earnings
|
—
|
|
|
—
|
|
|
2,106
|
|
|
9.9
|
|
|
—
|
|
|
—
|
|
|
Tax reform revaluation of deferred taxes
|
—
|
|
|
—
|
|
|
(45,840
|
)
|
|
(215.8
|
)
|
|
—
|
|
|
—
|
|
|
Other
|
(494
|
)
|
|
0.1
|
|
|
236
|
|
|
1.2
|
|
|
3,669
|
|
|
1.8
|
|
|
Total
|
$
|
(42,283
|
)
|
|
11.3
|
%
|
|
$
|
(26,179
|
)
|
|
(123.2
|
)%
|
|
$
|
82,034
|
|
|
40.5
|
%
|
|
|
|
|
(1)
|
Includes excess tax benefits and deficiencies related to share-based payments recorded in the provision of income taxes because of the adoption of ASU 2016-09,
Compensation — Stock Compensation — Improvements to Employee Share-Based Payment Accounting
in 2017.
|
The tax effects of temporary differences giving rise to deferred income tax assets (liabilities) were:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018(1)
|
|
2017(2)
|
|
|
(In thousands)
|
|
Deferred income tax assets:
|
|
|
|
|
Accrued liabilities
|
$
|
54,906
|
|
|
$
|
54,971
|
|
|
Retirement plans and postretirement benefits
|
12,190
|
|
|
10,379
|
|
|
Share-based compensation
|
2,343
|
|
|
3,886
|
|
|
Receivables and inventories
|
6,789
|
|
|
6,651
|
|
|
Derivative financial instruments
|
1,075
|
|
|
99
|
|
|
Net operating loss carryforwards
|
61,009
|
|
|
38,023
|
|
|
Tax credits and other carryforwards
|
23,195
|
|
|
9,965
|
|
|
Valuation allowances
|
(40,966
|
)
|
|
(21,755
|
)
|
|
|
120,541
|
|
|
102,219
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
(113,272
|
)
|
|
(124,185
|
)
|
|
Intangible assets
|
(14,475
|
)
|
|
(22,213
|
)
|
|
Cancellation of debt
|
—
|
|
|
(1,708
|
)
|
|
Other
|
(3,983
|
)
|
|
(3,400
|
)
|
|
|
(131,730
|
)
|
|
(151,506
|
)
|
|
Net deferred income tax asset (liability)
|
$
|
(11,189
|
)
|
|
$
|
(49,287
|
)
|
|
|
|
|
(1)
|
Includes
$5.4 million
of deferred tax assets related to uncertain tax positions.
|
|
|
|
|
(2)
|
Includes
$7.0 million
of deferred tax assets related to uncertain tax positions.
|
These net deferred income tax assets (liabilities) are classified in our Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Noncurrent assets
|
$
|
2,518
|
|
|
$
|
10,731
|
|
|
Noncurrent liabilities
|
(13,707
|
)
|
|
(60,018
|
)
|
|
Total
|
$
|
(11,189
|
)
|
|
$
|
(49,287
|
)
|
At
December 31, 2018
, we had
$61.0 million
of tax-effected federal and state net operating losses and
$23.2 million
of federal and state tax credits and other carryovers available for use in future years. While some of these assets can be carried forward indefinitely, certain attributes are subject to limitations and begin to expire in
2019
. A valuation allowance of
$41.0 million
has been established because we do not believe it is more likely than not that all state deferred tax assets will be realized. Our valuation allowance increased
$19.2 million
in
2018
, which primarily relates to our assessment of the realizability of our net deferred state tax assets, as well as certain state net operating losses and tax credits.
The following is a reconciliation of gross unrecognized tax benefits, including interest, recorded in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Balance at beginning of year
|
$
|
15,054
|
|
|
$
|
30,410
|
|
|
$
|
27,829
|
|
|
Increases in tax positions for current year
|
211
|
|
|
251
|
|
|
125
|
|
|
Increases in tax positions for prior years
|
244
|
|
|
904
|
|
|
4,542
|
|
|
Decreases in tax positions for prior years
|
(5,842
|
)
|
|
(53
|
)
|
|
(199
|
)
|
|
Settlement of tax matters
|
(217
|
)
|
|
—
|
|
|
(1,887
|
)
|
|
Lapse of applicable statutes of limitations
|
—
|
|
|
(16,458
|
)
|
|
—
|
|
|
Balance at end of year
|
$
|
9,450
|
|
|
$
|
15,054
|
|
|
$
|
30,410
|
|
Of the total unrecognized tax benefit balance at
December 31, 2018
,
$4.0 million
would impact our effective tax rate if recognized. The remaining
$5.4 million
represents tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Due to the impact of deferred income tax accounting, the disallowance of the shorter deductibility period would not affect our effective tax rate but would accelerate payment of cash to the applicable taxing authority. We do not expect a material change to our gross liability for uncertain tax positions during the next
12 months
.
We recognize accrued interest related to uncertain tax positions as a component of income tax expense. Penalties, if incurred, are recorded in general and administrative expenses in our Consolidated Statements of Operations. Interest expense recorded in income tax expense for
2018
,
2017
and
2016
was immaterial. Our liability for uncertain tax positions included accrued interest of
$0.8 million
and
$2.0 million
at
December 31, 2018
and
2017
, respectively.
As of
December 31, 2018
, our
2015
through
2017
U.S. consolidated income tax returns remain open for examination by the IRS. State income tax returns are generally subject to examination for a period of
three
to
five
years after filing. We have various state income tax returns in the process of examination, appeals or settlement.
10
. DEBT
Our long-term debt as of
December 31, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Amount
|
|
Interest
Rate
|
|
|
Amount
|
|
Interest
Rate
|
|
|
|
(In thousands, except percentages)
|
|
|
Dean Foods Company debt obligations:
|
|
|
|
|
|
|
|
|
|
|
Senior secured revolving credit facility
|
$
|
19,300
|
|
|
4.65
|
%
|
*
|
|
$
|
11,200
|
|
|
3.33
|
%
|
*
|
|
Senior notes due 2023
|
700,000
|
|
|
6.50
|
|
|
|
700,000
|
|
|
6.50
|
|
|
|
|
719,300
|
|
|
|
|
|
711,200
|
|
|
|
|
|
Subsidiary debt obligations:
|
|
|
|
|
|
|
|
|
|
|
Receivables securitization facility
|
190,000
|
|
|
3.54
|
|
*
|
|
205,000
|
|
|
2.48
|
|
*
|
|
Capital lease and other
|
1,618
|
|
|
—
|
|
|
|
2,671
|
|
|
—
|
|
|
|
|
191,618
|
|
|
|
|
|
207,671
|
|
|
|
|
|
Subtotal
|
910,918
|
|
|
|
|
|
918,871
|
|
|
|
|
|
Unamortized debt issuance costs
|
(4,574
|
)
|
|
|
|
|
(5,672
|
)
|
|
|
|
|
Total debt
|
906,344
|
|
|
|
|
|
913,199
|
|
|
|
|
|
Less current portion
|
(1,174
|
)
|
|
|
|
|
(1,125
|
)
|
|
|
|
|
Total long-term portion
|
$
|
905,170
|
|
|
|
|
|
$
|
912,074
|
|
|
|
|
|
|
|
|
*
|
Represents a weighted average rate, including applicable interest rate margins.
|
The scheduled debt maturities at
December 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
2019
|
$
|
1,226
|
|
|
2020
|
190,392
|
|
|
2021
|
—
|
|
|
2022
|
19,300
|
|
|
2023
|
700,000
|
|
|
Thereafter
|
—
|
|
|
Subtotal
|
910,918
|
|
|
Less unamortized debt issuance costs
|
(4,574
|
)
|
|
Total debt
|
$
|
906,344
|
|
Senior Secured Revolving Credit Facility
— In March 2015, we entered into a credit agreement, as amended on January 4, 2017 and as further amended on November 6, 2018, in each case described below (as amended, the "prior Credit Agreement"), pursuant to which the lenders provided us with a senior secured revolving credit facility in the amount of up to
$450 million
(the "prior Credit Facility"). Under the prior Credit Agreement, we have the right to request an increase of the aggregate commitments under the prior Credit Facility by up to
$200 million
, which we may request to be made available as either term loans or revolving loans, without the consent of any lenders not participating in such increase, subject to specified conditions. The prior Credit Facility is available for the issuance of up to
$75 million
of letters of credit and up to
$100 million
of swing line loans.
On
January 4, 2017
, we amended the prior Credit Agreement to, among other things, (i) extend the maturity date of the prior Credit Facility to
January 4, 2022
; (ii) modify the leverage ratio covenant to add a requirement that we comply with a maximum total net leverage ratio (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility) not to exceed
4.25
to
1.00
and to eliminate the maximum senior secured net leverage ratio requirement; (iii) modify the definition of “Consolidated EBITDA” to permit certain pro forma cost savings add-backs in connection with permitted acquisitions and dispositions; (iv) modify the definition of “Applicable Rate” to reduce the interest rate margins such that loans outstanding under the Credit Facility will bear interest, at our option, at either (x) the LIBO Rate (as defined in the prior Credit Agreement) plus a margin of between
1.75%
and
2.50%
(
2.25%
as of
December 31, 2018
) based on our total net leverage ratio (as defined in the prior Credit Agreement), or (y) the Alternate Base Rate (as defined in the prior Credit Agreement) plus a
margin of between
0.75%
and
1.50%
(
1.25%
as of
December 31, 2018
) based on our total net leverage ratio; (v) modify certain negative covenants to provide additional flexibility for the incurrence of debt, the payment of dividends and the making of certain permitted acquisitions and other investments; (vi) eliminate and release all real property as collateral for loans under the prior Credit Facility; and (vii) provide the Company the ability to request that increases in the aggregate commitments under the prior Credit Facility be made available as either revolving loans or term loans.
In connection with the execution of the amendment to the prior Credit Agreement, we paid certain arrangement fees of approximately
$0.7 million
to lenders and other fees of approximately
$0.3 million
, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off
$0.9 million
of unamortized deferred financing costs in connection with this amendment.
On
November 6, 2018
, we amended the prior Credit Agreement, to modify the leverage ratio covenant and set the maximum total leverage ratio required to be complied with, (i) for the fiscal quarters ending on September 30, 2018 and December 31, 2018, at
4.25
x, (ii) for the fiscal quarter ending on March 31, 2019, at
5.00
x, (iii) for the fiscal quarter ending on June 30, 2019, at
5.50
x, (iv) for the fiscal quarter ending on September 30, 2019, at
5.25
x and (v) for each fiscal quarter thereafter, at
4.25
x.
In connection with the execution of this amendment to the prior Credit Agreement, we paid certain arrangement fees of approximately $
0.7 million
to lenders and other fees of approximately $
0.1 million
, which were capitalized and will be amortized to interest expense over the remaining term of the facility.
We may make optional prepayments of loans under the prior Credit Facility, in whole or in part, without premium or penalty (other than applicable breakage costs). Subject to certain exceptions and conditions described in the prior Credit Agreement, we will be obligated to prepay the prior Credit Facility, but without a corresponding commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds. The prior Credit Facility is guaranteed by our existing and future domestic material restricted subsidiaries (as defined in the prior Credit Agreement), which are substantially all of our wholly-owned U.S. subsidiaries other than the receivables securitization facility subsidiaries (the "Guarantors").
The prior Credit Facility is secured by a first priority perfected security interest in substantially all of our assets and the assets of the Guarantors, whether consisting of personal, tangible or intangible property, including a pledge of, and a perfected security interest in, (i) all of the shares of capital stock of the Guarantors and (ii)
65%
of the shares of capital stock of our and the Guarantors' first-tier foreign subsidiaries that are material restricted subsidiaries, in each case subject to certain exceptions as set forth in the prior Credit Agreement. The collateral does not include, among other things, (a) any of our real property, (b) the capital stock and any assets of any unrestricted subsidiary, (c) any capital stock of any direct or indirect subsidiary of Dean Holding Company ("Legacy Dean"), a wholly owned subsidiary of the Company, which owns any real property, or (d) receivables sold pursuant to the receivables securitization facility.
The prior Credit Agreement contains customary representations, warranties and covenants, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments during a default or non-compliance with the financial covenants, investments, loans and advances, transactions with affiliates and sale and leaseback transactions. The prior Credit Agreement also contains customary events of default and related cure provisions. We are required to comply with (a) a maximum total net leverage ratio of (i) for the fiscal quarters ending on September 30, 2018 and December 31, 2018, of
4.25
x, (ii) for the fiscal quarter ending on March 31, 2019, of
5.00
x, (iii) for the fiscal quarter ending on June 30, 2019, of
5.50
x, (iv) for the fiscal quarter ending on September 30, 2019, of
5.25
x and (v) for each fiscal quarter ending thereafter, of
4.25
x (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility); and (b) a minimum consolidated interest coverage ratio of
2.25
x. In addition, the prior Credit Agreement imposes certain restrictions on our ability to pay dividends and make other restricted payments if our total net leverage ratio (including borrowings under our receivables securitization facility) is in excess of
3.50
x.
At
December 31, 2018
, we had outstanding borrowings of
$19.3 million
under the
prior Credit Facility. Our average daily balance under the prior Credit Facility during the year ended
December 31, 2018
was
$2.6 million
. There
wer
e
no
le
tters of credit issued under the prior Credit Facility as of
December 31, 2018
.
On February 22, 2019, we terminated the prior Credit Agreement governing our prior Credit Facility and 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 we don’t repay or refinance the 2023 Notes on or prior to July 15, 2022. A portion of the Credit Facility is available for the issuance of up to
$25 million
of standby letters of credit and up to
$10 million
of swing line loans.
Loans outstanding under the Credit Facility bear interest, at our option, at either: (i) the Base Rate (as defined in the Credit Agreement) or (ii) the Adjusted Eurodollar Rate (as defined in the Credit Agreement), plus a margin of between
1.25%
and
1.75%
(in the case of Base Rate loans) or
2.25%
and
2.75%
(in the case of Eurodollar Rate loans), in each case based on our total net leverage ratio.
We may make optional prepayments of the loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, and with a
50%
commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds relating to the assets not included in the borrowing base. The Credit Facility is guaranteed by our existing and future wholly owned material domestic subsidiaries, which are substantially all of our existing domestic subsidiaries other than the subsidiaries 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
).
Dean Foods Receivables Securitization Facility
— We have a
$450 million
receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to
two
wholly-owned entities intended to be bankruptcy-remote. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our Consolidated Balance Sheets, and the securitization is treated as a borrowing for accounting purposes.
On
January 4, 2017
, we amended the purchase agreement governing the receivables securitization facility to, among other things, (i) extend the liquidity termination date to
January 4, 2020
, (ii) reduce the maximum size of the receivables securitization facility to
$450 million
, (iii) replace the senior secured net leverage ratio with a total net leverage ratio to be consistent with the amended leverage ratio covenant under the
January 4, 2017
amendment to the Credit Agreement described above, and (iv) modify certain pricing terms such that advances outstanding under the receivables securitization facility will bear interest between
0.90%
and
1.05%
, and the Company will pay an unused fee between
0.40%
and
0.55%
on undrawn amounts, in each case based on the Company's total net leverage ratio.
In connection with the amendment to the receivables purchase agreement, we paid certain arrangement fees of approximately
$0.6 million
to lenders and other fees of approximately
$0.1 million
, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off
$0.2 million
of unamortized deferred financing costs in connection with the amendment.
The receivables purchase agreement contains covenants consistent with those contained in the prior Credit Agreement.
Based on the monthly borrowing base formula, we had the ability to borrow up to
$437.3 million
of the total commitment amount under the receivables securitization facility as of
December 31, 2018
. The total amount of receivables sold to these entities as of
December 31, 2018
was
$552.3 million
. During the year ended
December 31, 2018
, we borrowed
$2.4 billion
and repaid
$2.4 billion
under the facility with a remaining balance of
$190.0 million
as of
December 31, 2018
. In addition to letters of credit in the aggregate amount of
$109.6 million
that were issued but undrawn, the remaining available borrowing capacity was
$137.7 million
at
December 31, 2018
. Our average daily balance under this facility during the year ended
December 31, 2018
was
$157.2 million
. The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.
On January 17, 2019, we amended and restated the existing receivables purchase agreement ("Existing RPA") governing our receivables securitization facility to, among other things, (i) waive compliance with the financial covenant in the Existing RPA requiring the Company to maintain a total net leverage ratio (as defined in the Existing RPA) 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 Existing RPA arising
from non-compliance with the Financial Covenant under the prior Credit Facility. The waiver is subject to termination upon the earliest to occur of (a) March 1, 2019, (b) the date, if any, on which any Seller Party (as defined in the Existing RPA) breaches its obligations under Amendment No. 2 and (c) the date, if any, on which the Collateral Agent (as defined in the Existing RPA) enters into a forbearance agreement with the Company relating to (x) the prior Credit Agreement, dated as of March 26, 2015, by and among the Company and the lenders and other parties from time to time party thereto (y) the exercise of remedies with respect to the prior Credit Facility.
On February 22, 2019, we amended and restated the Existing RPA to, among other things, (i) extend the liquidity termination date to February 22, 2022 and (ii) replace the leverage ratio covenant with a springing fixed charge coverage ratio 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) 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
).
Dean Foods Company Senior Notes due 2023
— On February 25, 2015, we issued
$700 million
in aggregate principal amount of
6.50%
senior notes due 2023 (the "2023 Notes") at an issue price of
100%
of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and in offshore transactions pursuant to Regulation S under the Securities Act.
In connection with the issuance of the 2023 Notes, we paid certain arrangement fees of approximately
$7.0 million
to initial purchasers and other fees of approximately
$1.8 million
, which were deferred and netted against the outstanding debt balance, and will be amortized to interest expense over the remaining term of the 2023 Notes.
The 2023 Notes are our senior unsecured obligations. Accordingly, the 2023 Notes rank equally in right of payment with all of our existing and future senior obligations and are effectively subordinated in right of payment to all of our existing and future secured obligations, including obligations under our Credit Facility and receivables securitization facility, to the extent of the value of the collateral securing such obligations. The 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by our subsidiaries that guarantee obligations under the Credit Facility.
The 2023 Notes will mature on March 15, 2023, and bear interest at an annual rate of
6.50%
. Interest on the 2023 Notes is payable semi-annually in arrears in March and September of each year.
We may, at our option, redeem all or a portion of the 2023 Notes at any time on or after March 15, 2018 at the applicable redemption prices specified in the indenture governing the 2023 Notes (the "Indenture"), plus any accrued and unpaid interest to, but excluding, the applicable redemption date. If we undergo certain kinds of changes of control, holders of the 2023 Notes have the right to require us to repurchase all or any portion of such holder’s 2023 Notes at
101%
of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit our ability to: (i) create certain liens; (ii) enter into sale and lease-back transactions; (iii) assume, incur or guarantee indebtedness for borrowed money that is secured by a lien on certain principal properties (or on any shares of capital stock of our subsidiaries that own such principal properties) without securing the 2023 Notes on a pari passu basis; and (iv) consolidate with or merge with or into, or sell, transfer, convey or lease all or substantially all of our properties and assets, taken as a whole, to another person.
The carrying value under the 2023 Notes at
December 31, 2018
was
$695.4 million
, net of unamortized debt issuance costs of
$4.6 million
.
See Note
11
for information regarding the fair value of the 2023 Notes as of
December 31, 2018
and
2017
.
Subsidiary Senior Notes due 2017
— Legacy Dean had certain senior notes outstanding at the time of its acquisition, of which one series (
$142 million
aggregate principal amount) matured on
October 15, 2017
. The indenture governing the Legacy Dean senior notes does not contain financial covenants but does contain certain restrictions, including a prohibition against Legacy Dean and its subsidiaries granting liens on certain of their real property interests and a prohibition against Legacy Dean granting liens on the stock of its subsidiaries. The Legacy Dean senior notes are not guaranteed by Dean Foods Company or Legacy Dean’s wholly-owned subsidiaries.
On October 16, 2017, we repaid in full the
$142 million
outstanding aggregate principal amount of the senior notes, plus remaining accrued and unpaid interest of
$4.9 million
, with borrowings from our receivables securitization facility.
Capital Lease Obligations and Other
— Capital lease obligations of
$1.6 million
and
$2.7 million
as of
December 31, 2018
and
2017
, respectively, were primarily comprised of our leases for information technology equipment. See Note
19
.
11
. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Derivative Financial Instruments
Commodities
— We are exposed to commodity price fluctuations, including in the prices of raw milk, butterfat, sweeteners and other commodity costs 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 our 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 Consolidated Balance Sheet.
Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. As of
December 31, 2018
and
2017
, our derivatives recorded at fair value in our Consolidated Balance Sheets were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
(In thousands)
|
|
Commodities contracts — current(1)
|
$
|
11
|
|
|
$
|
1,431
|
|
|
$
|
4,328
|
|
|
$
|
1,829
|
|
|
Commodities contracts — non-current(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
Total derivatives
|
$
|
11
|
|
|
$
|
1,431
|
|
|
$
|
4,328
|
|
|
$
|
1,844
|
|
|
|
|
|
(1)
|
Derivative assets and liabilities that have settlement dates equal to or less than 12 months from the respective balance sheet date were included in prepaid expenses and other current assets and accounts payable and accrued expenses, respectively, in our Consolidated Balance Sheets.
|
|
|
|
|
(2)
|
Derivative assets and liabilities that have settlement dates greater than 12 months from the respective balance sheet date were included in identifiable intangible and other assets, net, and other long-term liabilities, respectively, in our 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
December 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
as of
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets — Commodities contracts
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
Liabilities — Commodities contracts
|
4,328
|
|
|
—
|
|
|
4,328
|
|
|
—
|
|
A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of
December 31, 2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
as of
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets — Commodities contracts
|
$
|
1,431
|
|
|
$
|
—
|
|
|
$
|
1,431
|
|
|
$
|
—
|
|
|
Liabilities — Commodities contracts
|
1,844
|
|
|
—
|
|
|
1,844
|
|
|
—
|
|
Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on our Credit Facility, receivables securitization facility, and certain other debt are variable, their fair values approximate their carrying values.
The fair value of the 2023 Notes was determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined these fair values to be Level 2 measurements as all significant inputs into the quotes provided by our pricing source are observable in active markets. The following table presents the outstanding principal amounts and fair value of the 2023 Notes at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Amount Outstanding
|
|
Fair Value
|
|
Amount Outstanding
|
|
Fair Value
|
|
|
(In thousands)
|
|
Dean Foods Company senior notes due 2023
|
$
|
700,000
|
|
|
$
|
560,000
|
|
|
$
|
700,000
|
|
|
$
|
698,250
|
|
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 this plan are primarily invested in money market and mutual funds and are held at fair value. We classify these assets as Level 2 as fair value can be corroborated based on quoted market prices for identical or similar instruments in markets that are not active. The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Money market
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
Mutual funds
|
1,693
|
|
|
—
|
|
|
1,693
|
|
|
—
|
|
The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Money market
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
Mutual funds
|
1,785
|
|
|
—
|
|
|
1,785
|
|
|
—
|
|
12
. 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. 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. Quarterly dividends of
$0.09
per share were paid
in each quarter through September 30, 2018,
and a quarterly dividend of
$0.03
per share was paid in December 2018, totaling approximately
$27.4 million
for the year ended
December 31, 2018
. Quarterly dividends of
$0.09
per share were paid
in each quarter
of
2017
and
2016
, totaling approximately
$32.7 million
and
$32.8 million
for the years ended December 31,
2017
and
2016
, respectively. Any future dividends and the dividend policy may be changed at the Board of Directors’ discretion at any time. Dividends are presented as a reduction to retained earnings in our 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 years ended
December 31, 2018
and
2017
. We repurchased
1,371,185
shares for
$25.0 million
during the year ended
December 31, 2016
. As of
December 31, 2018
,
$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.
Stock Award Plans
— The Dean Foods Company 2016 Stock Incentive Plan (the “2016 Plan”), approved on May 11, 2016, allows grant awards of various types of equity-based compensation, including stock options, stock appreciation rights (‘‘SARs’’), restricted stock and restricted stock units, performance shares and performance units and other types of stock-based awards as compensation to employees, consultants and directors. The maximum number of shares that are available to be awarded under the 2016 Plan is
11,750,000
shares of common stock of the Company and is inclusive of the shares remaining available for issuance under the 2007 Stock Incentive Plan (the "2007 Plan"), which expired upon the 2016 Plan approval.
Any shares subject to any award granted under the 2016 Plan or the 2007 Plan which for any reason expires after the effective date of the 2016 Plan without having been exercised, or is canceled, terminated or otherwise settled without the issuance of stock will again be available for grant under the 2016 Plan. However, to the extent that any options or SARs are exercised by delivering the net value of such award in shares (a so-called ‘‘net exercise’’), the total number of shares for which the option or SAR is exercised, and not just the net number of shares delivered upon such exercise, will be counted as though issued under the 2016 Plan. Additionally, any shares that are canceled or surrendered to satisfy a participant’s applicable tax withholding obligations in respect of any award granted under the 2016 Plan or the 2007 Plan will not again become available for issuance. If any full-value award granted under the 2016 Plan or granted under the 2007 Plan expires without having been exercised, or is canceled, terminated or otherwise settled without the issuance of stock, that number of shares equal to (x) the number of shares subject to such award multiplied by (y) the multiplier applicable under the applicable plan (that is, two shares for each share subject to each such full-value award granted under the 2016 Plan and
1.67
for each full-value award granted under the 2007 Plan) will become available for issuance under the 2016 Plan.
As of
December 31, 2018
, we had approximately
8.5 million
shares, in the aggregate, available for grant under the 2016 Plan.
Restricted Stock Units
— We issue restricted stock units ("RSUs") to certain senior employees and non-employee directors as part of our long-term incentive 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 year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
Non-Employee Directors
|
|
Total
|
|
RSUs outstanding at January 1, 2018
|
545,405
|
|
|
85,829
|
|
|
631,234
|
|
|
RSUs granted
|
759,814
|
|
|
95,669
|
|
|
855,483
|
|
|
Shares issued upon vesting of RSUs
|
(176,881
|
)
|
|
(39,044
|
)
|
|
(215,925
|
)
|
|
RSUs canceled or forfeited(1)
|
(287,907
|
)
|
|
(1,915
|
)
|
|
(289,822
|
)
|
|
RSUs outstanding at December 31, 2018
|
840,431
|
|
|
140,539
|
|
|
980,970
|
|
|
Weighted-average per share grant date fair value
|
$
|
11.35
|
|
|
$
|
11.95
|
|
|
$
|
11.44
|
|
|
|
|
|
(1)
|
Pursuant to the terms of our stock unit plans, employees have the option of forfeiting stock units to cover their minimum statutory tax withholding when shares are issued. Any stock units surrendered or canceled in satisfaction of participants’ tax withholding obligations are not available for future grants under the plans.
|
The following table summarizes information about our RSU grants and RSU expense during the years ended
December 31, 2018
,
2017
and
2016
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
Total intrinsic value of RSUs vested/distributed during the period
|
$
|
2,496
|
|
|
$
|
7,960
|
|
|
$
|
8,920
|
|
|
Weighted-average grant date fair value of RSUs granted
|
8.92
|
|
|
17.91
|
|
|
19.13
|
|
|
Tax benefit related to RSU expense
|
972
|
|
|
2,071
|
|
|
1,694
|
|
At
December 31, 2018
, there was
$7.1 million
of total unrecognized RSU expense, all of which is related to unvested awards. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of
1.02
years.
Performance Stock Units
— In 2016, we began granting performance stock units ("PSUs") as 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 award that is expected to vest. The fair value of the PSUs is remeasured at each reporting period. The following table summarizes PSU activity during the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
PSUs
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at January 1, 2018
|
121,807
|
|
|
$
|
18.62
|
|
|
Granted
|
295,191
|
|
|
8.80
|
|
|
Forfeited
|
(39,430
|
)
|
|
10.38
|
|
|
Performance adjustment(1)
|
(85,795
|
)
|
|
18.13
|
|
|
Outstanding at December 31, 2018
|
291,773
|
|
|
$
|
9.94
|
|
|
|
|
|
(1)
|
Represents an adjustment to the 2017 tranche of the 2016 and 2017 PSU awards based on actual performance during the 2017 annual performance period in relation to the established performance goal for that period. The actual performance for the 2017 annual performance period was certified by the Compensation Committee of our Board of Directors in the first quarter of 2018.
|
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 period. The fair value of the awards is remeasured at each reporting period. Compensation expense, which is variable, is recognized over the vesting period with a corresponding liability, which is recorded in accounts payable and accrued expenses in our Consolidated Balance Sheets. The following table summarizes the phantom share activity during the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Outstanding at January 1, 2018
|
1,322,580
|
|
|
$
|
18.26
|
|
|
Granted
|
1,718,732
|
|
|
8.78
|
|
|
Converted/paid
|
(633,271
|
)
|
|
17.88
|
|
|
Forfeited
|
(400,614
|
)
|
|
12.79
|
|
|
Outstanding at December 31, 2018
|
2,007,427
|
|
|
$
|
11.35
|
|
Restricted Stock
— We offer our non-employee directors the option to receive certain compensation for services rendered in either cash or shares of restricted stock equal to
150%
of the fee amount.
Shares of restricted stock vest one-third on grant, one-third on the first anniversary of grant and one-third on the second anniversary of grant.
The following table summarizes restricted stock activity during the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Unvested at January 1, 2018
|
52,769
|
|
|
$
|
14.97
|
|
|
Restricted shares granted
|
102,485
|
|
|
6.99
|
|
|
Restricted shares vested
|
(67,728
|
)
|
|
11.33
|
|
|
Unvested at December 31, 2018
|
87,526
|
|
|
$
|
8.44
|
|
Stock Options —
We did not grant any stock options during
2016
,
2017
or
2018
. At
December 31, 2018
, there was
no
remaining unrecognized stock option expense related to unvested awards.
Under the terms of our stock option plans, employees and non-employee directors may be granted options to purchase our stock at a price equal to the market price on the date the option is granted.
The following table summarizes stock option activity during the year ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Contractual Life (Years)
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding and exercisable at January 1, 2018
|
700,467
|
|
|
$
|
17.21
|
|
|
|
|
|
|
Forfeited and canceled(1)
|
(314,929
|
)
|
|
20.46
|
|
|
|
|
|
|
Options outstanding and exercisable at December 31, 2018(2)
|
385,538
|
|
|
14.55
|
|
|
1.04
|
|
$
|
—
|
|
|
|
|
|
(1)
|
Pursuant to the terms of our stock option plans, options that are forfeited or canceled may be available for future grants. Effective May 15, 2013, any stock options surrendered or canceled in satisfaction of participants' exercise proceeds or tax withholding obligation will no longer become available for future grants under the plans.
|
|
|
|
|
(2)
|
As of
December 31, 2018
, there were
no
remaining unvested stock options.
|
The following table summarizes information about options outstanding and exercisable at
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable
|
|
Range of
Exercise Prices
|
Number
Outstanding
|
|
Weighted-
Average
Remaining
Contractual Life (in years)
|
|
Weighted-
Average
Exercise Price
|
|
$8.96 to 10.44
|
88,451
|
|
|
2.69
|
|
$
|
9.77
|
|
|
12.60
|
67,287
|
|
|
1.12
|
|
12.60
|
|
|
13.30 to 15.70
|
31,987
|
|
|
2.00
|
|
14.46
|
|
|
17.36
|
194,233
|
|
|
0.12
|
|
17.36
|
|
|
17.48
|
3,580
|
|
|
0.17
|
|
17.48
|
|
The following table summarizes additional information regarding our stock option activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
Intrinsic value of options exercised
|
$
|
—
|
|
|
$
|
427
|
|
|
$
|
1,372
|
|
|
Fair value of shares vested
|
—
|
|
|
—
|
|
|
—
|
|
|
Tax benefit related to stock option expense
|
—
|
|
|
—
|
|
|
—
|
|
During the year ended
December 31, 2018
, there were
no
stock option exercises.
Share-Based Compensation Expense
— The following table summarizes the share-based compensation expense related to equity-based awards recognized during the years ended
December 31, 2018
,
2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
RSUs
|
$
|
4,935
|
|
|
$
|
5,969
|
|
|
$
|
11,053
|
|
|
PSUs
|
(68
|
)
|
(1)
|
(2,395
|
)
|
(2)
|
3,601
|
|
|
Phantom shares
|
3,028
|
|
|
7,447
|
|
|
15,176
|
|
|
Total
|
$
|
7,895
|
|
|
$
|
11,021
|
|
|
$
|
29,830
|
|
|
|
|
|
(1)
|
The net credit to PSU expense for the year ended
December 31, 2018
is primarily the result of lower expected performance (relative to the established performance metric) associated with the 2018 tranche of these awards.
|
|
|
|
|
(2)
|
The net credit to PSU expense for the year ended
December 31, 2017
is primarily the result of lower performance (relative to the established performance metric) associated with the 2017 tranche of these awards and reflects the impact of a mark-to-market adjustment with respect to PSUs granted to certain former executives which were cash settled following the completion of the performance period based on our stock price.
|
13
. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based on the weighted average number of common shares issued and outstanding during each period. Diluted earnings (loss) per share is based on the weighted average number of common shares issued and outstanding and the effect of all dilutive common stock equivalents outstanding during each period. Stock option conversions and stock units were not included in the computation of diluted loss per share for the year ended
December 31, 2018
as we incurred a loss from continuing operations for this period 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 earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In thousands, except share data)
|
|
Basic earnings (loss) per share computation:
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(332,230
|
)
|
|
$
|
47,422
|
|
|
$
|
120,617
|
|
|
Net loss attributable to non-controlling interest
|
458
|
|
|
—
|
|
|
—
|
|
|
Income (loss) from continuing operations attributable to Dean Foods Company
|
$
|
(331,772
|
)
|
|
$
|
47,422
|
|
|
$
|
120,617
|
|
|
Denominator:
|
|
|
|
|
|
|
Average common shares
|
91,327,846
|
|
|
90,899,284
|
|
|
90,933,886
|
|
|
Basic earnings (loss) per share from continuing operations attributable to Dean Foods Company
|
$
|
(3.63
|
)
|
|
$
|
0.52
|
|
|
$
|
1.33
|
|
|
Diluted earnings (loss) per share computation:
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(332,230
|
)
|
|
$
|
47,422
|
|
|
$
|
120,617
|
|
|
Net loss attributable to non-controlling interest
|
458
|
|
|
—
|
|
|
—
|
|
|
Income (loss) from continuing operations attributable to Dean Foods Company
|
$
|
(331,772
|
)
|
|
$
|
47,422
|
|
|
$
|
120,617
|
|
|
Denominator:
|
|
|
|
|
|
|
Average common shares — basic
|
91,327,846
|
|
|
90,899,284
|
|
|
90,933,886
|
|
|
Stock option conversion(1)
|
—
|
|
|
119,284
|
|
|
246,116
|
|
|
RSUs and PSUs(2)
|
—
|
|
|
255,426
|
|
|
330,481
|
|
|
Average common shares — diluted
|
91,327,846
|
|
|
91,273,994
|
|
|
91,510,483
|
|
|
Diluted earnings (loss) per share from continuing operations attributable to Dean Foods Company
|
$
|
(3.63
|
)
|
|
$
|
0.52
|
|
|
$
|
1.32
|
|
|
(1) Anti-dilutive common shares excluded
|
436,473
|
|
|
880,541
|
|
|
1,262,158
|
|
|
(2) Anti-dilutive stock units excluded
|
1,086,206
|
|
|
442,047
|
|
|
—
|
|
14
. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component, net of tax, during the year ended
December 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits Items
|
|
Foreign Currency
Items
|
|
Total
|
|
Balance, December 31, 2017
|
$
|
(73,629
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(78,410
|
)
|
|
Other comprehensive loss before reclassifications
|
(9,971
|
)
|
|
—
|
|
|
(9,971
|
)
|
|
Amounts reclassified from accumulated other comprehensive loss(1)
|
6,621
|
|
|
—
|
|
|
6,621
|
|
|
Net current-period other comprehensive loss
|
(3,350
|
)
|
|
—
|
|
|
(3,350
|
)
|
|
Reclassification of stranded tax effects related to the Tax Act(2)
|
(16,847
|
)
|
|
—
|
|
|
(16,847
|
)
|
|
Balance, December 31, 2018
|
$
|
(93,826
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(98,607
|
)
|
|
|
|
|
(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 pension cost. See Notes
15
and
16
.
|
|
|
|
|
(2)
|
See Note
1
for additional details on the adoption of ASU No. 2018-02 during the first quarter of 2018.
|
The changes in accumulated other comprehensive loss by component, net of tax, during the year ended
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Benefits Items
|
|
Foreign Currency
Items
|
|
Total
|
|
Balance, December 31, 2016
|
$
|
(84,852
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(89,633
|
)
|
|
Other comprehensive income before reclassifications
|
17,740
|
|
|
—
|
|
|
17,740
|
|
|
Amounts reclassified from accumulated other comprehensive loss(1)
|
(6,517
|
)
|
|
—
|
|
|
(6,517
|
)
|
|
Net current-period other comprehensive income
|
11,223
|
|
|
—
|
|
|
11,223
|
|
|
Balance, December 31, 2017
|
$
|
(73,629
|
)
|
|
$
|
(4,781
|
)
|
|
$
|
(78,410
|
)
|
|
|
|
|
(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 pension cost. See Notes
15
and
16
.
|
15
. EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS
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. Substantially all full-time union and non-union employees who have completed
one or more years of service
and have met other requirements pursuant to the plans are eligible to participate in one or more of these plans. During
2018
,
2017
and
2016
, our retirement and profit sharing plan expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Defined benefit plans
|
$
|
5,547
|
|
|
$
|
6,717
|
|
|
$
|
6,805
|
|
|
Defined contribution plans
|
18,968
|
|
|
19,562
|
|
|
19,078
|
|
|
Multiemployer pension and certain union plans
|
27,181
|
|
|
29,231
|
|
|
30,073
|
|
|
Total
|
$
|
51,696
|
|
|
$
|
55,510
|
|
|
$
|
55,956
|
|
Defined Benefit Plans
— The benefits under our defined benefit plans are based on years of service and employee compensation. Our funding policy is to contribute annually the minimum amount required under Employee Retirement Income Security Act regulations plus additional amounts as we deem appropriate.
Included in accumulated other comprehensive loss at
December 31, 2018
and
2017
are the following amounts that have not yet been recognized in net periodic pension cost: unrecognized prior service costs of
$2.2 million
(
$1.7 million
net of tax) and
$2.6 million
(
$1.6 million
net of tax), respectively, and unrecognized actuarial losses of
$128.2 million
(
$96.3 million
net of tax) and
$122.1 million
(
$74.4 million
net of tax), respectively. Prior service costs and actuarial losses included in accumulated other comprehensive loss and expected to be recognized in net periodic pension cost during the year ending December 31,
2019
are
$0.4 million
(
$0.3 million
net of tax) and
$9.8 million
(
$7.2 million
net of tax), respectively.
The reconciliation of the beginning and ending balances of the projected benefit obligation and the fair value of plan assets for the years ended
December 31, 2018
and
2017
, and the funded status of the plans at
December 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
349,784
|
|
|
$
|
338,733
|
|
|
Service cost
|
2,928
|
|
|
3,007
|
|
|
Interest cost
|
11,311
|
|
|
11,709
|
|
|
Plan amendments
|
—
|
|
|
1,233
|
|
|
Actuarial (gain) loss
|
(26,820
|
)
|
|
19,921
|
|
|
Benefits paid
|
(23,105
|
)
|
|
(24,819
|
)
|
|
Benefit obligation at end of year
|
314,098
|
|
|
349,784
|
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
344,760
|
|
|
282,183
|
|
|
Actual return (loss) on plan assets
|
(23,276
|
)
|
|
48,038
|
|
|
Employer contributions
|
829
|
|
|
39,358
|
|
|
Benefits paid
|
(23,105
|
)
|
|
(24,819
|
)
|
|
Fair value of plan assets at end of year
|
299,208
|
|
|
344,760
|
|
|
Funded status at end of year
|
$
|
(14,890
|
)
|
|
$
|
(5,024
|
)
|
The underfunded status of the plans of
$14.9 million
at
December 31, 2018
is recognized in our Consolidated Balance Sheet and includes
$14.1 million
classified as a noncurrent pension liability and
$0.8 million
classified as a current accrued pension liability. We do not expect any plan assets to be returned to us during the year ending December 31,
2019
. We do not currently expect to make any contributions to the pension plans in
2019
.
A summary of our key actuarial assumptions used to determine benefit obligations as of
December 31, 2018
and
2017
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
Weighted average discount rate
|
4.38
|
%
|
|
3.69
|
%
|
|
Rate of compensation increase
|
3.70
|
%
|
|
3.70
|
%
|
A summary of our key actuarial assumptions used to determine net periodic benefit cost for
2018
,
2017
and
2016
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
Effective discount rate for benefit obligations
|
3.69
|
%
|
|
4.29
|
%
|
|
4.53
|
%
|
|
Effective rate for interest on benefit obligations
|
3.32
|
%
|
|
3.56
|
%
|
|
3.76
|
%
|
|
Effective discount rate for service cost
|
3.79
|
%
|
|
4.51
|
%
|
|
4.67
|
%
|
|
Effective rate for interest on service cost
|
3.51
|
%
|
|
3.91
|
%
|
|
4.14
|
%
|
|
Expected return on assets
|
5.25
|
%
|
|
6.25
|
%
|
|
6.75
|
%
|
|
Rate of compensation increase
|
3.70
|
%
|
|
3.70
|
%
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service cost
|
$
|
2,928
|
|
|
$
|
3,007
|
|
|
$
|
3,173
|
|
|
Interest cost
|
11,311
|
|
|
11,709
|
|
|
12,171
|
|
|
Expected return on plan assets
|
(17,644
|
)
|
|
(19,030
|
)
|
|
(18,531
|
)
|
|
Amortizations:
|
|
|
|
|
|
|
Prior service cost
|
431
|
|
|
706
|
|
|
857
|
|
|
Unrecognized net loss
|
8,521
|
|
|
10,325
|
|
|
8,822
|
|
|
Effect of settlement
|
—
|
|
|
—
|
|
|
313
|
|
|
Net periodic benefit cost
|
$
|
5,547
|
|
|
$
|
6,717
|
|
|
$
|
6,805
|
|
The overall expected long-term rate of return on plan assets is a weighted-average expectation based on the targeted and expected portfolio composition. We consider historical performance and current benchmarks to arrive at expected long-term rates of return in each asset category.
The amortization of unrecognized net loss represents the amortization of investment losses incurred. The effect of settlement costs represents the recognition of net periodic benefit cost related to pension settlements reached as a result of plant closures.
Pension plans with an accumulated benefit obligation in excess of plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
|
(In millions)
|
|
Projected benefit obligation
|
$
|
314.1
|
|
|
$
|
349.8
|
|
|
Accumulated benefit obligation
|
311.7
|
|
|
346.0
|
|
|
Fair value of plan assets
|
299.2
|
|
|
344.8
|
|
The accumulated benefit obligation for all defined benefit plans was
$311.7 million
and
$346.0 million
at
December 31, 2018
and
2017
, respectively.
Almost
90%
of our defined benefit plan obligations are frozen as to future participation or increases in projected benefit obligation. Many of these obligations were acquired in prior strategic transactions. As an alternative to defined benefit plans, we offer defined contribution plans for eligible employees.
At the end of 2015, we changed our approach used to measure service and interest costs for pension and other postretirement benefits. In 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. In 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations but generally results in lower pension expense in
periods when the yield curve is upward sloping. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis starting in 2016.
Substantially all of our qualified pension plans are consolidated into one master trust. Our investment objectives are to minimize the volatility of the value of our pension assets relative to our pension liabilities and to ensure assets are sufficient to pay plan benefits. In 2014, we adopted a broad pension de-risking strategy intended to align the characteristics of our assets relative to our liabilities. The strategy targets investments depending on the funded status of the obligation. We anticipate this strategy will continue in future years and will be dependent upon market conditions and plan characteristics.
At
December 31, 2018
, our master trust was invested as follows: investments in equity securities were at
29%
; investments in fixed income were at
70%
; and cash equivalents were less than
1%
. We believe the allocation of our master trust investments as of
December 31, 2018
is generally consistent with the targets set forth by our Investment Committee.
Estimated pension plan benefit payments to participants for the next ten years are as follows:
|
|
|
|
|
|
|
|
2019
|
$
|
18.0
|
million
|
|
2020
|
18.3
|
million
|
|
2021
|
19.0
|
million
|
|
2022
|
19.8
|
million
|
|
2023
|
20.1
|
million
|
|
Next five years
|
103.1
|
million
|
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 of our defined benefit plans’ consolidated assets 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.
|
The fair values by category of inputs as of
December 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
December 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
Common Stock
|
$
|
299
|
|
|
$
|
299
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Index Funds:
|
|
|
|
|
|
|
|
|
U.S. Equities(a)
|
84,693
|
|
|
—
|
|
|
84,693
|
|
|
—
|
|
|
Equity Funds(b)
|
5,924
|
|
|
—
|
|
|
5,924
|
|
|
—
|
|
|
Total Equity Securities
|
90,916
|
|
|
299
|
|
|
90,617
|
|
|
—
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
Bond Funds(c)
|
203,640
|
|
|
—
|
|
|
203,640
|
|
|
—
|
|
|
Diversified Funds(d)
|
2,712
|
|
|
—
|
|
|
—
|
|
|
2,712
|
|
|
Total Fixed Income
|
206,352
|
|
|
—
|
|
|
203,640
|
|
|
2,712
|
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
Short-term Investment Funds(e)
|
1,940
|
|
|
—
|
|
|
1,940
|
|
|
—
|
|
|
Total Cash Equivalents
|
1,940
|
|
|
—
|
|
|
1,940
|
|
|
—
|
|
|
Total
|
$
|
299,208
|
|
|
$
|
299
|
|
|
$
|
296,197
|
|
|
$
|
2,712
|
|
|
|
|
|
(a)
|
Represents a pooled/separate account that tracks the Dow Jones U.S. Total Stock Market Index.
|
|
|
|
|
(b)
|
Represents a pooled/separate account comprised of approximately
90%
U.S. large-cap stocks and
10%
international stocks.
|
|
|
|
|
(c)
|
Represents investments primarily in U.S. dollar-denominated, investment grade bonds, including government securities, corporate bonds, and mortgage- and asset-backed securities.
|
|
|
|
|
(d)
|
Represents a pooled/separate account investment in the General Investment Account of an investment manager. The account primarily invests in fixed income debt securities, such as high grade corporate bonds, government bonds and asset-backed securities.
|
|
|
|
|
(e)
|
Investment is comprised of high grade money market instruments with short-term maturities and high liquidity.
|
The fair values by category of inputs as of
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
Common Stock
|
$
|
364
|
|
|
$
|
364
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Index Funds:
|
|
|
|
|
|
|
|
|
U.S. Equities(a)
|
98,759
|
|
|
—
|
|
|
98,759
|
|
|
—
|
|
|
Equity Funds(b)
|
7,675
|
|
|
—
|
|
|
7,675
|
|
|
—
|
|
|
Total Equity Securities
|
106,798
|
|
|
364
|
|
|
106,434
|
|
|
—
|
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
Bond Funds(c)
|
233,628
|
|
|
—
|
|
|
233,628
|
|
|
—
|
|
|
Diversified Funds(d)
|
2,700
|
|
|
—
|
|
|
—
|
|
|
2,700
|
|
|
Total Fixed Income
|
236,328
|
|
|
—
|
|
|
233,628
|
|
|
2,700
|
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
Short-term Investment Funds(e)
|
1,634
|
|
|
—
|
|
|
1,634
|
|
|
—
|
|
|
Total Cash Equivalents
|
1,634
|
|
|
—
|
|
|
1,634
|
|
|
—
|
|
|
Total
|
$
|
344,760
|
|
|
$
|
364
|
|
|
$
|
341,696
|
|
|
$
|
2,700
|
|
|
|
|
|
(a)
|
Represents a pooled/separate account that tracks the Dow Jones U.S. Total Stock Market Index.
|
|
|
|
|
(b)
|
Represents a pooled/separate account comprised of approximately
90%
U.S. large-cap stocks and
10%
international stocks.
|
|
|
|
|
(c)
|
Represents investments primarily in U.S. dollar-denominated, investment grade bonds, including government securities, corporate bonds, and mortgage- and asset-backed securities.
|
|
|
|
|
(d)
|
Represents a pooled/separate account investment in the General Investment Account of an investment manager. The account primarily invests in fixed income debt securities, such as high grade corporate bonds, government bonds and asset-backed securities.
|
|
|
|
|
(e)
|
Investment is comprised of high grade money market instruments with short-term maturities and high liquidity.
|
Inputs and valuation techniques used to measure the fair value of plan assets vary according to the type of security being valued. The common stock investments held directly by the plans are actively traded and fair values are determined based on quoted prices in active markets and are therefore classified as Level 1 inputs in the fair value hierarchy.
Fair values of equity securities held through units of pooled or index funds are based on net asset value of the units of the funds as determined by the fund manager. These funds are similar in nature to retail mutual funds, but are typically more efficient for institutional investors than retail mutual funds. The fair value of pooled funds is determined by the value of the underlying assets held by the fund and the units outstanding. The values of the pooled funds are not directly observable, but are based on observable inputs and, accordingly, have been classified as Level 2 in the fair value hierarchy.
Fair values of fixed income bond funds are typically determined by reference to the values of similar securities traded in the marketplace and current interest rate levels. Multiple pricing services are typically employed to assist in determining these valuations. These investments are classified as Level 2 in the fair value hierarchy as all significant inputs into the valuation are readily observable in the marketplace. Investments in diversified funds and investments in partnerships/joint ventures are classified as Level 3 in the fair value hierarchy as their fair value is dependent on inputs and assumptions which are not readily observable in the marketplace.
A reconciliation of the change in the fair value measurement of the defined benefit plans’ consolidated assets using significant unobservable inputs (Level 3) during the years ended
December 31, 2018
and
2017
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified
Funds
|
|
Partnerships/
Joint Ventures
|
|
Total
|
|
Balance at December 31, 2016
|
$
|
3,930
|
|
|
$
|
163
|
|
|
$
|
4,093
|
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
Relating to instruments still held at reporting date
|
97
|
|
|
—
|
|
|
97
|
|
|
Relating to instruments sold during the period
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Purchases, sales and settlements (net)
|
(1,849
|
)
|
|
—
|
|
|
(1,849
|
)
|
|
Transfers in and/or out of Level 3
|
522
|
|
|
(162
|
)
|
|
360
|
|
|
Balance at December 31, 2017
|
$
|
2,700
|
|
|
$
|
—
|
|
|
$
|
2,700
|
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
Relating to instruments still held at reporting date
|
76
|
|
|
—
|
|
|
76
|
|
|
Purchases, sales and settlements (net)
|
(1,360
|
)
|
|
—
|
|
|
(1,360
|
)
|
|
Transfers in and/or out of Level 3
|
1,296
|
|
|
—
|
|
|
1,296
|
|
|
Balance at December 31, 2018
|
$
|
2,712
|
|
|
$
|
—
|
|
|
$
|
2,712
|
|
Defined Contribution Plans
— Certain of our non-union personnel may elect to participate in savings and profit sharing plans sponsored by us. These plans generally provide for salary reduction contributions to the plans on behalf of the participants of between
1%
and
50%
of a participant’s annual compensation and provide for employer matching and profit sharing contributions as determined by the plan provisions and approved by our Board of Directors. In addition, certain union hourly employees are participants in company-sponsored defined contribution plans, which provide for salary reduction contributions according to several schedules, including as a percentage of salary and flat dollar amounts. Additionally, employer contributions are sometimes, although not always, provided according to various schedules ranging from flat dollar contributions to matching contributions as a percent of salary based on the employees deferral election and according to the terms of the relevant collective bargaining agreement.
Multiemployer Pension Plans
— Certain of our subsidiaries contribute to various multiemployer pension and other postretirement benefit plans which cover a majority of our full-time union employees and certain of our part-time union employees. Such plans are usually administered by a board of trustees composed of labor representatives and the management of the participating companies. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
|
|
|
|
•
|
Assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;
|
|
|
|
|
•
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and
|
|
|
|
|
•
|
If we choose to stop participating in one or more of our multiemployer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
Our participation in these multiemployer plans for the year ended
December 31, 2018
is outlined in the table below. Unless otherwise noted, the most recent Pension Protection Act (“PPA”) Zone Status available in
2018
and
2017
is for the plans’ year-end at
December 31, 2017
and
December 31, 2016
, respectively. The zone status is based on information that we obtained from each plan’s Form 5500, which is available in the public domain and is certified by the plan’s actuary. Among other factors, plans in the red zone are in "critical" or "critical and declining" status and generally less than
65%
funded, plans in the yellow zone are in "endangered" status and less than
80%
funded, and plans in the green zone are in "healthy" status and at least
80%
funded. The “FIP/RP Status Pending/Implemented” column indicates plans for which a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. Federal law requires that plans classified in the yellow zone or red zone adopt a funding improvement plan or rehabilitation plan, respectively, in order to improve the financial health of the plan. The “Extended Amortization Provisions” column indicates plans which have elected to utilize the special 30-year amortization rules provided by the Pension Relief Act of 2010 to amortize its losses from 2008 as a result of turmoil in the financial markets. The last column in the table lists the expiration date(s) of the collective-bargaining agreement(s) to which the plans are subject.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
Employer
Identification
Number
|
|
Pension
Plan
Number
|
|
PPA Zone Status
|
|
FIP /
RP Status
Pending/
Implemented
|
|
Extended
Amortization
Provisions
|
|
Expiration
Date of
Associated
Collective-
Bargaining
Agreement(s)
|
|
2018
|
|
2017
|
|
|
Western Conference of Teamsters Pension Plan(1)
|
91-6145047
|
|
001
|
|
Green
|
|
Green
|
|
N/A
|
|
No
|
|
March 31, 2019 - October 31, 2021
|
|
Central States, Southeast and Southwest Areas Pension Plan(2)
|
36-6044243
|
|
001
|
|
Red
|
|
Red
|
|
Implemented
|
|
No
|
|
April 3, 2019 - May 1, 2021
|
|
Retail, Wholesale & Department Store International Union and Industry Pension Fund(3)
|
63-0708442
|
|
001
|
|
Red
|
|
Green
|
|
Implemented
|
|
Yes
|
|
August 26, 2019 - June 11, 2021
|
|
Dairy Industry – Union Pension Plan for Philadelphia Vicinity(4)
|
23-6283288
|
|
001
|
|
Red
|
|
Yellow
|
|
Implemented
|
|
Yes
|
|
August 31, 2020 -
September 30, 2022
|
|
|
|
|
(1)
|
We are party to approximately
thirteen
collective bargaining agreements that require contributions to this plan. These agreements cover a large number of employee participants and expire on various dates between 2019 and 2021. The agreement expiring in March 2019 is the most significant as
29%
of our employee participants in this plan are covered by that agreement.
|
|
|
|
|
(2)
|
There are approximately
19
collective bargaining agreements that govern our participation in this plan. The agreements expire on various dates between 2019 and 2021. Approximately
40%
,
34%
, and
26%
of our employee participants in this plan are covered by the agreements expiring in 2019, 2020, and 2021 respectively.
|
|
|
|
|
(3)
|
We are subject to approximately
eight
collective bargaining agreements with respect to this plan. Approximately
2%
,
44%
, and
54%
of our employee participants in this plan are covered by the agreements expiring in 2019, 2020, and 2021 respectively.
|
|
|
|
|
(4)
|
We are party to
five
collective bargaining agreements with respect to this plan. The agreement expiring in September 2020 is the most significant as
62%
of our employee participants in this plan are covered by that agreement.
|
Information regarding our contributions to our multiemployer pension plans is shown in the table below. There are no changes that materially affected the comparability of our contributions to each of these plans during the years ended
December 31, 2018
,
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
Employer
Identification
Number
|
|
Pension
Plan
Number
|
|
Dean Foods Company Contributions
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
|
Surcharge
Imposed(3)
|
|
Western Conference of Teamsters Pension Plan
|
91-6145047
|
|
001
|
|
$
|
14.0
|
|
|
$
|
13.2
|
|
|
$
|
13.8
|
|
|
No
|
|
Central States, Southeast and Southwest Areas Pension Plan
|
36-6044243
|
|
001
|
|
9.5
|
|
|
9.5
|
|
|
8.6
|
|
|
No
|
|
Retail, Wholesale & Department Store International Union and Industry Pension Fund(1)
|
63-0708442
|
|
001
|
|
1.3
|
|
|
1.3
|
|
|
1.8
|
|
|
No
|
|
Dairy Industry – Union Pension Plan for Philadelphia Vicinity(1)
|
23-6283288
|
|
001
|
|
2.1
|
|
|
2.1
|
|
|
1.9
|
|
|
No
|
|
Other Funds(2)
|
|
|
|
|
0.3
|
|
|
3.1
|
|
|
4.0
|
|
|
|
|
Total Contributions
|
|
|
|
|
$
|
27.2
|
|
|
$
|
29.2
|
|
|
$
|
30.1
|
|
|
|
|
|
|
|
(1)
|
During the 2017 and 2016 plan years, our contributions to these plans exceeded 5% of total plan contributions. At the date of filing of this Annual Report on Form 10-K, Forms 5500 were not available for the plan years ending in 2018.
|
|
|
|
|
(2)
|
Amounts shown represent our contributions to all other multiemployer pension and other postretirement benefit plans, which are immaterial both individually and in the aggregate to our Consolidated Financial Statements.
|
|
|
|
|
(3)
|
Federal law requires that contributing employers to a plan in Critical status pay to the plan a surcharge to help correct the plan’s financial situation. The amount of the surcharge is equal to a percentage of the amount we would otherwise be required to contribute to the plan and ceases once our related collective bargaining agreements are amended to comply with the provisions of the rehabilitation plan.
|
16
. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain of our subsidiaries provide health care benefits to certain retirees who are covered under specific group contracts. As defined by the specific group contract, qualified covered associates may be eligible to receive major medical insurance with deductible and co-insurance provisions subject to certain lifetime maximums.
Included in accumulated other comprehensive loss at
December 31, 2018
and
2017
are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service costs of
$0.3 million
(
$0.2 million
net of tax) and
$0.4 million
(
$0.3 million
net of tax), respectively, and unrecognized actuarial gains of
$6.1 million
(
$4.6 million
net of tax) and
$4.6 million
(
$3.4 million
net of tax), respectively. The prior service cost and actuarial gains included in accumulated other comprehensive income (loss) and expected to be recognized in net periodic benefit cost during the year ending December 31,
2019
is
$0.1 million
(
$0.1 million
net of tax) and
$0.6 million
(
$0.5 million
net of tax), respectively.
The following table sets forth the funded status of these plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
31,866
|
|
|
$
|
30,122
|
|
|
Service cost
|
679
|
|
|
586
|
|
|
Interest cost
|
941
|
|
|
960
|
|
|
Employee contributions
|
316
|
|
|
256
|
|
|
Actuarial (gain) loss
|
(1,959
|
)
|
|
1,622
|
|
|
Benefits paid
|
(1,929
|
)
|
|
(1,680
|
)
|
|
Benefit obligation at end of year
|
29,914
|
|
|
31,866
|
|
|
Fair value of plan assets at end of year
|
—
|
|
|
—
|
|
|
Funded status
|
$
|
(29,914
|
)
|
|
$
|
(31,866
|
)
|
The unfunded portion of the liability of
$29.9 million
at
December 31, 2018
is recognized in our Consolidated Balance Sheet and includes
$2.4 million
classified as a current accrued postretirement liability.
A summary of our key actuarial assumptions used to determine the benefit obligation as of
December 31, 2018
and
2017
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2018
|
|
2017
|
|
Healthcare inflation:
|
|
|
|
|
Healthcare cost trend rate assumed for next year
|
6.43
|
%
|
|
6.72
|
%
|
|
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)
|
4.50
|
%
|
|
4.50
|
%
|
|
Year of ultimate rate achievement
|
2038
|
|
|
2038
|
|
|
Weighted average discount rate
|
4.26
|
%
|
|
3.53
|
%
|
A summary of our key actuarial assumptions used to determine net periodic benefit cost follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
Healthcare inflation:
|
|
|
|
|
|
|
Healthcare cost trend rate assumed for next year
|
6.72
|
%
|
|
7.00
|
%
|
|
7.27
|
%
|
|
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
|
Year of ultimate rate achievement
|
2038
|
|
|
2038
|
|
|
2038
|
|
|
Effective discount rate for benefit obligations
|
3.53
|
%
|
|
3.97
|
%
|
|
4.27
|
%
|
|
Effective rate for interest on benefit obligations
|
3.16
|
%
|
|
3.32
|
%
|
|
3.52
|
%
|
|
Effective discount rate for service cost
|
3.77
|
%
|
|
4.44
|
%
|
|
4.68
|
%
|
|
Effective rate for interest on service cost
|
3.59
|
%
|
|
4.08
|
%
|
|
4.37
|
%
|
At the end of 2015, we changed our approach used to measure service and interest costs for pension and other postretirement benefits. In 2015, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. In 2016, we elected to measure service and interest costs by applying the specific spot rates along that yield curve to the plans’ liability cash flows. We believe the new approach provides a more precise measurement of service and interest costs by aligning the timing of the plans’ liability cash flows to the corresponding spot rates on the yield curve. This change does not affect the measurement of our plan obligations but generally results in lower pension expense in periods when the yield curve is upward sloping. We have accounted for this change as a change in accounting estimate and, accordingly, have accounted for it on a prospective basis starting in 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
Service and interest cost
|
$
|
1,620
|
|
|
$
|
1,545
|
|
|
$
|
1,725
|
|
|
Amortizations:
|
|
|
|
|
|
|
Prior service cost
|
92
|
|
|
92
|
|
|
92
|
|
|
Unrecognized net (gain) loss
|
(472
|
)
|
|
(457
|
)
|
|
(245
|
)
|
|
Net periodic benefit cost
|
$
|
1,240
|
|
|
$
|
1,180
|
|
|
$
|
1,572
|
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percent change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
Point Increase
|
|
1-Percentage-
Point Decrease
|
|
|
(In thousands)
|
|
Effect on total of service and interest cost components
|
$
|
220
|
|
|
$
|
(181
|
)
|
|
Effect on postretirement obligation
|
1,956
|
|
|
(3,358
|
)
|
We expect to contribute
$2.4 million
to the postretirement health care plans in
2019
. Estimated postretirement health care plan benefit payments for the next ten years are as follows:
|
|
|
|
|
|
|
|
2019
|
$
|
2.4
|
million
|
|
2020
|
2.4
|
million
|
|
2021
|
2.3
|
million
|
|
2022
|
2.3
|
million
|
|
2023
|
2.2
|
million
|
|
Next five years
|
10.9
|
million
|
17
. 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
11
.
The results of our 2018 impairment analysis indicated an impairment of our property, plant, and equipment at five of our production facilities, totaling
$13.7 million
. The impairments were the result of declines in operating cash flows at these production facilities on both a historical and forecasted basis. These impairment charges were recorded during the year ended
December 31, 2018
.
For the year ended
December 31, 2017
, the results of our analysis indicated an impairment of our property, plant and equipment at three of our production facilities, totaling
$27.8 million
. The impairments were the result of declines in operating cash flows at these production facilities on both a historical and forecasted basis. In addition, we recorded a write-down of certain corporate assets in connection with our enterprise-wide cost productivity plan totaling
$2.9 million
.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Closure of facilities, net(1)
|
$
|
60,460
|
|
|
$
|
12,703
|
|
|
$
|
8,719
|
|
|
Organizational effectiveness(2)
|
(331
|
)
|
|
12,210
|
|
|
—
|
|
|
Enterprise-wide cost productivity plan(3)
|
14,863
|
|
|
—
|
|
|
—
|
|
|
Facility closing and reorganization costs, net
|
$
|
74,992
|
|
|
$
|
24,913
|
|
|
$
|
8,719
|
|
|
|
|
|
(1)
|
Reflects charges, net of gains on the sales of assets, associated with closed facilities that were incurred in
2018
,
2017
and
2016
. These charges are primarily related to facility closures in Braselton, Georgia; Louisville, Kentucky; Erie, Pennsylvania; Huntley, Illinois; Thief River Falls, Minnesota; Lynn, Massachusetts; Livonia, Michigan; Richmond, Virginia; Orem, Utah; New Orleans, Louisiana; Rochester, Indiana; Riverside, California; Denver, Colorado; and Buena Park, California. We have incurred net charges to date of
$111.9 million
related to these facility closures through
December 31, 2018
. We expect to incur additional charges related to these facility closures of approximately
$7.6 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 an additional phase of the plan; however, as specific details of this phase have not been finalized and approved, future costs are not yet estimable.
|
Activity for
2018
and
2017
with respect to facility closing and reorganization costs is summarized below and includes items expensed as incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Charges at
December 31, 2016
|
|
Charges and Adjustments
|
|
Payments
|
|
Accrued Charges at
December 31, 2017
|
|
Charges and Adjustments
|
|
Payments
|
|
Accrued Charges at
December 31, 2018
|
|
|
(In thousands)
|
|
Cash charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction costs
|
$
|
3,610
|
|
|
$
|
14,033
|
|
|
$
|
(11,780
|
)
|
|
$
|
5,863
|
|
|
$
|
27,460
|
|
|
$
|
(20,110
|
)
|
|
$
|
13,213
|
|
|
Shutdown costs
|
—
|
|
|
3,792
|
|
|
(3,792
|
)
|
|
—
|
|
|
7,349
|
|
|
(7,349
|
)
|
|
—
|
|
|
Lease obligations after shutdown
|
3,932
|
|
|
1,021
|
|
|
(2,347
|
)
|
|
2,606
|
|
|
143
|
|
|
(1,381
|
)
|
|
1,368
|
|
|
Other
|
—
|
|
|
318
|
|
|
(318
|
)
|
|
—
|
|
|
465
|
|
|
(465
|
)
|
|
—
|
|
|
Subtotal
|
$
|
7,542
|
|
|
19,164
|
|
|
$
|
(18,237
|
)
|
|
$
|
8,469
|
|
|
35,417
|
|
|
$
|
(29,305
|
)
|
|
$
|
14,581
|
|
|
Non-cash charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down of assets(1)
|
|
|
5,602
|
|
|
|
|
|
|
45,450
|
|
|
|
|
|
|
(Gain) loss on sale of related assets
|
|
|
138
|
|
|
|
|
|
|
(6,062
|
)
|
|
|
|
|
|
Other, net
|
|
|
9
|
|
|
|
|
|
|
187
|
|
|
|
|
|
|
Subtotal
|
|
|
5,749
|
|
|
|
|
|
|
39,575
|
|
|
|
|
|
|
Total
|
|
|
$
|
24,913
|
|
|
|
|
|
|
$
|
74,992
|
|
|
|
|
|
|
|
|
|
(1)
|
The write-down of assets relates primarily to owned buildings, land and equipment of those facilities identified for closure. The assets were tested for recoverability at the time the decision to close the facilities was more likely than not to occur. Over time, refinements to our estimates used in testing for recoverability may result in additional asset write-downs. The write-down of assets can include accelerated depreciation recorded for those facilities identified for closure. Our methodology for testing the recoverability of the assets is consistent with the methodology described in the “Asset Impairment Charges” section above.
|
18
. SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
|
Cash paid for interest and financing charges, net of capitalized interest
|
$
|
54,178
|
|
|
$
|
60,403
|
|
|
$
|
60,580
|
|
|
Net cash paid (received) for taxes
|
(335
|
)
|
|
(3,063
|
)
|
|
50,630
|
|
|
Non-cash additions to property, plant and equipment, including capital leases
|
17,088
|
|
|
8,879
|
|
|
4,748
|
|
19
. 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 only become payable if we materially breach or terminate one of our related milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire in
2021
, without any obligation to pay any portion of the principal or interest. Payments made under the note, if any, would be expensed as incurred. We have not terminated, and we have not materially breached, any of our milk supply agreements with DFA related to the promissory note. We have previously terminated unrelated supply agreements with respect to several plants that were supplied by DFA. In connection with our continued focus on cost control and increased supply chain efficiency, we continue to evaluate our sources of raw milk supply.
Insurance
— We use a combination of insurance and self-insurance for a number of risks, including property, workers’ compensation, general liability, automobile liability, product liability and employee health care utilizing high deductibles. Deductibles vary due to insurance market conditions and risk. Liabilities associated with these risks are estimated considering historical claims experience and other actuarial assumptions. Based on current information, we believe that we have established adequate reserves to cover these claims. At
December 31, 2018
and
2017
, we recorded accrued liabilities related to these retained risks of
$142.0 million
and
$152.6 million
, respectively, including both current and long-term liabilities.
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. Rent expense was
$143.3 million
,
$135.4 million
and
$127.3 million
for
2018
,
2017
and
2016
, respectively.
The net book value of assets under capital leases, which are included in property, plant and equipment in our Consolidated Balance Sheets, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
2017
|
|
|
(In thousands)
|
|
Machinery and equipment
|
$
|
5,481
|
|
|
$
|
5,619
|
|
|
Less accumulated depreciation
|
(4,045
|
)
|
|
(2,948
|
)
|
|
Net book value of assets under capital leases
|
$
|
1,436
|
|
|
$
|
2,671
|
|
Future minimum payments at
December 31, 2018
under non-cancelable capital leases and operating leases with terms in excess of one year are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Leases
|
|
Operating Leases
|
|
|
(In thousands)
|
|
2019
|
$
|
1,271
|
|
|
$
|
118,827
|
|
|
2020
|
398
|
|
|
90,615
|
|
|
2021
|
—
|
|
|
64,501
|
|
|
2022
|
—
|
|
|
45,049
|
|
|
2023
|
—
|
|
|
32,771
|
|
|
Thereafter
|
—
|
|
|
50,998
|
|
|
Total minimum lease payments
|
1,669
|
|
|
$
|
402,761
|
|
|
Less amount representing interest
|
(51
|
)
|
|
|
|
Present value of capital lease obligations
|
$
|
1,618
|
|
|
|
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 claims, litigations, audits and investigations. Potential liabilities associated with these other matters are not expected to have a material adverse impact on our financial position, results of operations, or cash flows.
20
. 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 case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our products are primarily delivered through what we believe to be one of the most extensive refrigerated direct-to-store delivery systems in the United States. Our Chief Executive Officer evaluates the performance of our business based on operating income or loss before facility closing and reorganization costs, litigation settlements, impairments of long-lived assets, gains and losses on the sale of businesses and certain other non-recurring gains and losses.
All results herein have been recast to present results on a comparable basis. These changes had no impact on consolidated net sales and operating income. The amounts in the following tables include our operating results and are obtained from reports used by our executive management team and do not include any allocated income taxes or management fees. There are no significant non-cash items reported in segment profit or loss other than depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
|
Operating income (loss):
|
|
|
|
|
|
|
Dean Foods
|
$
|
(46,015
|
)
|
|
$
|
143,147
|
|
|
$
|
276,950
|
|
|
Facility closing and reorganization costs, net
|
(74,992
|
)
|
|
(24,913
|
)
|
|
(8,719
|
)
|
|
Impairment of goodwill and long-lived assets
|
(204,414
|
)
|
|
(30,668
|
)
|
|
—
|
|
|
Other operating income
|
2,289
|
|
|
—
|
|
|
—
|
|
|
Equity in earnings (loss) of unconsolidated affiliate
|
7,939
|
|
|
—
|
|
|
—
|
|
|
Total
|
(315,193
|
)
|
|
87,566
|
|
|
268,231
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
Interest expense
|
56,443
|
|
|
64,961
|
|
|
66,795
|
|
|
Other (income) expense, net
|
2,877
|
|
|
1,362
|
|
|
(1,215
|
)
|
|
Consolidated income (loss) from continuing operations before income taxes
|
$
|
(374,513
|
)
|
|
$
|
21,243
|
|
|
$
|
202,651
|
|
Geographic Information
— Net sales related to our foreign operations comprised less than
1%
of our consolidated net sales during the years ended
December 31, 2018
,
2017
and
2016
.
None
of our long-lived assets are associated with our foreign operations.
Significant Customers
— Our largest customer accounted for approximately
15.3%
,
17.5%
, and
16.7%
of our consolidated net sales in
2018
,
2017
and
2016
, respectively. As disclosed in Note
1
, on a prospective basis, effective January 1, 2018, we began reporting sales of excess raw materials within the net sales line of our Consolidated Statements of Operations. As such, the computation, and comparison, of the percentages of our largest customer between fiscal periods is impacted by the change in the presentation of excess raw material sales.
21
. QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following is a summary of our unaudited quarterly results of operations for
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
(In thousands, except share and per share data)
|
|
2018
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,980,507
|
|
|
$
|
1,951,230
|
|
|
$
|
1,894,066
|
|
|
$
|
1,929,480
|
|
|
Gross profit
|
448,503
|
|
|
432,784
|
|
|
390,597
|
|
|
383,394
|
|
|
Loss from continuing operations(1)
|
(265
|
)
|
|
(42,016
|
)
|
|
(26,648
|
)
|
|
(263,301
|
)
|
|
Net loss
|
(265
|
)
|
|
(40,094
|
)
|
|
(26,648
|
)
|
|
(260,351
|
)
|
|
Net loss attributable to Dean Foods Company
|
(265
|
)
|
|
(40,094
|
)
|
|
(26,424
|
)
|
|
(260,117
|
)
|
|
Loss per common share from continuing operations attributable to Dean Foods Company(2):
|
|
|
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(2.88
|
)
|
|
Diluted
|
$
|
—
|
|
|
$
|
(0.46
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(2.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
(In thousands, except share and per share data)
|
|
2017
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,995,686
|
|
|
$
|
1,926,722
|
|
|
$
|
1,937,620
|
|
|
$
|
1,934,997
|
|
|
Gross profit
|
462,219
|
|
|
467,480
|
|
|
441,838
|
|
|
446,530
|
|
|
Income (loss) from continuing operations(3)
|
(9,759
|
)
|
|
17,647
|
|
|
(9,973
|
)
|
|
49,507
|
|
|
Net income (loss)(4)
|
(9,759
|
)
|
|
17,647
|
|
|
1,382
|
|
|
52,318
|
|
|
Earnings (loss) per common share from continuing operations(2):
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.11
|
)
|
|
$
|
0.19
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.54
|
|
|
Diluted
|
$
|
(0.11
|
)
|
|
$
|
0.19
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.54
|
|
|
|
|
|
(1)
|
Loss from continuing operations for the first, second, third and fourth quarters of
2018
includes facility closing and reorganization costs, net of tax and gains on sales of assets, of
$6.4 million
,
$51.2 million
,
$(2.0) million
and
$1.2 million
, respectively. See Note
17
. The results for the second and fourth quarters of
2018
include impairments of our property, plant and equipment totaling
$2.2 million
and
$11.5 million
, respectively. See Note
17
. The results for the fourth quarter of
2018
include a goodwill impairment of
$190.7 million
. See Note
7
.
|
|
|
|
|
(2)
|
Earnings (loss) per common share calculations for each of the quarters were based on the basic and diluted weighted average number of shares outstanding for each quarter. The sum of the quarters may not necessarily be equal to the full year earnings (loss) per common share amount.
|
|
|
|
|
(3)
|
Income (loss) from continuing operations for the first, second, third and fourth quarters of
2017
includes facility closing and reorganization costs, net of tax and gains on sales of assets, of
$5.7 million
,
$3.6 million
,
$4.8 million
and
$1.2 million
, respectively. See Note
17
. Additionally, results for the first quarter of
2017
include a charge due to litigation settlements and the related legal expenses. The results for the third and fourth quarters of
2017
include impairments of our property, plant and equipment totaling
$25.0 million
and
$5.7 million
, respectively. See Note
17
. The results for the fourth quarter of
2017
include a one-time income tax benefit of
$43.7 million
associated with the December 22, 2017 enactment of the Tax Cuts and Jobs Act. See Note
9
.
|
|
|
|
|
(4)
|
Net income for the third quarter of 2017 includes net gains from discontinued operations of
$11.4 million
. See Note
3
.
|