0000931336-18-000019.txt : 20180807 0000931336-18-000019.hdr.sgml : 20180807 20180807161316 ACCESSION NUMBER: 0000931336-18-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 88 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180807 DATE AS OF CHANGE: 20180807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEAN FOODS CO CENTRAL INDEX KEY: 0000931336 STANDARD INDUSTRIAL CLASSIFICATION: DAIRY PRODUCTS [2020] IRS NUMBER: 752559681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12755 FILM NUMBER: 18998108 BUSINESS ADDRESS: STREET 1: 2711 N. HASKELL AVENUE STREET 2: SUITE 3400 CITY: DALLAS STATE: TX ZIP: 75204 BUSINESS PHONE: 2143033400 MAIL ADDRESS: STREET 1: 2711 N. HASKELL AVENUE STREET 2: SUITE 3400 CITY: DALLAS STATE: TX ZIP: 75204 FORMER COMPANY: FORMER CONFORMED NAME: DEAN FOODS CO/ DATE OF NAME CHANGE: 20011221 FORMER COMPANY: FORMER CONFORMED NAME: SUIZA FOODS CORP DATE OF NAME CHANGE: 19941013 10-Q 1 df-063018x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2018
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from              to             
Commission File Number 001-12755 
 
Dean Foods Company
(Exact name of the registrant as specified in its charter)
deanlogo.jpg
 
Delaware
 
75-2559681
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
2711 North Haskell Avenue, Suite 3400
Dallas, Texas 75204
(214) 303-3400
(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices) 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
ý
 
 
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
¨
 
 
 
 
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  ý
As of August 2, 2018, the number of shares of the registrant's common stock outstanding was: 91,374,424.
Common Stock, par value $.01



Table of Contents
 


2


Part I — Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
25,434

 
$
16,512

Receivables, net of allowances of $3,949 and $5,583
593,207

 
675,826

Income tax receivable
1,461

 
2,140

Inventories
276,656

 
278,063

Prepaid expenses and other current assets
41,396

 
47,338

Assets held for sale
5,127

 

Total current assets
943,281

 
1,019,879

Property, plant and equipment, net
1,001,808

 
1,094,064

Goodwill
190,707

 
167,535

Identifiable intangible and other assets, net
207,684

 
211,620

Deferred income taxes
14,083

 
10,731

Total
$
2,357,563

 
$
2,503,829

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
642,514

 
$
671,070

Current portion of debt
1,150

 
1,125

Total current liabilities
643,664

 
672,195

Long-term debt, net
855,809

 
912,074

Deferred income taxes
50,450

 
60,018

Other long-term liabilities
190,179

 
203,595

Commitments and contingencies (Note 14)

 

Stockholders’ equity:
 
 
 
Preferred stock, none issued

 

Common stock, 91,368,529 and 91,123,759 shares issued and outstanding, with a par value of $0.01 per share
914

 
911

Additional paid-in capital
662,883

 
659,227

Retained earnings
33,943

 
74,219

Accumulated other comprehensive loss
(92,031
)
 
(78,410
)
Total Dean Foods Company stockholders’ equity
605,709

 
655,947

Non-controlling interest
11,752

 

Total stockholders’ equity
617,461

 
655,947

Total
$
2,357,563

 
$
2,503,829

See Notes to unaudited Condensed Consolidated Financial Statements.


3


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
2018
 
2017
 
2018
 
2017
Net sales
$
1,951,230

 
$
1,926,722

 
$
3,931,737

 
$
3,922,408

Cost of sales
1,518,446

 
1,459,242

 
3,050,450

 
2,992,709

Gross profit
432,784

 
467,480

 
881,287

 
929,699

Operating costs and expenses:
 
 
 
 
 
 
 
Selling and distribution
336,721

 
338,010

 
682,717

 
683,073

General and administrative
65,972

 
72,281

 
141,494

 
170,945

Amortization of intangibles
5,078

 
5,155

 
10,156

 
10,310

Facility closing and reorganization costs, net
67,661

 
5,817

 
76,123

 
15,103

Impairment of long-lived assets
2,232

 

 
2,232

 

Other operating income
(2,289
)
 

 
(2,289
)
 

Equity in (earnings) loss of unconsolidated affiliate
(1,699
)
 

 
(3,599
)
 

Total operating costs and expenses
473,676

 
421,263

 
906,834

 
879,431

Operating income (loss)
(40,892
)
 
46,217

 
(25,547
)
 
50,268

Other expense:
 
 
 
 
 
 
 
Interest expense
14,069

 
16,419

 
28,102

 
33,883

Other expense, net
782

 
248

 
1,252

 
391

Total other expense
14,851

 
16,667

 
29,354

 
34,274

Income (loss) before income taxes
(55,743
)
 
29,550

 
(54,901
)
 
15,994

Income tax expense (benefit)
(13,727
)
 
11,903

 
(12,620
)
 
8,106

Income (loss) from continuing operations
(42,016
)
 
17,647

 
(42,281
)
 
7,888

Gain on sale of discontinued operations, net of tax
1,922

 

 
1,922

 

Net income (loss)
(40,094
)
 
17,647

 
(40,359
)
 
7,888

Net (income) loss attributable to non-controlling interest

 

 

 

Net income (loss) attributable to Dean Foods Company
$
(40,094
)
 
$
17,647

 
$
(40,359
)
 
$
7,888

Average common shares:
 
 
 
 
 
 
 
Basic
91,342,652

 
90,882,415

 
91,267,748

 
90,796,585

Diluted
91,342,652

 
91,369,030

 
91,267,748

 
91,365,946

Basic income (loss) per common share:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Dean Foods Company
$
(0.46
)
 
$
0.19

 
$
(0.46
)
 
$
0.09

Income from discontinued operations attributable to Dean Foods Company
0.02

 

 
0.02

 

Net income (loss) attributable to Dean Foods Company
$
(0.44
)
 
$
0.19

 
$
(0.44
)
 
$
0.09

Diluted income (loss) per common share:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Dean Foods Company
$
(0.46
)
 
$
0.19

 
$
(0.46
)
 
$
0.09

Income from discontinued operations attributable to Dean Foods Company
0.02

 

 
0.02

 

Net income (loss) attributable to Dean Foods Company
$
(0.44
)
 
$
0.19

 
$
(0.44
)
 
$
0.09

Cash dividends declared per common share
$
0.09

 
$
0.09

 
$
0.18

 
$
0.18

See Notes to unaudited Condensed Consolidated Financial Statements.

4


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(40,094
)
 
$
17,647

 
$
(40,359
)
 
$
7,888

Other comprehensive income (loss):
 
 
 
 
 
 
 
Pension and other postretirement liability adjustment, net of tax
1,602

 
1,632

 
3,226

 
3,276

Other comprehensive income
1,602

 
1,632

 
3,226

 
3,276

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


 

 
(16,847
)
 

Comprehensive income (loss)
(38,492
)
 
19,279

 
(53,980
)
 
11,164

Comprehensive (income) loss attributable to non-controlling interest

 

 

 

Comprehensive income (loss) attributable to Dean Foods Company
$
(38,492
)
 
$
19,279

 
$
(53,980
)
 
$
11,164

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

5


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

 
$
911

 
$
659,227

 
$
74,219

 
$
(78,410
)
 
$

 
$
655,947

Issuance of common stock
244,770

 
3

 
(36
)
 

 

 

 
(33
)
Share-based compensation expense

 

 
3,692

 

 

 

 
3,692

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

 

 

 
16,847

 
(16,847
)
 

 

Net loss attributable to Dean Foods Company

 

 

 
(40,359
)
 

 

 
(40,359
)
Fair value of non-controlling interest acquired

 

 

 

 

 
11,752

 
11,752

Dividends

 

 

 
(16,764
)
 

 

 
(16,764
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liability adjustment, net of tax of $1,060

 

 

 

 
3,226

 

 
3,226

Balance, June 30, 2018
91,368,529

 
$
914

 
$
662,883

 
$
33,943

 
$
(92,031
)
 
$
11,752

 
$
617,461

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

6


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
Common Stock
 
 
 
 
 
 
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
Balance, January 1, 2017
90,586,741

 
$
906

 
$
653,629

 
$
45,654

 
$
(89,633
)
 
$
610,556

Issuance of common stock
326,823

 
3

 
(883
)
 

 

 
(880
)
Share-based compensation expense

 

 
3,975

 

 

 
3,975

Net income

 

 

 
7,888

 

 
7,888

Dividends

 

 

 
(16,604
)
 

 
(16,604
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liability adjustment, net of tax of $2,057

 

 

 

 
3,276

 
3,276

Balance, June 30, 2017
90,913,564

 
$
909

 
$
656,721

 
$
36,938

 
$
(86,357
)
 
$
608,211

See Notes to unaudited Condensed Consolidated Financial Statements.


7


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended 
 June 30
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(40,359
)
 
$
7,888

Gain on sale of discontinued operations, net of tax
(1,922
)
 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
80,102

 
86,489

Share-based compensation expense
6,625

 
6,659

Non-cash facility closing and reorganization costs, net
43,734

 
4,750

Impairment of long-lived assets
2,232

 

Write-off of financing costs

 
1,080

Other operating income
(2,289
)
 

Equity in (earnings) loss of unconsolidated affiliate
(3,599
)
 

Deferred income taxes
(16,472
)
 
7,533

Other, net
(1,100
)
 
(2,596
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables, net
84,105

 
68,351

Inventories
2,220

 
3,555

Prepaid expenses and other assets
10,263

 
8,837

Accounts payable and accrued expenses
(43,459
)
 
(73,253
)
Income taxes receivable
679

 
(1,613
)
Contributions to company sponsored pension plans

 
(38,500
)
Net cash provided by operating activities
120,760

 
79,180

Cash flows from investing activities:
 
 
 
Payments for property, plant and equipment
(37,292
)
 
(34,551
)
Payments for acquisitions, net of cash acquired
(13,324
)
 
(21,596
)
Proceeds from sale of fixed assets
12,418

 
2,481

Other investments

 
(9,000
)
Net cash used in investing activities
(38,198
)
 
(62,666
)
Cash flows from financing activities:
 
 
 
Repayments of debt
(589
)
 
(832
)
Payments of financing costs

 
(1,764
)
Proceeds from senior secured revolver
185,800

 
120,900

Payments for senior secured revolver
(197,000
)
 
(128,700
)
Proceeds from receivables securitization facility
1,240,000

 
1,120,000

Payments for receivables securitization facility
(1,285,000
)
 
(1,095,000
)
Cash dividends paid
(16,438
)
 
(16,357
)
Issuance of common stock, net of share repurchases for withholding taxes
(413
)
 
(1,232
)
Net cash used in financing activities
(73,640
)
 
(2,985
)
Increase in cash and cash equivalents
8,922

 
13,529

Cash and cash equivalents, beginning of period
16,512

 
17,980

Cash and cash equivalents, end of period
$
25,434

 
$
31,509

See Notes to unaudited Condensed Consolidated Financial Statements.

8


DEAN FOODS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2018 and 2017
(Unaudited)
1. General
Nature of Our Business — We are a leading food and beverage company and the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products in the United States, with a vision to be the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion.
We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our portfolio includes DairyPure®, the country's first and largest fresh, white milk national brand, and TruMoo®, the leading national flavored milk brand, along with well-known regional dairy brands such as Alta Dena®, Berkeley Farms®, Country Fresh®, Dean’s®, Friendly's®, Garelick Farms®, LAND O LAKES ® milk and cultured products (licensed brand), Lehigh Valley Dairy Farms®, Mayfield ®, McArthur®, Meadow Gold ®, Oak Farms®, PET ® (licensed brand), T.G. Lee®, Tuscan® and more. In all, we have more than 50 national, regional and local dairy brands, as well as private labels. We also sell and distribute organic juice, probiotic-infused juices, and fruit-infused waters under the Uncle Matt's Organic® brand. Additionally, we are party to the Organic Valley Fresh joint venture which distributes organic milk under the Organic Valley® brand to retailers. With our majority interest acquisition of Good Karma Foods, Inc., which was completed on June 29, 2018, we now sell and distribute flax-based milk and yogurt products under the Good Karma® brand. Dean Foods also makes and distributes juices, teas and bottled water. Due to the perishable nature of our products, we deliver the majority of our products directly to our customers’ locations in refrigerated trucks or trailers that we own or lease. We believe that we have one of the most extensive refrigerated direct-to-store delivery ("DSD") systems in the United States. We sell our products primarily on a local or regional basis through our local and regional sales forces, and in some instances, with the assistance of national brokers. Some national customer relationships are coordinated by our centralized corporate sales department or national brokers.
Basis of Presentation and Consolidation — The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q have been prepared on the same basis as the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report on Form 10-K”), which we filed with the Securities and Exchange Commission on February 26, 2018. The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and entities controlled by the Company through its direct ownership of a majority interest. The Company eliminates from its financial results all intercompany transactions between entities included in the consolidated financial statements. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. Our results of operations for the three and six month periods ended June 30, 2018 may not be indicative of our operating results for the full year. The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements contained in our 2017 Annual Report on Form 10-K.
Unless otherwise indicated, references in this report to “we,” “us,” “our” or "the Company" refer to Dean Foods Company and its subsidiaries, taken as a whole.
Recently Adopted Accounting Pronouncements
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.

9


The pro forma effect of the change in classification of sales of excess raw materials on our unaudited Condensed Consolidated Statements of Operations was as follows (in thousands):
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
As Previously Reported
Pro Forma Results Assuming Retrospective Adoption of ASU 2014-09
Increase (Decrease) to Previously Reported Amounts
 
As Previously Reported
Pro Forma Results Assuming Retrospective Adoption of ASU 2014-09
Increase (Decrease) to Previously Reported Amounts
Net sales
$
1,926,722

$
2,063,926

$
137,204

 
$
3,922,408

$
4,230,615

$
308,207

Cost of sales
1,459,342

1,596,546

137,204

 
2,992,903

3,301,110

308,207

Gross profit
467,380

467,380


 
929,505

929,505


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 12 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 unaudited Condensed Consolidated Statements of Operations was as follows (in thousands):
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
 
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
$
1,459,342

$
(100
)
$
1,459,242

 
$
2,992,903

$
(194
)
$
2,992,709

Gross profit
467,380

100

467,480

 
929,505

194

929,699

Selling and distribution
338,144

(134
)
338,010

 
683,340

(267
)
683,073

General and administrative
73,100

(819
)
72,281

 
172,636

(1,691
)
170,945

Total operating costs and expenses
422,216

(953
)
421,263

 
881,389

(1,958
)
879,431

Operating income
45,164

1,053

46,217

 
48,116

2,152

50,268

Other (income) expense, net
(805
)
1,053

248

 
(1,761
)
2,152

391

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 Cuts and Jobs Act (the "Tax Act") from accumulated other comprehensive income to retained earnings in the amount of $16.8 million on our unaudited Condensed 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.

10


Recently Issued Accounting Pronouncements
Effective in 2019
ASU No. 2017-12 — In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this guidance are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of this guidance. We do not intend to early adopt this ASU. We do not currently expect the adoption of ASU 2017-12 to have a material impact on our financial statements as our derivative instruments are not designated as cash flow or fair value hedges under Topic 815. See Note 8 for further information on our derivative instruments.
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 Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"). The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, Leases: Targeted Improvements, allowing ASU 2016-02 to be adopted using either 1) 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; or 2) application of the new standard at the January 1, 2019 adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Early adoption is permitted. We do not intend to early adopt this ASU. To assess the impacts of the new lease standard on our financial statements and current accounting practices, we have formed a steering committee comprised of subject matter experts within the Company to assist with the assessment of contractual arrangements that may qualify as a lease under the new standard, gather lease data, assist with evaluating and implementing lease management technology solutions, and other key activities. At this time, we have finalized our selection of a software vendor and are in the process of implementing a lease management technology solution. We anticipate the impact of this standard to be significant to our Consolidated Balance Sheet due to the amount of our lease commitments. See Note 18 to the Consolidated Financial Statements contained in our 2017 Annual Report on Form 10-K for further information regarding these commitments. We are currently evaluating the other impacts that ASU 2016-02 will have on our financial statements.
Effective in 2020
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. For public companies, this guidance is effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material impact on our financial statements.

11


2. Revenue Recognition
Disaggregation of Net Sales
The following table presents a disaggregation of our net sales by product type and revenue source. We believe these categories most appropriately depict the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with our customers.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017(1)
 
June 30, 2018
 
June 30, 2017(1)
 
(In thousands)
Fluid milk
$
1,157,288

 
$
1,266,688

 
$
2,417,222

 
$
2,683,344

Ice cream(2)
321,005

 
324,955

 
560,603

 
580,339

Fresh cream(3)
99,816

 
92,911

 
191,766

 
180,782

Extended shelf life and other dairy products(4)
46,183

 
46,578

 
91,425

 
94,716

Cultured
65,504

 
72,111

 
129,670

 
144,185

Other beverages(5)
66,700

 
72,100

 
137,044

 
147,034

Other(6)
30,794

 
27,795

 
63,098

 
55,019

Subtotal
1,787,290

 
1,903,138

 
3,590,828

 
3,885,419

Sales of excess raw materials(7)
122,880

 

 
274,682

 

Sales of other bulk commodities
41,060

 
23,584

 
66,227

 
36,989

Total net sales
$
1,951,230

 
$
1,926,722

 
$
3,931,737

 
$
3,922,408

(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 $137.2 million and $308.2 million for the three and six months ended June 30, 2017, respectively, were included as a reduction of cost of sales in our unaudited Condensed 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 and water.
(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 unaudited Condensed Consolidated Statements of Operations.


12


The following table presents a disaggregation of our net product sales between sales of Company-branded products versus sales of private label products:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(In thousands)
Branded products
$
871,269

 
$
926,351

 
$
1,763,395

 
$
1,907,596

Private label products
916,021

 
976,787

 
1,827,433

 
1,977,823

Subtotal
1,787,290

 
1,903,138

 
3,590,828

 
3,885,419

Sales of excess raw materials
122,880

 

 
274,682

 

Sales of other bulk commodities
41,060

 
23,584

 
66,227

 
36,989

Total net sales
$
1,951,230

 
$
1,926,722

 
$
3,931,737

 
$
3,922,408

Revenue Recognition and Nature of Products and Services
We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Revenue is recognized upon transfer of control of promised goods or services to our customers’ facility in an amount that reflects the consideration we expect to ultimately receive in exchange for those promised goods or services. Revenue is recognized net of allowances for product returns, trade promotions and prompt pay and other discounts.
The substantial majority of our revenue is derived from the sale of fluid milk, ice cream and other dairy products, which includes sales of both Company-branded products as well as private label products. In addition, we derive revenue from the sale of excess raw materials and the sale of other bulk commodities.
Our portfolio of products includes fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy and dairy case products. We sell these products under national, regional and local proprietary or licensed brands, or under private labels. Our sales of excess raw materials consist primarily of bulk cream sales. As a result of the purchase of raw milk, we obtain more butterfat than is needed in our production process. Excess butterfat is sold, primarily in the form of bulk cream, to third parties. Additionally, in certain cases we may be required to externally purchase bulk cream in order to fulfill minimum supply requirements for our customers. In these cases, we purchase bulk cream from other processors or suppliers and resell it to our customers to fulfill our contractual requirements with them.
In all cases, we recognize revenue upon delivery to our customers as we have determined that this is the point at which control is transferred, our performance obligation is complete, and we are entitled to consideration.
Contractual Arrangements with Customers
The majority of our sales are to retailers, warehouse clubs, distributors, foodservice outlets, educational institutions and governmental entities with whom we have contractual agreements. Our sales of excess raw materials and other bulk commodities are primarily to dairy cooperatives, dairy processors or other manufacturers for use as a raw ingredient in their respective manufacturing processes. Our customer contracts typically contain standard terms and conditions and a term sheet. In some cases, upon expiration, these arrangements may continue with the same terms and may not be formally renewed. Additionally, we have a number of informal sales arrangements with certain local and regional customers, which we consider to be contracts based on the criteria outlined in ASC 606. Payment terms and conditions vary by customer, but we generally provide credit terms to customers ranging up to 30 days; therefore, we have determined that our contracts do not include a significant financing component. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses based on our historical experience.
We have determined that we satisfy our performance obligations related to our customer contracts at a point in time, as opposed to over time, and, accordingly, revenue is recognized at a point in time across all of our revenue streams. Therefore, we do not have any contract balances with our customers recorded on our unaudited Condensed Consolidated Balance Sheets.

13


Sales Incentives and Other Promotional Programs
We routinely offer sales incentives and discounts through various regional and national programs to our customers and consumers. These programs include scan backs, product rebates, product returns, trade promotions and co-op advertising, product discounts, product coupons and amounts paid to customers for shelf space in retail stores. The expenses associated with these programs are accounted for as reductions to the transaction price of our products and are therefore recorded as reductions to gross sales.
Some of our sales incentives are recorded by estimating incentive costs or redemption rates based on our historical experience and expected levels of performance of the trade promotion or other program. We maintain liabilities at the end of each period for the estimated incentive costs incurred but unpaid for these programs. Differences between estimated and actual incentive costs are normally not material and are recognized in earnings in the period such differences are determined.
3. 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 milk and yogurt products. This investment allows us to diversify our portfolio to include plant-based dairy alternatives and provides Good Karma the ability to more rapidly expand distribution across the U.S., as well as increase investments in brand building and product innovation.
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 three months ended June 30, 2018 and is included in other operating income in our unaudited Condensed Consolidated Statements of Operations.
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. We recorded the fair value of the non-controlling interest in Good Karma of $11.8 million in our unaudited Condensed 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 will be consolidated in our unaudited Condensed Consolidated Statements of Operations from the date of acquisition.
Prior to the June 29, 2018 step-acquisition, we accounted for our investment in Good Karma under the equity method of accounting based upon our ability to exercise significant influence over the investee through our ownership interest and representation on Good Karma's board of directors. Our equity in the earnings of this investment was not material to our unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2018.


14


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.
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 unaudited Condensed Consolidated Statements of Operations from the date of acquisition.
Discontinued Operations
During the second quarter of 2018, we recognized a net gain from discontinued operations of $1.9 million, net of tax, resulting from a tax refund received from the settlement of a state tax refund claim related to our 2013 sale of Morningstar Foods, LLC.
4. Investments in Unconsolidated Affiliates
Organic Valley Fresh Joint Venture In the third quarter of 2017, we commenced the operations of our previously announced 50/50 strategic joint venture with Cooperative Regions of Organic Producer Pools (“CROPP”), an independent farmer cooperative that distributes organic milk and other organic dairy products under the Organic Valley® brand. The joint venture, called Organic Valley Fresh, combines our processing plants and refrigerated DSD system with CROPP's portfolio of recognized brands and products, marketing expertise, and access to an organic milk supply from America's largest cooperative of organic dairy farmers to bring the Organic Valley® brand to retailers. We and CROPP each made a capital contribution of $2.0 million to the joint venture during the third quarter of 2017.
We have concluded that Organic Valley Fresh is a variable interest entity, but we have determined that we are not the primary beneficiary of the Organic Valley Fresh joint venture because we do not have the power to direct the activities that most significantly affect the economic performance of the joint venture; therefore, the financial results of the joint venture have not been consolidated in our unaudited Condensed Consolidated Financial Statements. We are accounting for this investment under the equity method of accounting. Our equity in the earnings of the joint venture 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 the earnings of the joint venture was $1.7 million and $3.6 million for the three and six months ended June 30, 2018, respectively. We received cash distributions from the joint venture of $2.8 million for each of the three and six months ended June 30, 2018.
5. Inventories
Inventories at June 30, 2018 and December 31, 2017 consisted of the following:
 
June 30, 2018
 
December 31, 2017
 
(In thousands)
Raw materials and supplies
$
105,801

 
$
106,814

Finished goods
170,855

 
171,249

Total
$
276,656

 
$
278,063

6. Goodwill and Intangible Assets
As of June 30, 2018, the gross carrying value of goodwill was $2.26 billion and accumulated goodwill impairment was $2.08 billion. We recorded a goodwill impairment charge of $2.08 billion in 2011 with no goodwill impairment charges in subsequent years.

15


The changes in the net carrying amounts of goodwill as of June 30, 2018 and December 31, 2017 were as follows (in thousands):
Balance at December 31, 2017
$
167,535

Acquisitions(1)
23,172

Balance at June 30, 2018
$
190,707

(1)
The increase in the net carrying amount of goodwill from December 31, 2017 to June 30, 2018 is related to the Good Karma acquisition and the finalization of tax matters associated with the Uncle Matt's acquisition. See Note 3.
The net carrying amounts of our intangible assets other than goodwill as of June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 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

 

 
(43,339
)
 
40,206

 
80,685

 

 
(41,398
)
 
39,287

Trademarks
230,709

 
(109,910
)
 
(66,405
)
 
54,394

 
230,709

 
(109,910
)
 
(58,189
)
 
62,610

Total
$
383,569

 
$
(109,910
)
 
$
(109,744
)
 
$
163,915

 
$
369,994

 
$
(109,910
)
 
$
(99,587
)
 
$
160,497

(1)
The increase in the carrying amount of intangible assets from December 31, 2017 to June 30, 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.
Our finite-lived trademarks will be amortized on a straight-line basis over their remaining useful lives, which range from approximately 2 to 8 years, with a weighted-average remaining useful life of approximately 5 years. Amortization expense on intangible assets for the three months ended June 30, 2018 and 2017 was $5.1 million and $5.2 million, respectively. Amortization expense on intangible assets for the six months ended June 30, 2018 and 2017 was $10.2 million and $10.3 million, respectively. The amortization of intangible assets is reported on a separate line item in our unaudited Condensed Consolidated Statements of Operations.
Estimated aggregate intangible asset amortization expense for the next five years is as follows (in millions):
2018
$
20.5

2019
20.6

2020
12.5

2021
10.8

2022
8.1


16


7. Debt
Our long-term debt as of June 30, 2018 and December 31, 2017 consisted of the following:
 
June 30, 2018
 
 
December 31, 2017
 
 
Amount
 
Interest
Rate
 
 
Amount
 
Interest
Rate
 
 
(In thousands, except percentages)
 
Dean Foods Company debt obligations:
 
 
 
 
 
 
 
 
 
Senior secured revolving credit facility
$

 
%
 
$
11,200

 
3.33
% *
Senior notes due 2023
700,000

 
6.50
 
 
700,000

 
6.50
 
 
700,000

 
 
 
 
711,200

 
 
 
Subsidiary debt obligations:
 
 
 
 
 
 
 
 
 
Receivables securitization facility
160,000

 
3.07
*
 
205,000

 
2.48
*
Capital lease and other
2,082

 
 
 
2,671

 
 
 
162,082

 
 
 
 
207,671

 
 
 
Subtotal
862,082

 
 
 
 
918,871

 
 
 
Unamortized debt issuance costs
(5,123
)
 
 
 
 
(5,672
)
 
 
 
Total debt
856,959

 
 
 
 
913,199

 
 
 
Less current portion
(1,150
)
 
 
 
 
(1,125
)
 
 
 
Total long-term portion
$
855,809

 
 
 
 
$
912,074

 
 
 
*    Represents a weighted average rate, including applicable interest rate margins.
The scheduled debt maturities at June 30, 2018 were as follows (in thousands):
2018
$
516

2019
1,174

2020
160,392

2021

2022

Thereafter
700,000

Subtotal
862,082

Less unamortized debt issuance costs
(5,123
)
Total debt
$
856,959

Senior Secured Revolving Credit Facility — In March 2015, we entered into a credit agreement, as amended on January 4, 2017 and as described below (as amended, the "Credit Agreement"), pursuant to which the lenders provided us with a senior secured revolving credit facility in the amount of up to $450 million (the “Credit Facility”). Under the Credit Agreement, we have the right to request an increase of the aggregate commitments under the Credit Facility by up to $200 million, which we may request to be made available as either term loans or revolving loans, without the consent of any lenders not participating in such increase, subject to specified conditions. The Credit Facility is available for the issuance of up to $75 million of letters of credit and up to $100 million of swing line loans.
On January 4, 2017, we amended the Credit Agreement to, among other things, (i) extend the maturity date of the Credit Facility to January 4, 2022; (ii) modify the leverage ratio covenant to add a requirement that we comply with a maximum total net leverage ratio (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility) not to exceed 4.25 to 1.00 and to eliminate the maximum senior secured net leverage ratio requirement; (iii) modify the definition of “Consolidated EBITDA” to permit certain pro forma cost savings add-backs in connection with permitted acquisitions and dispositions; (iv) modify the definition of “Applicable Rate” to reduce the interest rate margins such that loans outstanding under the Credit Facility will bear interest, at our option, at either (x) the LIBO Rate (as defined in the Credit Agreement) plus a margin of between 1.75% and 2.50% (2.00% as of June 30, 2018) based on our total net leverage ratio (as defined in the Credit Agreement), or (y) the Alternate Base Rate (as defined in the Credit Agreement) plus a margin of between 0.75% and 1.50%

17


(1.00% as of June 30, 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 Credit Facility; and (vii) provide the Company the ability to request that increases in the aggregate commitments under the Credit Facility be made available as either revolving loans or term loans.
In connection with the execution of the amendment to the Credit Agreement, we paid certain arrangement fees of approximately $0.7 million to lenders and other fees of approximately $0.3 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $0.9 million of unamortized deferred financing costs in connection with this amendment.
We may make optional prepayments of loans under the Credit Facility, in whole or in part, without premium or penalty (other than applicable breakage costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, but without a corresponding commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds. The Credit Facility is guaranteed by our existing and future domestic material restricted subsidiaries (as defined in the Credit Agreement), which are substantially all of our wholly-owned U.S. subsidiaries other than the receivables securitization facility subsidiaries (the “Guarantors”).
The Credit Facility is secured by a first priority perfected security interest in substantially all of our assets and the assets of the Guarantors, whether consisting of personal, tangible or intangible property, including a pledge of, and a perfected security interest in, (i) all of the shares of capital stock of the Guarantors and (ii) 65% of the shares of capital stock of our and the Guarantors' first-tier foreign subsidiaries that are material restricted subsidiaries, in each case subject to certain exceptions as set forth in the Credit Agreement. The collateral does not include, among other things, (a) any of our real property, (b) the capital stock and any assets of any unrestricted subsidiary, (c) any capital stock of any direct or indirect subsidiary of Dean Holding Company ("Legacy Dean"), a wholly owned subsidiary of the Company, which owns any real property, or (d) receivables sold pursuant to the receivables securitization facility.
 The Credit Agreement contains customary representations, warranties and covenants, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments during a default or non-compliance with the financial covenants, investments, loans and advances, transactions with affiliates and sale and leaseback transactions. The Credit Agreement also contains customary events of default and related cure provisions. We are required to comply with (a) a maximum total net leverage ratio of 4.25x (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility); and (b) a minimum consolidated interest coverage ratio of 2.25x. In addition, the Credit Agreement imposes certain restrictions on our ability to pay dividends and make other restricted payments if our total net leverage ratio (including borrowings under our receivables securitization facility) is in excess of 3.50x.
At June 30, 2018, we had no outstanding borrowings under the Credit Facility. Our average daily balance under the Credit Facility during the six months ended June 30, 2018, was $2.6 million. There were no letters of credit issued under the Credit Facility as of June 30, 2018.
Dean Foods Receivables Securitization Facility — We have a $450 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to two wholly-owned entities intended to be bankruptcy-remote. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our unaudited Condensed Consolidated Balance Sheets, and the securitization is treated as a borrowing for accounting purposes.
On January 4, 2017, we amended the purchase agreement governing the receivables securitization facility to, among other things, (i) extend the liquidity termination date to January 4, 2020, (ii) reduce the maximum size of the receivables securitization facility to $450 million, (iii) replace the senior secured net leverage ratio with a total net leverage ratio to be consistent with the amended leverage ratio covenant under the amended Credit Agreement described above, and (iv) modify certain pricing terms such that advances outstanding under the receivables securitization facility will bear interest between 0.90% and 1.05%, and the Company will pay an unused fee between 0.40% and 0.55% on undrawn amounts, in each case based on the Company's total net leverage ratio.
In connection with the amendment to the receivables purchase agreement, we paid certain arrangement fees of approximately $0.6 million to lenders and other fees of approximately $0.1 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $0.2 million of unamortized deferred financing costs in connection with the amendment.
The receivables purchase agreement contains covenants consistent with those contained in the Credit Agreement.

18


Based on the monthly borrowing base formula, we had the ability to borrow up to $435.7 million of the total commitment amount under the receivables securitization facility as of June 30, 2018. The total amount of receivables sold to these entities as of June 30, 2018 was $557.8 million. During the first six months of 2018, we borrowed $1.2 billion and repaid $1.3 billion under the facility with a remaining balance of $160.0 million as of June 30, 2018. In addition to letters of credit in the aggregate amount of $108.7 million that were issued but undrawn, the remaining available borrowing capacity was $167.0 million at June 30, 2018. Our average daily balance under this facility during the six months ended June 30, 2018 was $168.8 million. The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.
Dean Foods Company Senior Notes due 2023 — On February 25, 2015, we issued $700 million in aggregate principal amount of 6.50% senior notes due 2023 (the “2023 Notes”) at an issue price of 100% of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act.
In connection with the issuance of the 2023 Notes, we paid certain arrangement fees of approximately $7.0 million to initial purchasers and other fees of approximately $1.8 million, which were deferred and netted against the outstanding debt balance, and will be amortized to interest expense over the remaining term of the 2023 Notes.
The 2023 Notes are our senior unsecured obligations. Accordingly, the 2023 Notes rank equally in right of payment with all of our existing and future senior obligations and are effectively subordinated in right of payment to all of our existing and future secured obligations, including obligations under our Credit Facility and receivables securitization facility, to the extent of the value of the collateral securing such obligations. The 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by our subsidiaries that guarantee obligations under the Credit Facility.
The 2023 Notes will mature on March 15, 2023, and bear interest at an annual rate of 6.50%. Interest on the 2023 Notes is payable semi-annually in arrears in March and September of each year.
We may, at our option, redeem all or a portion of the 2023 Notes at any time on or after March 15, 2018, at the applicable redemption prices specified in the indenture governing the 2023 Notes (the "Indenture"), plus any accrued and unpaid interest to, but excluding, the applicable redemption date. If we undergo certain kinds of changes of control, holders of the 2023 Notes have the right to require us to repurchase all or any portion of such holder’s 2023 Notes at 101% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit our ability to: (i) create certain liens; (ii) enter into sale and lease-back transactions; (iii) assume, incur or guarantee indebtedness for borrowed money that is secured by a lien on certain principal properties (or on any shares of capital stock of our subsidiaries that own such principal properties) without securing the 2023 Notes on a pari passu basis; and (iv) consolidate with or merge with or into, or sell, transfer, convey or lease all or substantially all of our properties and assets, taken as a whole, to another person.
The carrying value under the 2023 Notes at June 30, 2018 was $694.9 million, net of unamortized debt issuance costs of $5.1 million.
See Note 8 for information regarding the fair value of the 2023 Notes as of June 30, 2018.
Capital Lease Obligations and Other — Capital lease obligations of $2.1 million and $2.7 million as of June 30, 2018 and December 31, 2017, respectively, were primarily comprised of our leases for information technology equipment.
8. Derivative Financial Instruments and Fair Value Measurements
Derivative Financial Instruments
Commodities — We are exposed to commodity price fluctuations, including in the prices of milk, butterfat, sweeteners and other commodities used in the manufacturing, packaging and distribution of our products, such as natural gas, resin and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month’s to one year’s anticipated requirements, depending on the ingredient or commodity. These contracts are considered normal purchases.

19


In addition to entering into forward purchase contracts, from time to time we may purchase over-the-counter contracts from qualified financial institutions or enter into exchange-traded commodity futures contracts for raw materials that are ingredients of our products or components of such ingredients. All commodities contracts are marked to market in our income statement at each reporting period and a derivative asset or liability is recorded on our balance sheet.
Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. At June 30, 2018 and December 31, 2017, our derivatives recorded at fair value in our unaudited Condensed Consolidated Balance Sheets consisted of the following:
 
Derivative Assets
 
Derivative Liabilities
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
(In thousands)
Commodities contracts — current(1)
$
2,226

 
$
1,431

 
$
1,450

 
$
1,829

Commodities contracts — non-current(2)
2

 

 

 
15

Total derivatives
$
2,228

 
$
1,431

 
$
1,450

 
$
1,844

(1)
Derivative assets and liabilities that have settlement dates equal to or less than 12 months from the respective balance sheet date are included in prepaid expenses and other current assets and accounts payable and accrued expenses, respectively, in our unaudited Condensed Consolidated Balance Sheets.
(2)
Derivative assets and liabilities that have settlement dates greater than 12 months from the respective balance sheet date are included in identifiable intangible and other assets, net and other long-term liabilities, respectively, in our unaudited Condensed Consolidated Balance Sheets.

Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, we follow a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Quoted prices for identical instruments in active markets.
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 is as follows (in thousands):
 
Fair Value as of June 30, 2018
 
Level 1
 
Level 2
 
Level 3
Asset — Commodities contracts
$
2,228

 
$

 
$
2,228

 
$

Liability — Commodities contracts
1,450

 

 
1,450

 

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
Asset — Commodities contracts
$
1,431

 
$

 
$
1,431

 
$

Liability — Commodities contracts
1,844

 

 
1,844

 



20


Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on our Credit Facility, receivables securitization facility, and certain other debt are variable, their fair values approximate their carrying values.
The fair value of the 2023 Notes was determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined these fair values to be Level 2 measurements as all significant inputs into the quotes provided by our pricing source are observable in active markets. The following table presents the outstanding principal amount and fair value of the 2023 Notes at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Amount Outstanding
 
Fair Value
 
Amount Outstanding
 
Fair Value
 
(In thousands)
Dean Foods Company senior notes due 2023
$
700,000

 
$
672,000

 
$
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 the SERP are primarily invested in money market and mutual funds and are held at fair value. We classify these assets as Level 2 as fair value can be corroborated based on quoted market prices for identical or similar instruments in markets that are not active. The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of June 30, 2018 (in thousands):
 
Total
 
Level 1
 
Level 2
 
Level 3
Money market
$
19

 
$

 
$
19

 
$

Mutual funds
1,754

 

 
1,754

 


The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of December 31, 2017 (in thousands):
 
Total
 
Level 1
 
Level 2
 
Level 3
Money market
$
22

 
$

 
$
22

 
$

Mutual funds
1,785

 

 
1,785

 

9. Common Stock and Share-Based Compensation
Our authorized shares of capital stock include one million shares of preferred stock and 250 million shares of common stock with a par value of $0.01 per share.
Cash Dividends — In accordance with our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. Beginning in 2015, all awards of restricted stock units, performance stock units and phantom shares provide for cash dividend equivalent units, which vest in cash at the same time as the underlying award. Quarterly dividends of $0.09 per share were paid in March and June of 2018 and 2017, totaling approximately $16.4 million for each of the first six months of 2018 and 2017. We expect to pay quarterly dividends of $0.09 per share ($0.36 per share annually) for the remainder of 2018. Our cash dividend policy is subject to modification, suspension or cancellation in any manner and at any time. Dividends are presented as a reduction to retained earnings in our unaudited Condensed Consolidated Statement of Stockholders’ Equity unless we have an accumulated deficit as of the end of the period, in which case they are reflected as a reduction to additional paid-in capital.
Stock Repurchase Program — Since 1998, our Board of Directors has from time to time authorized the repurchase of our common stock up to an aggregate of $2.38 billion, excluding fees and commissions. We made no share repurchases during the three and six months ended June 30, 2018 and 2017. As of June 30, 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.

21


Restricted Stock Units — We issue restricted stock units ("RSUs") to certain senior employees and non-employee directors as part of our long-term incentive compensation program. An RSU represents the right to receive one share of common stock in the future. RSUs have no exercise price. RSUs granted to employees generally vest ratably over three years, subject to certain accelerated vesting provisions based primarily on a change of control, or in certain cases upon death or qualified disability. RSUs granted to non-employee directors vest ratably over three years.
The following table summarizes RSU activity during the six months ended June 30, 2018:
 
Employees
 
Non-Employee Directors
 
Total
RSUs outstanding at January 1, 2018
545,405

 
85,829

 
631,234

RSUs granted
717,744

 
95,669

 
813,413

Shares issued upon vesting of RSUs
(166,389
)
 
(38,454
)
 
(204,843
)
RSUs canceled or forfeited(1)
(164,033
)
 
(1,915
)
 
(165,948
)
RSUs outstanding at June 30, 2018
932,727

 
141,129

 
1,073,856

Weighted average grant date fair value
$
11.52

 
$
11.98

 
$
11.58

(1)
Pursuant to the terms of our plans, employees have the option of forfeiting RSUs to cover their minimum statutory tax withholding when shares are issued. Any RSUs surrendered or canceled in satisfaction of participants’ tax withholding obligations are not available for future grants under the plans.
Performance Stock Units — In 2016, we began granting performance stock units ("PSUs") as a part of our long-term incentive compensation program. PSUs cliff vest and settle in shares of our common stock at the end of a three-year performance period contingent upon the achievement of specific performance goals established for each calendar year during the performance period. The PSUs are deemed granted in three separate one year tranches on the dates in which our Compensation Committee establishes the applicable annual performance goals. The number of shares that may be earned at the end of the vesting period may range from zero to 200 percent of the target award amount based on the achievement of the performance goals. The fair value of PSUs is estimated using the market price of our common stock on the date of grant, and we recognize compensation expense ratably over the vesting period for the portion of the awards that are expected to vest. The fair value of the PSUs is remeasured at each reporting period. The following table summarizes PSU activity during the six months ended June 30, 2018:
 
PSUs
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018
121,807

 
$
18.62

Granted
290,609

 
8.79

Vested

 

Forfeited or canceled
(21,870
)
 
10.98

Performance adjustment(1)
(85,795
)
 
18.13

Outstanding at June 30, 2018
304,751

 
$
9.93

(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.

22


Phantom Shares — We grant phantom shares as part of our long-term incentive compensation program, which are similar to RSUs in that they are based on the price of our stock and vest ratably over a three-year period, but are cash-settled based upon the value of our stock at each vesting date. The fair value of the awards is remeasured at each reporting period. Compensation expense is recognized over the vesting period with a corresponding liability, which is recorded in accounts payable and accrued expenses in our unaudited Condensed Consolidated Balance Sheets. The following table summarizes the phantom share activity during the six months ended June 30, 2018:
 
Shares
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018
1,322,580

 
$
18.26

Granted
1,618,179

 
8.80

Converted/paid
(595,402
)
 
18.03

Forfeited
(264,215
)
 
13.47

Outstanding at June 30, 2018
2,081,142

 
$
11.58

Stock Options — The following table summarizes stock option activity during the six months ended June 30, 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
(270,922
)
 
21.00

 
 
 
 
Exercised

 

 
 
 
 
Options outstanding and exercisable at June 30, 2018
429,545

 
$
14.81

 
1.41
 
$
65,143

We recognize share-based compensation expense for stock options ratably over the vesting period. The fair value of each option award is estimated on the date of grant using a Black-Scholes valuation model. We did not grant any stock options during 2017 or 2018, nor do we currently plan to in the future. At June 30, 2018, there was no remaining unrecognized stock option expense related to unvested awards.
Share-Based Compensation Expense — The following table summarizes the share-based compensation expense recognized during the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
RSUs
$
1,399

 
$
1,046

 
$
2,545

 
$
2,654

PSUs
551

 
(1,051
)
 
1,147

 
(551
)
Phantom shares
2,520

 
2,707

 
2,933

 
4,556

Total
$
4,470

 
$
2,702

 
$
6,625


$
6,659


23


10. Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is based on the weighted average number of common shares outstanding during each period. Diluted EPS is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period. Stock option and stock unit conversions were not included in the computation of diluted loss per share for the three and six months ended June 30, 2018 as we incurred a loss from continuing operations for these periods and any effect on loss per share would have been anti-dilutive. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share data)
Basic earnings (loss) per share computation:
 
 
 
Numerator:
 
 
 
Income (loss) from continuing operations
$
(42,016
)
 
$
17,647

 
$
(42,281
)
 
$
7,888

Net (income) loss attributable to non-controlling interest

 

 

 

Income (loss) from continuing operations attributable to Dean Foods Company
$
(42,016
)
 
$
17,647

 
$
(42,281
)
 
$
7,888

Denominator:
 
 
 
 
 
 
 
Average common shares
91,342,652

 
90,882,415

 
91,267,748

 
90,796,585

Basic earnings (loss) per share from continuing operations attributable to Dean Foods Company
$
(0.46
)
 
$
0.19

 
$
(0.46
)
 
$
0.09

Diluted earnings (loss) per share computation:
 
 
 
Numerator:
 
 
 
Income (loss) from continuing operations
$
(42,016
)
 
$
17,647

 
$
(42,281
)
 
$
7,888

Net (income) loss attributable to non-controlling interest

 

 

 

Income (loss) from continuing operations attributable to Dean Foods Company
$
(42,016
)
 
$
17,647

 
$
(42,281
)
 
$
7,888

Denominator:
 
 
 
 
 
 
 
Average common shares — basic
91,342,652

 
90,882,415

 
91,267,748

 
90,796,585

Stock option conversion(1)

 
220,318

 

 
232,495

RSUs and PSUs(2)

 
266,297

 

 
336,866

Average common shares — diluted
91,342,652

 
91,369,030

 
91,267,748

 
91,365,946

Diluted earnings (loss) per share from continuing operations attributable to Dean Foods Company
$
(0.46
)
 
$
0.19

 
$
(0.46
)
 
$
0.09

(1) Anti-dilutive options excluded
443,169

 
655,700

 
473,149

 
776,710

(2) Anti-dilutive stock units excluded
1,202,367

 
8,959

 
1,057,057

 
4,504


24


11. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended June 30, 2018 were as follows (in thousands):
 
Pension and 
Other
Postretirement
Benefits Items
 
Foreign 
Currency
Items
 
Total
Balance at March 31, 2018
$
(88,852
)
 
$
(4,781
)
 
$
(93,633
)
Other comprehensive income before reclassifications
3,210

 

 
3,210

Amounts reclassified from accumulated other comprehensive loss(1)
(1,608
)
 

 
(1,608
)
Net current-period other comprehensive income
1,602

 

 
1,602

Balance at June 30, 2018
$
(87,250
)
 
$
(4,781
)
 
$
(92,031
)
(1)
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12.

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended June 30, 2017 were as follows (in thousands):
 
Pension and 
Other
Postretirement
Benefits Items
 
Foreign 
Currency
Items
 
Total
Balance at March 31, 2017
$
(83,208
)
 
$
(4,781
)
 
$
(87,989
)
Other comprehensive income before reclassifications
3,278

 

 
3,278

Amounts reclassified from accumulated other comprehensive loss(1)
(1,646
)
 

 
(1,646
)
Net current-period other comprehensive income
1,632

 

 
1,632

Balance at June 30, 2017
$
(81,576
)
 
$
(4,781
)
 
$
(86,357
)
(1)
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12.

25


The changes in accumulated other comprehensive income (loss) by component, net of tax, during the six months ended June 30, 2018 were as follows (in thousands):
 
Pension and 
Other
Postretirement
Benefits Items
 
Foreign 
Currency
Items
 
Total
Balance at December 31, 2017
$
(73,629
)
 
$
(4,781
)
 
$
(78,410
)
Other comprehensive income before reclassifications
6,443

 

 
6,443

Amounts reclassified from accumulated other comprehensive loss(1)
(3,217
)
 

 
(3,217
)
Net current-period other comprehensive income
3,226

 

 
3,226

Reclassification of stranded tax effects related to the Tax Act(2)
(16,847
)
 

 
(16,847
)
Balance at June 30, 2018
$
(87,250
)
 
$
(4,781
)
 
$
(92,031
)
(1)
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12.
(2)
See Note 1 for additional details on the adoption of ASU No. 2018-02 during the first quarter of 2018.

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the six months ended June 30, 2017 were as follows (in thousands):
 
Pension and 
Other
Postretirement
Benefits Items
 
Foreign 
Currency
Items
 
Total
Balance at December 31, 2016
$
(84,852
)
 
$
(4,781
)
 
$
(89,633
)
Other comprehensive income before reclassifications
6,569

 

 
6,569

Amounts reclassified from accumulated other comprehensive loss(1)
(3,293
)
 

 
(3,293
)
Net current-period other comprehensive income
3,276

 

 
3,276

Balance at June 30, 2017
$
(81,576
)
 
$
(4,781
)
 
$
(86,357
)
(1)
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12.

26


12. Employee Retirement and Postretirement Benefits
We sponsor various defined benefit and defined contribution retirement plans, including various employee savings and profit sharing plans, and contribute to various multiemployer pension plans on behalf of our employees. All full-time union and non-union employees who have met requirements pursuant to the plans are eligible to participate in one or more of these plans.
Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation. The following table sets forth the components of net periodic benefit cost for our defined benefit plans during the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
732

 
$
752

 
$
1,464

 
$
1,504

Interest cost
2,828

 
2,927

 
5,656

 
5,854

Expected return on plan assets
(4,411
)
 
(4,758
)
 
(8,822
)
 
(9,516
)
Amortizations:
 
 
 
 
 
 
 
Prior service cost
108

 
176

 
216

 
352

Unrecognized net loss
2,130

 
2,581

 
4,260

 
5,162

Net periodic benefit cost
$
1,387

 
$
1,678

 
$
2,774

 
$
3,356

We do not expect to make any contributions to the company-sponsored pension plans in 2018.
Postretirement Benefits — Certain of our subsidiaries provide health care benefits to certain retirees who are covered under specific group contracts. The following table sets forth the components of net periodic benefit cost for our postretirement benefit plans during the three and six months ended June 30, 2018 and 2017: 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
170

 
$
146

 
$
340

 
$
292

Interest cost
235

 
240

 
470

 
480

Amortizations:
 
 
 
 
 
 
 
Prior service cost
23

 
23

 
46

 
46

Unrecognized net gain
(118
)
 
(114
)
 
(236
)
 
(228
)
Net periodic benefit cost
$
310

 
$
295

 
$
620

 
$
590

13. Asset Impairment Charges and Facility Closing and Reorganization Costs
Asset Impairment Charges
We evaluate our finite-lived intangible and long-lived assets for impairment when circumstances indicate that the carrying value may not be recoverable. Indicators of impairment could include, among other factors, significant changes in the business environment, the planned closure of a facility, or deteriorations in operating cash flows. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows.
Testing the assets for recoverability involves developing estimates of future cash flows directly associated with, and that are expected to arise as a direct result of, the use and eventual disposition of the assets. Other inputs are based on assessment of an individual asset’s alternative use within other production facilities, evaluation of recent market data and historical liquidation sales values for similar assets. As the inputs for testing recoverability are largely based on management’s judgments and are not generally observable in active markets, we consider such measurements to be Level 3 measurements in the fair value hierarchy. See Note 8.

27


The results of our analysis indicated an impairment to our property, plant and equipment at one of our production facilities of $2.2 million. The impairment was the result of declines in operating cash flows at this facility on both a historical and forecasted basis. This charge was recorded during the three months ended June 30, 2018.
The results of our analysis indicated no impairment of our property, plant and equipment, outside of facility closing and reorganization costs, for the three and six months ended June 30, 2017.
We can provide no assurance that we will not have impairment charges in future periods as a result of changes in our business environment, operating results or the assumptions and estimates utilized in our impairment tests.
Facility Closing and Reorganization Costs
Costs associated with approved plans within our ongoing network optimization strategies are summarized as follows:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Closure of facilities, net(1)
$
59,229

 
$
4,203

 
$
61,591

 
$
7,689

Organizational effectiveness(2)

 
1,614

 
(331
)
 
7,414

Enterprise-wide cost productivity plan(3)
8,432

 

 
14,863

 

Facility closing and reorganization costs, net
$
67,661

 
$
5,817

 
$
76,123

 
$
15,103

(1)
Reflects charges, net of gains on the sales of assets, associated with closed facilities that were incurred in 2018 and 2017. These charges are primarily related to facility closures in Braselton, GA; Louisville, KY; Erie, PA; Huntley, IL; Thief River Falls, MN; Lynn, MA; Livonia, MI; Richmond, Virginia; Orem, Utah; New Orleans, Louisiana; Rochester, Indiana; Riverside, California; Denver, Colorado; and Buena Park, California. We have incurred net charges to date of $110.9 million related to these facility closures through June 30, 2018. We expect to incur additional charges related to these facility closures of approximately $13.2 million related to shutdown, contract termination and other costs. As we continue the evaluation of our supply chain and distribution network, it is likely that we will close additional facilities in the future.
(2)
During 2017, we initiated a company-wide, multi-phase organizational effectiveness assessment to better align each key function of the Company with our strategic plan. This initiative has resulted in headcount reductions due to changes to our organizational structure, and the charges shown in the table above are primarily comprised of severance benefits and other employee-related costs associated with these organizational changes. We do not expect to incur any material additional costs associated with this initiative.
(3)
In the fourth quarter of 2017, we announced an enterprise-wide cost productivity plan, which includes rescaling our supply chain, optimizing spend management and integrating our operating model. This plan has resulted in headcount reductions due to changes to our organizational structure, and the charges shown in the table above are primarily comprised of severance benefits and other employee-related costs associated with these changes. Efforts with respect to the enterprise-wide cost productivity plan are ongoing, and we expect that we will incur additional costs in the coming months associated with the approval and implementation of additional phases of the plan; however, as specific details of these phases have not been finalized and approved, future costs are not yet estimable.

28


Activity with respect to facility closing and reorganization costs during the six months ended June 30, 2018 is summarized below and includes items expensed as incurred:
 
Accrued Charges at December 31, 2017
 
Charges and Adjustments
 
Payments
 
Accrued Charges at June 30, 2018
 
(In thousands)
Cash charges:
 
 
 
 
 
 
 
Workforce reduction costs
$
5,863

 
$
30,318

 
$
(5,019
)
 
$
31,162

Shutdown costs