UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For The Fiscal Year Ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Transition Period from to
Commission File Number 001-12755
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(214 ) 303-3400
(Address, including zip code, and telephone number, including
area code, of Registrant’s principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
OTC Pink Open Market | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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.
Large accelerated filer | ☐ | ☑ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company | |||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant at June 28, 2019, based on the closing price for the registrant’s common stock on the New York Stock Exchange on June 28, 2019, was approximately $62 million.
The number of shares of the registrant’s common stock outstanding as of March 12, 2020 was 91,940,015 .
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file on Form 10-K/A an amendment to this Annual Report on Form 10-K within 120 days of the registrant’s fiscal year end, which will be incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Item | Page | |
PART I | ||
1 | ||
1A | ||
1B | ||
2 | ||
3 | ||
4 | ||
PART II | ||
5 | ||
6 | ||
7 | ||
7A | ||
8 | ||
9 | ||
9A | ||
PART III | ||
10 | ||
11 | ||
12 | ||
13 | ||
14 | ||
PART IV | ||
15 | ||
16 | ||
Forward-Looking Statements
This Annual Report on Form 10-K (this “Form 10-K”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are predictions based on expectations and projections about future events, and are not statements of historical fact. Forward-looking statements include statements concerning business strategy, among other things, including anticipated trends and developments in and management plans for our business and the markets in which we operate. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” "would," "can," “could,” “predict,” and “continue,” the negative or plural of these words and other comparable terminology. All forward-looking statements included in this Form 10-K are based upon information available to us as of the filing date of this Form 10-K, and we undertake no obligation to update any of these forward-looking statements for any reason. You should not place undue reliance on forward-looking statements. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in the section entitled “Part I — Item 1A — Risk Factors” in this Form 10-K, and elsewhere in this Form 10-K. You should carefully consider the risks and uncertainties described in this Form 10-K.
PART I
Item 1. | 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 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, national white milk 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 the completion of our majority interest acquisition of Good Karma Foods, Inc. ("Good Karma") on June 29, 2018, we now sell and distribute flax-based beverages 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 brokers. Some national customer relationships are coordinated by our centralized corporate sales department.
Unless stated otherwise, any reference to income statement items in this Form 10-K refers to results from continuing operations. Each of the terms "we," "us," "our," "the Company," and "Dean Foods" refers collectively to Dean Foods Company and its wholly-owned subsidiaries unless the context indicates otherwise.
We were incorporated in Delaware in 1994, and our principal executive offices are located at 2711 North Haskell Avenue, Suite 3400, Dallas, Texas 75204. Our telephone number is (214) 303-3400, and we maintain a web site at www.deanfoods.com.
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Developments Since January 1, 2019
Leadership Changes — On July 26, 2019, we announced that Eric Beringause will serve as the Company's new President and Chief Executive Officer effective July 29, 2019, replacing Ralph Scozzafava. Mr. Beringause previously served as the Chief Executive Officer of Gehl Foods, LLC from March 2015 to August 2018, as Chief Executive Officer of Advanced Refreshment LLC from 2011 to 2014, and President and Chief Executive Officer of Sturm Foods, Inc. from 2008 to 2011.
On October 25, 2019, we announced that Gary W. Rahlfs will serve as the Company's new Senior Vice President and Chief Financial Officer, effective October 23, 2019. Mr. Rahlfs, 52, had served as the Company's Interim Chief Financial Officer since September 24, 2019, replacing Jody Macedonio. Mr. Rahlfs previously served as the Company's Senior Vice President, Finance & Strategy since May 2019. From March 2018 to May 2019, Mr. Rahlfs served as the Chief Financial Officer/Vice Chancellor for Finance at the University of North Texas. From 1994 until February 2017, Mr. Rahlfs was employed at PepsiCo, Inc., where he held several positions, including Vice President Finance, Global Groups for PepsiCo, Chief Financial Officer – PepsiCo Foods Canada, and Vice President Sales Finance – Frito-Lay US-South Division.
Chapter 11 Proceedings — On November 12, 2019 (the “Petition Date”), we and substantially all of our wholly owned subsidiaries (other than our Securitization Subsidiaries and foreign subsidiaries) (the “Filing Subsidiaries” and, together with the Company, the “debtors-in-possession”) filed voluntary petitions for reorganization (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The debtors-in-possession’s Chapter 11 cases (collectively, the “Chapter 11 Cases”) are being jointly administered under the caption In re Southern Foods Group, LLC, Case No. 19-36313. Since the commencement of the Chapter 11 Cases, the debtors-in-possession have continued to operate their business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.
The filing of the Bankruptcy Petitions constituted an event of default that accelerated our obligations under the documents governing the Senior Secured Revolving Credit Facility, the Receivables Securitization Facility and our 2023 Notes (collectively, the “Debt Instruments”) and substantially all of our other indebtedness.
Since the Petition Date, the debtors-in-possession have requested and received certain approvals and authorizations from the Bankruptcy Court. This relief provided the debtors-in-possession authority to make payments upon, or otherwise honor, certain prepetition obligations (e.g., obligations related to certain employee wages, salaries and benefits and certain vendors and other providers essential to the debtors-in-possession’s businesses).
Going Concern — As a result of extremely challenging current market conditions, continuing losses from operations, our current financial condition and the resulting risks and uncertainties surrounding our Chapter 11 proceedings, there is substantial doubt about our ability to continue as a going concern within one year after the date of issuance of these financial statements. Our ability to continue as a going concern is dependent upon, among other things, our ability to become profitable, maintain profitability and successfully implement our Chapter 11 plan of reorganization and/or any sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code. As a result of the Bankruptcy Petitions, the realization of the debtors-in-possession’s assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as debtors-in-possession pursuant to the Bankruptcy Code, we may sell or otherwise dispose of or liquidate assets, or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business for amounts other than those reflected under “Part II - Item 8 - Consolidated Financial Statements” in this Form 10-K. Further, a Chapter 11 plan of reorganization is likely to materially change the amounts and classifications of assets and liabilities reported under “Part II - Item 8 - Consolidated Financial Statements” in this Form 10-K. As the progress of these plans and transactions is subject to approval of the Bankruptcy Court and therefore not within our control, successful reorganization and emergence from bankruptcy cannot be considered probable and such plans do not alleviate substantial doubt about our ability to continue as a going concern.
Delisting of our Common Stock from the New York Stock Exchange (the "NYSE") — Our common stock was previously listed on the NYSE under the symbol “DF.” On November 12, 2019, the NYSE suspended trading in our common stock at the market opening and we received written notice from the NYSE that it had determined to commence proceedings to delist our common stock because we are no longer suitable for listing pursuant to Listed Company Manual Section 802.01D following the filing of the Bankruptcy Petitions. The delisting became effective on November 27, 2019. Since November 13, 2019, our common stock has been quoted on the Pink Open Market maintained by the OTC Markets Group, Inc. under the symbol “DFODQ.” We can provide no assurance that our common stock will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our common stock on this market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue on this market in the future.
Debtors-in-Possession Financing — In connection with the Bankruptcy Petitions, on November 14, 2019, we entered into a Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), among us, as borrower,
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the lenders from time to time party thereto (the “DIP Lenders”) and Coöperatieve Rabobank U.A., New York Branch, as administrative agent and collateral agent for the DIP Lenders (in such capacities, the “DIP Agent”). The DIP Credit Agreement provides for a senior secured superpriority debtor-in-possession credit facility (the “DIP Facility”) consisting of (i) a new money revolving loan facility in an aggregate principal amount of up to approximately $236.2 million, in the form of revolving loans (the “DIP Revolving Loans”) or, subject to a sub-limit of $25 million, the form of letters of credit (the “DIP Letters of Credit”) and (ii) term loans (the “DIP Term Loans” and, together with the DIP Revolving Loans, the “DIP Loans”) refinancing the aggregate principal amount of loans outstanding under the Senior Secured Revolving Credit Facility as of the Petition Date. Our obligations under the DIP Facility are guaranteed by all of our subsidiaries that are debtors-in-possession in the Chapter 11 Cases. In addition, the claims of the DIP Lenders are (i) entitled to superpriority administrative expense claim status and, subject to certain customary exclusions in the credit documentation, and (ii) secured by (x) a perfected first priority lien on all property of the debtors-in-possession not subject to valid, perfected and non-avoidable liens in existence on the Petition Date, (y) a perfected first priority priming lien on collateral under the Senior Secured Revolving Credit Facility and (z) a perfected junior lien on all property of the debtors-in-possession and the proceeds thereof that are subject to valid, perfected and non-avoidable liens in existence on the Petition Date or valid and non-avoidable liens in existence on the Petition Date that are perfected subsequent to the Petition Date to the extent permitted by Section 546(b) of the Bankruptcy Code, in each case subject to a carve-out for the debtors-in-possession’s professional fees and certain liens permitted by the terms of the DIP Credit Agreement.
In connection with the Bankruptcy Petitions, on November 14, 2019, we also reached agreement with the lenders under our Receivables Securitization Facility to amend and restate certain agreements governing our Receivables Securitization Facility to, among other things, (i) modify certain covenants, representations, events of default and cross defaults arising as a result of the commencement of the Chapter 11 Cases, (ii) modify the other rights and obligations of the parties to the facility in order to give effect to, and in certain instances be subject to, orders of the Bankruptcy Court from time to time, (iii) reduce the total size of the facility to $425 million, with a corresponding reduction to availability thereunder, (iv) after giving effect to the commencement of the Chapter 11 Cases, ensure that the facility continues in effect (as amended) and liquidity continues to be available during the pendency of the Chapter 11 Cases, subject to the terms and conditions therein and subject to the orders of the Bankruptcy Court, (v) modify certain pricing terms and fees payable under the facility and (vi) make certain other amendments, including in order to give effect to future issuances of letters of credit and to issue a letter of credit thereunder to backstop all of our letters of credit issued and outstanding under the facility in order to, among other things, help ensure that such letters of credit remain in effect to secure our obligations owed to the beneficiaries thereunder.
The Bankruptcy Court entered orders approving the DIP Credit Agreement and amended Receivables Securitization Facility, on an interim basis, on November 14, 2019. Final orders approving the DIP Credit Agreement and the amended Receivables Securitization Facility were entered by the Bankruptcy Court on December 23, 2019.
Key Employee Retention Program (the “KERP”) — In order to enhance the Company’s ability to attract, retain and incentivize the employees necessary to maximize the value of the business during its restructuring, on January 17, 2020, on the recommendation of its compensation advisors, the Board of Directors of the Company approved a $7.13 million Key Employee Retention Program (the “KERP”). The KERP was subsequently approved by the Bankruptcy Court on February 19, 2020.
The KERP provides for retention awards to certain key employees with high business impact and retention risk as well as a discretionary pool from which the Company’s President and CEO may make awards in connection with new hires, promotions and job changes. Awards made under the KERP are intended to replace the Company’s long-term incentive award program and prepetition retention awards that are not continuing through the Company’s restructuring. The award recipient must execute a waiver of any long-term incentive opportunity for 2020 in order to receive a retention award. KERP awards will be paid in cash at the earlier of (i) one year following the Bankruptcy Court approval date, (ii) the consummation of a sale of all or substantially all the assets, or (iii) the effective date of an emergence from bankruptcy, subject to the continued employment of the KERP participant; however, if the KERP participant’s employment is terminated without cause, the participant remains eligible for payment of the award.
Asset Sale — On February 16, 2020, we, and certain of our subsidiaries (collectively, the “Sellers”), agreed to enter into an Asset Purchase Agreement (the “APA”) with Dairy Farmers of America, Inc., a cooperative organized and existing under the laws of the State of Kansas (“DFA” or “Buyer”), pursuant to which, subject to certain conditions described below, DFA agreed to purchase certain assets (the “Asset Sale”) from the Sellers. The assets to be acquired pursuant to the APA included 44 of the debtors-in-possession’s 56 fluid and frozen facilities (the “Acquired Facilities”), plus certain related real estate, inventory, equipment, assigned contracts, permits and other assets necessary to operate such facilities and certain other real estate and assets as set forth in the APA (together with the Acquired Facilities, the “Bid Assets”). In connection with the proposed execution of the APA, the debtors-in-possession initially sought authorization from the Bankruptcy Court in the Chapter 11 Cases to enter into the APA and the Asset Sale with DFA. On March 19, 2020, the Sellers and DFA mutually agreed to terminate the APA and withdraw the request for authorization from the Bankruptcy Court of the Asset Sale and for approval of DFA as a “stalking horse” bidder of
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the Assets. Notwithstanding the termination of the APA, DFA has indicated to us that it will submit a bid for the Bid Assets before the court-imposed deadline described below, but DFA is under no obligation to do so.
On March 18, 2020, the debtors-in-possession filed notice with the Bankruptcy Court of the termination of the APA, while seeking approval of proposed bidding procedures with respect to the sale of the Bid Assets (the “Bidding Procedures”), and on March 19, 2020, the Bankruptcy Court held a hearing with respect to the proposed Bidding Procedures. At this hearing, the parties obtained an order of the Bankruptcy Court (the "Bidding Procedures Order") approving the revised Bidding Procedures.
Pursuant to the Bidding Procedures Order, the debtors-in-possession intend to sell all of their right, title and interest in and to the Bid Assets free and clear of any pledges, liens, security interests, encumbrances, claims, charges, options, and interests thereon (collectively, the “Interests”) to the maximum extent permitted by section 363 of the Bankruptcy Code, with such Interests to attach to the net proceeds of the sale of the Bid Assets with the same validity and priority as such Interests applied against the Bid Assets. The deadline for the submission of bids that satisfy the requirements of the Bidding Procedures Order (each a “Bid,” and those parties who submit a Bid, each a “Bidder”) is March 30, 2020 at 12:00 p.m. (prevailing Central Time) (the “Bid Deadline”).
Immediately following the Bid Deadline, the debtors-in-possession shall, in consultation with the Consultation Parties, (i) review and evaluate each Bid on the basis of financial and contractual terms and other factors relevant to the sale process, including those factors affecting the speed and certainty of consummating the Sale, (ii) determine and identify the highest or otherwise best offer or collection of offers (the “Successful Bid(s)”) and (iii) determine and identify the second best offer or collection of offers (the “Alternate Bid(s)”). The deadline to object to the Successful Bid(s) will be April 1, 2020 at 12:00 p.m. (prevailing Central Time). Following selection of the Successful Bid(s), the debtors-in-possession may, in their discretion, elect to seek approval of the transactions contemplated in the Successful Bid(s) at the hearing to consider and approve the proposed Sale Order (the “Sale Hearing”).
The Sale Hearing is proposed to be held on April 3, 2020 at 9:00 a.m. (prevailing Central time) before the Bankruptcy Court. The Sale Hearing may be adjourned by the debtors-in-possession, in consultation with the Consultation Parties, by an announcement of the adjourned date at a hearing before the Bankruptcy Court or by filing a notice on the Bankruptcy Court’s docket. At the Sale Hearing, the debtors-in-possession will seek the Bankruptcy Court’s approval of the Successful Bid(s) and/or, at the debtors-in-possession’s election, the Alternate Bid(s).
The Acquired Facilities plus certain related real estate and equipment in the APA are reported as property, plant and equipment in our Consolidated Balance Sheets. Because the Bankruptcy Court has not authorized and approved the Asset Sale, these assets have not been reclassified under ASC 852 to assets held for sale.
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Overview
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 consolidated net sales totaled $7.3 billion in 2019. The following charts depict our 2019 net sales, excluding sales of excess raw materials of $380.3 million and sales of other bulk commodities of $127.5 million, by product and product sales mix between company branded versus private label.
Net Sales for the Year Ended December 31, 2019
(1) | Includes half-and-half and whipping cream. |
(2) | Includes creamers and other extended shelf-life fluids. |
(3) | Includes fruit juice, fruit flavored drinks, iced tea, water, and flax-based beverages. |
(4) | Includes ice cream, ice cream mix and ice cream novelties. |
(5) | Includes items for resale such as butter, cheese, eggs and milkshakes. |
(6) | Includes all national, regional and local brands. |
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We sell our products under national, regional and local proprietary or licensed brands. Products not sold under these brands are sold under a variety of private labels. We sell our products primarily on a local or regional basis through our local and regional sales forces, although some national customer relationships are coordinated by a centralized corporate sales department. Our largest customer is Walmart Inc., including its subsidiaries such as Sam’s Club, which accounted for approximately 15.3% of our net sales for the year ended December 31, 2019.
Our brands include DairyPure®, the country's first and largest fresh, white milk national brand, and TruMoo®, the leading national flavored milk brand. As of December 31, 2019, our national, local and regional proprietary and licensed brands included the following:
Alta Dena® | Jilbert™ | Pog® (licensed brand) |
Arctic Splash® | Knudsen® (licensed brand) | Price’s™ |
Barbers Dairy® | LAND O LAKES® (licensed brand) | Purity™ |
Berkeley Farms® | Land-O-Sun & design® | ReadyLeaf® |
Broughton™ | Lehigh Valley Dairy Farms® | Reiter™ |
Brown Cow® | Louis Trauth Dairy Inc.® | Robinson™ |
Brown’s Dairy® | Mayfield® | Schepps® |
Chug® | McArthur® | Sonora™ |
Country Fresh™ | Meadow Brook® | Steve's® |
Country Love® | Meadow Gold® | Stroh’s® |
Creamland™ | Model Dairy® | Swiss Dairy™ |
DairyPure® | Morning Glory® | Swiss Premium™ |
Dean’s® | Nature’s Pride® | TruMoo® |
Fieldcrest® | Nurture® | T.G. Lee® |
Friendly's® | Nutty Buddy® | Turtle Tracks® |
Fruit Rush® | Oak Farms® | Tuscan® |
Gandy’s™ | Orchard Pure® | Uncle Matt's Organic® |
Garelick Farms® | Organic Valley® (licensed by joint venture) | Viva® |
Good Karma® | Over the Moon® | |
Hygeia® | PET® (licensed brand) | |
We currently operate 56 manufacturing facilities in 29 states located largely based on customer needs and other market factors, with distribution capabilities across all 50 states. For more information about our facilities, see “Item 2. Properties.” 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. This form of delivery is called a “direct-to-store delivery” or “DSD” system. We believe that we have one of the most extensive refrigerated DSD systems in the United States.
The primary raw material used in our products is conventional raw milk (which contains both raw skim milk and butterfat) that we purchase primarily from farmers’ cooperatives, as well as from independent farmers. The federal government and certain state governments set minimum prices for raw skim milk and butterfat on a monthly basis. Another significant raw material we use is resin, which is a fossil fuel-based product used to make plastic bottles. The price of resin fluctuates based on changes in crude oil and natural gas prices. Other raw materials and commodities used by us include diesel fuel, used to operate our extensive DSD system, and juice concentrates and sweeteners used in our products. We generally increase or decrease the prices of our private label fluid dairy products on a monthly basis in correlation with fluctuations in the costs of raw materials, packaging supplies and delivery costs. We manage the pricing of our branded fluid milk products on a longer-term basis, balancing consumer demand with net price realization but, in some cases, we are subject to the terms of sales agreements with respect to the means and/or timing of price increases.
We have several competitors in each of our major product and geographic markets. Competition between dairy processors for shelf-space with retailers is based primarily on price, service, quality and the expected or historical sales performance of the product compared to its competitors’ products. In some cases we pay fees to customers for shelf-space. Competition for consumer sales is based on a variety of factors such as price, taste preference, quality and brand recognition. Dairy products also compete with many other beverages and nutritional products for consumer sales. Additionally, we face competitive pressures from vertically integrated retailers, discount supermarket chains, dairy cooperatives and other processors, and online and delivery grocery retailers.
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The fluid milk category enjoys a number of attractive attributes. This category’s size and pervasiveness, plus the limited shelf life of the product, make it an important category for retailers and consumers, as well as a large long-term opportunity for the best positioned dairy processors. However, the dairy industry is not without some well documented challenges. It is a mature industry that has traditionally been characterized as highly competitive and subject to commodity volatility, with low profit margins. Additionally, according to the U.S. Department of Agriculture ("USDA"), consumption of fluid milk continues to decline.
For more information on factors that could impact our business, see “— Government Regulation — Milk Industry Regulation” and “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Known Trends and Uncertainties — Conventional Raw Milk and Other Inputs.” See Note 21 to our Consolidated Financial Statements for segment, geographic and customer information.
Current Business Strategy
Dean Foods has evolved over the past 20 years through periods of rapid acquisition, consolidation, integration and the separation of our operations including the spin-off of The WhiteWave Foods Company ("WhiteWave") and sale of Morningstar Foods ("Morningstar") in 2013. Today, 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.
Our vision is to be the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion. Our strategy is to invest and grow our portfolio of brands while strengthening our operations and capabilities to achieve a more profitable core business. Our strategy is anchored by our commitments to safety, quality and service, and delivering sustainable profit growth and total shareholder return.
Corporate Responsibility
Within our business strategies, corporate responsibility remains an integral part of our efforts. As we work to strengthen our business, we are committed to do it in a way that is right for our employees, shareholders, consumers, customers, suppliers and the environment. We intend to realize savings by reducing waste and duplication while we continue to support programs that improve our local communities. We believe that our customers, consumers and suppliers value our efforts to operate in an ethical, environmentally sustainable, and socially responsible manner.
Seasonality
Our business is affected by seasonal changes in the demand for dairy products. Sales volumes are typically higher in the fourth quarter due to increased dairy consumption during seasonal holidays. Fluid milk volumes tend to decrease in the second and third quarters of the year primarily due to the reduction in dairy consumption associated with our school customers, partially offset by the increase in ice cream and ice cream mix consumption during the summer months. Because certain of our operating expenses are fixed, fluctuations in volumes and revenue from quarter to quarter may have a material effect on operating income for the respective quarters.
Intellectual Property
We are continually developing new technology and enhancing existing proprietary technology related to our dairy operations. Seven U.S. and eight international patents have been issued to us, two U.S. patents have been allowed, and three U.S. and five international patent applications are pending. Our U.S. patents are expected to expire at various dates between February 2019 and December 2035. If the pending U.S. patent applications are granted, those patents would be expected to expire at various dates between June 2035 and October 2037. Our international patents are expected to expire at various dates between February 2028 and March 2030. If the pending international patent applications are granted, those patents would be expected to expire in September 2037.
We primarily rely on a combination of trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions to protect our technology and other intellectual property rights. Despite these protections, it may be possible for unauthorized parties to copy, obtain or use certain portions of our proprietary technology or trademarks.
Employees
As of December 31, 2019, we had approximately 14,500 employees. Approximately 39% of our employees participate in a multitude of collective bargaining agreements of varying duration and terms.
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Government Regulation
Food-Related Regulations
As a manufacturer and distributor of food products, we are subject to a number of food-related regulations, including the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S. Food and Drug Administration (“FDA”). This comprehensive regulatory framework governs the manufacture (including composition and ingredients), labeling, packaging and safety of food in the United States. The FDA:
• | regulates manufacturing practices for foods through its current good manufacturing practices regulations; |
• | specifies the standards of identity for certain foods, including many of the products we sell; and |
• | prescribes the format and content of certain information required to appear on food product labels. |
We are also subject to the Food Safety Modernization Act of 2011, which, among other things, mandates the FDA to adopt preventative controls to be implemented by food facilities in order to minimize or prevent hazards to food safety. In addition, the FDA enforces the Public Health Service Act and regulations issued thereunder, which authorizes regulatory activity necessary to prevent the introduction, transmission or spread of communicable diseases. These regulations require, for example, pasteurization of milk and milk products. We are subject to numerous other federal, state and local regulations involving such matters as the licensing and registration of manufacturing facilities, enforcement by government health agencies of standards for our products, inspection of our facilities and regulation of our trade practices in connection with the sale of food products.
We use quality control laboratories in our manufacturing facilities to test raw ingredients. In addition, all of our facilities have achieved Safety Quality Food ("SQF") Level 3 under the Global Food Safety Initiative. Product quality and freshness are essential to the successful distribution of our products. To monitor product quality at our facilities, we maintain quality control programs to test products during various processing stages. We believe our facilities and manufacturing practices are in material compliance with all government regulations applicable to our business.
Employee Safety Regulations
We are subject to certain safety regulations, including regulations issued pursuant to the U.S. Occupational Safety and Health Act. These regulations require us to comply with certain manufacturing safety standards to protect our employees from accidents. We believe that we are in material compliance with all employee safety regulations applicable to our business.
Environmental Regulations
We are subject to various state and federal environmental laws, regulations and directives, including the Food Quality Protection Act of 1996, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended. Our plants use a number of chemicals that are considered to be “extremely” hazardous substances pursuant to applicable environmental laws due to their toxicity, including ammonia, which is used extensively in our operations as a refrigerant. Such chemicals must be handled in accordance with such environmental laws. Also, on occasion, certain of our facilities discharge biodegradable wastewater into municipal waste treatment facilities in excess of levels allowed under local regulations. As a result, certain of our facilities are required to pay wastewater surcharges or to construct wastewater pretreatment facilities. To date, such wastewater surcharges and construction costs have not had a material effect on our financial condition or results of operations.
We maintain above-ground and under-ground petroleum storage tanks at many of our facilities. We periodically inspect these tanks to determine whether they are in compliance with applicable regulations and, as a result of such inspections, we are required to make expenditures from time to time to ensure that these tanks remain in compliance. In addition, upon removal of the tanks, we are sometimes required to make expenditures to restore the site in accordance with applicable environmental laws. To date, such expenditures have not had a material effect on our financial condition or results of operations.
We believe that we are in material compliance with the environmental regulations applicable to our business. We do not expect the cost of our continued compliance to have a material impact on our capital expenditures, earnings, cash flows or competitive position in the foreseeable future. In addition, any asset retirement obligations are not material.
Milk Industry Regulation
The federal government establishes minimum prices that we must pay to producers in federally regulated areas for raw milk. Raw milk primarily contains raw skim milk in addition to a small percentage of butterfat. Raw milk delivered to our facilities is tested to determine the percentage of butterfat and other milk components, and we pay our suppliers for the raw milk based on the results of these tests.
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The federal government’s minimum prices for Class I milk vary depending on the processor’s geographic location or sales area and the type of product manufactured. Federal minimum prices change monthly. Class I butterfat and raw skim milk prices (which are the minimum prices we are required to pay for raw milk that is processed into Class I products such as fluid milk) and Class II raw skim milk prices (which are the minimum prices we are required to pay for raw milk that is processed into Class II products such as cottage cheese, creams, creamers, ice cream and sour cream) for each month are announced by the federal government the immediately preceding month. Class II butterfat prices are announced either at the end of the month or the first week of the following month in which the price is effective. Some states have established their own rules for determining minimum prices for raw milk. In addition to the federal or state minimum prices, we also may pay producer premiums, procurement costs and other related charges that vary by location and supplier.
Labeling Regulations
We are subject to various labeling requirements with respect to our products at the federal, state and local levels. At the federal level, the FDA has authority to review product labeling, and the U.S. Federal Trade Commission (“FTC”) may review labeling and advertising materials including online and television advertisements, to determine if advertising materials are misleading. Similarly, many states review dairy product labels to determine whether they comply with applicable state laws. We believe we are in material compliance with all labeling laws and regulations applicable to our business.
We are also subject to various state and local consumer protection laws.
Where You Can Get More Information
Our fiscal year ends on December 31. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission.
We file our reports with the Securities and Exchange Commission electronically through the Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system. The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding companies that file electronically with the Securities and Exchange Commission through EDGAR. The address of this Internet site is http://www.sec.gov.
We also make available free of charge through our website at www.deanfoods.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. We are not, however, including the information contained on our website, or information that may be accessed through links on our website, as part of, or incorporating such information by reference into, this Form 10-K.
Our Code of Ethics is applicable to all of our employees and directors. Our Code of Ethics is available on our corporate website at www.deanfoods.com, together with the Corporate Governance Principles of our Board of Directors and the charters of the Audit, Compensation and Nominating/Corporate Governance Committees of our Board of Directors. Any waivers that we may grant to our executive officers or directors under the Code of Ethics, and any amendments to our Code of Ethics, will be posted on our corporate website. If you would like hard copies of any of these documents, or of any of our filings with the Securities and Exchange Commission, write or call us at:
Dean Foods Company
2711 North Haskell Avenue, Suite 3400
Dallas, Texas 75204
(214) 303-3400
Attention: Investor Relations
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Item 1A. Risk Factors
Risks Related to Our Chapter 11 Cases
The Chapter 11 Cases may have a material adverse impact on our business, financial condition, results of operations, and cash flows. In addition, the Chapter 11 Cases may have a material adverse impact on the trading price and may result in the cancellation and discharge of our securities, including our common stock. If approved by the Bankruptcy Court, a Chapter 11 plan of reorganization will govern distributions to and the recoveries of holders of our securities.
We have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic financial alternatives to address our liquidity and capital structure, including strategic financial alternatives to restructure our indebtedness. These efforts led to the commencement of the Chapter 11 Cases in the Bankruptcy Court on November 12, 2019.
The Chapter 11 Cases could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 Cases continue, our management may be required to spend a significant amount of time and effort dealing with the restructuring instead of focusing on our business operations. Bankruptcy Court protection and operating as debtors-in-possession also may make it more difficult to retain management and the key personnel necessary to the success and growth of our business. In addition, during the pendency of the Chapter 11 Cases, our customers and suppliers might lose confidence in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships, which may cause, among other things, our suppliers, vendors, counterparties and service providers to renegotiate the terms of our agreements, attempt to terminate their relationship with us or require financial assurances from us. Although we remain committed to providing safe, reliable operations and we believe that we have sufficient resources to do so, customers may lose confidence in our ability to provide them the level of service they expect, resulting in a significant decline in our revenues, profitability and cash flow.
We have received notice of the NYSE determining to commence proceedings to delist our common stock. Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. We expect that the existing common stock of the Company will be extinguished and existing equity holders will not receive consideration in respect of their equity interests.
As a consequence of the Chapter 11 Cases, on November 12, 2019, the NYSE suspended trading in our common stock at the market opening and we received written notice from the NYSE that it had determined to commence proceedings to delist our common stock because we are no longer suitable for listing pursuant to Listed Company Manual Section 802.01D following the filing of the Bankruptcy Petitions. The delisting became effective on November 27, 2019. Since November 13, 2019, our common stock has been quoted on the Pink Open Market maintained by the OTC Markets Group, Inc. under the symbol "DFODQ." We can provide no assurance that our common stock will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our common stock on this market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue on this market in the future. We expect that the existing common stock of the Company will be extinguished upon the Company’s emergence from Chapter 11 and that existing equity holders will not receive consideration in respect of their equity interests. These recent developments could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell shares of our common stock.
If we are not able to obtain confirmation of a Chapter 11 plan of reorganization or complete the proposed sale of the Company pursuant to Section 363 of the Bankruptcy Code, or if current financing is insufficient or exit financing is not available, we could be required to liquidate under Chapter 7 of the Bankruptcy Code.
In order to successfully emerge from Chapter 11 bankruptcy protection, we must obtain confirmation of a Chapter 11 plan of reorganization by the Court (possibly subsequent to a sale of the Company or certain of its material assets pursuant to Section 363 of the Bankruptcy Code). If confirmation by the Court does not occur, we could be forced to liquidate under Chapter 7 of the Bankruptcy Code.
As described in “Item 1. Business - Developments since January 1, 2019 - Asset Sale,” the debtors-in-possession are in the process of seeking the authorization of the Bankruptcy Court in the Chapter 11 Cases to consummate a sale of the Bid Assets to a potential Bidder. There can be no assurance that we will receive any Bid(s) (or that any Bid(s) we do receive will be on terms favorable to us), or that we will be able to obtain approval and complete any proposed sale because there may be objections from our stakeholders, which could include a committee of unsecured creditors, other debt holders or our equity holders.
There can be no assurance that our current cash position and amounts of cash from future operations will be sufficient to fund operations. In the event that we do not have sufficient cash to meet our liquidity requirements, and our current financing is insufficient or exit financing is not available, we may be required to seek additional financing. There can be no assurance that such additional financing would be available, or, if available, would be available on acceptable terms. Failure to secure any
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necessary exit financing or additional financing would have a material adverse effect on our operations and ability to continue as a going concern.
Any Chapter 11 plan of reorganization that we may implement will be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, or adverse market conditions persist or worsen, our plan may be unsuccessful in its execution.
Any Chapter 11 plan of reorganization that we may implement will affect both our capital structure and the ownership, structure and operation of our businesses and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to substantially change our capital structure; (ii) our ability to obtain adequate liquidity and financing sources; (iii) our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them; (iv) our ability to retain key employees, and (v) the overall strength and stability of general economic conditions of the financial industry, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses.
In addition, any plan of reorganization will rely upon financial projections, including with respect to revenues, gross profit, adjusted EBITDA, capital expenditures, net debt and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our capital structure. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any Chapter 11 plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of any Chapter 11 plan of reorganization.
As a result of the Chapter 11 Cases, the realization of our assets and liquidation of our liabilities are subject to uncertainty, and our historical financial information will not be indicative of our future financial performance.
If a Chapter 11 plan of reorganization is ultimately confirmed by the Court, our capital structure will likely be significantly altered under such plan (whether or not following a sale of the Company or certain of its material assets pursuant to Section 363 of the Bankruptcy Code). Under fresh-start reporting rules that may apply to us upon the effective date of a Chapter 11 plan of reorganization, our assets and liabilities would be adjusted to fair values and our accumulated deficit would be restated to zero. Accordingly, if fresh-start reporting rules apply, our financial condition and results of operations following our emergence from Chapter 11 would not be comparable to the financial condition and results of operations reflected in our historical financial statements. Further, a Chapter 11 plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a Chapter 11 plan of reorganization.
While operating under the protection of the Bankruptcy Code, and subject to Court approval or otherwise as permitted in the normal course of business, we may seek a sale of the Company or certain of its material assets pursuant to Section 363 of the Bankruptcy Code in conjunction with, or instead of, a Chapter 11 plan of reorganization. As described in “Item 1. Business - Developments since January 1, 2019 - Asset Sale,” the debtors-in-possession are in the process of seeking the authorization of the Bankruptcy Court in the Chapter 11 Cases to consummate a sale of the Bid Assets to a potential Bidder. There can be no assurance that we will receive any Bid(s) (or that any Bid(s) we do receive will be on terms favorable to us), or that we will be able to obtain approval and complete any proposed sale because there may be objections from our stakeholders, which could include a committee of unsecured creditors, other debt holders or our equity holders. Any sales or disposals of assets and liquidations or settlements of liabilities may be for amounts other than those reflected in our consolidated financial statements. In connection with the Chapter 11 Cases, the development of a Chapter 11 plan of reorganization and/or sale of the Company or certain of its material assets pursuant to Section 363 of the Bankruptcy Code, it is also possible that additional restructuring and related charges may be identified and recorded in future periods. Such sales, disposals, liquidations, settlements or charges could be material to our consolidated financial position and results of operations in any given period.
We may be unable to comply with restrictions imposed by our DIP Credit Agreement, our Receivables Securitization Facility and other financing arrangements.
The agreements governing our outstanding financing arrangements impose a number of restrictions on us. For example, the terms of our credit facilities, leases and other financing arrangements contain financial and other covenants that create limitations on our ability to borrow the full amount under our credit facilities, effect acquisitions or dispositions and incur
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additional debt. The agreements will also require us to maintain minimum levels of liquidity and various financial ratios and comply with various other financial covenants. Specifically, the terms of the DIP Credit Agreement require us to comply with covenants that are customary for debtors-in-possession facilities of this type, 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 other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also requires compliance with a variance covenant that compares actual operating disbursements and receipts and capital expenditures to the budgeted amounts set forth in the DIP budgets delivered to the DIP Agent and DIP Lenders on or prior to the closing date and updated periodically thereafter pursuant to the terms of the DIP Credit Agreement. Our ability to comply with these provisions may be affected by events beyond our control and our failure to comply could result in an event of default under the DIP Credit Agreement, the Receivables Securitization Facility or our other financing arrangements.
In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert our Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in smaller distributions being made to our creditors than those provided for in the Chapter 11 plan of reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our financial condition and results of operations.
The Bankruptcy Court provides that the confirmation of a Chapter 11 plan of reorganization discharges a debtor from, among other things, substantially all debts arising prior to consummation of a Chapter 11 plan of reorganization. With few exceptions, all claims against the debtors-in-possession that arose prior to the Petition Date or before consummation of the Chapter 11 plan of reorganization (i) would be subject to compromise and/or treatment under the Chapter 11 plan of reorganization and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the Chapter 11 plan of reorganization. Subject to the terms of the Chapter 11 plan of reorganization and orders of the Bankruptcy Court, any claims not ultimately discharged pursuant to the Chapter 11 plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.
We may experience employee attrition as a result of the Chapter 11 Cases.
As a result of the Chapter 11 Cases, we may experience employee attrition, and our employees may face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our financial condition, liquidity and results of operations.
Business, Competitive and Strategic Risks
Volume softness in the dairy category, combined with our volume losses, has had a negative impact on our sales and profits.
Industry-wide volume softness across dairy product categories, particularly within fluid milk, continued throughout 2018 and 2019. Decreasing dairy category volume has increased the impact of declining margins on our business. Periods of declining volumes limit the cost and price increases that we can seek to recapture. We have experienced volume losses and declines from historical levels from some of our largest customers, which has negatively impacted our sales and profitability. This will continue to have a negative impact in the future if we are not able to reduce costs quickly enough to offset the lost volume and attract and retain a profitable customer and product mix. We expect volume softness to continue in the future.
The continuing shift from branded to private label products could continue to negatively impact our profit margin.
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We are experiencing a continuing shift from branded to private label milk products. Retailers continue to aggressively price their private label milk to drive foot traffic, which has been increasing the price gap between branded and private label milk. We believe this negatively affects our branded product sales as customers trade down to private label products. This trend could be accelerated by the continued expansion of deep discount supermarket retailers, such as Aldi and Lidl, in the U.S. market. These factors have negatively impacted and could continue to impact our mix and margins, which could materially adversely affect our profitability.
Our results of operations and financial condition depend heavily on commodity prices and the availability of raw materials and other inputs. Our failure or inability to respond to high or fluctuating input prices could adversely affect our profitability.
Our results of operations and financial condition depend heavily on the cost and supply of raw materials and other inputs including conventional raw milk, butterfat, cream and other dairy commodities, many of which are determined by constantly changing market forces of supply and demand over which we have limited or no control. Cost increases in raw materials and other inputs have caused and could continue to cause our profitability to decrease significantly compared to prior periods, as we may be unwilling or unable to increase our prices or unable to achieve cost savings to offset the increased cost of these raw materials and other inputs.
Although we generally pass through the cost of dairy commodities to our customers over time, we believe demand destruction can occur at certain price levels, and we may be unwilling or unable to pass through the cost of dairy commodities, which could materially and adversely affect our profitability. Dairy commodity prices can be affected by adverse weather conditions (including the impact of climate change) and natural disasters, such as floods, droughts, frost, fires, earthquakes and pestilence, which can lower crop and dairy yields and reduce supplies of these ingredients or increase their prices.
Our profitability also depends on the cost and supply of non-dairy raw materials and other inputs, such as sweeteners, petroleum-based products, diesel fuel, resin and other non-dairy food ingredients.
We are significantly impacted by changes in fuel costs due to our large DSD system consisting of refrigerated trucks and trailers that we own or lease. In some cases, we also use third-party carriers to deliver our products. Conditions that may affect logistics and freight costs include, among other things, the nationwide driver shortage, unemployment rates and competition for labor, federal regulations applicable to drivers/haulers, increased commodity costs, third-party capacity, carrier acceptance rates and other factors. Our profitability has been and may continue to be negatively impacted by increased logistics and freight costs.
Our dairy and non-dairy raw materials are generally sourced from third parties, and we are not assured of continued supply, pricing or sufficient access to raw materials from any of these suppliers. Damage to our suppliers' manufacturing, transportation or distribution capabilities could impair our ability to make, transport, distribute or sell our products. Other events that adversely affect our suppliers and that are out of our control could also impair our ability to obtain the raw materials and other inputs that we need in the quantities and at the prices that we desire. Such events include adverse weather conditions (including climate change) or natural disasters, government action, or problems with our suppliers’ businesses, finances, labor relations, costs, production, insurance, reputation and international demand and supply characteristics.
If we are unable to obtain raw materials and other inputs for our products or offset any increased costs for such raw materials and inputs, our business could be negatively affected. While we may enter into forward purchase contracts and other purchase arrangements with suppliers and may purchase over-the-counter contracts with our qualified banking partners or exchange-traded commodity futures contracts for raw materials, these arrangements do not eliminate the risk of negative impacts on our business, financial condition and results of operations from commodity price changes.
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We may not realize anticipated benefits from our enterprise-wide cost productivity plan, and we may not complete this plan within our projected time frames, either of which could materially adversely impact our business, financial condition, results of operations and cash flows.
We are executing an aggressive enterprise-wide cost productivity plan to significantly overhaul and reset our cost structure. We believe these cost savings measures are necessary to offset our volume deleverage and position our business for future success and growth. Our future success and earnings depend upon our ability to realize the benefit of our cost reduction activities and rationalization plans, particularly in an environment of increased competitive activity, volume pressures, and reduced profitability. Inflation, declining volumes and competitive pricing pressures have negated, and may continue to negate, some of the impact of our cost saving efforts. In addition, several factors could cause our cost productivity plan to adversely affect our business, financial condition, results of operations and cash flows. These include potential disruption of our operations and other aspects of our business and significant investments required to execute the plan. Employee morale and productivity could also suffer and result in unintended employee attrition. Our cost productivity plan will require substantial management time and attention and may divert management from other important work. In addition, certain of our cost reduction activities have led to increased costs in other aspects of our business such as increased conversion or distribution costs. For example, in connection with our plant closures, our cost of distribution on a per gallon basis has increased as we have changed distribution routes and transported product into areas previously serviced by now closed plants. If we fail to properly anticipate and mitigate the ancillary cost increases related to our plant closures or other cost savings, we may not realize the benefits of our cost productivity plan.
In addition, we must execute our plans within our projected timelines in order to meet our financial projections and to remain competitive in the marketplace. We could encounter delays in executing our plans, which could cause further disruption and additional unanticipated expense. If we are unable to realize the anticipated benefits from our cost productivity plan or complete them within the targeted time frame, we may be unable to meet our financial projections, or realize the necessary cost savings to offset the anticipated impact from our volume deleverage and cost inflation. In addition, we could be cost disadvantaged in the marketplace, and our competitiveness and our profitability could decrease. Depending on the extent of the decline in our financial results and our financial and cash flow projections, we may also incur additional tangible or intangible asset impairment charges in future periods.
Our volume, sales and profits have been, and may continue to be, negatively impacted by the outcome of competitive bidding.
Many of our retail customers have become increasingly price sensitive and are investing in their own private label products, which has intensified the competitive environment in which we operate. As a result, we have been subject to a number of competitive bidding situations which have materially reduced our sales volumes and profitability on sales to several customers. We expect this trend of competitive bidding to continue. In order to win business in such a competitive environment, we may have to replace existing or lost volume with lower margin business, which could also negatively impact our profitability. Additionally, this competitive environment may result in us serving an increasing number of small format customers, which may raise the costs of production and distribution and negatively impact the profitability of our business. If we are unable to structure our business to appropriately respond to the pricing demands of our customers, we may lose customers to other processors that are willing to sell product at a lower cost, which could negatively impact our volume, sales and profits.
Price concessions to retailers have negatively impacted, and could continue to negatively impact, our operating margins and profitability.
In the past, retailers have at times required price concessions that have negatively impacted our margins, and continued pressures to make such price concessions could negatively impact our profitability in the future. If we are not able to lower our cost structure adequately in response to customer pricing demands, and if we are not able to attract and retain a profitable customer mix and a profitable product mix, our profitability could continue to be adversely affected.
We may be adversely impacted by a changing customer and consumer landscape.
Many of our customers, such as supermarkets, warehouse clubs and food distributors, have consolidated. This consolidation may continue. These consolidations have produced large, more sophisticated customers with increased buying power and negotiating strength, who may seek lower prices or more favorable terms, and they have increased our dependence on key large-format retailers and discount supermarket retailers. In addition, some of these customers are vertically integrated and have re-dedicated key shelf-space that was formerly occupied by our branded products for their private label products. We are also facing downward pricing pressure from retailers, such as discount supermarket retailers, who sell their own private label products and proprietary brands. In addition to the competitive pressures from retail customers, we are facing increased competition from dairy cooperatives and other processors.
Numerous brands and products compete for shelf-space and sales, with competition based primarily on price, service,
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quality and the expected or historical sales performance of the product compared to its competitor’s products. Our products also face increased competition from plant-based milk alternatives. We compete with such alternatives for shelf-space and sales as well.
The highly competitive retail fluid milk and broader grocery industries are facing additional future uncertainties as a result of the rise of discount supermarket chains, online and delivery grocery offerings, meal kit services, and other mechanisms of food delivery. These developments may trigger significant changes in pricing competition, and the grocery industry, as well as consumer buying patterns, the effects and timing of which are currently unknown.
Higher levels of price competition and higher resistance to price increases have had a significant impact on our business. If we are unable to respond to these customer dynamics and potential future changes in the customer landscape, our business or financial results could be materially adversely affected.
The success of our business strategy depends upon our ability to build our brands.
Building strong brands is a key component of our business strategy in order to expand sales and volumes and to respond to the changing customer landscape. With the launch of our national brands, DairyPure® and TruMoo®, we have expanded from a regional branding strategy to a national branding strategy. We may be unable to fund the advertising and marketing campaigns necessary to build brand awareness and preference over other brands or our private label products. We may not be successful in our efforts to expand our regional brand presence to a national brand presence, and we cannot guarantee that the advertising and marketing campaigns we are able to fund will result in customer or consumer acceptance of our brands. Further, the success of our national branding strategy requires us to drive operational changes in order to have a national brand footprint. If these efforts are unsuccessful or we incur substantial costs in connection with these efforts, our business, operating results and financial condition could be adversely affected.
Further, brand value could diminish significantly due to a number of factors, including future consumer perception that we have acted in an irresponsible manner, adverse publicity about our products (whether or not valid), our failure to maintain the quality of our products, the failure of our products to produce consistently positive consumer experience or the products becoming unavailable to our consumers. The growing use of social and digital media by consumers and others increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about Dean Foods, our brands or our products on social or digital media could seriously damage our brands, reputation and brand loyalty, regardless of the information’s accuracy. The harm may be immediate without affording us an opportunity for redress or correction. If we do not maintain the favorable perception of our brands, our results could be negatively impacted.
The loss of, or a material reduction or change in the mix of sales volumes purchased by, any of our largest customers could negatively impact our sales and profits.
Walmart Inc. and its subsidiaries, including Sam’s Club, accounted for approximately 15.3% and 15.3% of our consolidated net sales in 2019 and 2018, respectively, and our top five customers, including Walmart, collectively accounted for approximately 42% and 29% of our consolidated net sales in 2019 and 2018, respectively. In connection with Walmart Inc.’s dairy processing plant in Indiana, we lost approximately 55 million gallons of private label fluid milk volume beginning in the second half of 2018, which equates to approximately 125 million gallons annually. In addition, we expect marketplace volume and mix changes to continue in 2020, including those associated with our largest customer.
We are also indirectly exposed to the financial and business risks of our largest customers because, if their business declines, they may correspondingly decrease the volumes purchased from us. The loss of, or further declines or changes in the mix of sales volumes purchased by, any of our largest customers could negatively impact our sales and profits, particularly due to our significant fixed costs and assets, which are difficult to rapidly reduce in response to significant volume declines.
If we fail to anticipate and respond to changes in consumer preferences, demand for our products could decline.
Consumer tastes, preferences and consumption habits evolve over time and are difficult to predict. Demand for our products depends on our ability to identify and offer products that appeal to these shifting preferences. Factors that may affect consumer tastes and preferences include:
• | dietary trends and increased attention to nutritional values, such as the sugar, fat, protein or calorie content of different foods and beverages; |
• | concerns regarding the health effects of specific ingredients and nutrients, such as dairy, sugar and other sweeteners, vitamins and minerals; |
• | concerns regarding the public health consequences associated with obesity, particularly among young people; and |
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• | increasing awareness of the environmental and social effects of product production. |
If we fail to anticipate and respond to these changes and trends, we may experience reduced consumer demand for our products, which in turn could adversely affect our sales volumes and our business could be negatively affected.
Our business operations could be disrupted and the liquidity and market price of our securities could decline if our information technology systems fail to perform adequately or experience a security breach.
The efficient operation of our business depends on our information technology systems. We maintain a large database of confidential information and sensitive data in our information technology systems, including confidential employee, supplier and customer information that may subject to privacy and security laws, regulations and customer-imposed controls, and accounting, financial and other data on which we rely for internal and external financial reporting and other purposes. We rely extensively on information technology systems, networks and services, including those of third parties, to effectively manage and support our business processes and activities, including our business data, communications, supply chain, logistics, accounting and other business processes. If we do not allocate and effectively manage the resources necessary to build, manage and sustain an appropriate technology environment, our business or financial results could be negatively impacted.
Additionally, as part of our current business strategy and the implementation of our enterprise-wide cost productivity plan to improve operations and cost structure, we are expanding and improving our information technologies, migrating certain systems to enterprise-wide systems solutions, and utilizing cloud-based services and systems and networks managed by third-party vendors to process, transmit and store information and to conduct certain of our business activities and transactions with employees, customers, consumers and other third parties. These initiatives have resulted in a larger technological presence and increased our exposure to cybersecurity risk, including risk that the data held by a third party could be breached or risk that a third-party service provider fails to perform effectively or that we fail to adequately monitor their performance, any of which may result in a negative impact to our business or financial results. Also, our ability to achieve anticipated enterprise-wide cost savings may be negatively impacted by our failure to assess and identify cybersecurity risks associated with our Information technology and related initiatives or our failure to fully or successfully implement such initiatives.
In addition, our information technology systems and infrastructure and those of third parties may be vulnerable to damage, disruption or shutdown due to circumstances beyond our control, including attacks by hackers, social engineering attacks, breaches, employee error or malfeasance, power outages, computer viruses, ransomware, telecommunication or utility failures, systems failures, service or cloud provider breaches, natural disasters or other catastrophic events, and it is possible for such vulnerabilities to remain undetected for an extended period. The misappropriation, theft, destruction, loss, or release of sensitive and/or confidential information, or interference with our information technology systems or those of our third-party providers could result in business disruption, negative publicity, damage to our brands and our reputation, negatively impact our relations with our customers or employees, and expose us to liability and litigation. Moreover, a security breach or the failure of our information technologies systems or those of our third party providers could also result in the alteration, corruption or loss of the accounting, financial or other data on which we rely for internal and external financial reporting and other purposes and, depending on the severity of the security breach or systems failure, could prevent the audit of our financial statements or our internal control over financial reporting from being completed on a timely basis or at all, or could negatively impact the resulting audit opinions. Any such damage or interruption, or alteration, corruption, or loss, could have a material adverse effect on our business, financial condition or results of operations or could cause our securities to become less liquid and the market price of our securities to decline.
We may incur liabilities or harm to our reputation, or be forced to recall products, as a result of real or perceived product quality or other product-related issues.
We sell products for human consumption, which involves a number of risks. Product contamination, spoilage, other adulteration, misbranding, mislabeling, or product tampering could require us to recall products. We also may be subject to liability if our products or operations violate applicable laws or regulations, including environmental, health and safety requirements, or in the event our products cause injury, illness or death. In addition, our product advertising could make us the target of claims relating to false or deceptive advertising under U.S. federal and state laws, including the consumer protection statutes of some states, or laws of other jurisdictions in which we operate. A significant product liability, consumer fraud or other legal judgment against us or a widespread product recall may negatively impact our sales, brands, reputation and profitability. Moreover, claims or liabilities of this sort might not be covered by insurance or by any rights of indemnity or contribution that we may have against others. Even if a product liability, consumer fraud or other claim is found to be without merit or is otherwise unsuccessful, the negative publicity surrounding such assertions regarding our products or processes could materially and adversely affect our reputation and brand image, particularly in categories that consumers believe as having strong health and wellness credentials. Further, the risks to our reputation and brand image are more susceptible on a national scale as a result of our expansion from a regional branded platform to a national branded platform. In addition, consumer preferences related to genetically modified foods, animal proteins, or the use of certain sweeteners could result in negative publicity and adversely affect our reputation. Any loss
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of consumer confidence in our product ingredients or in the safety and quality of our products would be difficult and costly to overcome and could have a material adverse effect on our business.
Disruption of our supply or distribution chains or transportation systems could adversely affect our business.
Our ability to make, move and sell our products is critical to our success. Damage or disruption to our manufacturing or distribution capabilities due to weather (including the impact of climate change), natural disaster, fire, environmental incident, terrorism (including eco-terrorism and bio-terrorism), pandemic, strikes, the financial or operational instability of key suppliers, distributors, warehousing and transportation providers, or other reasons could impair our ability to manufacture or distribute our products. If we are unable, or it is not financially feasible, to mitigate the likelihood or potential impact of such events, our business and results of operations could be negatively affected and additional resources could be required to restore our supply chain. In addition, we are subject to federal motor carrier regulations, such as the Federal Motor Carrier Safety Act, with which our extensive DSD system must comply. Failure to comply with such regulations could result in our inability to deliver product to our customers in a timely manner, which could adversely affect our reputation and our results.
Failure to maintain sufficient internal production capacity or to enter into co-packing agreements on terms that are beneficial for us may result in our inability to meet customer demand and/or increase our operating costs.
The success of our business depends, in part, on maintaining a strong production platform and we rely on internal production resources and third-party co-packers to fulfill our manufacturing needs. As part of our ongoing cost reduction efforts, we have closed or announced the closure of a number of our plants since late 2012. It is possible that we may need to increase our reliance on third parties to provide manufacturing and supply services, commonly referred to as “co-packing” agreements, for a number of our products. In particular, there is increasing consumer preference for certain sized extended shelf life (“ESL”) products in certain categories and we do not currently have ESL manufacturing facilities. As such, we must rely on our co-packers to manufacture our ESL products. A failure by our co-packers to comply with food safety, environmental, or other laws and regulations may disrupt our supply of products and cause damage to the reputation of our brand. If we need to enter into additional co-packing agreements in the future, we can provide no assurance that we would be able to find acceptable third-party providers or enter into agreements on satisfactory terms. Our inability to establish satisfactory co-packing arrangements could limit our ability to operate our business and could negatively affect our sales volumes and results of operations. If we cannot maintain sufficient production capacity, either internally or through third-party agreements, we may be unable to meet customer demand and/or our manufacturing costs may increase, which could negatively affect our business.
If we are unable to hire, retain and develop our leadership bench, or fail to develop and implement an adequate succession plan for current leadership positions, it could have a negative impact on our business.
Our continued and future success depends partly upon our ability to hire, retain and develop our leadership bench. Effective succession planning is also a key factor in our long-term success. Any unplanned turnover or failure to develop or implement an adequate succession plan to backfill key leadership positions could deplete our institutional knowledge base and erode our competitive advantage. Our failure to enable the effective transfer of knowledge or to facilitate smooth transitions with regard to key leadership positions, could adversely affect our long-term strategic planning and execution and negatively affect our business, financial condition and results of operations.
New or revised tax regulations could have an adverse effect on our results
We are subject to legislative or other actions relating to taxes that could have an adverse effect on the Company. The rules related to U.S. federal income taxation are consistently under review by persons involved in the legislative process, the Internal Revenue Service (“IRS”) and the U.S. Treasury Department. These reviews and legislative changes can lead to changes in the tax rules in jurisdictions in which we operate, including tax reform in the U.S. that was enacted in December 2017, which could reduce our after-tax income and have an adverse effect on our results of operations.
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Risks Related to Our Common Stock
Our stock price is volatile and may decline regardless of our operating performance, and you could lose a significant part of your investment.
As a consequence of the Chapter 11 Cases, on November 12, 2019. the NYSE suspended trading in our common stock at the market opening and we received written notice from the NYSE that it had determined to commence proceedings to delist our common stock because we are no longer suitable for listing pursuant to List Company Manual Section 802.01D following the filing of the Bankruptcy Petitions. The delisting became effective on November 27, 2019. Since November 13, 2019, our common stock has been quoted on the Pink Open Market maintained by the OTC Markets Group, Inc. under the symbol "DFODQ." We can provide no assurance that our common stock will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our common stock on this market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue on this market in the future. In addition, the market price of our common stock may be influenced by many factors, some of which are beyond our control, including those described in this section and the following:
• | changes in financial estimates by analysts or our inability to meet those financial estimates; |
• | strategic actions by us or our competitors, such as acquisitions, restructurings, significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments; |
• | variations in our quarterly results of operations and those of our competitors; |
• | general economic and stock market conditions; |
• | changes in conditions or trends in our industry, geographies or customers; |
• | terrorist acts; |
• | activism by any large stockholder or group of stockholders; |
• | perceptions of the investment opportunity associated with our common stock relative to other investment alternatives; |
• | actual or anticipated growth rates relative to our competitors; and |
• | speculation by the investment community regarding our business. |
In the past, some companies that have had volatile market prices for their securities have been subject to class action or derivative lawsuits or shareholder activism. The filing of a lawsuit against us or shareholder activism targeted toward us, regardless of the outcome, could have a negative effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of management’s attention and resources.
These market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. This volatility may increase the risk that our stockholders will suffer a loss on their investment or be unable to sell or otherwise liquidate their holdings of our common stock. In addition, we expect that our existing common stock will be extinguished upon our emergence from Chapter 11 and that existing equity holders will not receive consideration in respect of their equity interests.
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Capital Markets and General Economic Risks
Future funding requirements, withdrawal liabilities and related charges associated with multiemployer plans in which we participate could have a material negative impact on our business.
In addition to our company-sponsored pension plans, we participate in certain multiemployer defined benefit pension plans that are administered jointly by labor unions representing certain of our employees and multiple employers like us that have employees participating in the plan. We make periodic contributions to these multiemployer pension plans in accordance with the provisions of negotiated collective bargaining agreements. Our required contributions to these plans could increase due to a number of factors, including the funded status of the plans and the level of our ongoing participation in these plans. Underfunding is not a direct obligation or liability of ours or any employer, but is likely to have important consequences. Our risk of such increased payments may be greater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and is not able to contribute an amount sufficient to fund the unfunded liabilities associated with its participants in the plan. In the event that we decide to withdraw from participation in one of these multiemployer plans, we could be required to make additional lump-sum contributions to the relevant plan. These withdrawal liabilities may be significant and could materially adversely affect our business and our financial results.
Some of the plans in which we participate are reported to have significant underfunded liabilities, which could increase the amount of any potential withdrawal liability. This requires us to potentially make substantial withdrawal liability payments when we close a facility covered by one of these plans, which could hinder our ability to make otherwise appropriate management decisions to operate as efficiently as possible. In addition, under the Pension Protection Act of 2006 and the Multi-Employer Pension Reform Act of 2014, special funding rules apply to multiemployer pension plans that are classified as “endangered,” “seriously endangered,” “critical,” or "critical and declining" status. Some of the plans in which we participate are in critical or critical and declining status, and we have been required to make additional contributions and may be subject to additional contributions in the future. We are subject to substantial withdrawal liability with respect to a number of multiemployer pension plans in which we participate. Our greatest potential withdrawal liability is related to the Central States, Southeast and Southwest Areas Pension Fund, which is in “critical and declining” status and has been for a number of years based on that plan's annual Form 5500 filings, meaning it was less than 65% funded. The plan is currently projected to become insolvent in 2025. It is unclear what will happen to this plan in the future, and the effects and consequences of the plan’s insolvency are currently unknown. Future funding requirements and related charges associated with multiemployer plans in which we participate could limit the strategic alternatives available to us or could have a material negative impact on our results of operations, financial condition and cash flows.
The costs of providing employee benefits have escalated, and liabilities under certain plans may be triggered due to our actions or the actions of others, which may adversely affect our profitability and liquidity.
We sponsor various defined benefit and defined contribution retirement plans, as well as contribute to various multiemployer pension plans on behalf of our employees. Changes in interest rates or in the market value of plan assets could affect the funded status of our pension plans. This could cause volatility in our benefits costs and increase future funding requirements of our plans. Pension and post-retirement costs also may be significantly affected by changes in key actuarial assumptions including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and annual periodic pension costs. Recent changes in federal laws require plan sponsors to eliminate, over defined time periods, the underfunded status of plans that are subject to the Employee Retirement Income Security Act rules and regulations. Certain of our defined benefit retirement plans are less than fully funded. Facility closings may trigger cash payments or previously unrecognized obligations under our defined benefit retirement plans, and the costs of such liabilities may be significant or may compromise our ability to close facilities or otherwise conduct cost reduction initiatives on time and within budget. A significant increase in future funding requirements could have a negative impact on our results of operations, financial condition and cash flows. In addition to potential changes in funding requirements, the costs of maintaining our pension plans are impacted by various factors including increases in healthcare costs and legislative changes.
Unfavorable economic conditions, including as a result of catastrophic events, may adversely impact our business, financial condition and results of operations.
The dairy industry is sensitive to changes in international, national and local general economic conditions. Future economic decline or increased income disparity could have an adverse effect on consumer spending patterns. Increased levels of unemployment, increased consumer debt levels and other unfavorable economic factors could further adversely affect consumer demand for products we sell or distribute, which in turn could adversely affect our results of operations. Consumers may not return to historical spending patterns following any future reduction in consumer spending.
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We are also subject to the risk of disruption by earthquakes, floods and other natural disasters, fire, power shortages, geopolitical unrest, war, terrorist attacks and other hostile acts, public health issues, epidemics or pandemics and other events beyond our control and the control of the third parties on which we depend. Any of these catastrophic events, whether in the United States or abroad, may have a strong negative impact on the global economy, our employees, facilities, partners, suppliers, distributors or customers, and could decrease demand for our products, create delays and inefficiencies in our supply chain and make it difficult or impossible for us to deliver products to our customers. For example, in December 2019 an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to a number of other countries in which we or our suppliers operate, including the United States. The effect of this outbreak could include disruptions or restrictions on our employees' ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers or other vendors in our supply chain. Global health concerns, such as coronavirus, could also result in social, economic and labor instability in the countries in which we or our customers and suppliers operate. These uncertainties could have a material adverse effect on our business and our results of operation and financial condition.
Legal and Regulatory Risks
Litigation could expose us to significant liabilities and may have a material adverse impact on our reputation and business.
Scrutiny of the dairy industry has resulted, and may continue to result, in litigation against us. Such lawsuits are expensive to defend, divert management’s attention and may result in significant judgments or settlements. In some cases, these awards would be trebled by statute and successful plaintiffs are entitled to an award of attorneys’ fees. Depending on its size, such a judgment or settlement could materially and adversely affect our results of operations, cash flows and financial condition and impair our ability to continue operations. We may not be able to pay such judgment or to post a bond for an appeal, given our financial condition and our available cash resources. In addition, depending on its size, failure to pay such a judgment or failure to post an appeal bond could cause us to breach certain provisions of our credit facilities. In either of these or other circumstances, we may seek a waiver of or amendment to the terms of our credit facilities, but we may not be able to obtain such a waiver or amendment. Failure to obtain such a waiver or amendment would materially and adversely affect our results of operations, cash flows and financial condition and could impair our ability to continue operations. Moreover, such litigation could expose us to negative publicity, which could adversely affect our brands, reputation and/or customer preference for our products.
We were previously a party to a private antitrust lawsuit brought by two plaintiffs that was scheduled for trial beginning March 28, 2017. Prior to trial, the plaintiffs agreed with us to settle the lawsuit. We agreed to pay settlements to the plaintiffs and the parties resolved all outstanding claims in the litigation and agreed to voluntarily dismiss the litigation. The litigation was dismissed on March 21, 2017 with respect to one plaintiff, and on March 26, 2017 with respect to the other plaintiff. The two plaintiffs initiated the case in 2007 as a putative class action. Although the court refused to certify the case as a class action, the court’s denial of class certification did not act as an adjudication on the merits for the class of purchasers the named plaintiffs proposed to represent. Therefore, we may be subject to subsequent litigation by such purchasers.
On November 12, 2019, we filed voluntary petitions for Chapter 11 reorganization in the Bankruptcy Court. See "Item 3. Legal Proceedings."
Our results of operations could be adversely affected if actual losses from legal claims against us exceed our reserves.
We are party to various litigation claims and legal proceedings. We evaluate these litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and/or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from our current assessments and estimates. If the amounts we are required to pay as a result of claims against us substantially exceed the sums anticipated by our reserves, if established, the need to pay those amounts could have a material adverse effect on our results of operations.
Labor disputes could adversely affect us.
As of December 31, 2019, approximately 39% of our employees were covered under collective bargaining agreements. Our collective bargaining agreements generally run in duration from 3 to 5 years. At any given time, we may face a number of union organizing drives. When we negotiate collective bargaining agreements or terms, we and the union may disagree on important issues which, in turn, could possibly lead to a strike, work slowdown or other job actions at one or more of our locations. In the event of a strike, work slowdown or other labor unrest, or if we are unable to negotiate labor contracts on reasonable terms, our ability to supply our products to customers could be impaired, which could result in reduced revenue and customer claims, and may distract our management from focusing on our business and strategic priorities. In addition, our ability to make short-term
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adjustments to control compensation and benefits costs or otherwise to adapt to changing business requirements may be limited by the terms of our collective bargaining agreements.
Our business is subject to various environmental and health and safety laws and regulations, which may increase our compliance costs or subject us to liabilities.
Our business operations are subject to numerous requirements in the United States relating to the protection of the environment and health and safety matters, including the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response and the Compensation and Liability Act of 1980, as amended, as well as similar state and local statutes and regulations in the United States. These laws and regulations govern, among other things, air emissions and the discharge of wastewater and other pollutants, the use of refrigerants, the handling and disposal of hazardous materials, and the cleanup of contamination in the environment. The costs of complying with these laws and regulations may be significant, particularly relating to wastewater and ammonia treatment which are capital intensive. Additionally, we could incur significant costs, including fines, penalties and other sanctions, cleanup costs and third-party claims for property damage or personal injury as a result of the failure to comply with, or liabilities under, environmental, health and safety requirements. New legislation, as well as current federal and other state regulatory initiatives relating to these environmental matters, could require us to replace equipment, install additional pollution controls, purchase various emission allowances or curtail operations. These costs could negatively affect our results of operations and financial condition.
Changes in laws, regulations and accounting standards could have an adverse effect on our financial results.
We are subject to federal, state and local governmental laws and regulations, including those promulgated by the FDA, the USDA, U.S. Department of the Treasury, IRS, Environmental Protection Agency ("EPA"), FTC, Department of Transportation, Department of Labor, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and numerous related regulations promulgated by the Securities and Exchange Commission and the Financial Accounting Standards Board. Changes in federal, state or local laws, or the interpretations of such laws and regulations, may negatively impact our financial results or our ability to market our products. Any or all of these risks could adversely impact our financial results.
Violations of laws or regulations related to the food industry, as well as new laws or regulations or changes to existing laws or regulations related to the food industry, could adversely affect our business.
The food production and marketing industry is subject to a variety of federal, state and local laws and regulations, including food safety requirements related to the ingredients, manufacture, processing, packaging, storage, marketing, advertising, labeling quality and distribution of our products, as well as those related to worker health and workplace safety. Our activities are subject to extensive regulation. We are regulated by, among other federal and state authorities, the FDA, the EPA, the FTC, and the U.S. Departments of Agriculture, Commerce, Labor and Transportation. In December 2018 USDA issued its final rule under the 2016 National Bioengineered Food Disclosure Standard, which requires companies of our size to have labels disclosing whether products contain or are derived from genetically engineered organisms as defined by the rule by January 2022. Change and implementation of new labels on our products to comply with this rule may result in significant costs to our business. In addition, a growing number of local ordinances across the country have imposed a tax on sweetened beverages, which may have a negative impact on our sales, results of operations and our business. In addition, a number of states and localities are expected to consider similar laws. Governmental regulations also affect taxes and levies, healthcare costs, energy usage, immigration and other labor issues, all of which may have a direct or indirect effect on our business or those of our customers or suppliers.
In addition, our volumes may be impacted by the level of government spending that supports grocery purchases because such amounts may impact the level of consumer spending on fluid dairy products. As a meaningful portion of Supplemental Nutrition Assistance Program (“SNAP”) benefits are spent in the dairy category, we are cautious about the impact that any change or reduction in these benefits could have on consumer spending in the dairy category. Any reduction or change in SNAP benefits or the suspension, curtailment, or expiration of other government spending programs, such as the Special Supplemental Nutrition Program for Women, Infants, and Children, could have an adverse impact upon our volumes and our results of operations.
In addition, the marketing and advertising of our products could make us the target of claims relating to alleged false or deceptive advertising under federal and state laws and regulations, and we may be subject to initiatives that limit or prohibit the marketing and advertising of our products to children. Changes in these laws or regulations or the introduction of new laws or regulations could increase our compliance costs, increase other costs of doing business for us, our customers or our suppliers, or restrict our actions, which could adversely affect our results of operations. In some cases, increased regulatory scrutiny could interrupt distribution of our products or force changes in our production processes or procedures (or force us to implement new processes or procedures). For example, the FDA has finalized new regulations pursuant to the Food Safety Modernization Act of 2011 which requires, among other things, that food facilities conduct contamination hazard analysis, implement risk-based preventive controls and develop track-and-trace capabilities, and there could be unforeseen issues, requirements and costs that arise as we come into compliance with these new rules by the various required compliance dates, with the last new rule becoming
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effective in 2019. Further, if we are found to be in violation of applicable laws and regulations in these areas, we could be subject to civil remedies, including fines, injunctions or recalls, as well as potential criminal sanctions, any of which could have a material adverse effect on our business.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
Our corporate headquarters are located in leased premises at 2711 North Haskell Avenue, Suite 3400, Dallas, Texas 75204. In addition, we operate 56 manufacturing facilities. We believe that our facilities are well maintained and are generally suitable and of sufficient capacity to support our current business operations and that the loss of any single facility would not have a material adverse effect on our operations or financial results.
We currently conduct our manufacturing operations within the following facilities, most of which are owned:
Homewood, Alabama(2) | Franklin, Massachusetts | Toledo, Ohio |
City of Industry, California(2) | Wilbraham, Massachusetts | Lansdale, Pennsylvania |
Hayward, California | Grand Rapids, Michigan | Lebanon, Pennsylvania |
Englewood, Colorado | Marquette, Michigan | Schuylkill Haven, Pennsylvania |
Deland, Florida | Woodbury, Minnesota | Sharpsville, Pennsylvania |
Miami, Florida | Billings, Montana | Spartanburg, South Carolina |
Orlando, Florida | Great Falls, Montana | Sioux Falls, South Dakota |
Hilo, Hawaii | North Las Vegas, Nevada | Athens, Tennessee |
Honolulu, Hawaii | Reno, Nevada | Nashville, Tennessee(2) |
Boise, Idaho | Florence, New Jersey | Dallas, Texas |
Belvidere, Illinois | Albuquerque, New Mexico | El Paso, Texas |
Harvard, Illinois | Rensselaer, New York | Houston, Texas |
O’Fallon, Illinois | High Point, North Carolina | Lubbock, Texas |
Rockford, Illinois | Winston-Salem, North Carolina | San Antonio, Texas |
Decatur, Indiana | Bismarck, North Dakota | Salt Lake City, Utah |
Huntington, Indiana | Tulsa, Oklahoma | St. George, Utah |
LeMars, Iowa | Marietta, Ohio | Ashwaubenon, Wisconsin |
Hammond, Louisiana | Springfield, Ohio | |
The majority of our manufacturing facilities also serve as distribution facilities. In addition, we have numerous distribution branches located across the country, some of which are owned but most of which are leased.
Item 3. Legal Proceedings
Filing Under Chapter 11 of the United States Bankruptcy Code
On November 12, 2019 (the “Petition Date”), we and substantially all of our wholly owned subsidiaries (other than our Securitization Subsidiaries and foreign subsidiaries) (the “Filing Subsidiaries” and, together with the Company, the “debtors-in-possession”) filed voluntary petitions for reorganization (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The debtors-in-possession’s Chapter 11 cases (collectively, the “Chapter 11 Cases”) are being jointly administered under the caption In re Southern Foods Group, LLC, Case No. 19-36313. Each debtor-in-possession will continue to operate its business as a "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. See "Part II - Item7. - Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K for further discussion of these proceedings.
Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the debtors-in-possession, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over
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the debtors-in-possession’s property. Subject to certain exceptions under the Bankruptcy Code, the filing of the debtors-in-possession’s Chapter 11 Cases also automatically stayed the filing of most legal proceedings and other actions against or on behalf of the debtors-in-possession or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the debtors-in-possession’s bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.
Item 4. | Mine Safety Disclosures |
Not applicable.
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PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock trades over-the-counter under the symbol “DFODQ.” At March 12, 2020, there were 1,822 record holders of our common stock.
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.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources — Current Debt Obligations” and Note 11 to our Consolidated Financial Statements for further information regarding the terms of our senior secured credit facility, including terms restricting the payment of dividends.
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Item 6. | Selected Financial Data |
The following selected financial data as of and for each of the years ended December 31, 2015 to 2019 has been derived from our Consolidated Financial Statements. The selected financial data does not purport to indicate results of operations as of any future date or for any future period. The selected financial data should be read in conjunction with our Consolidated Financial Statements and the related Notes thereto.
Year Ended December 31 | |||||||||||||||||||
2019 | 2018 | 2017(1) | 2016(1) | 2015(1) | |||||||||||||||
(Dollars in thousands, except share data) | |||||||||||||||||||
Operating data: | |||||||||||||||||||
Net sales(2) | $ | 7,328,663 | $ | 7,755,283 | $ | 7,795,025 | $ | 7,710,226 | $ | 8,121,661 | |||||||||
Cost of sales(2) | 5,888,931 | 6,100,005 | 5,976,958 | 5,722,112 | 6,146,756 | ||||||||||||||
Gross profit(3) | 1,439,732 | 1,655,278 | 1,818,067 | 1,988,114 | 1,974,905 | ||||||||||||||
Operating costs and expenses: | |||||||||||||||||||
Selling and distribution | 1,327,922 | 1,403,178 | 1,346,417 | 1,347,847 | 1,378,884 | ||||||||||||||
General and administrative | 301,355 | 277,659 | 307,793 | 342,565 | 346,680 | ||||||||||||||
Amortization of intangibles(4) | 20,600 | 20,456 | 20,710 | 20,752 | 21,653 | ||||||||||||||
Prepetition facility closing and restructuring costs, net | 17,017 | 74,992 | 24,913 | 8,719 | 19,844 | ||||||||||||||
Impairment of goodwill, intangible and long-lived assets(5) | 177,357 | 204,414 | 30,668 | — | 109,910 | ||||||||||||||
Other operating (income) loss(6) | — | (2,289 | ) | — | — | — | |||||||||||||
Equity in (earnings) loss of unconsolidated affiliate(7) | (4,835 | ) | (7,939 | ) | — | — | — | ||||||||||||
Total operating costs and expenses | 1,839,416 | 1,970,471 | 1,730,501 | 1,719,883 | 1,876,971 | ||||||||||||||
Operating income (loss) | (399,684 | ) | (315,193 | ) | 87,566 | 268,231 | 97,934 | ||||||||||||
Other (income) expense: | |||||||||||||||||||
Interest expense(8) | 68,730 | 56,443 | 64,961 | 66,795 | 66,813 | ||||||||||||||
Loss on early retirement of debt(9) | — | — | — | — | 43,609 | ||||||||||||||
Other (income) expense, net | (3,012 | ) | 2,877 | 1,362 | (1,215 | ) | 822 | ||||||||||||
Reorganization items(10) | 44,527 | — | — | — | — | ||||||||||||||
Total other expense | 110,245 | 59,320 | 66,323 | 65,580 | 111,244 | ||||||||||||||
Income (loss) from continuing operations before income taxes | (509,929 | ) | (374,513 | ) | 21,243 | 202,651 | (13,310 | ) | |||||||||||
Income tax expense (benefit)(11) | (9,195 | ) | (42,283 | ) | (26,179 | ) | 82,034 | (5,229 | ) | ||||||||||
Income (loss) from continuing operations | (500,734 | ) | (332,230 | ) | 47,422 | 120,617 | (8,081 | ) | |||||||||||
Income (loss) from discontinued operations, net of tax(12) | — | — | 11,291 | (312 | ) | (1,095 | ) | ||||||||||||
Gain (loss) on sale of discontinued operations, net of tax(13) | (70 | ) | 4,872 | 2,875 | (376 | ) | 668 | ||||||||||||
Net income (loss) | (500,804 | ) | (327,358 | ) | 61,588 | 119,929 | (8,508 | ) | |||||||||||
Net loss attributable to non-controlling interest(14) | 862 | 458 | — | — | — | ||||||||||||||
Net income (loss) attributable to Dean Foods Company | $ | (499,942 | ) | $ | (326,900 | ) | $ | 61,588 | $ | 119,929 | $ | (8,508 | ) | ||||||
Basic earnings (loss) per common share: | |||||||||||||||||||
Income (loss) from continuing operations attributable to Dean Foods Company | $ | (5.45 | ) | $ | (3.63 | ) | $ | 0.52 | $ | 1.33 | $ | (0.09 | ) | ||||||
Income (loss) from discontinued operations attributable to Dean Foods Company | — | 0.05 | 0.16 | (0.01 | ) | — | |||||||||||||
Net income (loss) attributable to Dean Foods Company | $ | (5.45 | ) | $ | (3.58 | ) | $ | 0.68 | $ | 1.32 | $ | (0.09 | ) | ||||||
Diluted earnings (loss) per common share: | |||||||||||||||||||
Income (loss) from continuing operations attributable to Dean Foods Company | $ | (5.45 | ) | $ | (3.63 | ) | $ | 0.52 | $ | 1.32 | $ | (0.09 | ) | ||||||
Income (loss) from discontinued operations attributable to Dean Foods Company | — | 0.05 | 0.15 | (0.01 | ) | — | |||||||||||||
Net income (loss) attributable to Dean Foods Company | $ | (5.45 | ) | $ | (3.58 | ) | $ | 0.67 | $ | 1.31 | $ | (0.09 | ) | ||||||
Cash dividend declared per common share | $ | — | $ | 0.30 | $ | 0.36 | $ | 0.36 | $ | 0.28 | |||||||||
Average common shares: | |||||||||||||||||||
Basic | 91,777,119 | 91,327,846 | 90,899,284 | 90,933,886 | 93,298,467 | ||||||||||||||
Diluted | 91,777,119 | 91,327,846 | 91,273,994 | 91,510,483 | 93,298,467 | ||||||||||||||
Balance sheet data (at end of period): | |||||||||||||||||||
Total assets(15) | $ | 2,228,557 | $ | 2,118,492 | $ | 2,503,829 | $ | 2,606,227 | $ | 2,520,163 | |||||||||
Long-term debt(15)(16) | 445,055 | 906,344 | 913,199 | 886,051 | 834,573 | ||||||||||||||
Other long-term liabilities | 65,777 | 184,048 | 203,595 | 276,630 | 272,864 | ||||||||||||||
Liabilities subject to compromise(17) | 1,027,393 | — | — | — | — | ||||||||||||||
Dean Foods Company stockholders’ equity | (181,122 | ) | 302,960 | 655,947 | 610,556 | 545,504 | |||||||||||||
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(1) | Results for the years ended December 31, 2017, 2016, and 2015 have been revised to reflect the retrospective adoption of Accounting Standards Update No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost ("ASU 2017-07"). The adoption of ASU 2017-07 had no impact to net income (loss), basic earnings (loss) per share or diluted earnings (loss) per share for the years ended December 31, 2017, 2016, and 2015. See Note 1 to our Consolidated Financial Statements |
(2) | As disclosed in Note 1 to our Consolidated Financial Statements, on a prospective basis, effective January 1, 2018, in connection with the adoption of ASC 606, we began reporting sales of excess raw materials within the net sales line of our Consolidated Statements of Operations. Historically, we presented sales of excess raw materials as a reduction of cost of sales within our Consolidated Statements of Operations. Sales of excess raw materials included in net sales were $380.3 million in the twelve months ended December 31, 2019. |
(3) | As disclosed in Note 1 to our Consolidated Financial Statements, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales. |
(4) | 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. See Note 7 to our Consolidated Financial Statements. |
(5) | Results for 2019 include non-cash impairment charges of $155.9 million related to property, plant and equipment at certain of our production facilities and $21.5 million related to one of our indefinite-lived trademarks. Results for 2018 include a non-cash goodwill impairment of $190.7 million and non-cash impairment charges of $13.7 million related to property, plant and equipment at certain of our production facilities. Results for 2017 include non-cash impairment charges of $30.7 million related to property, plant and equipment at certain of our production facilities, and certain assets that are not expected to generate a future economic benefit. 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 changed our indefinite lived trademarks to finite lived, resulting in a triggering event for impairment testing purposes. Based upon our analysis, we recorded a non-cash impairment charge of $109.9 million. See Notes 7 and 18 to our Consolidated Financial Statements. |
(6) | Results for 2018 include a $2.3 million gain from the re-measurement of our investment in Good Karma in connection with a step-acquisition on June 29, 2018. See Note 4 to our Consolidated Financial Statements. |
(7) | Results for 2019 include $4.8 million of equity in earnings of our Organic Valley Fresh joint venture. Results for 2018 include $7.9 million of equity in earnings of our Organic Valley Fresh joint venture. See Note 4 to our Consolidated Financial Statements. |
(8) | Results for 2019 include a charge of $3.8 million related to the write-off of deferred financing costs in connection with the amendments to our senior secured revolving credit facility and receivables securitization facility. Results for 2017 include a charge of $1.1 million related to the write-off of deferred financing costs in connection with the amendments to our senior secured revolving credit facility and receivables securitization facility. |
(9) | In March 2015, we redeemed the remaining $476.2 million principal amount of our outstanding senior notes due 2016 at a total redemption price of approximately $521.8 million. As a result, we recorded a $38.3 million pre-tax loss on early retirement of long-term debt in the first quarter of 2015. |
(10) | Results for 2019 include reorganization costs of $19.6 million write-off of prepetition deferred financing costs, $18.7 million of professional fees and $6.2 million of DIP Credit Agreement financing fees. See Note 2 to our Consolidated Financial Statements. |
(11) | Results for 2017 include a one-time net income tax benefit of $43.7 million associated with the December 22, 2017 enactment of the Tax Cuts and Jobs Act (the "Tax Act"). |
(12) | Income (loss) from discontinued operations shown in the table above includes the operating results and certain other directly attributable expenses, including interest expense, related to the disposition of Morningstar and the spin-off of WhiteWave in 2013. See Note 4 to our Consolidated Financial Statements. |
(13) | Amounts for each of the five years relate to the disposition of Morningstar and the spin-off of WhiteWave in 2013. See Note 4 to our Consolidated Financial Statements. |
(14) | Results for 2019 include the net loss attributable to the non-controlling interest in Good Karma of $0.9 million. Results for 2018 include the net loss attributable to the non-controlling interest in Good Karma of $0.5 million. Good Karma's results of operations have been consolidated in our Consolidated Statement of Operations from the step-acquisition on June 29, 2018. See Note 4 to our Consolidated Financial Statements. |
(15) | Beginning in the first quarter of 2016, unamortized debt issuance costs, not related to revolving credit agreements, of $6.8 million and $7.9 million as of December 31, 2016 and 2015, respectively, were reclassified from other assets and netted against the outstanding debt balance due to the retrospective effect of ASU No. 2015-03, Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. |
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(16) | Includes the current portion of long-term debt. |
(17) | Refers to prepetition obligations which may be affected by the Chapter 11 process. Includes $700.0 million of senior notes due 2023, $181.1 million of accounts payable, $100.1 million of other accrued expenses and $31.8 million of accrued postretirement obligations other than pensions as of December 31, 2019. See Note 2 to our Consolidated Financial Statements. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
A wide range of factors relating to our voluntary petitions for reorganization under Chapter 11 of Title 11 of the U.S. Code ("Chapter 11") could materially affect future developments and performance, including but not limited to:
• | our ability to continue as a going concern; |
• | our ability to successfully consummate any proposed sale of the business pursuant to Section 363 of the Bankruptcy Code to a potential acquirer through a sale process in Chapter 11 and, if consummated, to obtain an adequate price; |
• | our ability to successfully complete a reorganization under Chapter 11 and emerge from bankruptcy; |
• | the effects of the Chapter 11 Cases on us and on the interests of various constituents; |
• | bankruptcy court rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general; |
• | the length of time the Company will operate under the Chapter 11 Cases; |
• | risks associated with third-party motions in the Chapter 11 Cases; |
• | the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operations; |
• | increased legal and other professional costs necessary to execute our reorganization; |
• | our ability to comply with the restrictions imposed by our Debtor-in-Possession Credit Agreement, our Receivables Securitization Facility and other financing arrangements; |
• | the consequences of the acceleration of our debt obligations; |
• | employee attrition and our ability to retain senior management and key personnel due to the distractions and uncertainties, including our ability to provide adequate compensation and benefits during the Chapter 11 Cases; |
• | the likely cancellation of our common stock in the Chapter 11 Cases; |
• | the potential material adverse effect of claims that are not discharged in the Chapter 11 Cases; |
• | the diversion of management's attention as a result of the Chapter 11 Cases; and |
• | volatility of our financial results as a result of the Chapter 11 Cases. |
Business Overview
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 consolidated net sales totaled $7.3 billion in 2019. 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 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 brokers. Some national customer relationships are coordinated by our centralized corporate sales department.
Our Reportable Segment
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 our financial statements refers to results from continuing operations.
Recent Developments
See “Part I — Item 1. Business — Developments Since January 1, 2019” for further information regarding recent developments that have impacted our financial condition and results of operations.
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Matters Affecting Comparability
Our discussion of the results of operations for the twelve months ended December 31, 2019 and 2018 is affected by our adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), on January 1, 2018. Historically, we presented sales of excess raw materials as a reduction of cost of sales within our Consolidated Statements of Operations. On a prospective basis, effective January 1, 2018, in connection with the adoption of ASC 606, we began reporting sales of excess raw materials within the net sales line of our Consolidated Statements of Operations.
Sales of excess raw materials included in net sales were $380.3 million and $515.2 million in the twelve months ended December 31, 2019 and 2018, respectively. Sales of excess raw materials included as a reduction to cost of sales were $606.9 million in the twelve months ended December 31, 2017. See Notes 1 and 3 to our Consolidated Financial Statements for additional information.
Results of Operations
Our key performance indicators are brand mix and achieving low cost, which are reflected in gross margin and operating income, respectively. We evaluate our financial performance based on operating income or loss before gains and losses on the sale of businesses, prepetition facility closing and restructuring costs, asset impairment charges, litigation settlements and other nonrecurring gains and losses. The following table presents certain information concerning our financial results, including information presented as a percentage of net sales:
Year Ended December 31 | ||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||
Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Net sales | $ | 7,328.7 | 100.0 | % | $ | 7,755.3 | 100.0 | % | $ | 7,795.0 | 100.0 | % | ||||||||
Cost of sales | 5,888.9 | 80.4 | 6,100.0 | 78.7 | 5,976.9 | 76.7 | ||||||||||||||
Gross profit(1) | 1,439.8 | 19.6 | 1,655.3 | 21.3 | 1,818.1 | 23.3 | ||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||
Selling and distribution | 1,327.9 | 18.1 | 1,403.2 | 18.1 | 1,346.4 | 17.3 | ||||||||||||||
General and administrative | 301.4 | 4.1 | 277.6 | 3.6 | 307.8 | 3.9 | ||||||||||||||
Amortization of intangibles | 20.6 | 0.3 | 20.5 | 0.3 | 20.7 | 0.3 | ||||||||||||||
Prepetition facility closing and restructuring costs, net | 17.0 | 0.3 | 75.0 | 1.0 | 24.9 | 0.3 | ||||||||||||||
Impairment of goodwill and long-lived assets | 177.4 | 2.4 | 204.4 | 2.6 | 30.7 | 0.4 | ||||||||||||||
Other operating income | — | — | (2.3 | ) | (0.1 | ) | — | — | ||||||||||||
Equity in (earnings) loss of unconsolidated affiliate | (4.8 | ) | (0.1 | ) | (7.9 | ) | (0.1 | ) | — | — | ||||||||||
Total operating costs and expenses | 1,839.5 | 25.1 | 1,970.5 | 25.4 | 1,730.5 | 22.2 | ||||||||||||||
Operating income (loss) | $ | (399.7 | ) | (5.5 | )% | $ | (315.2 | ) | (4.1 | )% | $ | 87.6 | 1.1 | % | ||||||
(1) | As disclosed in Note 1 to our Consolidated Financial Statements, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales. |
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Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Net Sales — The change in net sales was due to the following:
Year Ended December 31, 2019 vs. 2018 | |||
(In millions) | |||
Volume | $ | (873.5 | ) |
Pricing and product mix changes | 436.7 | ||
Acquisitions | 10.2 | ||
Total decrease | $ | (426.6 | ) |
Net sales decreased $426.6 million, or 5.5%, during the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to fluid milk volume declines from year-ago levels, partly offset by increased pricing, as a result of increases in dairy commodity costs from year-ago levels and pricing actions taken during the year ended December 31, 2019 to offset inflation. On average, during 2019, the Class I price was 14.5% above prior-year levels. Fluid milk volume declines were driven predominantly by customer losses, overall category declines and lower branded fluid milk volumes due to continued retailer investment in private label products. Net sales declines were further offset by volumes associated with the acquisition and consolidation of Good Karma into our Consolidated Financial Statements on June 29, 2018, which contributed $19.8 million to net sales during 2019 as compared to $9.7 million during 2018. Net sales during the year ended December 31, 2018 reflect 186 days of Good Karma's operations.
We generally increase or decrease the prices of our private label fluid dairy products on a monthly basis in correlation with fluctuations in the costs of raw materials, packaging supplies and delivery costs. We manage the pricing of our branded fluid milk products on a longer-term basis, balancing consumer demand with net price realization, but in some cases, we are subject to the terms of our sales agreements with respect to the means and/or timing of price increases, which can negatively impact our profitability. The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for 2019 compared to 2018:
Year Ended December 31* | ||||||||||
2019 | 2018 | % Change | ||||||||
Class I mover(1) | $ | 16.99 | $ | 14.84 | 14.5 | % | ||||
Class I raw skim milk mover(1)(2) | 8.39 | 6.23 | 34.7 | |||||||
Class I butterfat mover(2)(3) | 2.54 | 2.52 | 0.8 | |||||||
Class II raw skim milk minimum(1)(4) | 8.24 | 6.15 | 34.0 | |||||||
Class II butterfat minimum(3)(4) | 2.52 | 2.53 | (0.4 | ) | ||||||
* | The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus producer premiums and a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes procurement costs and other related charges that vary by location and supplier. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” and “— Known Trends and Uncertainties — Conventional Raw Milk and Other Inputs” below for a more complete description of raw milk pricing. |
(1) | Prices are per hundredweight. |
(2) | We process Class I raw skim milk and butterfat into fluid milk products. |
(3) | Prices are per pound. |
(4) | We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream. |
Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Cost of sales decreased $211.1 million, or 3.5%, during the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily due to the volume declines discussed above. This overall decrease was partly offset by higher dairy commodity costs. On average, the Class I price was 14.5% above prior-year levels.
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Gross Profit — Our gross margin decreased to 19.6% in 2019 as compared to 21.3% in 2018. The decrease was primarily due to the volume deleverage and Class I raw milk inflation discussed above.
Operating Costs and Expenses — Our operating expenses decreased $131.1 million, or 6.7%, during the year ended December 31, 2019 in comparison to the year ended December 31, 2018. Significant changes to operating costs and expenses in the year ended December 31, 2019 as compared to the year ended December 31, 2018 include the following:
• | Selling and distribution costs decreased by $75.3 million in comparison to the prior year primarily due to decreases in advertising and marketing costs of approximately $22.3 million, employee-related costs of approximately $18.3 million, fuel costs of approximately $13.6 million, and freight costs of approximately $13.3 million. |
• | General and administrative costs increased by $23.7 million during the year ended December 31, 2019, primarily due to increases in professional fees and separation charges related to the previously disclosed departure of certain executive officers. |
• | Prepetition facility closing and restructuring costs decreased by $58.0 million during the year ended December 31, 2019. See Note 18 to our Consolidated Financial Statements. |
• | We recorded total impairment charges of $177.4 million during the year ended December 31, 2019. This amount includes impairment charges of $21.5 million to one of our indefinite-lived trademarks. Total impairment charges during the year ended December 31, 2018 of $204.4 million include the full impairment of our goodwill of $190.7 million. See Note 7 to our Consolidated Financial Statements. We also recorded impairment charges to our property, plant and equipment of $155.9 million and $13.7 million during the years ended December 31, 2019 and 2018, respectively. See Note 18 to our Consolidated Financial Statements. |
• | We recorded $4.8 million of equity in the earnings of our Organic Valley Fresh joint venture during the year ended December 31, 2019. See Note 4 to our Consolidated Financial Statements. |
Other (Income) Expense — Other expense increased $50.9 million during the year ended December 31, 2019 as compared to the year ended December 31, 2018. This increase was primarily due to $44.5 million of reorganization items recorded in 2019 as a result of our Chapter 11 bankruptcy filing. We also had higher interest expense during 2019 compared to the prior year, related to the write off of deferred financing costs for $3.8 million and higher interest rates on our new DIP credit agreement.
Income Taxes — Income tax benefit of $9.2 million was recorded at an effective rate of 1.8% for 2019 compared to a 11.3% effective tax rate in 2018. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In 2019, our effective tax rate was impacted by an increase to tax expense of $118.1 million due to the change in valuation allowances recorded against both federal and state deferred tax assets. In 2018, our effective tax rate was impacted by a decrease in tax benefit of $35.1 million related to the non-deductible portion of the goodwill impairment charge and an increase to tax expense of $17.4 million due to a change in valuation allowance primarily related to state deferred tax assets.
In 2019, excluding the $118.1 million of tax expense related to our valuation allowance, our effective tax rate in 2019 would have been 25.0%. In 2018, excluding the net tax expense of $35.1 million related to the goodwill impairment and the $17.4 million tax expense related to our valuation allowance, our effective tax rate in 2018 would have been 25.3%.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Net Sales — The change in net sales was due to the following:
Year Ended December 31, 2018 vs. 2017 | |||
(In millions) | |||
Volume, pricing and product mix changes | $ | (573.3 | ) |
Acquisitions | 18.4 | ||
Sales of excess raw materials | 515.2 | ||
Total decrease | $ | (39.7 | ) |
Net sales decreased $39.7 million, or 0.5%, during the year ended December 31, 2018 as compared to the year ended December 31, 2017, primarily due to fluid milk volume declines from year-ago levels, largely offset by the change in reporting of sales of excess raw materials of $515.2 million during 2018. Excluding the impact of sales or excess raw materials, net sales decreased $554.9 million, or 7.1%. Fluid milk volume declines were driven predominantly by the loss of volume from two large retailers, overall category declines and lower branded fluid milk volumes due to continued retailer investment in private label
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products. Net sales were further impacted by decreased pricing, as a result of decreases in dairy commodity costs from 2017 levels. On average, during the year ended December 31, 2018, the Class I price was 9.8% below prior-year levels. Net sales declines were partially offset by volumes associated with the Uncle Matt's and Good Karma acquisitions, which contributed $26.4 million to net sales during 2018 as compared to $8.0 million associated with the Uncle Matt's acquisition during 2017. The Uncle Matt's acquisition closed on June 22, 2017 and net sales during the year ended December 31, 2017 reflect 193 days of Uncle Matt's operations. The Good Karma acquisition closed on June 29, 2018 and net sales during the year ended December 31, 2018 reflect 186 days of Good Karma's operations.
The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for 2018 compared to 2017:
Year Ended December 31* | ||||||||||
2018 | 2017 | % Change | ||||||||
Class I mover(1) | $ | 14.84 | $ | 16.45 | (9.8 | )% | ||||
Class I raw skim milk mover(1)(2) | 6.23 | 7.60 | (18.0 | ) | ||||||
Class I butterfat mover(2)(3) | 2.52 | 2.61 | (3.4 | ) | ||||||
Class II raw skim milk minimum(1)(4) | 6.15 | 7.12 | (13.6 | ) | ||||||
Class II butterfat minimum(3)(4) | 2.53 | 2.62 | (3.4 | ) | ||||||
* | The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus producer premiums and a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes procurement costs and other related charges that vary by location and supplier. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” and “— Known Trends and Uncertainties — Conventional Raw Milk and Other Inputs” below for a more complete description of raw milk pricing. |
(1) | Prices are per hundredweight. |
(2) | We process Class I raw skim milk and butterfat into fluid milk products. |
(3) | Prices are per pound. |
(4) | We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream. |
Cost of Sales — Cost of sales increased $123.0 million, or 2.1% during the year ended December 31, 2018 as compared to the year ended December 31, 2017, primarily due to the change in reporting of sales of excess raw materials discussed above. Excluding the impact of sales of excess raw material, costs of sales decreased $392.1 million, or 6.6%, primarily due to decreased dairy commodity costs. The Class I price was 9.8% below prior-year levels. This decrease was partially offset by higher non-dairy commodity costs and higher than expected transitory costs related to our plant closure activities.
Gross Profit — Our gross margin decreased to 21.3% in 2018 as compared to 23.3% in 2017. This decrease was primarily due to the overall volume declines discussed above, in addition to the change in reporting of excess raw materials discussed above. Excluding the impact of the change in reporting of excess raw materials, our gross margin would have been 22.9% in 2018. Our gross margin was further impacted by continued transitory costs related to our accelerated plant closure activity, which include incremental product shrink and higher labor and freight costs.
Operating Costs and Expenses — Our operating expenses increased $240.0 million, or 13.9%, during the year ended December 31, 2018 in comparison to the year ended December 31, 2017. Significant changes to operating costs and expenses in the year ended December 31, 2018 as compared to the year ended December 31, 2017 include the following:
• | Selling and distribution costs increased by $56.8 million in comparison to the prior year primarily due to increases in external freight costs of $33.7 million, fuel costs of $20.6 million and advertising and promotion costs of $2.6 million. |
• | General and administrative costs decreased by $30.1 million during the year ended December 31, 2018 in comparison to the prior period. General and administrative costs of $307.8 million in 2017 included charges of $17.0 million for litigation settlements reached in the first quarter of 2017 and the related legal expenses. General and administrative costs of $277.7 million in 2018 declined from the prior year driven by decreases in salaries and wages and employee-related costs of $26.4 million associated with lower headcount in comparison to the prior year as we execute our enterprise-wide cost productivity plan. These decreases were partially offset by costs incurred in connection with our enterprise-wide cost productivity plan in 2018. |
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• | Prepetition facility closing and restructuring costs increased by $50.1 million primarily due to costs associated with asset write-downs and other charges in connection with our accelerated facility closure activities. See Note 18 to our Consolidated Financial Statements. |
• | We recorded total impairment charges of $204.4 million during the year ended December 31, 2018. This amount includes the full impairment of our goodwill of $190.7 million. There were no goodwill impairment charges during the year ended December 31, 2017. See Note 7 to our Consolidated Financial Statements. We also recorded impairment charges to our long-lived assets of $13.7 million and $30.7 million during the years ended December 31, 2018 and 2017, respectively. See Note 18 to our Consolidated Financial Statements. |
Other (Income) Expense — Other expense decreased $7.0 million during the year ended December 31, 2018 as compared to the year ended December 31, 2017. This decrease in expense was primarily due to lower interest expense during 2018 compared to the prior year, primarily due to the repayment in full of the $142 million outstanding aggregate principal amount of subsidiary senior notes on October 16, 2017.
Income Taxes — Income tax benefit was recorded at an effective rate of 11.3% for 2018 compared to a (123.2)% effective tax rate in 2017. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In 2018, our effective tax rate was significantly impacted by a decrease in tax benefit of $35.1 million related to the non-deductible portion of the goodwill impairment charge and an increase to tax expense of $17.4 million due to a change in valuation allowance primarily related to state deferred tax assets. In 2017, our effective tax rate was significantly impacted by the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), which resulted in a one-time benefit of $45.8 million related to the revaluation of our deferred tax assets and liabilities, partly offset by the recognition of a $2.1 million income tax expense associated with the mandatory deemed repatriation of our foreign earnings.
In 2018, excluding the net tax expense of $35.1 million related to the goodwill impairment and the $17.4 million tax expense related to our valuation allowance, our effective tax rate in 2018 would have been 25.3%. In 2017, our effective tax rate was also impacted by the adoption of Accounting Standards Update ("ASU") 2016-09, which requires excess tax benefits and tax deficiencies related to share-based payments to be recorded in the provision for income taxes, and an increase in our valuation allowance related to state net operating losses. Excluding the one-time net tax benefit of $43.7 million related to the Tax Act, the $3.0 million tax expense related to excess tax deficiencies, and the $5.9 million tax expense related to our valuation allowance, our effective tax rate in 2017 would have been 41.0%.
Liquidity and Capital Resources
The filing of the Bankruptcy Petitions constituted an event of default that accelerated our obligations under all of our material debt instruments. As a result, we are no longer able to borrow under our Senior Secured Revolving Credit Facility. In addition, pursuant to the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the debtors-in-possession, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the debtors-in-possession’s property. Accordingly, although the filing of the Bankruptcy Petitions triggered defaults under the Debt Instruments, creditors are stayed from taking action as a result of these defaults, other than with respect to our Securitization Subsidiaries. Additionally, under Section 502(b)(2) of the Bankruptcy Code, and subject to the terms of the DIP orders providing for adequate protection payments to certain of our prepetition lenders, we are no longer required to pay interest on the prepetition Debt Instruments accruing on or after the Petition Date.
The following table provides a summary of our total liquidity (in thousands):
December 31, 2019 | |||
Cash and cash equivalents (1) | $ | 80,011 | |
Availability under debtors-in-possession financing (2) | 92,427 | ||
Total liquidity (3) | $ | 172,438 | |
(1) | As of December 31, 2019, $4.8 million of the $80.0 million of our cash and cash equivalents was attributable to our foreign operations. |
(2) | The $92.4 million is the combined available future borrowing capacity under our DIP Credit Agreement and amended and restated Receivables Securitization Facility, subject to compliance with the covenants in such credit agreements. |
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(3) | Based on our current financial forecasts, we believe that our cash on hand, cash generated from the results of our operations and funds available under our debtors-in-possession financing will be sufficient to fund anticipated cash requirements until a Chapter 11 plan of reorganization is confirmed for minimum operating and capital expenditures and for working capital purposes. However, given the current level of volatility in the market, uncertainty regarding our ability to complete a sale of the Company, the operation of our business and the commercial decisions of counter parties in the context of bankruptcy, as well as the unpredictability of certain costs that could potentially arise in our operations, our liquidity needs could be significantly higher than we currently anticipate. |
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. From 2015 through 2018, all awards of restricted stock units, performance stock units and phantom shares provide for cash dividend equivalent units, which vest in cash at the same time as the underlying award. 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. As a result, no dividends were paid during the year ended December 31, 2019. Quarterly dividends of $0.09 per share were paid in each quarter of 2018 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, totaling approximately $32.7 million for the year ended December 31, 2017. 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. See Note 13 to our Consolidated Financial Statements.
Historical Cash Flow
The following table summarizes our cash flows from operating, investing and financing activities for the last three years:
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands) | |||||||||||
Cash flows provided by (used in): | |||||||||||
Operating activities | $ | (47,336 | ) | $ | 152,962 | $ | 144,799 | ||||
Investing activities | (83,415 | ) | (109,224 | ) | (134,986 | ) | |||||
Financing activities | 186,586 | (36,074 | ) | (11,281 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 55,835 | $ | 7,664 | $ | (1,468 | ) | ||||
Operating Activities
Cash used in operating activities was $47.3 million during the year ended December 31, 2019 compared to cash provided by operating activities of $153.0 million and 144.8 million during the years ended December 31, 2018 and December 31, 2017, respectively. The 2019 change was primarily attributable to lower operating income and higher dairy commodity costs. The 2018 change was primarily attributable to lower dairy commodity costs and better working capital management in comparison to the prior year, partially offset by lower operating income in 2018. Additionally, we made a discretionary pension contribution of $38.5 million to our company-sponsored pension plans in 2017.
Investing Activities
Cash used in investing activities was 83.4 million in the year ended December 31, 2019 compared to 109.2 million and 135.0 million for the years ended December 31, 2018 and December 31, 2017, respectively. The decrease in 2019 was primarily attributable to lower capital expenditures of $26.0 million, partially offset by a reduction of proceeds from the sale of fixed assets of $13.5 million in comparison to 2018. The decrease was also partially caused by the purchase price, net of cash acquired, of $13.3 million paid for the Good Karma acquisition, which closed in the second quarter of 2018. The decrease in 2018 was primarily attributable to $15.1 million of higher proceeds from the sales of fixed assets in 2018 as compared to 2017. Additionally, the purchase price, net of cash acquired, for the Uncle Matt's acquisition was $21.6 million, which closed in the second quarter of 2017, and other investments were $11.0 million in 2017, as compared to the purchase price, net of cash acquired, of $13.3 million paid for the Good Karma acquisition in 2018. Partially offsetting these decreases, capital expenditures were $8.6 million higher in 2018 compared to 2017.
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Financing Activities
Cash provided by financing activities was $186.6 million in the year ended December 31, 2019 compared to cash used in financing activities of $36.1 million and $11.3 million in the years ended December 31, 2018 and December 31, 2017, respectively. The change in 2019 was primarily attributable to net debt proceeds of $227.7 million in 2019 as compared to net debt repayments of $8.0 million in 2018. Net debt proceeds were partially offset by payments of financing costs related to our new DIP financing and amendments to our existing credit facilities of $40.6 million in the year ended December 31, 2019. The change in 2019 cash from financing activities was also partially caused by dividend payments of $27.4 million in the year ended December 31, 2018. The change in 2018 was primarily attributable net debt repayments of $8.0 million in 2018 as compared to net debt proceeds of $23.8 million in 2017, partially offset by a decrease of $5.3 million in cash dividends paid in 2018 compared to 2017.
Current Debt Obligations
Our debt obligations consist of outstanding borrowings and letters of credit issued under our DIP credit facility, receivables securitization facility, our Dean Foods Company Senior Notes Due 2023 and our capital lease obligations, each of which are described more fully below.
Senior Secured Debtor-in-Possession Credit Facility — On November 14, 2019, the Bankruptcy Court entered an order approving, on an interim basis, the financing to be provided pursuant to the DIP Credit Agreement. The DIP Credit Agreement was entered into by and among the Company, as borrower, the DIP Lenders and Coöperatieve Rabobank U.A., New York Branch, as administrative agent and collateral agent for the DIP Lenders. A final order approving the agreement was entered by the Court on December 23, 2019.
The DIP Credit Agreement provides for a senior secured superpriority debtor-in-possession credit facility in the aggregate principal amount of up to $425 million consisting of (i) a new money revolving loan facility in an aggregate principal amount of approximately $236.2 million, which may be in the form of revolving loans or, subject to a sub-limit of $25 million, the form of letters of credit and (ii) term loans refinancing the aggregate principal amount of all outstanding loans under our prepetition Credit Agreement as of the Petition Date.
In connection with the execution of the DIP Credit Agreement, we paid certain arrangement fees of approximately $14.0 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility.
As of December 31, 2019, we had total outstanding borrowings of $258.8 million under the DIP Credit Agreement, consisting of $188.8 million outstanding for our term loans portion and $70.0 million outstanding for our revolving loan facility portion. Our average daily balance under the DIP Credit Agreement during the year ended December 31, 2019 was $200.9 million. There were no letters of credit issued under the DIP Credit Agreement as of December 31, 2019.
Our obligations under the DIP Facility are guaranteed by all of our subsidiaries that are debtors-in-possession in the Chapter 11 Cases. In addition, subject to the terms of the final order entered on December 20, 2019, the claims of the DIP Lenders are (i) entitled superpriority administrative expense claim status and (ii) subject to certain customary exclusions in the credit documentation, secured by (x) a perfected first priority lien on all property of the Loan Parties not subject to valid, perfected and non-avoidable liens in existence on the Petition Date, (y) a perfected first priority priming lien on collateral under the Senior Secured Revolving Credit Facility and (z) a perfected junior lien on all property of the Loan Parties and the proceeds thereof that are subject to valid, perfected and non-avoidable liens in existence on the Petition Date or valid and non-avoidable liens in existence on the Petition Date that are perfected subsequent to the Petition Date to the extent permitted by Section 546(b) of the Bankruptcy Code, in each case subject to a carve-out for the debtors-in-possession’s professional fees and certain liens permitted by the terms of the DIP Credit Agreement.
The scheduled maturity date of the DIP facility is August 14, 2020. However, we may elect to extend the scheduled maturity date by an additional three months subject to the satisfaction of certain conditions, including the payment of an extension fee of 0.50% of the aggregate principal amount of the DIP loans and commitments outstanding. The DIP loans bear interest at an interest rate per annum equal to, at the Company's option (i) LIBOR plus 7.0% or (ii) the base rate plus 6.0%. In addition, borrowings under the DIP revolving facility are limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount is equal to 65% of the appraised value of certain of our real property and equipment less the carve-out amount and the aggregate principal amount of DIP Term Loans. Our ability to borrow is also limited by the condition that our unrestricted cash (less budgeted disbursements for the immediately succeeding week and the carve-out) does not exceed $30 million after giving effect to such borrowing.
Under the DIP Credit Agreement, we may make optional prepayments of the DIP Loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs and the payment of certain other fees as more fully set forth in
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the DIP Credit Agreement). In addition, subject to certain exceptions and conditions described in the DIP Credit Agreement, we are obligated to prepay the obligations thereunder with the net cash proceeds of certain asset sales and with casualty insurance proceeds. Furthermore, we are required to prepay obligations to the extent (i) revolving exposure under the DIP revolving facility exceeds the greater of the revolving commitments and the borrowing base or (ii) our unrestricted cash (less budgeted disbursements for the immediately succeeding week and the carve-out) exceeds $30 million for a period of 5 consecutive business days.
The DIP Credit Agreement also contains customary representations, warranties and covenants that are typical and customary for debtors-in-possession facilities of this type, 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 other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default, including as a result of certain events occurring in the Chapter 11 Cases. Furthermore, the DIP Credit Agreement requires us to comply with a variance covenant that compares actual operating disbursements and receipts and capital expenditures to the budgeted amounts set forth in the DIP budgets delivered to the DIP agent and DIP lenders on or prior to the closing date and updated periodically thereafter pursuant to the terms of the DIP Credit Agreement.
In addition, on February 10, 2020, the Company entered into the first amendment to the DIP Credit Agreement (the “First DIP Amendment”) to extend several of the milestone dates set forth in the DIP Credit Agreement, including extending from February 10, 2020 to February 24, 2020 the date by which the Company must elect whether it intends to pursue a sale of its assets under Section 363 of Title 11 of the U.S. Code or a plan of reorganization, and if it elects a sale to file a motion seeking approval thereof.
Dean Foods Receivables Securitization Facility — We have a $425 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.
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).
On November 14, 2019, we amended and restated the Existing RPA to continue the receivables securitization facility during the Chapter 11 cases. The amendment and restatement had been previously approved pursuant to an interim order entered by the Bankruptcy Court on November 13, 2019. The amendment and restatement, among other things, (i) modifies certain covenants, representations, events of default and cross defaults arising as a result of the commencement of the Chapter 11 Cases, (ii) modifies the other rights and obligations of the parties to the facility in order to give effect to, and in certain instances be subject to, orders of the Court from time to time, (iii) reduces the total size of the facility from $450 million to $425 million, with a corresponding reduction to availability thereunder, (iv) modifies certain pricing terms and fees payable under the facility, (v) makes
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certain other amendments, including in order to give effect to future issuances of letters of credit and (vi) grants superpriority administrative expense claim status to certain indemnification, performance guaranty and other obligations of certain of the debtors-in-possession under the receivables securitization facility documents. It also adjusted the maturity date to August 14, 2020. The Bankruptcy Court approved this amendment and restatement pursuant to a final order on December 20, 2019.
On February 10, 2020, we further amended the receivables purchase agreement to give effect to the First DIP Amendment for purposes of our compliance with the covenants under the receivables securitization facility.
In connection with the amendments to the receivables purchase agreement during the year, we paid certain arrangement fees of approximately $10.8 million to lenders and other fees of approximately $0.6 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $2.2 million of unamortized deferred financing costs in connection with the amendments.
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 $425.0 million of the total commitment amount under the receivables securitization facility as of December 31, 2019. The total amount of receivables sold to these entities as of December 31, 2019 was $530.1 million. During the year ended December 31, 2019, we borrowed $0.7 billion and repaid $0.7 billion under the facility with a remaining balance of $180.0 million as of December 31, 2019. In addition to letters of credit in the aggregate amount of $236.7 million that were issued but undrawn, the remaining available borrowing capacity was $8.3 million at December 31, 2019. Our average daily balance under this facility during the year ended December 31, 2019 was $246.0 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 were amortized to interest expense over the remaining term of the 2023 Notes. In connection with the bankruptcy filing, we wrote off $3.6 million of unamortized deferred financings costs.
The 2023 Notes are our senior unsecured obligations and 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 were scheduled to mature on March 15, 2023. However, as a result of the Bankruptcy Petitions, the payment obligations under the 2023 Notes were accelerated.
The carrying value under the 2023 Notes at December 31, 2019 was $700.0 million. Due to the unsecured nature of the 2023 Notes, the full amount outstanding was reclassified to Liabilities Subject to Compromise on the Consolidated Balance Sheets and is no longer included as part of long-term debt. See Note 2 for additional information.
See Note 12 for information regarding the fair value of the 2023 Notes as of December 31, 2019 and 2018.
Capital Lease Obligations and Other — Capital lease obligations of $6.3 million and $1.6 million as of December 31, 2019 and 2018, respectively, were primarily comprised of our leases for information technology equipment. See Note 20.
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Contractual Obligations and Other Long-Term Liabilities
In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. The table below summarizes our obligations for indebtedness, purchase, lease and certain other contractual obligations at December 31, 2019.
Payments Due by Period | |||||||||||||||||||||||||||
Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | |||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||
Receivables securitization facility(1) | $ | 180.0 | $ | 180.0 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
DIP Facility (1) | 258.8 | 258.8 | — | — | — | — | — | ||||||||||||||||||||
Purchase obligations(2) | 358.0 | 185.1 | 36.1 | 34.2 | 34.2 | 34.2 | 34.2 | ||||||||||||||||||||
Operating leases(3) | 335.9 | 101.3 | 76.0 | 54.7 | 40.1 | 27.9 | 35.9 | ||||||||||||||||||||
Capital leases(4) | 6.3 | 1.7 | 1.3 | 1.1 | 0.9 | 0.4 | 0.9 | ||||||||||||||||||||
Interest payments(5) | 58.0 | 58.0 | — | — | — | — | — | ||||||||||||||||||||
Benefit payments(6) | 380.1 | 21.2 | 21.5 | 22.0 | 22.1 | 22.5 | 270.8 | ||||||||||||||||||||
Total(7) | $ | 1,577.1 | $ | 806.1 | $ | 134.9 | $ | 112.0 | $ | 97.3 | $ | 85.0 | $ | 341.8 | |||||||||||||
(1) | Represents amounts outstanding under our receivables securitization facility and DIP Facility at December 31, 2019. As of December 31, 2019, the maturity date for these facilities was August 14, 2020. On November 14, 2019, the Bankruptcy Court entered an order approving, on an interim basis, the DIP Facility, which refinanced and effectively replaced our Senior Secured Revolving Credit Facility, and the amended Receivables Securitization Facility. A final order approving the DIP Facility and Receivables Securitization Facility was entered on December 20, 2019. |
(2) | Primarily represents commitments to purchase minimum quantities of raw materials used in our production processes, including raw milk, diesel fuel, sugar and cocoa powder. We enter into these contracts from time to time to ensure a sufficient supply of raw ingredients. |
(3) | Represents future minimum lease payments under non-cancelable operating leases with terms more than one year related to our distribution fleet, corporate offices and certain of our manufacturing and distribution facilities. See Note 20 to our Consolidated Financial Statements for more detail about our lease obligations. |
(4) | Represents future payments, including interest, under capital leases related to information technology equipment. See Note 20 to our Consolidated Financial Statements for more detail about our lease obligations. |
(5) | Includes fixed rate interest obligations and interest on variable rate debt based on the outstanding balances and interest rates in effect at December 31, 2019. Interest that may be due in the future on variable rate borrowings under the Credit Facility and receivables securitization facility will vary based on the interest rate in effect at the time and the borrowings outstanding at the time. |
(6) | Represents expected future benefit obligations of $348.3 million and $31.8 million related to our company-sponsored pension plans and postretirement healthcare plans, respectively. In addition to our company-sponsored plans, we participate in certain multiemployer defined benefit plans. The cost of these plans is equal to the annual required contributions determined in accordance with the provisions of negotiated collective bargaining arrangements. These costs were approximately $29.0 million, $27.2 million and $29.2 million during the years ended December 31, 2019, 2018 and 2017, respectively; however, the future cost of the multiemployer plans is dependent upon a number of factors, including the funded status of the plans, the ability of other participating companies to meet ongoing funding obligations, and the level of our ongoing participation in these plans. Because the amount of future contributions we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated, such amounts have been excluded from the table above. See Note 16 to our Consolidated Financial Statements. |
(7) | The table above excludes our liability for uncertain tax positions of $4.8 million because the timing of any related cash payments cannot be reasonably estimated. |
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Pension and Other Postretirement Benefit Obligations
We offer pension benefits through various defined benefit pension plans and also offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees. Reported costs of providing non-contributory defined pension benefits and other postretirement benefits are dependent upon numerous factors, assumptions and estimates. For example, these costs are impacted by actual employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plan and earnings on plan assets. Pension and postretirement costs also may be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and annual periodic pension costs. In 2019 and 2018, we made contributions of $0.7 million and $0.8 million, respectively, to our defined benefit pension plans.
Our pension plan assets are primarily comprised of equity and fixed income investments. Changes made to the provisions of the plan may impact current and future pension costs. Fluctuations in actual equity market returns, as well as changes in general interest rates may result in increased or decreased pension costs in future periods. In accordance with Accounting Standards related to “Employers’ Accounting for Pensions,” changes in obligations associated with these factors may not be immediately recognized as pension costs on the income statement, but generally are recognized in future years over the remaining average service period of plan participants. As such, significant portions of pension costs recorded in any period may not reflect the actual level of cash benefits provided to plan participants. In 2019 and 2018, we recorded non-cash pension expense of $9.2 million and $5.5 million, respectively, substantially all of which was attributable to periodic expense.
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.
The weighted average discount rate reflects the rate at which our defined benefit plan obligations could be effectively settled. The rate, which is updated annually with the assistance of an independent actuary, uses a model that reflects a bond yield curve. The weighted average discount rate for our pension plan obligations decreased from 4.38% at December 31, 2018 to 3.35% at December 31, 2019. We expect that our net periodic benefit cost in 2020 will be lower than 2019. We do not currently expect to make any contributions to the pension plans in 2020.
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, 2019, our master trust was invested as follows: investments in equity securities were at 31%; investments in fixed income were at 69%; and cash equivalents were less than 1%. We believe the allocation of our master trust investments as of December 31, 2019 is generally consistent with the targets set forth by our Investment Committee.
See Notes 16 and 17 to our Consolidated Financial Statements for additional information regarding retirement plans and other postretirement benefits.
Other Commitments and Contingencies
In 2001, in connection with our acquisition of Legacy Dean, we purchased DFA's 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 and 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 goals of cost control and supply chain efficiency, we continue to evaluate our sources of raw milk supply.
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We also have the following commitments and contingent liabilities, in addition to contingent liabilities related to ordinary course litigation, investigations and audits:
• | certain indemnification obligations related to businesses that we have divested; |
• | certain lease obligations, which require us to guarantee the minimum value of the leased asset at the end of the lease; |
• | selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims and other casualty losses; and |
• | certain litigation-related contingencies. |
See Note 20 to our Consolidated Financial Statements for more information regarding our commitments and contingent obligations.
Future Capital Requirements
During 2020, we intend to invest a total of approximately $85 million to $115 million in capital expenditures, primarily in support of our existing manufacturing facilities. For 2020, we expect cash interest to be approximately $39 million to $40 million based upon current debt levels and projected forward interest rates under our DIP Credit Facility and Receivables Securitization Facility. Cash interest excludes amortization of deferred financing fees of approximately $20 million.
At March 12, 2020, the Receivables Securitization Facility was fully utilized between borrowings and standby letters of credit, with $161.2 million also available under the DIP Credit Facility, subject to compliance with the covenants in our credit agreements. Availability under the Receivables Securitization Facility is calculated using the current receivables balance for the seller entities, less adjustments for vendor concentration limits, reserve requirements and other adjustments as described in our amended and restated receivables purchase agreement, not to exceed the total commitment amount less current borrowings and outstanding letters of credit. Availability under the DIP Credit Facility is calculated using the borrowing base availability less current borrowings and outstanding letters of credit. There are currently no letters of credit outstanding under the DIP Credit Facility.
Known Trends and Uncertainties
Filing Under Chapter 11 of the United States Bankruptcy Code
On the Petition Date, the debtors-in-possession filed the Bankruptcy Petitions under the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption In re Southern Foods Group, LLC, Case No. 19-36313. Each debtor-in-possession will continue to operate its business as a “debtor in possession” under the jurisdiction of the Bankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. For further information on the risks and uncertainties associated with the Bankruptcy Petitions, see "Item 1A. Risk Factors".
Going Concern
As a result of extremely challenging current market conditions, continuing losses from operations, our current financial condition and the resulting risks and uncertainties surrounding our Chapter 11 proceedings, there is substantial doubt about our ability to continue as a going concern within one year after the date of issuance of these financial statements. Our ability to continue as a going concern is dependent upon, among other things, our ability to become profitable, maintain profitability and successfully implement our Chapter 11 plan of reorganization.
Competitive Environment and Volume Performance
The fluid milk industry remains highly competitive, and we are currently navigating a number of challenging dynamics across our cost structure, volumes, customers, consumers and product mix. We continue to navigate a rapidly-changing industry landscape and a dynamic retail environment. Within private label fluid milk, competition for volume has increased significantly, and in some cases, we have lost volume. As a result, we have experienced increased levels of volume deleverage that have negatively impacted our operating income. In addition, retailers continue to aggressively price their private label products, which we believe negatively impacts our branded product sales, resulting in compressed margins.
During the year ended December 31, 2019, we experienced fluid milk volume declines from year-ago levels, driven predominantly by customer losses and overall category declines. We expect volume and mix challenges to continue into 2020.
40
Conventional Raw Milk and Other Inputs
Conventional Raw Milk and Butterfat — The primary raw materials used in the products we manufacture, distribute and sell are conventional raw milk (which contains both raw skim milk and butterfat) and bulk cream. On a monthly basis, the federal government and certain state governments set minimum prices for raw milk. The regulated minimum prices differ based on how the raw milk is utilized. Raw milk processed into fluid milk is priced at the Class I price and raw milk processed into products such as cottage cheese, creams and creamers, ice cream and sour cream is priced at the Class II price. Generally, we pay the federal minimum prices for raw milk, plus certain producer premiums (or “over-order” premiums) and location differentials. We also incur other raw milk procurement costs in some locations (such as hauling and field personnel). A change in the federal minimum price does not necessarily mean an identical change in our total raw milk costs as over-order premiums may increase or decrease. This relationship is different in every region of the country and can sometimes differ within a region based on supplier arrangements. However, in general, the overall change in our raw milk costs can be linked to the change in federal minimum prices. Because our Class II products typically have a higher fat content than that contained in raw milk, we also purchase bulk cream for use in some of our Class II products. Bulk cream is typically purchased based on a multiple of the Grade AA butter price on the Chicago Mercantile Exchange.
Prices for conventional raw milk during the fourth quarter of 2019 were approximately 18% higher than year-ago levels and increased approximately 5% sequentially from the third quarter of 2019. We are currently projecting Class I raw milk costs to increase during 2020 as compared to 2019. Commodity price changes primarily impact our branded business as the changes in raw milk costs are essentially a pass-through cost on our private label products. Given the multitude of factors that influence the dairy commodity environment, we expect the volatility of raw milk prices to continue.
Fuel, Resin and External Freight Costs — We purchase diesel fuel to operate our extensive DSD system, and we incur fuel surcharge expense related to the products we deliver through third-party carriers. Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuations, 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. Another significant raw material we use is resin, which is a fossil fuel-based product used to make plastic bottles. The prices of diesel and resin are subject to fluctuations based on changes in petroleum feed stock prices. Additionally, in some cases we incur expenses associated with utilizing third-party carriers to deliver our products. The expenses we incur for external freight may vary based on capacity, carrier acceptance rates and other factors. During the year ended December 31, 2019, we experienced a decline in fuel, external freight and resin costs. Overall freight and fuel expense and usage was down in the year ended December 31, 2019 primarily driven by lower volume and network optimization activities. We expect the favorability for resin to continue and for freight and fuel costs to remain stable into the first quarter of 2020.
Tax Rate
The income tax benefit of $9.2 million was recorded at an effective rate of 1.8% for 2019 compared to a 11.3% effective tax rate in 2018. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In 2019, our effective tax rate was impacted by an increase to tax expense of $118.1 million due to the change in valuation allowance recorded against both federal and state deferred tax assets. In 2018, our effective tax rate was impacted by a decrease in tax benefit of $35.1 million related to the non-deductible portion of the goodwill impairment charge and an increase to tax expense of $17.4 million due to a change in valuation allowance primarily related to state deferred tax assets.
In 2019, excluding the $118.1 million of tax expense related to our valuation allowance, our effective tax rate in 2019 would have been 25.0%. In 2018, excluding the net tax expense of $35.1 million related to the goodwill impairment and the $17.4 million tax expense related to our valuation allowance, our effective tax rate in 2018 would have been 25.3%.
We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets, including net operating loss carryforwards. A valuation allowance is recorded against deferred tax assets to reduce the net carrying value when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Our assessment is made on a jurisdiction-by-jurisdiction basis. In making such a determination, we consider the future reversals of taxable temporary differences, projected future taxable income, and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance.
The effective tax rate for 2020 and beyond could vary based upon our profitability level and the relative earnings of our business units and is also subject to change based on our assessment of the realizability of our deferred tax assets.
41
Critical Accounting Policies and Use of Estimates
In certain circumstances, the preparation of our Consolidated Financial Statements in conformity with generally accepted accounting principles requires us to use our judgment to make certain estimates and assumptions. These estimates 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. Our senior management has discussed the development and selection of these critical accounting policies, as well as our significant accounting policies (see Note 1 to our Consolidated Financial Statements), with the Audit Committee of our Board of Directors. The following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results, and the estimates they involve require our most difficult, subjective or complex judgments.
Estimate Description | Judgment and/or Uncertainty | Potential Impact if Results Differ |
Goodwill and Intangible Assets Our goodwill and intangible assets have resulted from acquisitions and primarily include trademarks with finite lives and indefinite lives and customer-related intangible assets. Goodwill and indefinite-lived trademarks are evaluated for impairment quarterly and when circumstances arise that indicate a possible impairment to ensure that the carrying value is recoverable. An indefinite-lived trademark is impaired if its book value exceeds its estimated fair value. Goodwill is evaluated for impairment if we determine that it is more likely than not that the book value of a reporting unit exceeds its estimated fair value. Finite-lived intangible assets are evaluated 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. Goodwill was zero as of December 31, 2019 (the gross carrying value was $2.26 billion and accumulated goodwill impairment was $2.26 billion). Intangible assets totaled $111.5 million as of December 31, 2019 after a $21.5 million non-cash impairment charge recorded in 2019. | Considerable management judgment is necessary to initially value intangible assets upon acquisition and to evaluate those assets and goodwill for impairment going forward. We determine fair value using widely acceptable valuation techniques including discounted cash flows, market multiples analyses and relief from royalty analyses. Assumptions used in our valuations, such as forecasted growth rates and our cost of capital, are consistent with our internal projections and operating plans. We believe that a trademark has an indefinite life if it has a history of strong sales and cash flow performance that we expect to continue for the foreseeable future. If these indefinite-lived trademark criteria are not met, the trademarks are amortized over their expected useful lives. Determining the expected life of a trademark requires considerable management judgment and is based on an evaluation of a number of factors including the competitive environment, trademark history and anticipated future trademark support. | We believe that the assumptions used in valuing our intangible assets and in our impairment analysis are reasonable, but variations in any of the assumptions may result in different calculations of fair values that could result in a material impairment charge. 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. We performed a step one valuation of goodwill, which indicated the carrying value of our reporting unit exceeded the fair value by approximately $381 million or 25.9%. As a result, we recorded a $190.7 million impairment charge which reduced goodwill to zero as of December 31, 2018. Results of the annual impairment testing of our indefinite-lived trademarks completed during the fourth quarter of 2018 indicated no impairment. In the fourth quarter of 2019, we recorded a $21.5 million impairment charge to reduce the carrying value of one of our indefinite-lived trademarks to its $30.5 million estimated fair value. The impairment was the result of declining volume and projected future cash flows. We can provide no assurance that we will not have additional impairment charges in future periods as a result of changes in our operating results or our assumptions. |
42
Estimate Description | Judgment and/or Uncertainty | Potential Impact if Results Differ |
Property, Plant and Equipment We perform impairment tests when circumstances indicate that the carrying value may not be recoverable. Indicators of impairment could include significant changes in business environment or planned closure of a facility. The results of our 2019 impairment analysis indicated an impairment of our property, plant, and equipment at 13 of our production facilities, totaling $155.9 million. The impairments were the result of declines in operating cash flows at these production facilities on both a historical and forecasted basis. Additionally, within prepetition facility closing and restructuring costs, we recognized $5.1 million of impairment charges during the year ended December 31, 2019 related to the write-down of property, plant and equipment at facilities approved for closure. Our property, plant and equipment, net of accumulated depreciation, totaled $820.4 million as of December 31, 2019. | Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows for purposes of determining whether an asset group needs to be tested for recoverability. The testing of an asset group for recoverability involves assumptions regarding the future cash flows of the asset group (which often includes consideration of a probability weighting of estimated future cash flows), the growth rate of those cash flows, and the remaining useful life over which the asset group is expected to generate cash flows. In the event we determine an asset group is not recoverable, the measurement of an estimated impairment loss involves a number of management judgments, including the selection of an appropriate discount rate, and estimates regarding the cash flows that would ultimately be realized upon liquidation of the asset group. | If actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows or the proceeds expected to be realized upon liquidation, we may be exposed to impairment losses that could be material. Additionally, we can provide no assurance that we will not have additional impairment charges in future periods as a result of changes in our operating results or our assumptions. |
Insurance Accruals We retain selected levels of employee health care, 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. At December 31, 2019, we recorded accrued liabilities related to these retained risks of $93.5 million, including both current and long-term liabilities. | Accrued liabilities related to these retained risks are calculated based upon loss development factors, which contemplate a number of variables including claims history and expected trends. These loss development factors are developed in consultation with third-party actuaries. | If actual results differ from our assumptions, we could be exposed to material gains or losses. A 10% change in our insurance liabilities could affect net earnings by approximately $9.2 million. |
43
Estimate Description | Judgment and/or Uncertainty | Potential Impact if Results Differ |
Income Taxes A liability for uncertain tax positions is recorded to the extent a tax position taken or expected to be taken in a tax return does not meet certain recognition or measurement criteria. A valuation allowance is recorded against a deferred tax asset if it is not more likely than not that the asset will be realized. At December 31, 2019, our liability for uncertain tax positions, including accrued interest, was $4.8 million, and our valuation allowance was $155.8 million. | Considerable management judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulations and taxing authority rulings, as well as to the expiration of statutes of limitations in the jurisdictions in which we operate. Additionally, several factors are considered in evaluating the realizability of our deferred tax assets, including the remaining years available for carry forward, the tax laws for the applicable jurisdictions, the future profitability of the specific business units, and tax planning strategies. | Our judgments and estimates concerning uncertain tax positions may change as a result of evaluation of new information, such as the outcome of tax audits or changes to or further interpretations of tax laws and regulations. Our judgments and estimates concerning realizability of deferred tax assets could change if any of the evaluation factors change. If such changes take place, there is a risk that our effective tax rate could increase or decrease in any period, impacting our net earnings. |
Employee Benefit Plans We provide a range of benefits including pension and postretirement benefits to our eligible employees and retirees. | We record annual amounts relating to these plans, which include various actuarial assumptions, such as discount rates, assumed investment rates of return, compensation increases, employee turnover rates and health care cost trend rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when it is deemed appropriate. The effect of the modifications is generally recorded and amortized over future periods. | Different assumptions could result in the recognition of different amounts of expense over different periods of time. A 0.25% reduction in the assumed rate of return on plan assets or a 0.25% reduction in the discount rate would result in an increase in our annual pension expense of $0.7 million and $0.5 million, respectively. A 1% increase in assumed healthcare costs trends would increase the aggregate postretirement medical obligation by approximately $3.3 million. |
44
Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to commodity price fluctuations, including raw milk, butterfat, sweeteners and other commodity costs used in the manufacturing, packaging and distribution of our products, including utilities, 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 with our qualified banking partners or exchange-traded commodity futures contracts for raw materials that are ingredients of our products or components of such ingredients. Our open commodity derivatives recorded at fair value on our balance sheet were at a net liability position of $0.8 million as of December 31, 2019.
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 expect to derive from these strategies. See Note 12 to our Consolidated Financial Statements.
45
Item 8. | Financial Statements and Supplementary Data |
Our Consolidated Financial Statements for 2019 are included in this report on the following pages.
Page | |
46
DEAN FOODS COMPANY
(Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
December 31 | |||||||
2019 | 2018 | ||||||
(Dollars in thousands, except share data) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | $ | |||||
Receivables, net of allowances of $6,676 and $5,994 | |||||||
Income tax receivable | |||||||
Inventories | |||||||
Prepaid expenses and other current assets | |||||||
Assets held for sale | |||||||
Total current assets | |||||||
Property, plant and equipment, net | |||||||
Operating lease right of use assets | |||||||
Identifiable intangible and other assets, net | |||||||
Deferred income taxes | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | $ | |||||
Current maturities of long-term debt and finance leases | |||||||
Operating lease liabilities | |||||||
Total current liabilities | |||||||
Long-term debt, net | |||||||
Deferred income taxes | |||||||
Long-term operating lease liabilities | |||||||
Other long-term liabilities | |||||||
Liabilities subject to compromise (Note 2) | |||||||
Commitments and contingencies (Note 20) | |||||||
Stockholders’ equity: | |||||||
Preferred stock, none issued | |||||||
Common stock, 91,940,015 and 91,438,768 shares issued and outstanding, with a par value of $0.01 per share | |||||||
Additional paid-in capital | |||||||
Accumulated deficit | ( | ) | ( | ) | |||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Total Dean Foods Company stockholders’ equity (deficiency) | ( | ) | |||||
Non-controlling interest | |||||||
Total stockholders’ equity (deficiency) | ( | ) | |||||
Total | $ | $ | |||||
See Notes to Consolidated Financial Statements.
F-1
DEAN FOODS COMPANY
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements.
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(Dollars in thousands, except share data) | |||||||||||
Net sales | $ | $ | $ | ||||||||
Cost of sales | |||||||||||
Gross profit | |||||||||||
Operating costs and expenses: | |||||||||||
Selling and distribution | |||||||||||
General and administrative | |||||||||||
Amortization of intangibles | |||||||||||
Prepetition facility closing and restructuring costs, net | |||||||||||
Impairment of goodwill and long-lived assets | |||||||||||
Other operating income | ( | ) | |||||||||
Equity in (earnings) loss of unconsolidated affiliate | ( | ) | ( | ) | |||||||
Total operating costs and expenses | |||||||||||
Operating income (loss) | ( | ) | ( | ) | |||||||
Other (income) expense: | |||||||||||
Interest expense | |||||||||||
Other (income) expense, net | ( | ) | |||||||||
Reorganization items | |||||||||||
Total other expense | |||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | |||||||
Income tax benefit | ( | ) | ( | ) | ( | ) | |||||
Income (loss) from continuing operations | ( | ) | ( | ) | |||||||
Income from discontinued operations, net of tax | |||||||||||
Gain (loss) on sale of discontinued operations, net of tax | ( | ) | |||||||||
Net income (loss) | ( | ) | ( | ) | |||||||
Net loss attributable to non-controlling interest | |||||||||||
Net income (loss) attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
Average common shares: | |||||||||||
Basic | |||||||||||
Diluted | |||||||||||
Basic income (loss) per common share: | |||||||||||
Income (loss) from continuing operations attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
Income from discontinued operations attributable to Dean Foods Company | |||||||||||
Net income (loss) attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
Diluted income (loss) per common share: | |||||||||||
Income (loss) from continuing operations attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
Income from discontinued operations attributable to Dean Foods Company | |||||||||||
Net income (loss) attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
F-2
DEAN FOODS COMPANY
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(in thousands) | |||||||||||
Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ||||
Other comprehensive income (loss): | |||||||||||
Defined benefit pension and other postretirement benefit plans, net of tax: | |||||||||||
Prior service costs arising during the period | ( | ) | |||||||||
Net gain (loss) arising during the period | ( | ) | |||||||||
Less: amortization of prior service cost included in net periodic benefit cost | |||||||||||
Other comprehensive income (loss) | ( | ) | |||||||||
Comprehensive income (loss) | ( | ) | ( | ) | |||||||
Comprehensive loss attributable to non-controlling interest | |||||||||||
Comprehensive income (loss) attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
See Notes to Consolidated Financial Statements.
F-3
DEAN FOODS COMPANY
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Dean Foods Company Stockholders | ||||||||||||||||||||||||||
Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Total Stockholders’ Equity (Deficiency) | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
(Dollars in thousands, except share data) | ||||||||||||||||||||||||||
Balance, January 1, 2017 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||
Issuance of common stock | — | — | — | |||||||||||||||||||||||
Repurchase of shares for withholding taxes | ( | ) | ( | ) | — | — | — | ( | ) | |||||||||||||||||
Share-based compensation expense | — | — | — | — | — | |||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||
Dividends(1) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||
Other comprehensive income(Note 15) | — | — | — | — | — | |||||||||||||||||||||
Balance, December 31, 2017 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||
Issuance of common stock | — | — | — | |||||||||||||||||||||||
Repurchase of shares for withholding taxes | ( | ) | — | — | — | |||||||||||||||||||||
Share-based compensation expense | — | — | — | — | — | |||||||||||||||||||||
Reclassification of stranded tax effects related to the Tax Act(2) | — | — | — | ( | ) | — | — | |||||||||||||||||||
Net loss | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||
Fair value of non-controlling interest acquired | — | — | — | — | — | |||||||||||||||||||||
Net loss attributable to non-controlling interest | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Issuance of subsidiary's common stock | — | — | ( | ) | — | — | ||||||||||||||||||||
Dividends(1) | — | — | ( | ) | ( | ) | — | — | ( | ) | ||||||||||||||||
Other comprehensive income(Note 15) | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||
Balance, December 31, 2018 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Issuance of common stock | — | — | — | |||||||||||||||||||||||
Repurchase of shares for withholding taxes | ( | ) | ( | ) | ( | ) | — | — | — | ( | ) | |||||||||||||||
Share-based compensation expense | — | — | — | — | — | |||||||||||||||||||||
Net loss | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||
Net loss attributable to non-controlling interest | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Issuance of subsidiary's common stock | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Dividends forfeited(1)(3) | — | — | — | — | — | |||||||||||||||||||||
Other comprehensive income(Note 15) | — | — | — | — | — | |||||||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||
(1) | Cash dividends declared per common share were $ |
(2) | Refer to Note 1 - Recently Adopted Accounting Pronouncements within our Notes to Consolidated Financial Statements for additional details on the adoption of ASU No. 2018-02 during the first quarter of 2018. |
(3) | During the year ended December 31, 2019, participants forfeited accrued dividends related to previously-granted restricted share units ("RSUs") and performance share units ("PSUs"), causing a reduction to our accumulated deficit position. Under our long-term incentive compensation program, cash dividend equivalent units for RSUs and PSUs are accrued over time as our Board of Directors declares cash dividends and vest in cash at the same time as the underlying award. |
See Notes to Consolidated Financial Statements.
F-4
DEAN FOODS COMPANY
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ||||
Income from discontinued operations, net of tax | ( | ) | |||||||||
(Gain) loss on sale of discontinued operations, net of tax | ( | ) | ( | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and amortization | |||||||||||
Non-cash lease expense | |||||||||||
Share-based compensation expense | |||||||||||
Non-cash prepetition facility closing and restructuring costs, net | |||||||||||
Non-cash reorganization items | |||||||||||
Impairment of goodwill and long-lived assets | |||||||||||
Write-off of financing costs | |||||||||||
Other operating income | ( | ) | |||||||||
Equity in (earnings) loss of unconsolidated affiliate | ( | ) | ( | ) | |||||||
Deferred income taxes | ( | ) | ( | ) | ( | ) | |||||
Other, net | ( | ) | |||||||||
Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
Receivables, net | ( | ) | |||||||||
Inventories | |||||||||||
Prepaid expenses and other assets | ( | ) | ( | ) | |||||||
Accounts payable and accrued expenses | ( | ) | ( | ) | |||||||
Income tax receivable | ( | ) | |||||||||
Operating lease liabilities | ( | ) | |||||||||
Contributions to company-sponsored pension plans | ( | ) | |||||||||
Net cash provided by (used in) operating activities | ( | ) | |||||||||
Cash flows from investing activities: | |||||||||||
Payments for property, plant and equipment | ( | ) | ( | ) | ( | ) | |||||
Payments for acquisitions, net of cash acquired | ( | ) | ( | ) | |||||||
Proceeds from sale of fixed assets | |||||||||||
Other investments | ( | ) | |||||||||
Net cash used in investing activities | ( | ) | ( | ) | ( | ) | |||||
Cash flows from financing activities: | |||||||||||
Repayments of debt | ( | ) | ( | ) | ( | ) | |||||
Payments of financing costs | ( | ) | ( | ) | ( | ) | |||||
Proceeds from DIP senior credit facility | |||||||||||
Proceeds from senior secured revolver | |||||||||||
Payments for senior secured revolver | ( | ) | ( | ) | ( | ) | |||||
Proceeds from receivables securitization facility | |||||||||||
Payments for receivables securitization facility | ( | ) | ( | ) | ( | ) | |||||
Proceeds from issuance of subsidiary's common stock | |||||||||||
Repurchase of subsidiary's common stock | ( | ) | |||||||||
Cash dividends paid | ( | ) | ( | ) | |||||||
Issuance of common stock, net of share repurchases for withholding taxes | ( | ) | ( | ) | ( | ) | |||||
Net cash provided by (used in) financing activities | ( | ) | ( | ) | |||||||
Increase (decrease) in cash and cash equivalents | ( | ) | |||||||||
Cash and cash equivalents, beginning of year | |||||||||||
Cash and cash equivalents, end of year | $ | $ | $ | ||||||||
See Notes to Consolidated Financial Statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Debtors-in-Possession)
Years Ended December 31, 2019, 2018 and 2017
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 including non-debtor entities that are not a party to the Bankruptcy filings. See Note 2 for more information specific to the debtors-in-possession.
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 18. Expenditures for repairs and maintenance which do not improve or extend the life of the assets are expensed as incurred.
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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 | |
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.
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respectively. Sales of excess raw materials included as a reduction to cost of sales were $606.9 million for the year ended December 31, 2017.
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.
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.
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 3. 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.
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The following table summarizes the impact of adopting ASU 2014-09 on our Consolidated Statements of Operations for the year ended December 31, 2019 (in thousands):
Year Ended December 31, 2019 | ||||||||||
As Reported | As Without Adoption of ASU 2014-09 | Impact of Adoption of ASU 2014-09 | ||||||||
Net sales | $ | $ | $ | |||||||
Cost of sales | ||||||||||
Gross profit | $ | $ | $ | |||||||
The following table summarizes the impact of adopting ASU 2014-09 on our Consolidated Statements of Operations for the year ended December 31, 2018 (in thousands):
Year Ended December 31, 2018 | ||||||||||
As Reported | As Without Adoption of ASU 2014-09 | Impact of Adoption of ASU 2014-09 | ||||||||
Net sales | $ | $ | $ | |||||||
Cost of sales | ||||||||||
Gross profit | $ | $ | $ | |||||||
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 16 and 17 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 | |||||||||
As Previously Reported | Adjustment for Adoption of ASU 2017-07 | As Revised | |||||||
Cost of sales | $ | $ | ( | ) | $ | ||||
Gross profit | |||||||||
Selling and distribution | ( | ) | |||||||
General and administrative | ( | ) | |||||||
Total operating costs and expenses | ( | ) | |||||||
Operating income | |||||||||
Other (income) expense, net | ( | ) | |||||||
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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.
ASU No. 2016-02 — We adopted ASU 2016-02, Leases (Topic 842) (the New Lease Standard) as of January 1, 2019. The New Lease Standard requires lessees to recognize a right-of-use (ROU) asset and a lease liability on the balance sheet for operating leases. Accounting for finance leases is substantially unchanged.
We adopted the New Lease Standard using the comparative reporting at adoption method. Under this method, financial results reported in periods prior to January 1, 2019 are unchanged. We also elected the package of practical expedients which among other things, does not require reassessment of lease classification. We have implemented processes and a lease accounting system to ensure adequate internal controls are in place to assess our contracts and enable proper accounting and reporting of financial information.
The adoption of this standard had a significant impact to our consolidated balance sheet due to the recognition of approximately $358 million of operating lease liabilities with corresponding operating lease ROU assets as of January 1, 2019. We do not expect it to have a significant impact to our condensed consolidated statement of operations or condensed consolidated statement of cash flows in the periods after adoption. See Note 10 for further discussion.
ASU No. 2019-12 — We early adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, effective January 1, 2019, and have applied the guidance as of the beginning of the period of adoption. The update is intended to enhance and simplify various aspects of the accounting for income taxes. Amendments in this update remove certain exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The adoption of the new guidance did not have a material impact to the Company.
Recently Issued Accounting Pronouncements
Effective in 2020
ASU No. 2018-13 — The FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) in August 2018 to modify disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.
ASU No. 2018-15 —The FASB also issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) in August 2018. The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and 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 (and hosting arrangements that include an internal use software license). For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.
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.
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2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11
Filing Under Chapter 11 of the United States Bankruptcy Code
On November 12, 2019 (the “Petition Date”), we and substantially all of our wholly owned subsidiaries (other than our Securitization Subsidiaries) (the “Filing Subsidiaries” and, together with the Company, the “debtors-in-possession”) filed voluntary petitions for reorganization (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The debtors-in-possession’s Chapter 11 Cases are being jointly administered under the caption In re Southern Foods Group, LLC, Case No. 19-36313. Each debtor-in-possession has continued to operate its business as a “debtor in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.
The filing of the Bankruptcy Petitions constituted an event of default that accelerated our obligations under the documents governing the Senior Secured Revolving Credit Facility, the Receivables Securitization Facility and our 2023 Notes (collectively, the “Debt Instruments”) and substantially all of our other indebtedness.
On the Petition Date, the debtors-in-possession filed a number of motions with the Court generally designed to stabilize their operations and facilitate the debtors-in-possession’s transition into Chapter 11. Certain of these motions sought authority from the Court for the debtors-in-possession to make payments upon, or otherwise honor, certain prepetition obligations (e.g., obligations related to certain employee wages, salaries and benefits and certain vendors and other providers essential to the debtors-in-possession’s businesses).
Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the debtors-in-possession, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the debtors-in-possession’s property. Subject to certain exceptions under the Bankruptcy Code, the filing of the debtors-in-possession’s Chapter 11 Cases also automatically stayed the filing of most legal proceedings and other actions against or on behalf of the debtors-in-possession or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the debtors-in-possession’s bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.
On November 22, 2019, the United States Trustee for the Southern District of Texas (the “U.S. Trustee”), appointed an official committee of unsecured creditors (the “Creditors’ Committee”) in the Chapter 11 Cases. The Creditors’ Committee represents all unsecured creditors of the debtors-in-possession and has a right to be heard on all matters that come before the Court.
Debtors-in-Possession Financing
In connection with the Chapter 11 Cases, Coöperatieve Rabobank U.A., New York Branch (“Rabobank”) agreed to provide the debtors-in-possession with a senior secured, superpriority debtor-in-possession facility (the “DIP Facility”) in an aggregate principal amount of $425,000,000 , pursuant to which (i) Rabobank provided a “new money” revolving credit facility in a maximum principal amount of $236,200,000 , and (ii) on the Final Order Date, all of the outstanding loans under the Pre-Petition Credit Agreement (the “Pre-Petition Revolving Loans”) were, on a dollar-for-dollar basis, refinanced, and deemed repaid by (and converted into) terms loans (i.e., the “Revolver Refinancing’).
On November 14, 2019, the Bankruptcy Court entered an order approving, on an interim basis, the $425,000,000 financing to be provided pursuant to the DIP Credit Agreement.
On December 23, 2019, the Bankruptcy Court entered the Final Order approving the amendment and restatement of the receivables securitization facility in the amount of $425,000,000 .
See Note 11 for additional information regarding the DIP Credit Agreement.
Going Concern
As a result of extremely challenging current market conditions, continuing losses from operations, our current financial condition and the resulting risks and uncertainties surrounding our Chapter 11 proceedings, there is substantial doubt about our ability to continue as a going concern within one year after the date of issuance of these financial statements. Our ability to continue as a going concern is dependent upon, among other things, our ability to become profitable, maintain profitability and successfully implement our Chapter 11 plan of reorganization and/or any sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code. As a result of the Bankruptcy Petitions, the realization of the debtors-in-possession's assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as debtors-in-possession pursuant to the Bankruptcy Code, we may sell or otherwise dispose of or liquidate assets, or settle liabilities, subject to the approval of the
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Bankruptcy Court or as otherwise permitted in the ordinary course of business for amounts other than those reflected in the accompanying Consolidated Financial Statements. Further, a Chapter 11 plan of reorganization is likely to materially change the amounts and classifications of assets and liabilities reported in our Consolidated Balance Sheet as of December 31, 2019. As the progress of these plans and transactions is subject to approval of the Bankruptcy Court and therefore not within our control, successful reorganization and emergence from bankruptcy cannot be considered probable and such plans do not alleviate substantial doubt about our ability to continue as a going concern.
The consolidated financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty.
Sale of Assets
Evercore Group L.L.C. (“Evercore”) and the debtors-in-possession have run an extensive marketing process for the potential sale of all or substantially all of the debtors-in-possession’s assets under Section 363 of the Bankruptcy Code. To effectuate the sale, Evercore and the debtors-in-possession have contacted numerous potential purchasers, the debtors-in-possession have executed non-disclosure agreements with a significant number of such parties, and Evercore has provided additional details to these parties, including access to confidential diligence materials.
On February 17, 2020, the debtors-in-possession filed with the Bankruptcy Court the Motion of debtors-in-possession for Entry of Orders (I)(a) Approving Bidding Procedures for Sale of debtors-in-possession’s Assets, (b) Approving the Designation of DFA as the Stalking Horse Bidder for Substantially All of debtors-in-possession’s Assets, (c) Authorizing and Approving Entry into the Stalking Horse Asset Purchase Agreement, (d) Approving Bid Protections, (e) Scheduling Auction for, and Hearing To Approve, Sale of debtors-in-possession’s Assets, (f) Approving Form and Manner Notices of Sale, Auction, and Sale Hearing, (g) Approving Assumption and Assignment Procedures, and (h) Granting Related Relief and (II)(a) Approving Sale of debtors-in-possession’s Assets Free and Clear of Liens, Claims, Interests, and Encumbrances, (b) Authorizing Assumption and Assignment of Executory Contracts and Unexpired Leases, and (c) Granting Related Relief.
On March 18, 2020, the debtors-in-possession filed notice with the Bankruptcy Court of the termination of the Stalking Horse Asset Purchase Agreement described above, while seeking approval of proposed bidding procedures with respect to the sale of the Bid Assets (the “Bidding Procedures”), and on March 19, 2020, the Bankruptcy Court held a hearing with respect to the proposed Bidding Procedures. At this hearing, the parties obtained an order of the Bankruptcy Court (the "Bidding Procedures Order") approving the revised Bidding Procedures.
Pursuant to the Bidding Procedures Order, the debtors-in-possession intend to sell all of their right, title and interest in and to the Bid Assets free and clear of any pledges, liens, security interests, encumbrances, claims, charges, options, and interests thereon (collectively, the “Interests”) to the maximum extent permitted by section 363 of the Bankruptcy Code, with such Interests to attach to the net proceeds of the sale of the Bid Assets with the same validity and priority as such Interests applied against the Bid Assets. The deadline for the submission of bids that satisfy the requirements of the Bidding Procedures Order (each a “Bid,” and those parties who submit a Bid, each a “Bidder”) is March 30, 2020 at 12:00 p.m. (prevailing Central Time) (the “Bid Deadline”).
Immediately following the Bid Deadline, the debtors-in-possession shall, in consultation with the Consultation Parties, (i) review and evaluate each Bid on the basis of financial and contractual terms and other factors relevant to the sale process, including those factors affecting the speed and certainty of consummating the Sale, (ii) determine and identify the highest or otherwise best offer or collection of offers (the “Successful Bid(s)”) and (iii) determine and identify the second best offer or collection of offers (the “Alternate Bid(s)”). The deadline to object to the Successful Bid(s) will be April 1, 2020 at 12:00 p.m. (prevailing Central Time). Following selection of the Successful Bid(s), the debtors-in-possession may, in their discretion, elect to seek approval of the transactions contemplated in the Successful Bid(s) at the hearing to consider and approve the proposed Sale Order (the “Sale Hearing”).
The Sale Hearing is proposed to be held on April 3, 2020 at 9:00 a.m. (prevailing Central time) before the Bankruptcy Court. The Sale Hearing may be adjourned by the debtors-in-possession, in consultation with the Consultation Parties, by an announcement of the adjourned date at a hearing before the Bankruptcy Court or by filing a notice on the Bankruptcy Court’s docket. At the Sale Hearing, the debtors-in-possession will seek the Bankruptcy Court’s approval of the Successful Bid(s) and/or, at the debtors-in-possession’s election, the Alternate Bid(s).
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Liabilities Subject to Compromise
Liabilities subject to compromise refers to prepetition obligations which may be affected by the Chapter 11 process. These amounts represent the Company’s current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases. Differences between the liabilities the Company has estimated and the claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust amounts as necessary. Such adjustments may be material.
The following table summarizes the components of liabilities subject to compromise included in the Company's consolidated balance sheet as of December 31, 2019 (in thousands):
December 31, 2019 | |||
Debt subject to compromise: | |||
Senior notes due 2023 | $ | ||
Accrued interest | |||
Accounts payable | |||
Accrued prepetition facility closing and restructuring costs | |||
Accrued postretirement obligations other than pensions | |||
Other accrued expenses | |||
Liabilities subject to compromise | $ | ||
Costs of Reorganization
The Company has incurred and will continue to incur significant costs associated with the Chapter 11 Case. The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Company's results. Reorganization items represent costs directly associated with the Chapter 11 Cases since the Petition Date. Such costs include professional fees and the elimination of unamortized deferred financing costs associated with debt classified as liabilities subject to compromise.
The following table summarizes the components of "Reorganization items" included in the Company's statement of operations (in thousands):
Twelve Months Ended | |||
December 31, 2019 | |||
Professional fees | $ | ||
DIP Credit Agreement financing fees | |||
Write-off of prepetition deferred financing costs | |||
Reorganization items | $ | ||
Operating cash payments for bankruptcy-related transactions were $24.9 million for the year ended December 31, 2019. There were no bankruptcy-related operating cash receipt gains for the year ended December 31, 2019.
Interest Expense
The Company has discontinued recording interest on debt instruments classified as liabilities subject to compromise as of the Petition Date. The contractual interest expense on liabilities subject to compromise not accrued or recorded in the Consolidated Statements of Operations was approximately $6.3 million, representing interest expense from the Petition Date through December 31, 2019.
Debtors-in-Possession Condensed Combined Financial Statements
Condensed combined financial statements of the debtors-in-possession are set forth below. These condensed combined financial statements exclude the financial statements of certain non-debtors-in-possession entities and the Securitization Subsidiaries.
Transactions and balances of receivables and payables between debtors-in-possession are eliminated in consolidation. However, the debtors-in-possession’s condensed combined balance sheet includes receivables from related non-debtors-in-possession and payables to related non-debtors-in-possession.
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BALANCE SHEET
December 31, 2019 | |||
(in thousands) | |||
ASSETS | |||
Current assets: | |||
Cash and cash equivalents | $ | ||
Receivables, net of allowances | |||
Inventories | |||
Prepaid expenses and other current assets | |||
Total current assets | |||
Property, plant and equipment, net | |||
Operating lease right of use assets | |||
Identifiable intangible and other assets, net | |||
Investment in nondebtor subsidiaries | |||
Amounts due from nondebtor subsidiaries | |||
Total assets | $ | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||
Current liabilities: | |||
Accounts payable and accrued expenses | $ | ||
Current maturities of long-term debt and finance leases | |||
Operating lease liabilities | |||
Total current liabilities | |||
Long-term debt, net | |||
Long-term operating lease liabilities | |||
Other long-term liabilities | |||
Liabilities subject to compromise | |||
Commitments and contingencies | |||
Total stockholders’ equity | ( | ) | |
Total | $ | ||
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STATEMENT OF OPERATIONS
Year Ended | |||
December 31, 2019 | |||
(in thousands) | |||
Net sales | $ | ||
Cost of sales | |||
Gross profit | |||
Operating costs and expenses: | |||
Selling and distribution | |||
General and administrative | |||
Amortization of intangibles | |||
Prepetition facility closing and restructuring costs, net | |||
Impairment of goodwill and long-lived assets | |||
Equity in (earnings) loss of unconsolidated affiliate | ( | ) | |
Equity in (earnings) loss of nondebtor subsidiaries | |||
Total operating costs and expenses | |||
Operating income (loss) | ( | ) | |
Other (income) expense: | |||
Interest expense | |||
Other expense, net | ( | ) | |
Reorganization items | |||
Total other expense | |||
Loss from continuing operations before income taxes | ( | ) | |
Income tax benefit | ( | ) | |
Loss from continuing operations | ( | ) | |
Gain (loss) on sale of discontinued operations, net of tax | ( | ) | |
Net loss | $ | ( | ) |
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STATEMENT OF CASH FLOWS
Year Ended | |||
December 31, 2019 | |||
(in thousands) | |||
Net cash used in operating activities | $ | ( | ) |
Cash flows from investing activities: | |||
Payments for property, plant and equipment | ( | ) | |
Proceeds from sale of fixed assets | |||
Net cash used in investing activities | ( | ) | |
Cash flows from financing activities: | |||
Repayments of debt | ( | ) | |
Payments of financing costs | ( | ) | |
Proceeds from DIP senior credit facility | |||
Proceeds from senior secured revolver | |||
Payments for senior secured revolver | ( | ) | |
Intercompany loans | ( | ) | |
Issuance of common stock, net of share repurchases for withholding taxes | ( | ) | |
Net cash provided by financing activities | |||
Increase (decrease) in cash and cash equivalents | |||
Cash and cash equivalents, beginning of period | |||
Cash and cash equivalents, end of period | $ | ||
3. 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, 2019 | December 31, 2018 | December 31, 2017(1) | |||||||||
(In thousands) | |||||||||||
Fluid milk | $ | $ | $ | ||||||||
Ice cream(2) | |||||||||||
Fresh cream(3) | |||||||||||
Extended shelf life and other dairy products(4) | |||||||||||
Cultured | |||||||||||
Other beverages(5) | |||||||||||
Other(6) | |||||||||||
Subtotal | |||||||||||
Sales of excess raw materials(7) | |||||||||||
Sales of other bulk commodities | |||||||||||
Total net sales | $ | $ | $ | ||||||||
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(1) | Amounts in 2017 have not been restated as we elected to adopt ASC 606 in 2018 using the modified retrospective method. Sales of excess raw materials of $ |
(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 in 2018, we determined that it was 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, 2019 | December 31, 2018 | December 31, 2017(1) | |||||||||
(In thousands) | |||||||||||
Branded products | $ | $ | $ | ||||||||
Private label products | |||||||||||
Subtotal | |||||||||||
Sales of excess raw materials | |||||||||||
Sales of other bulk commodities | |||||||||||
Total net sales | $ | $ | $ | ||||||||
(1) | Amounts in 2017 have not been restated as we elected to adopt ASC 606 in 2018 using the modified retrospective method. Sales of excess raw materials of $ |
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.
F-17
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, 2019 or December 31, 2018.
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.
4. INVESTMENT IN AFFILIATES AND DISCONTINUED OPERATIONS
Unconsolidated Affiliate and Related Party
Organic Valley Fresh Joint Venture — In the third quarter of 2017, we commenced the operations of our 50 /50 strategic joint venture with Cooperative Regions of Organic Producer Pools (“CROPP”), an independent farmer cooperative that distributes organic milk and other organic dairy products under the Organic Valley® brand. The joint venture, called Organic Valley Fresh, combines our processing plants and refrigerated DSD system with CROPP's portfolio of recognized brands and products, marketing expertise, and access to an organic milk supply from America's largest cooperative of organic dairy farmers to bring the Organic Valley® brand to retailers. We and CROPP each made a capital contribution of $2.0 million to the joint venture during the third quarter of 2017. We received cash distributions from the joint venture of $5.6 million for the twelve months ended December 31, 2019. We made purchases from the joint venture of $69.9 million for the twelve months ended December 31, 2019, 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; therefore, the financial results of the joint venture have not been consolidated in our Consolidated Financial Statements. We are accounting for this investment under the equity method of accounting. Our equity in the earnings of the joint venture is included as a component of operating income as we have determined that the joint venture's operations are integral to, and an extension of, our business operations. Our equity in earnings of the joint venture was $4.8 million and $7.9 million for the years ended December 31, 2019 and 2018, respectively.
F-18
Controlling Interest in Consolidated Affiliate
Good Karma — On May 4, 2017, we acquired a non-controlling interest in, and entered into a distribution agreement with, Good Karma Foods, Inc. (“Good Karma”), the leading producer of flax-based beverage and yogurt products. This investment allows us to diversify our portfolio to include plant-based dairy alternatives and provides Good Karma the ability to more rapidly expand distribution across the U.S., as well as increase investments in brand building and product innovation.
On June 29, 2018, we increased our ownership interest in Good Karma to 67 % with an additional investment of $15.0 million, resulting in control under acquisition method accounting. 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 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 year ended December 31, 2018.
On October 12, 2018, we made a capital contribution to Good Karma of $3 million. Our current ownership interest in Good Karma is 69 %.
Discontinued Operations
During the year ended December 31, 2019, we recognized a net gain from the sale of discontinued operations of $0.1 million, net of tax.
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.
5. INVENTORIES
Inventories at December 31, 2019 and 2018 consisted of the following:
December 31 | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Raw materials and supplies | $ | $ | |||||
Finished goods | |||||||
Total | $ | $ | |||||
F-19
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2019 and 2018 consisted of the following:
December 31 | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Land | $ | $ | |||||
Buildings | |||||||
Leasehold improvements | |||||||
Machinery and equipment | |||||||
Construction in progress | |||||||
Less accumulated depreciation | ( | ) | ( | ) | |||
Total | $ | $ | |||||
Depreciation expense amounted to $126.7 million, $133.0 million and $145.1 million during the years ended December 31, 2019, 2018 and 2017, respectively.
There was no material interest capitalized during the years ended December 31, 2019 and 2018.
See Note 18 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.
As of December 31, 2019, 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.
We conduct impairment tests of indefinite-lived intangible assets annually in the fourth quarter and on an interim basis when circumstances arise that indicate a possible impairment. Considerable management judgment is necessary to evaluate indefinite-lived intangible assets for impairment. We estimate fair value using widely accepted valuation techniques including the relief-from-royalty method with respect to our indefinite-lived trademarks. 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.
In the fourth quarter of 2019, as a result of declining volumes and projected future cash flows related to one of our indefinite-lived trademarks, we recorded an impairment charge of $21.5 million to reduce the carrying value of the trademark to its estimated fair value. Based on the results of our annual impairment testing of our indefinite-lived trademarks completed during the fourth quarter of 2019, we did not record any other impairment charges.
F-20
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 6 years.
The net carrying amounts of our intangible assets as of December 31, 2019 and 2018 were as follows:
December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||
Acquisition Costs | Accumulated Impairment | Accumulated Amortization | Net Carrying Amount | Acquisition Costs | Accumulated Impairment | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Intangible assets with indefinite lives: | |||||||||||||||||||||||||||||||
Trademarks | $ | $ | ( | ) | $ | — | $ | $ | $ | $ | — | $ | |||||||||||||||||||
Intangible assets with finite lives: | |||||||||||||||||||||||||||||||
Customer-related and other | ( | ) | ( | ) | |||||||||||||||||||||||||||
Trademarks | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Total | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2019 and 2018 consisted of the following:
December 31 | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Accounts payable | $ | $ | |||||
Payroll and benefits, including incentive compensation | |||||||
Health insurance, workers’ compensation and other insurance costs | |||||||
Customer rebates | |||||||
Other accrued liabilities | |||||||
Total | $ | $ | |||||
F-21
9. INCOME TAXES
The following table presents the 2019, 2018 and 2017 income tax expense (benefit):
Year Ended December 31 | |||||||||||
2019 | 2018(1) | 2017(2) | |||||||||
(In thousands) | |||||||||||
Current income taxes: | |||||||||||
Federal | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
State | |||||||||||
Foreign | ( | ) | |||||||||
Total current income tax expense (benefit) | ( | ) | ( | ) | |||||||
Deferred income taxes: | |||||||||||
Federal | ( | ) | ( | ) | ( | ) | |||||
State | |||||||||||
Total deferred income tax expense (benefit) | ( | ) | ( | ) | ( | ) | |||||
Total income tax expense (benefit) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
(1) | Excludes $ |
(2) | Excludes $ |
Year Ended December 31 | ||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||
Amount | Percentage | Amount | Percentage | Amount | Percentage | |||||||||||||||
(In thousands, except percentages) | ||||||||||||||||||||
Tax expense (benefit) at statutory rate | $ | ( | ) | % | $ | ( | ) | % | $ | % | ||||||||||
State income taxes | ( | ) | ( | ) | ||||||||||||||||
Uncertain tax position | ( | ) | ||||||||||||||||||
Corporate owned life insurance | ( | ) | ( | ) | ( | ) | ||||||||||||||
Nondeductible executive compensation | ( | ) | ( | ) | ||||||||||||||||
Impairment | ( | ) | ||||||||||||||||||
Change in valuation allowances | ( | ) | ( | ) | ||||||||||||||||
Share-based compensation(1) | ( | ) | ||||||||||||||||||
Domestic production activities deduction | ( | ) | ( | ) | ||||||||||||||||
Transition tax on unrepatriated foreign earnings | ||||||||||||||||||||
Tax reform revaluation of deferred taxes | ( | ) | ( | ) | ||||||||||||||||
Other | ( | ) | ( | ) | ||||||||||||||||
Total | $ | ( | ) | % | $ | ( | ) | % | $ | ( | ) | ( | )% | |||||||
(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. |
F-22
December 31 | |||||||
2019(1) | 2018(2) | ||||||
(In thousands) | |||||||
Deferred income tax assets: | |||||||
Accrued liabilities | $ | $ | |||||
Retirement plans and postretirement benefits | |||||||
Share-based compensation | |||||||
Receivables and inventories | |||||||
Derivative financial instruments | |||||||
Net operating loss carryforwards | |||||||
Tax credits and other carryforwards | |||||||
Lease liability | |||||||
Valuation allowances | ( | ) | ( | ) | |||
Deferred income tax liabilities: | |||||||
Property, plant and equipment | ( | ) | ( | ) | |||
Operating lease right of use assets | ( | ) | |||||
Intangible assets | ( | ) | ( | ) | |||
Prepaid expenses | ( | ) | |||||
Other | ( | ) | ( | ) | |||
( | ) | ( | ) | ||||
Net deferred income tax asset (liability) | $ | ( | ) | $ | ( | ) | |
(1) | Includes $ |
(2) | Includes $ |
December 31 | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Noncurrent assets | $ | $ | |||||
Noncurrent liabilities | ( | ) | ( | ) | |||
Total | $ | ( | ) | $ | ( | ) | |
F-23
The following is a reconciliation of gross unrecognized tax benefits, including interest, recorded in our Consolidated Balance Sheets:
December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands) | |||||||||||
Balance at beginning of year | $ | $ | $ | ||||||||
Increases in tax positions for current year | |||||||||||
Increases in tax positions for prior years | |||||||||||
Decreases in tax positions for prior years | ( | ) | ( | ) | ( | ) | |||||
Settlement of tax matters | ( | ) | |||||||||
Lapse of applicable statutes of limitations | ( | ) | ( | ) | |||||||
Balance at end of year | $ | $ | $ | ||||||||
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 2019, 2018 and 2017 was immaterial. Our liability for uncertain tax positions included accrued interest of $0.2 million and $0.8 million at December 31, 2019 and 2018, respectively.
As of December 31, 2019, our 2016 through 2018 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.
10. LEASES
We determine if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities and long-term operating lease liabilities in our Consolidated Balance Sheet. Finance leases are included in property, plant, and equipment, the current maturities of long-term debt and finance leases, as well as long-term debt, net in our Consolidated Balance Sheet. Our finance leases are not material.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate derived from information available at the lease commencement date to determine the present value of our lease payments if a discount rate is not stated within the lease agreement. To estimate the incremental borrowing rate, we utilize a risk-free rate plus our incremental interest rate spread for collateralized debt, which is updated on a quarterly basis. We use multiple incremental borrowing rates that correspond to the term of the lease.
We lease certain property, vehicles used in the distribution of our product, and equipment. As of December 31, 2019, we had approximately 1,400 leases with remaining terms ranging from less than one year to 20 years. Our leases primarily consist of:
•Land and buildings of our manufacturing facilities and corporate office
•Leased vehicles within our direct-to-store delivery (“DSD”) system
•Leased equipment primarily related to equipment used in the production of our products.
We also have certain storage service agreements that may be treated as real estate leases. Storage agreements providing us with both fully dedicated square footage and the right to designate how the space is utilized are classified as a lease and included in the ROU asset and corresponding lease liability. To determine if a storage agreement has an embedded real estate lease we analyze the agreement to determine if the facility has space that is fully dedicated to storing and managing our products. If the space is fully dedicated to our products, we analyze whether or not we have the right and ability to dictate how the designated space will be utilized to manage our refrigerated and frozen products. Fixed payment amounts related to those agreements are included in the determination of the ROU asset and lease liability.
F-24
Our DIP Facility and our receivables backed securitization facility contain certain restrictions on finance lease activities as these are treated as indebtedness and subject to the indebtedness covenants pursuant to these credit agreements. See further discussion of debt facilities and covenant restrictions in Note 11.
Our lease terms may include options to extend or terminate the lease. We include options to extend the lease when it is reasonably certain that we will exercise that option based on the individual lease and our business objectives at lease inception. We have elected to not record leases with a term of 12 months or less on the balance sheet. Certain vehicle leases contain residual value guarantees (“RVG”). We continue to monitor whether amounts related to RVGs are probable of being owed. As of December 31, 2019, we do not expect to make any payments related to RVGs, and our maximum exposure under those guarantees is not a material amount; therefore, we have excluded from the determination of lease payments.
We have elected the practical expedient to combine the lease and non-lease components for all asset classes, except vehicles. For vehicles, we have three separate full service agreements, wherein the agreements provide for certain maintenance services to be included in the overall cost to lease the asset. We determined the stand-alone prices for each of the lease and non-lease components based on comparisons to similar supplier arrangements (such as the cost to lease a vehicle without maintenance services and the cost to obtain maintenance services for a non-leased vehicle). The total transaction price is allocated to the lease and non-lease components on a relative stand-alone price basis.
The components of lease expenses were as follows (in thousands):
Twelve months ended | |||
December 31, 2019 | |||
Operating lease cost | $ | ||
Finance lease cost | |||
Amortization of ROU assets | |||
Interest on lease liability | |||
Short term lease cost (1) | |||
Variable lease cost (2) | |||
Sublease income | ( | ) | |
Total net lease cost | $ | ||
(1)Related to leases with a term of 12 months or less that are not recorded on the balance sheet.
(2) | Certain operating lease agreements require the payment of additional amounts for maintenance, along with additional rentals based on miles driven or units produced. |
Supplemental balance sheet information related to leases was as follows (in thousands):
As of | |||
December 31, 2019 | |||
Operating leases: | |||
Operating lease ROU asset | $ | ||
Current operating lease liabilities | $ | ||
Long-term operating lease liabilities | |||
Total operating lease liabilities | $ | ||
F-25
The weighted-average remaining lease term of our operating leases as of December 31, 2019 was 4.7 years, and our weighted-average discount rate was 6.4 %.
Supplemental cash flow and other information related to leases was as follows (in thousands):
Twelve months ended | |||
December 31, 2019 | |||
Operating cash flows information: | |||
Cash paid for amounts included in the measurement of lease liabilities | $ | ||
Non-cash activity: | |||
Right of use assets obtained in exchange for operating lease obligations | $ | ||
Maturities of operating lease liabilities were as follows (in thousands):
As of | |||
December 31, 2019 | |||
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total lease payments | $ | ||
Less: imputed interest | ( | ) | |
Total lease obligations | $ | ||
Less: current obligations | |||
Long-term lease obligations | $ | ||
Disclosures related to periods prior to adoption of the New Lease Standard
Prior to the adoption of this standard, rent expense was $143.3 million and $135.4 million for 2018 and 2017, respectively.
F-26
11. DEBT
Our long-term debt as of December 31, 2019 and December 31, 2018 consisted of the following:
December 31, 2019 | December 31, 2018 | ||||||||||||||
Amount | Interest Rate | Amount | Interest Rate | ||||||||||||
(In thousands, except percentages) | |||||||||||||||
Dean Foods Company debt obligations: | |||||||||||||||
Senior secured debtor-in-possession credit facility | % | * | $ | % | |||||||||||
Senior secured revolving credit facility | * | ||||||||||||||
Senior notes due 2023 | |||||||||||||||
Subsidiary debt obligations: | |||||||||||||||
Receivables securitization facility | * | * | |||||||||||||
Finance lease and other | — | — | |||||||||||||
Subtotal | |||||||||||||||
Unamortized debt issuance costs | ( | ) | |||||||||||||
Less liabilities subject to compromise | ( | ) | |||||||||||||
Total debt | |||||||||||||||
Less current portion | ( | ) | ( | ) | |||||||||||
Total long-term portion | $ | $ | |||||||||||||
* | Represents a weighted average rate, including applicable interest rate margins. |
The scheduled debt maturities at December 31, 2019 were as follows (in thousands):
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total debt | $ | ||
Senior Secured Revolving Credit Facility — On February 22, 2019, we entered into an 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 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 were limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount was equal to 65 % of the value of certain of our equipment and real property. We elected to include real estate and equipment with appraised values sufficient to support a borrowing base of $265 million. Our ability to access the full borrowing base was limited by the requirement under the Credit Agreement to maintain 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) in an amount equal to the lesser of 50 % of the borrowing base under the Credit Facility and $175 million at any time when the Company's fixed charge coverage ratio was less than 1.05 to 1.00. The Credit Facility was set to mature on February 22, 2024, with a September 15, 2022 springing maturity date in the event we didn't repay or refinance the 2023 Notes on or prior to July 15, 2022. A portion of the Credit Facility was 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 bore 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
F-27
On June 28, 2019, we amended the Credit Agreement to, among other things, permit our borrowing base to equal 65 % of the appraised value of the real property and equipment included in the appraisal report delivered to the administrative agent (up to the maximum facility amount).
One August 27, 2019, we entered into supplements to the Credit Agreement and elected our right to increase the aggregate principal amount of the commitments under the Credit Agreement by $85 million to an aggregate principal amount of $350 million.
In connection with the execution of the Credit Agreement, including the amendment and supplements thereof, as well as post-closing appraisal work, we paid certain arrangement fees of approximately $11.9 million to lenders and other fees of approximately $3.2 million, which were capitalized and amortized to interest expense over the term of the facility. In connection with our bankruptcy filing, we wrote off the full $13.8 million of unamortized debt issuance costs.
On November 14, 2019, the United States Bankruptcy Court for the Southern District of Texas ("the Court") entered an order approving, on an interim basis, a new Senior Secured Debtor-in-Possession Credit Facility that, among other things, refinanced and effectively replaced the Credit Agreement. A final order approving the agreement was entered by the Court on December 23, 2019.
During the existence of the Credit Facility, our average daily balance for the year ended December 31, 2019 was $56.2 million.
Senior Secured Debtor-in-Possession Credit Facility — On November 14, 2019, the Bankruptcy Court entered an order approving, on an interim basis, the financing to be provided pursuant to the DIP Credit Agreement. The DIP Credit Agreement was entered into by and among the Company, as borrower, the DIP Lenders and the DIP Agent. A final order approving the agreement was entered by the Court on December 23, 2019.
The DIP Credit Agreement provides for a senior secured superpriority debtor-in-possession credit facility in the aggregate principal amount of up to $425 million consisting of (i) a new money revolving loan facility in an aggregate principal amount of approximately $236.2 million, which may be in the form of revolving loans or, subject to a sub-limit of $25 million, the form of letters of credit and (ii) term loans refinancing the aggregate principal amount of all outstanding loans under our prepetition Credit Agreement as of the Petition Date.
In connection with the execution of the DIP Credit Agreement, we paid certain arrangement fees of approximately $14.0 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility.
As of December 31, 2019, we had total outstanding borrowings of $258.8 million under the DIP Credit Agreement, consisting of $188.8 million outstanding for our term loans portion and $70.0 million outstanding for our revolving loan facility portion. Our average daily balance under the DIP Credit Agreement during the year ended December 31, 2019 was $200.9 million. There were no letters of credit issued under the DIP Credit Agreement as of December 31, 2019.
Our obligations under the DIP Facility are guaranteed by all of our subsidiaries that are debtors-in-possession in the Chapter 11 Cases. In addition, subject to the terms of the Final Order entered on December 23, 2019, the claims of the DIP Lenders are (i) entitled superpriority administrative expense claim status and (ii) subject to certain customary exclusions in the credit documentation, secured by (x) a perfected first priority lien on all property of the Loan Parties not subject to valid, perfected and non-avoidable liens in existence on the Petition Date, (y) a perfected first priority priming lien on collateral under the Senior Secured Revolving Credit Facility and (z) a perfected junior lien on all property of the Loan Parties and the proceeds thereof that are subject to valid, perfected and non-avoidable liens in existence on the Petition Date or valid and non-avoidable liens in existence on the Petition Date that are perfected subsequent to the Petition Date to the extent permitted by Section 546(b) of the Bankruptcy Code, in each case subject to a carve-out for the debtors-in-possession’s professional fees and certain liens permitted by the terms of the DIP Credit Agreement.
The scheduled maturity date of the DIP facility is August 14, 2020. However, we may elect to extend the scheduled maturity date by an additional three months subject to the satisfaction of certain conditions, including the payment of an extension fee of 0.50 % of the aggregate principal amount of the DIP loans and commitments outstanding. The DIP loans bears interest at an interest rate per annum equal to, at the Company's option (i) LIBOR plus 7.0 % or (ii) the base rate plus 6.0 %. In addition, borrowings under the DIP revolving facility are limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount is equal to 65 % of the appraised value of certain of our real property and equipment less the carve-out amount referenced above and the aggregate principal amount of DIP term loans. Our ability to borrow is also limited
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by the condition that our unrestricted cash (less budgeted disbursements for the immediately succeeding week and the carve-out) does not exceed $30 million after giving effect to such borrowing.
Under the DIP Credit Agreement, we may make optional prepayments of the DIP Loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs and the payment of certain other fees as more fully set forth in the DIP Credit Agreement). In addition, subject to certain exceptions and conditions described in the DIP Credit Agreement, we are obligated to prepay the obligations thereunder with the net cash proceeds of certain asset sales and with casualty insurance proceeds. Furthermore, we are required to prepay obligations to the extent (i) revolving exposure under the DIP revolving facility exceeds the greater of the revolving commitments and the borrowing base or (ii) our unrestricted cash (less budgeted disbursements for the immediately succeeding week and the carve-out) exceeds $30 million for a period of 5 consecutive business days.
The DIP Credit Agreement also contains customary representations, warranties and covenants that are typical and customary for debtors-in-possession facilities of this type, 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 other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default, including as a result of certain events occurring in the Chapter 11 Cases. Furthermore, the DIP Credit Agreement requires us to comply with a variance covenant that compares actual operating disbursements and receipts and capital expenditures to the budgeted amounts set forth in the DIP budgets delivered to the DIP agent and DIP lenders on or prior to the closing date and updated periodically thereafter pursuant to the terms of the DIP Credit Agreement.
In addition, on February 10, 2020, the Company entered into the first amendment to the DIP Credit Agreement (the “First DIP Amendment”) to extend several of the milestone dates set forth in the DIP Credit Agreement, including extending from February 10, 2020 to February 24, 2020 the date by which the Company must elect whether it intends to pursue a sale of its assets under Section 363 of Title 11 of the U.S. Code or a plan of reorganization, and if it elects a sale to file a motion seeking approval thereof.
Dean Foods Receivables Securitization Facility — We have a $425 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.
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).
On November 14, 2019, we amended and restated the Existing RPA to continue the receivables securitization facility during the Chapter 11 cases. The amendment and restatement had been previously approved by the Bankruptcy Court on November
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13, 2019. The amendment and restatement, among other things, (i) modifies certain covenants, representations, events of default and cross defaults arising as a result of the commencement of the Chapter 11 Cases, (ii) modifies the other rights and obligations of the parties to the facility in order to give effect to, and in certain instances be subject to, orders of the Court from time to time, (iii) reduces the total size of the facility from $450 million to $425 million, with a corresponding reduction to availability thereunder, (iv) modifies certain pricing terms and fees payable under the facility, (v) makes certain other amendments, including in order to give effect to future issuances of letters of credit and (vi) grants superpriority administrative expense claim status to certain indemnification, performance guaranty and other obligations of certain of the debtors-in-possession under the receivables securitization facility documents. It also adjusted the maturity date to August 14, 2020. The Bankruptcy Court approved this amendment and restatement pursuant to a final order on December 23, 2019.
On February 10, 2020, we further amended the receivables purchase agreement to give effect to the First DIP Amendment for purposes of our compliance with the covenants under receivables securitization facility.
In connection with certain of the amendments to the receivables purchase agreement during the year, we paid certain arrangement fees of approximately $10.8 million to lenders and other fees of approximately $0.6 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $2.2 million of unamortized deferred financing costs in connection with the amendments.
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 $425.0 million of the total commitment amount under the receivables securitization facility as of December 31, 2019. The total amount of receivables sold to these entities as of December 31, 2019 was $530.1 million. During the year ended December 31, 2019, we borrowed $0.7 billion and repaid $0.7 billion under the facility with a remaining balance of $180.0 million as of December 31, 2019. In addition to letters of credit in the aggregate amount of $236.7 million that were issued but undrawn, the remaining available borrowing capacity was $8.3 million at December 31, 2019. Our average daily balance under this facility during the year ended December 31, 2019 was $246.0 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 were amortized to interest expense over the remaining term of the 2023 Notes. In connection with the bankruptcy filing, we wrote off $3.6 million of unamortized deferred financings costs.
The 2023 Notes are our senior unsecured obligations and 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 were scheduled to mature on March 15, 2023. However, as a result of the Bankruptcy Petitions, the payment obligations under the 2023 Notes were accelerated.
The carrying value under the 2023 Notes at December 31, 2019 was $700.0 million. Due to the unsecured nature of the 2023 Notes, the full amount outstanding was reclassified as Liabilities Subject to Compromise on the Consolidated Balance Sheet and is no longer included as part of long-term debt. See Note 2 for additional information.
See Note 12 for information regarding the fair value of the 2023 Notes as of December 31, 2019 and 2018.
Capital Lease Obligations and Other — Capital lease obligations of $6.3 million and $1.6 million as of December 31, 2019 and 2018, respectively, were primarily comprised of our leases for information technology equipment. See Note 20.
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12. 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, 2019 and 2018, our derivatives recorded at fair value in our Consolidated Balance Sheets were:
Derivative Assets | Derivative Liabilities | ||||||||||||||
December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | ||||||||||||
(In thousands) | |||||||||||||||
Commodities contracts — current(1) | $ | $ | $ | $ | |||||||||||
Commodities contracts — non-current(2) | |||||||||||||||
Total derivatives | $ | $ | $ | $ | |||||||||||
(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 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. |
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A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 is as follows (in thousands):
Fair Value as of December 31, 2019 | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets — Commodities contracts | $ | $ | $ | $ | |||||||||||
Liabilities — Commodities contracts | |||||||||||||||
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 | $ | $ | $ | $ | |||||||||||
Liabilities — Commodities contracts | |||||||||||||||
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:
2019 | 2018 | ||||||||||||||
Amount Outstanding | Fair Value | Amount Outstanding | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
Dean Foods Company senior notes due 2023 | $ | $ | $ | $ | |||||||||||
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, 2019 (in thousands):
Total | Level 1 | Level 2 | Level 3 | ||||||||
Mutual funds | |||||||||||
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 | $ | $ | $ | $ | |||||||||||
Mutual funds | |||||||||||||||
13. 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.
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Cash Dividends — In accordance with our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. 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. 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. As a result, no dividends were paid in the year ended December 31, 2019. Quarterly dividends of $0.09 per share were paid in each quarter of 2018 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, totaling approximately $32.7 million for the year ended December 31, 2017. 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 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, 2019, we had approximately 8.5 million shares, in the aggregate, available for grant under the 2016 Plan.
On February 23, 2020, the Compensation Committee of the Company's Board of Directors approved the cancellation of all outstanding awards under the 2016 Plan, excluding restricted stock awards to non-employee directors, effective as of November 12, 2019. These outstanding awards include all outstanding restricted stock units, performance stock units, phantom shares and stock options discussed below. The restricted stock awards to non-employee directors now have an accelerated vesting date of March 31, 2020. All canceled awards will be returned to the aggregate shares 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 .
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The following table summarizes RSU activity during the year ended December 31, 2019:
Employees | Non-Employee Directors | Total | |||||||||
RSUs outstanding at January 1, 2019 | |||||||||||
RSUs granted | |||||||||||
Shares issued upon vesting of RSUs | ( | ) | ( | ) | ( | ) | |||||
RSUs canceled or forfeited(1) | ( | ) | ( | ) | ( | ) | |||||
RSUs outstanding at December 31, 2019 | |||||||||||
Weighted-average per share grant date fair value | $ | $ | $ | ||||||||
(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, 2019, 2018 and 2017 (in thousands, except per share amounts):
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
Total intrinsic value of RSUs vested/distributed during the period | $ | $ | $ | ||||||||
Weighted-average grant date fair value of RSUs granted | |||||||||||
Tax benefit related to RSU expense | |||||||||||
At December 31, 2019, there was $1.9 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 1.24 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, 2019:
PSUs | Weighted Average Grant Date Fair Value | |||||
Outstanding at January 1, 2019 | $ | |||||
Granted | ||||||
Vested | ( | ) | ||||
Forfeited | ( | ) | ||||
Performance adjustment(1) | ( | ) | ||||
Outstanding at December 31, 2019 | $ | |||||
(1) | Represents an adjustment to the 2018 tranche of the 2016, 2017 and 2018 PSU awards based on actual performance during the 2018 annual performance period in relation to the established performance goal for that period. The actual performance for the 2018 annual performance period was certified by the Compensation Committee of our Board of Directors in the first quarter of 2019. |
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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, 2019:
Shares | Weighted- Average Grant Date Fair Value | |||||
Outstanding at January 1, 2019 | $ | |||||
Granted | ||||||
Converted/paid | ( | ) | ||||
Forfeited | ( | ) | ||||
Outstanding at December 31, 2019 | $ | |||||
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, 2019:
Shares | Weighted- Average Grant Date Fair Value | |||||
Unvested at January 1, 2019 | $ | |||||
Restricted shares granted | ||||||
Restricted shares vested | ( | ) | ||||
Unvested at December 31, 2019 | $ | |||||
Stock Options — We did not grant any stock options during 2017, 2018 or 2019. At December 31, 2019, 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, 2019:
Options | Weighted Average Exercise Price | Weighted Average Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||
Options outstanding and exercisable at January 1, 2019 | $ | |||||||||||
Forfeited and canceled(1) | ( | ) | ||||||||||
Options outstanding and exercisable at December 31, 2019(2) | $ | |||||||||||
(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, 2019, there were |
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The following table summarizes information about options outstanding and exercisable at December 31, 2019:
Options Outstanding and Exercisable | ||||||||
Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Life (in years) | Weighted- Average Exercise Price | |||||
$ 8.96 | $ | |||||||
10.44 | ||||||||
12.60 | ||||||||
15.42 | ||||||||
The following table summarizes additional information regarding our stock option activity (in thousands):
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
Intrinsic value of options exercised | $ | $ | $ | ||||||||
Fair value of shares vested | |||||||||||
Tax benefit related to stock option expense | |||||||||||
During the years ended December 31, 2019 and 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, 2019, 2018 and 2017 (in thousands):
Year Ended December 31 | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
RSUs | $ | $ | $ | |||||||||
PSUs | ( | ) | (1) | ( | ) | (1) | ( | ) | (1) | |||
Phantom shares | ||||||||||||
Total | $ | $ | $ | |||||||||
(1) | The net credit to PSU expense for the years ended December 31, 2019, 2018 and 2017 is primarily the result of lower expected performance (relative to the established performance metric) associated with the 2019, 2018 and 2017 tranches of these awards, respectively. |
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14. 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, 2019 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 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands, except share data) | |||||||||||
Basic earnings (loss) per share computation: | |||||||||||
Numerator: | |||||||||||
Income (loss) from continuing operations | $ | ( | ) | $ | ( | ) | $ | ||||
Net loss attributable to non-controlling interest | |||||||||||
Income (loss) from continuing operations attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
Denominator: | |||||||||||
Average common shares | |||||||||||
Basic earnings (loss) per share from continuing operations attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
Diluted earnings (loss) per share computation: | |||||||||||
Numerator: | |||||||||||
Income (loss) from continuing operations | $ | ( | ) | $ | ( | ) | $ | ||||
Net loss attributable to non-controlling interest | |||||||||||
Income (loss) from continuing operations attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
Denominator: | |||||||||||
Average common shares — basic | |||||||||||
Stock option conversion(1) | |||||||||||
RSUs and PSUs(2) | |||||||||||
Average common shares — diluted | |||||||||||
Diluted earnings (loss) per share from continuing operations attributable to Dean Foods Company | $ | ( | ) | $ | ( | ) | $ | ||||
(1) Anti-dilutive common shares excluded | |||||||||||
(2) Anti-dilutive stock units excluded | |||||||||||
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component, net of tax, during the year ended December 31, 2019 were as follows (in thousands):
Pension and Other Postretirement Benefits Items | Foreign Currency Items | Total | |||||||||
Balance, December 31, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
Other comprehensive loss before reclassifications | |||||||||||
Amounts reclassified from accumulated other comprehensive loss(1) | |||||||||||
Net current-period other comprehensive loss | |||||||||||
Balance, December 31, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
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(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 16 and 17. |
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 | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
Other comprehensive income before reclassifications | ( | ) | ( | ) | |||||||
Amounts reclassified from accumulated other comprehensive loss(1) | |||||||||||
Net current-period other comprehensive income | ( | ) | ( | ) | |||||||
Reclassification of stranded tax effects related to the Tax Act(2) | ( | ) | ( | ) | |||||||
Balance, December 31, 2018 | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
(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 16 and 17. |
(2) | See Note 1 for additional details on the adoption of ASU No. 2018-02 during the first quarter of 2018. |
16. 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 2019, 2018 and 2017, our retirement and profit sharing plan expenses were as follows:
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands) | |||||||||||
Defined benefit plans | $ | $ | $ | ||||||||
Defined contribution plans | |||||||||||
Multiemployer pension and certain union plans | |||||||||||
Total | $ | $ | $ | ||||||||
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, 2019 and 2018 are the following amounts that have not yet been recognized in net periodic pension cost: unrecognized prior service costs of $1.8 million ($1.3 million net of tax) and $2.2 million ($1.7 million net of tax), respectively, and unrecognized actuarial losses of $112.3 million ($79.8 million net of tax) and $128.2 million ($96.3 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, 2020 are $0.4 million ($0.3 million net of tax) and $8.1 million ($6.0 million net of tax), respectively.
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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, 2019 and 2018, and the funded status of the plans at December 31, 2019 and 2018 are as follows:
December 31 | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Change in benefit obligation: | |||||||
Benefit obligation at beginning of year | $ | $ | |||||
Service cost | |||||||
Interest cost | |||||||
Plan amendments | |||||||
Actuarial (gain) loss | ( | ) | |||||
Benefits paid | ( | ) | ( | ) | |||
Benefit obligation at end of year | |||||||
Change in plan assets: | |||||||
Fair value of plan assets at beginning of year | |||||||
Actual return (loss) on plan assets | ( | ) | |||||
Employer contributions | |||||||
Benefits paid | ( | ) | ( | ) | |||
Fair value of plan assets at end of year | |||||||
Funded status at end of year | $ | ( | ) | $ | ( | ) | |
The underfunded status of the plans of $7.2 million at December 31, 2019 is recognized in our Consolidated Balance Sheet and includes $1.7 million classified as a noncurrent pension asset, $8.1 million classified as a noncurrent pension liability, and $0.9 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, 2020. We do not currently expect to make any contributions to the pension plans in 2020.
A summary of our key actuarial assumptions used to determine benefit obligations as of December 31, 2019 and 2018 follows:
December 31 | |||||
2019 | 2018 | ||||
Weighted average discount rate | % | % | |||
Rate of compensation increase | % | % | |||
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A summary of our key actuarial assumptions used to determine net periodic benefit cost for 2019, 2018 and 2017 follows:
Year Ended December 31 | ||||||||
2019 | 2018 | 2017 | ||||||
Effective discount rate for benefit obligations | % | % | % | |||||
Effective rate for interest on benefit obligations | % | % | % | |||||
Effective discount rate for service cost | % | % | % | |||||
Effective rate for interest on service cost | % | % | % | |||||
Expected return on assets | % | % | % | |||||
Rate of compensation increase | % | % | % | |||||
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands) | |||||||||||
Components of net periodic benefit cost: | |||||||||||
Service cost | $ | $ | $ | ||||||||
Interest cost | |||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | |||||
Amortizations: | |||||||||||
Prior service cost | |||||||||||
Unrecognized net loss | |||||||||||
Effect of settlement | |||||||||||
Net periodic benefit cost | $ | $ | $ | ||||||||
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 | |||||||
2019 | 2018 | ||||||
(In millions) | |||||||
Projected benefit obligation | $ | $ | |||||
Accumulated benefit obligation | |||||||
Fair value of plan assets | |||||||
The accumulated benefit obligation for all defined benefit plans was $345.9 million and $311.7 million at December 31, 2019 and 2018, 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
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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, 2019, our master trust was invested as follows: investments in equity securities were at 31 %; investments in fixed income were at 69 %; and cash equivalents were less than 1 %. We believe the allocation of our master trust investments as of December 31, 2019 is generally consistent with the targets set forth by our Investment Committee.
2020 | $ | million | |
2021 | million | ||
2022 | million | ||
2023 | million | ||
2024 | million | ||
Next five years | 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. |
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The fair values by category of inputs as of December 31, 2019 were as follows (in thousands):
Fair Value as of December 31, 2019 | Level 1 | Level 2 | Level 3 | ||||||||||||
Equity Securities: | |||||||||||||||
Common Stock | $ | $ | $ | — | $ | — | |||||||||
Index Funds: | |||||||||||||||
U.S. Equities(a) | — | — | |||||||||||||
Equity Funds(b) | — | — | |||||||||||||
Total Equity Securities | — | ||||||||||||||
Fixed Income: | |||||||||||||||
Bond Funds(c) | — | — | |||||||||||||
Diversified Funds(d) | — | ||||||||||||||
Total Fixed Income | — | ||||||||||||||
Cash Equivalents: | |||||||||||||||
Short-term Investment Funds(e) | — | — | |||||||||||||
Total Cash Equivalents | — | — | |||||||||||||
Total | $ | $ | $ | $ | |||||||||||
(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 |
(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. |
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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 | $ | $ | $ | — | $ | — | |||||||||
Index Funds: | |||||||||||||||
U.S. Equities(a) | — | — | |||||||||||||
Equity Funds(b) | — | — | |||||||||||||
Total Equity Securities | — | ||||||||||||||
Fixed Income: | |||||||||||||||
Bond Funds(c) | — | — | |||||||||||||
Diversified Funds(d) | — | — | |||||||||||||
Total Fixed Income | — | ||||||||||||||
Cash Equivalents: | |||||||||||||||
Short-term Investment Funds(e) | — | — | |||||||||||||
Total Cash Equivalents | — | — | |||||||||||||
Total | $ | $ | $ | $ | |||||||||||
(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 |
(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. |
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.
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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, 2019 and 2018 is as follows (in thousands):
Diversified Funds | Partnerships/ Joint Ventures | Total | |||||||||
Balance at December 31, 2017 | $ | $ | $ | ||||||||
Actual return on plan assets: | |||||||||||
Relating to instruments still held at reporting date | |||||||||||
Relating to instruments sold during the period | |||||||||||
Purchases, sales and settlements (net) | ( | ) | ( | ) | |||||||
Transfers in and/or out of Level 3 | |||||||||||
Balance at December 31, 2018 | $ | $ | $ | ||||||||
Actual return on plan assets: | |||||||||||
Relating to instruments still held at reporting date | |||||||||||
Purchases, sales and settlements (net) | ( | ) | ( | ) | |||||||
Transfers in and/or out of Level 3 | |||||||||||
Balance at December 31, 2019 | $ | $ | $ | ||||||||
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. |
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Our participation in these multiemployer plans for the year ended December 31, 2019 is outlined in the table below. Unless otherwise noted, the most recent Pension Protection Act (“PPA”) Zone Status available in 2019 and 2018 is for the plans’ year-end at December 31, 2018 and December 31, 2017, 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) | |||||||
2019 | 2018 | ||||||||||||
Western Conference of Teamsters Pension Plan(1) | 91-6145047 | 001 | N/A | May 31, 2020 - June 30, 2022 | |||||||||
Central States, Southeast and Southwest Areas Pension Plan(2) | 36-6044243 | 001 | February 1, 2020 - July 31, 2022 | ||||||||||
Retail, Wholesale & Department Store International Union and Industry Pension Fund(3) | 63-0708442 | 001 | January 29, 2020 - September 8, 2022 | ||||||||||
Dairy Industry – Union Pension Plan for Philadelphia Vicinity(4) | 23-6283288 | 001 | August 31, 2020 - September 30, 2022 | ||||||||||
(1) | We are party to approximately |
(2) | There are approximately |
(3) | We are subject to approximately |
(4) | We are party to |
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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, 2019, 2018 and 2017.
Pension Fund | Employer Identification Number | Pension Plan Number | Dean Foods Company Contributions (in millions) | ||||||||||||||
2019 | 2018 | 2017 | Surcharge Imposed(3) | ||||||||||||||
Western Conference of Teamsters Pension Plan | 91-6145047 | 001 | $ | $ | $ | No | |||||||||||
Central States, Southeast and Southwest Areas Pension Plan | 36-6044243 | 001 | No | ||||||||||||||
Retail, Wholesale & Department Store International Union and Industry Pension Fund(1) | 63-0708442 | 001 | No | ||||||||||||||
Dairy Industry – Union Pension Plan for Philadelphia Vicinity(1) | 23-6283288 | 001 | No | ||||||||||||||
Other Funds(2) | |||||||||||||||||
Total Contributions | $ | $ | $ | ||||||||||||||
(1) | During the 2018 and 2017 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 2019. |
(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. |
17. 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, 2019 and 2018 are the following amounts that have not yet been recognized in net periodic benefit cost: unrecognized prior service costs of $0.2 million ($0.2 million net of tax) and $0.3 million ($0.2 million net of tax), respectively, and unrecognized actuarial gains of $3.1 million ($2.3 million net of tax) and $6.1 million ($4.6 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, 2020 is $0.1 million ($0.1 million net of tax) and $0.6 million ($0.5 million net of tax), respectively.
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The following table sets forth the funded status of these plans:
December 31 | |||||||
2019 | 2018 | ||||||
(In thousands) | |||||||
Change in benefit obligation: | |||||||
Benefit obligation at beginning of year | $ | $ | |||||
Service cost | |||||||
Interest cost | |||||||
Employee contributions | |||||||
Actuarial (gain) loss | ( | ) | |||||
Benefits paid | ( | ) | ( | ) | |||
Benefit obligation at end of year | |||||||
Fair value of plan assets at end of year | |||||||
Funded status | $ | ( | ) | $ | ( | ) | |
The unfunded portion of the liability of $31.8 million at December 31, 2019 is recognized in our Consolidated Balance Sheet and, upon our bankruptcy filing, is classified as Liabilities Subject to Compromise. See Note 2 for additional information.
A summary of our key actuarial assumptions used to determine the benefit obligation as of December 31, 2019 and 2018 follows:
December 31 | |||||
2019 | 2018 | ||||
Healthcare inflation: | |||||
Healthcare cost trend rate assumed for next year | % | % | |||
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | % | % | |||
Year of ultimate rate achievement | 2038 | 2038 | |||
Weighted average discount rate | % | % | |||
A summary of our key actuarial assumptions used to determine net periodic benefit cost follows:
Year Ended December 31 | ||||||||
2019 | 2018 | 2017 | ||||||
Healthcare inflation: | ||||||||
Healthcare cost trend rate assumed for next year | % | % | % | |||||
Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | % | % | % | |||||
Year of ultimate rate achievement | 2038 | 2038 | 2038 | |||||
Effective discount rate for benefit obligations | % | % | % | |||||
Effective rate for interest on benefit obligations | % | % | % | |||||
Effective discount rate for service cost | % | % | % | |||||
Effective rate for interest on service cost | % | % | % | |||||
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.
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Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands) | |||||||||||
Components of net periodic benefit cost: | |||||||||||
Service and interest cost | $ | $ | $ | ||||||||
Amortizations: | |||||||||||
Prior service cost | |||||||||||
Unrecognized net (gain) loss | ( | ) | ( | ) | ( | ) | |||||
Net periodic benefit cost | $ | $ | $ | ||||||||
1-Percentage- Point Increase | 1-Percentage- Point Decrease | ||||||
(In thousands) | |||||||
Effect on total of service and interest cost components | $ | $ | ( | ) | |||
Effect on postretirement obligation | ( | ) | |||||
We expect to contribute $2.5 million to the postretirement health care plans in 2020. Estimated postretirement health care plan benefit payments for the next ten years are as follows:
2020 | $ | million | |
2021 | million | ||
2022 | million | ||
2023 | million | ||
2024 | million | ||
Next five years | million | ||
18. | ASSET IMPAIRMENT CHARGES AND PREPETITION FACILITY CLOSING AND RESTRUCTURING 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 12.
The results of our 2019 impairment analysis indicated an impairment of our property, plant, and equipment at 13 of our production facilities, totaling $155.9 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, 2019.
For the year ended December 31, 2018, the results of our 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.
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
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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.
Prepetition Facility Closing and Restructuring Costs
Costs associated with approved plans within our ongoing network optimization and reorganization strategies are summarized as follows:
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands) | |||||||||||
Closure of facilities, net(1) | $ | $ | $ | ||||||||
Organizational effectiveness(2) | ( | ) | |||||||||
Enterprise-wide cost productivity plan(3) | |||||||||||
Prepetition facility closing and restructuring costs, net | $ | $ | $ | ||||||||
(1) | Reflects charges, net of gains on the sales of assets, associated with closed facilities that were incurred in 2019, 2018 and 2017. These charges are primarily related to facility closures in McKinney, TX; Braselton, GA; Louisville, KY; Erie, PA; Huntley, IL; Thief River Falls, MN; Lynn, MA; Livonia, MI; Richmond, VA; Orem, UT; New Orleans, LA; Rochester, IN; Riverside, CA; Denver, CO; and Buena Park, CA. We have incurred net charges to date of $ |
(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. |
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Activity for 2019 and 2018 with respect to prepetition facility closing and restructuring costs is summarized below and includes items expensed as incurred:
Accrued Charges at December 31, 2017 | Charges and Adjustments | Payments | Accrued Charges at December 31, 2018 | Charges and Adjustments | Payments | Accrued Charges at December 31, 2019(1) | |||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||
Cash charges: | |||||||||||||||||||||||||||
Workforce reduction costs | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||
Shutdown costs | ( | ) | ( | ) | |||||||||||||||||||||||
Lease obligations after shutdown | ( | ) | ( | ) | |||||||||||||||||||||||
Other | ( | ) | ( | ) | |||||||||||||||||||||||
Subtotal | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
Non-cash charges: | |||||||||||||||||||||||||||
Write-down of assets(2) | |||||||||||||||||||||||||||
(Gain) loss on sale of related assets | ( | ) | ( | ) | |||||||||||||||||||||||
Other, net | |||||||||||||||||||||||||||
Subtotal | |||||||||||||||||||||||||||
Total | $ | $ | |||||||||||||||||||||||||
(1) | As a result of the bankruptcy filing, all accrued charges at December 31, 2019 were reclassified as Liabilities Subject to Compromise on the Consolidated Balance Sheet. See Note 2 for additional information. |
(2) | 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. |
19. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31 | |||||||||||
2019 | 2018 | 2017 | |||||||||
(In thousands) | |||||||||||
Cash paid for interest and financing charges, net of capitalized interest | $ | $ | $ | ||||||||
Cash paid for bankruptcy-related transactions | |||||||||||
Net cash paid (received) for taxes | ( | ) | ( | ) | ( | ) | |||||
Non-cash additions to property, plant and equipment, including capital leases | |||||||||||
20. 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.
F-50
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, Inc. (“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, 2019 and 2018, we recorded accrued liabilities related to these retained risks of $93.5 million and $142.0 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.
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.
21. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
Segment 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 56 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 prepetition facility closing and restructuring costs, litigation settlements, impairments of long-lived assets, gains and losses on the sale of businesses and certain other non-recurring gains and losses.
Geographic Information — Net sales related to our foreign operations comprised less than 1 % of our consolidated net sales during the years ended December 31, 2019, 2018 and 2017. None of our long-lived assets are associated with our foreign operations.
Significant Customers — Our largest customer accounted for approximately 15.3 %, 15.3 %, and 17.5 % of our consolidated net sales in 2019, 2018 and 2017, 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.
F-51
22. QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following is a summary of our unaudited quarterly results of operations for 2019 and 2018:
Quarter | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
(In thousands, except share and per share data) | |||||||||||||||
2019 | |||||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||
Gross profit | |||||||||||||||
Loss from continuing operations(1) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net loss | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net loss attributable to Dean Foods Company | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Loss per common share from continuing operations attributable to Dean Foods Company(2): | |||||||||||||||
Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Quarter | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
(In thousands, except share and per share data) | |||||||||||||||
2018 | |||||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||
Gross profit | |||||||||||||||
Loss from continuing operations(3) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net loss | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net loss attributable to Dean Foods Company | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Loss per common share from continuing operations attributable to Dean Foods Company(2): | |||||||||||||||
Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
(1) | Loss from continuing operations for the first, second, third and fourth quarters of 2019 includes prepetition facility closing and restructuring costs, net of tax and gains on sales of assets, of $ |
(2) | 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 loss per common share amount. |
(3) | Loss from continuing operations for the first, second, third and fourth quarters of 2018 includes prepetition facility closing and restructuring costs, net of tax and gains on sales of assets, of $ |
F-52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Dean Foods Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Dean Foods Company and subsidiaries (Debtors-in-Possession) (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB) (United States), the Company's internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 20, 2020, expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the U.S. Code in the United States Bankruptcy Court for the Southern District of Texas on November 11, 2019, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Bankruptcy Proceedings
As discussed in Note 1 and Note 2 to the financial statements, the Company has filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to prepetition liabilities, the settlement amounts for allowed claims, or the status and priority thereof; (3) as to shareholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (4) as to operations, the effect of any changes that may be made in its business.
Changes in Accounting Principle
As discussed in Note 1 to the financial statements, effective January 1, 2019, the Company changed its method of accounting for leases due to the adoption of the new lease standard. The Company adopted the new lease standard using the prospective approach.
As discussed in Note 1 to the financial statements, effective January 1, 2018, the Company changed its method of accounting for revenue from contracts with customers due to adoption of the new revenue standard. The Company adopted the new revenue standard using a modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also include evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-53
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 20, 2020
We have served as the Company’s auditor since 1988.
F-54
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, referred to herein as “Disclosure Controls”) as of the end of the period covered by this Annual Report on Form 10-K. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Based upon our most recent evaluation, our CEO and CFO have concluded that our Disclosure Controls and procedures were not effective as of December 31, 2019 due to the existence of material weaknesses in our internal controls over financial reporting described below.
Notwithstanding the material weaknesses in our internal control over financial reporting, we have concluded that the consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. Additionally, the material weaknesses did not result in any restatements of our consolidated financial statements or disclosures for any prior period.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, our internal control over financial reporting environment may not prevent or detect all misstatements, including the possibility of human error, the circumvention or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.
We have assessed the effectiveness of our internal control over financial reporting and concluded that they were not effective as of December 31, 2019. In making this assessment, we used the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under these criteria, management believes that our internal control over financial reporting as of December 31, 2019, was not effective due to the existence of material weaknesses described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.
Control environment
We did not maintain an effective control environment based on the criteria established in the COSO framework to enable the identification and mitigation of risks of accounting errors. Specifically, we were unable to attract, develop and retain competent individuals in alignment with our objectives. Following continuing declines in sales volumes and the results of our operations, we experienced significant turnover of key management, finance and accounting personnel and failed to adequately train our employees on business process controls. The material weakness in the control environment led to additional material weaknesses in our system of internal control.
Monitoring
We did not design and implement effective monitoring activities based on the criteria established in the COSO framework to enable appropriate monitoring to determine whether the components of internal control are present and functioning as established by the COSO framework. We did not monitor the transition of control activities during employee changes and departures.
43
Control activities
The material weaknesses noted above contributed to material weaknesses in the control activities component of our system of internal control based on the criteria established in the COSO framework. We did not develop written policies and procedures with a sufficient level of precision to support the operating effectiveness of the controls to prevent and detect potential material errors timely. As a result, the following control deficiencies individually constitute material weaknesses at the account level.
Ineffective control over cash reconciliations
The controls within our cash account reconciliation process did not operate effectively. Specifically, we did not properly identify and timely correct differences in our cash accounts including aged and unresolved reconciling items.
Lease accounting
We failed to adequately design and implement controls related to the following areas within our lease accounting processes:
• | Reviews of new leases for appropriate classification and validity prior to entry into the lease accounting system, |
• | Reviews for current and expiring leases to ensure the completeness and accuracy of the lease information contained in our reporting system, |
• | Identifying new leases for entry into the accounting system during the performance of our reconciliations of lease payments to lease expenses. |
Remediation activities
Our remediation activities are ongoing and we will continue our initiatives to hire and train competent personnel, effectively implement our internal controls over financial reporting and further document our policies, procedures, and internal controls. We will also test the ongoing operating effectiveness of the new and existing controls in future periods; however, the material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
While we believe the steps taken to date and those planned for implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts. Accordingly, as we continue to monitor the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses described above, we have and will continue to perform additional procedures prescribed by management, including the use of manual mitigating control procedures and employing any additional tools and resources deemed necessary to ensure that our consolidated financial statements are fairly stated in all material respects.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2019. Deloitte & Touche LLP's opinion, as stated in their report which appears on page 45 of this Form 10-K, is consistent with management's report on internal control over financial reporting as set forth above.
Changes in Internal Control over Financial Reporting
In addition to the material weaknesses described herein, during the fourth quarter of 2019, management implemented controls to ensure compliance with ASC 852 Reorganizations and its impact on our financial statements and related disclosures. We have also implemented controls related to our payment processes with respect to pre-petition and post-petition payments resulting from the filing of our voluntary petitions for reorganization under Chapter 11 of Title 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. The Company has appropriately considered and integrated these changes into our control design and related tests of operating effectiveness of internal controls over financial reporting as of December 31, 2019.
Other than the material weaknesses and internal control changes described above, there have been no other changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
March 20, 2020
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Dean Foods Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Dean Foods Company and subsidiaries (the "Company") as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated March 20, 2020, expressed an unqualified opinion on those financial statements and included explanatory paragraphs regarding the Company’s ability to continue as a going concern and the Company’s adoption of new accounting standards, and an emphasis-of-matter paragraph regarding the Company’s involvement in bankruptcy proceedings.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
Control environment - The Company did not maintain an effective control environment based on the criteria established in the COSO framework to enable the identification and mitigation of risks of accounting errors. Specifically, the Company was unable to attract, develop and retain competent individuals in alignment with control objectives and failed to adequately train employees on business process controls.
45
Monitoring - The Company did not design and implement effective monitoring activities based on the criteria established in the COSO framework to enable appropriate monitoring to determine whether the components of internal control are present and functioning as established by the COSO framework. The Company did not monitor the transition of control activities during employee changes and departures.
Control activities - The Company did not develop written policies and procedures with a sufficient level of precision to support the operating effectiveness of the controls to prevent and detect potential material errors timely. As a result, the following control deficiencies individually constituted material weaknesses at the account level.
Ineffective control over cash - The controls within the cash account reconciliation process did not operate effectively. The Company did not properly identify and timely correct differences in cash accounts including aged and unresolved reconciling items.
Ineffective control over leases - The Company failed to adequately design and implement controls related to the following areas within the lease accounting processes:
• | Reviews of new leases for appropriate classification and validity prior to entry into the lease accounting system, |
• | Reviews for current and expiring leases to ensure the completeness and accuracy of the lease information contained in the reporting system, |
• | Identifying new leases for entry into the accounting system during the performance of reconciliations of lease payments to lease expenses. |
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2019, of the Company, and this report does not affect our report on such consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
March 20, 2020
46
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Incorporated herein by reference to an amendment to this report to be filed on Form 10-K/A not later than 120 days after the end of the fiscal year covered by this report.
Item 11. | Executive Compensation |
Incorporated herein by reference to an amendment to this report to be filed on Form 10-K/A not later than 120 days after the end of the fiscal year covered by this report.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Incorporated herein by reference to an amendment to this report to be filed on Form 10-K/A not later than 120 days after the end of the fiscal year covered by this report.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Incorporated herein by reference to an amendment to this report to be filed on Form 10-K/A not later than 120 days after the end of the fiscal year covered by this report.
Item 14. | Principal Accountant Fees and Services |
Incorporated herein by reference to an amendment to this report to be filed on Form 10-K/A not later than 120 days after the end of the fiscal year covered by this report.
47
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
Financial Statements
The following Consolidated Financial Statements are filed as part of this Form 10-K or are incorporated herein as indicated:
Page | |
Financial Statement Schedule | |
Exhibits | |
See Index to Exhibits | |
48
Item 16. | Form 10-K Summary |
Not applicable.
49
INDEX TO EXHIBITS
Exhibit No. | Description | Previously Filed as an Exhibit to and Incorporated by Reference From | Date Filed | |||
Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 | November 12, 2013 | |||||
Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 | August 7, 2012 | |||||
Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 | November 12, 2013 | |||||
Current Report on Form 8-K | May 20, 2014 | |||||
Current Report on Form 8-K | February 27, 2019 | |||||
Current Report on Form 8-K | August 15, 2013 | |||||
Current Report on Form 8-K | March 3, 2015 | |||||
Current Report on Form 8-K | March 3, 2015 | |||||
Filed Herewith | ||||||
Annual Report on Form 10-K for the year ended December 31, 2006 | March 1, 2007 | |||||
Annual Report on Form 10-K for the year ended December 31, 2006 | March 1, 2007 | |||||
Annual Report on Form 10-K for the year ended December 31, 2006 | March 1, 2007 | |||||
Annual Report on Form 10-K for the year ended December 31, 2006 | March 1, 2007 | |||||
Annual Report on Form 10-K for the year ended December 31, 2006 | March 1, 2007 | |||||
Annual Report on Form 10-K for the year ended December 31, 2016 | February 22, 2017 | |||||
Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 | November 8, 2017 | |||||
Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 | November 12, 2013 | |||||
Exhibit No. | Description | Previously Filed as an Exhibit to and Incorporated by Reference From | Date Filed | |||
Current Report on Form 8-K | May 13, 2016 | |||||
Current Report on Form 8-K | January 17, 2019 | |||||
Current Report on Form 8-K | May 20, 2013 | |||||
Current Report on Form 8-K | November 18, 2014 | |||||
Annual Report on Form 10-K for the year ended December 31, 2010 | March 1, 2011 | |||||
Annual Report on Form 10-K for the year ended December 31, 2010 | March 1, 2011 | |||||
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 | August 8, 2008 | |||||
Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 | August 8, 2016 | |||||
Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 | November 7, 2016 | |||||
Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 | November 7, 2016 | |||||
Annual Report on Form 10-K for the year ended December 31, 2012 | February 27, 2013 | |||||
Current Report on Form 8-K | January 10, 2018 | |||||
Current Report on Form 8-K | January 10, 2018 | |||||
Current Report on Form 8-K | February 22, 2019 | |||||
Current Report on Form 8-K | March 11, 2019 | |||||
Current Report on Form 8-K | July 1, 2019 | |||||
Exhibit No. | Description | Previously Filed as an Exhibit to and Incorporated by Reference From | Date Filed | |||
Current Report on Form 8-K | July 29, 2019 | |||||
Current Report on Form 8-K | July 29, 2019 | |||||
Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 | August 8, 2019 | |||||
Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 | August 8, 2019 | |||||
Current Report on Form 8-K | August 27, 2019 | |||||
Current Report on Form 8-K | August 27, 2019 | |||||
Current Report on Form 8-K | August 27, 2019 | |||||
Current Report on Form 8-K | September 24, 2019 | |||||
Current Report on Form 8-K | September 24, 2019 | |||||
Current Report on Form 8-K | October 25, 2019 | |||||
Current Report on Form 8-K | November 20, 2019 | |||||
Exhibit No. | Description | Previously Filed as an Exhibit to and Incorporated by Reference From | Date Filed | |||
Current Report on Form 8-K | November 20, 2019 | |||||
Current Report on Form 8-K | February 11, 2020 | |||||
Filed Herewith | ||||||
Current Report on Form 8-K | February 11, 2020 | |||||
Current Report on Form 8-K | February 18, 2020 | |||||
Filed Herewith | ||||||
Filed Herewith | ||||||
Annual Report on Form 10-K for the year ended December 31, 2012 | February 27, 2013 | |||||
Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 | May 9, 2013 | |||||
Current Report on Form 8-K | May 13, 2016 | |||||
Current Report on Form 8-K | May 13, 2016 | |||||
Exhibit No. | Description | Previously Filed as an Exhibit to and Incorporated by Reference From | Date Filed | |||
Current Report on Form 8-K | May 13, 2016 | |||||
Current Report on Form 8-K | May 13, 2016 | |||||
Current Report on Form 8-K | March 7, 2018 | |||||
Current Report on Form 8-K | March 7, 2018 | |||||
Current Report on Form 8-K | March 7, 2018 | |||||
Current Report on Form 8-K | March 7, 2018 | |||||
Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 | November 12, 2019 | |||||
Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 | November 12, 2019 | |||||
Filed herewith | ||||||
Filed herewith | ||||||
Filed herewith | ||||||
Furnished herewith | ||||||
Furnished herewith | ||||||
101.INS | XBRL Instance Document(1) | |||||
101.SCH | XBRL Taxonomy Extension Schema Document(1) | |||||
101.CAL | XBRL Taxonomy Calculation Linkbase Document(1) | |||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document(1) | |||||
101.LAB | XBRL Taxonomy Label Linkbase Document(1) | |||||
Exhibit No. | Description | Previously Filed as an Exhibit to and Incorporated by Reference From | Date Filed | |||
101.PRE | XBRL Taxonomy Presentation Linkbase Document(1) | |||||
104 | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101) | |||||
(1) | Filed electronically herewith |
* | This exhibit is a management or compensatory contract. |
Attached as Exhibit 101 to this report are the following materials from Dean Foods Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017; (ii) the Consolidated Balance Sheets as of December 31, 2019 and 2018; (iii) the Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017; (iv) the Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017; and (vi) Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DEAN FOODS COMPANY | |
By: | /S/ JEFFERY S. DAWSON |
Jeffery S. Dawson | |
Senior Vice President and Chief Accounting Officer | |
Dated March 20, 2020
Each person whose signature appears below authorizes Gary W. Rahlfs, Senior Vice President and Chief Financial Officer, and Kristy N. Waterman, Senior Vice President - General Counsel, or any one of them, each of whom may act without joinder of the others, to execute in the name of each such person who is then an officer or director of the Registrant and to file any amendments to this Annual Report on Form 10-K necessary or advisable to enable the Registrant to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commissions in respect thereof, which amendments may make such changes in such report as such attorney-in-fact may deem appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
S-1
Name | Title | Date | ||
/S/ JIM L. TURNER | Chairman of the Board | March 20, 2020 | ||
Jim L. Turner | ||||
/S/ ERIC BERINGAUSE | Chief Executive Officer and Director | March 20, 2020 | ||
Eric Beringause | (Principal Executive Officer) | |||
/S/ GARY W. RAHLFS | Senior Vice President and Chief | March 20, 2020 | ||
Gary W. Rahlfs | Financial Officer | |||
(Principal Financial Officer) | ||||
/S/ JEFFERY S. DAWSON | Senior Vice President and | March 20, 2020 | ||
Jeffery S. Dawson | Chief Accounting Officer | |||
(Principal Accounting Officer) | ||||
/S/ JANET HILL | Director | March 20, 2020 | ||
Janet Hill | ||||
/S/ WAYNE MAILLOUX | Director | March 20, 2020 | ||
Wayne Mailloux | ||||
/S/ HELEN E. MCCLUSKEY | Director | March 20, 2020 | ||
Helen E. McCluskey | ||||
/S/ JOHN R. MUSE | Director | March 20, 2020 | ||
John R. Muse | ||||
/S/ B. CRAIG OWENS | Director | March 20, 2020 | ||
B. Craig Owens | ||||
S-2
SCHEDULE II
DEAN FOODS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2019, 2018 and 2017
Description | Balance at Beginning of Period | Charged to (Reduction in) Costs and Expenses | Other | Deductions | Balance at End of Period | ||||||||||||||
(In thousands) | |||||||||||||||||||
Year ended December 31, 2019 | |||||||||||||||||||
Allowance for doubtful accounts | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
Deferred tax asset valuation allowances | ( | ) | |||||||||||||||||
Year ended December 31, 2018 | |||||||||||||||||||
Allowance for doubtful accounts | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
Deferred tax asset valuation allowances | |||||||||||||||||||
Year ended December 31, 2017 | |||||||||||||||||||
Allowance for doubtful accounts | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
Deferred tax asset valuation allowances | |||||||||||||||||||
