Attached files

file filename
EX-99 - EXHIBIT 99 - DEAN FOODS COex-99063017.htm
EX-32.2 - EXHIBIT 32.2 - DEAN FOODS COex-322063017.htm
EX-32.1 - EXHIBIT 32.1 - DEAN FOODS COex-321063017.htm
EX-31.2 - EXHIBIT 31.2 - DEAN FOODS COex-312063017.htm
EX-31.1 - EXHIBIT 31.1 - DEAN FOODS COex-311063017.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2017
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from              to             
Commission File Number 001-12755 
 
Dean Foods Company
(Exact name of the registrant as specified in its charter)
deanlogo.jpg
 
Delaware
 
75-2559681
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
2711 North Haskell Avenue, Suite 3400
Dallas, Texas 75204
(214) 303-3400
(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices) 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
ý
 
 
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
¨
 
 
 
 
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  ý
As of August 3, 2017, the number of shares of the registrant's common stock outstanding was: 90,915,174.
Common Stock, par value $.01



Table of Contents
 


2


Part I — Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,509

 
$
17,980

Receivables, net of allowances of $6,189 and $5,118
601,869

 
669,200

Income tax receivable
7,191

 
5,578

Inventories
287,222

 
284,484

Deferred income taxes

 
37,504

Prepaid expenses and other current assets
40,292

 
43,884

Total current assets
968,083

 
1,058,630

Property, plant and equipment, net
1,124,089

 
1,163,851

Goodwill
167,535

 
154,112

Identifiable intangible and other assets, net
213,231

 
207,897

Deferred income taxes
21,310

 
21,737

Total
$
2,494,248

 
$
2,606,227

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
655,298

 
$
706,981

Current portion of debt
142,173

 
140,806

Total current liabilities
797,471

 
847,787

Long-term debt, net
762,125

 
745,245

Deferred income taxes
99,942

 
126,009

Other long-term liabilities
226,499

 
276,630

Commitments and contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Preferred stock, none issued

 

Common stock, 90,913,564 and 90,586,741 shares issued and outstanding, with a par value of $0.01 per share
909

 
906

Additional paid-in capital
656,721

 
653,629

Retained earnings
36,938

 
45,654

Accumulated other comprehensive loss
(86,357
)
 
(89,633
)
Total stockholders’ equity
608,211

 
610,556

Total
$
2,494,248

 
$
2,606,227

See Notes to unaudited Condensed Consolidated Financial Statements.


3


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
2017
 
2016
 
2017
 
2016
Net sales
$
1,926,722

 
$
1,848,788

 
$
3,922,408

 
$
3,727,616

Cost of sales
1,459,342

 
1,355,535

 
2,992,903

 
2,730,295

Gross profit
467,380

 
493,253

 
929,505

 
997,321

Operating costs and expenses:
 
 
 
 
 
 
 
Selling and distribution
338,144

 
331,150

 
683,340

 
664,037

General and administrative
73,100

 
86,614

 
172,636

 
171,765

Amortization of intangibles
5,155

 
4,120

 
10,310

 
10,445

Facility closing and reorganization costs, net
5,817

 
(1,400
)
 
15,103

 
(234
)
Total operating costs and expenses
422,216

 
420,484

 
881,389

 
846,013

Operating income
45,164

 
72,769

 
48,116

 
151,308

Other (income) expense:
 
 
 
 
 
 
 
Interest expense
16,419

 
16,830

 
33,883

 
33,706

Other income, net
(805
)
 
(2,210
)
 
(1,761
)
 
(3,207
)
Total other expense
15,614

 
14,620

 
32,122

 
30,499

Income before income taxes
29,550

 
58,149

 
15,994

 
120,809

Income tax expense
11,903

 
24,778

 
8,106

 
48,237

Net income
$
17,647

 
$
33,371

 
$
7,888

 
$
72,572

Average common shares:
 
 
 
 
 
 
 
Basic
90,882,415

 
91,244,745

 
90,796,585

 
91,406,969

Diluted
91,369,030

 
91,679,813

 
91,365,946

 
91,995,078

Basic income per common share:
 
 
 
 
 
 
 
Net income
$
0.19

 
$
0.37

 
$
0.09

 
$
0.79

Diluted income per common share:
 
 
 
 
 
 
 
Net income
$
0.19

 
$
0.36

 
$
0.09

 
$
0.79

Cash dividends declared per common share
$
0.09

 
$
0.09

 
$
0.18

 
$
0.18

See Notes to unaudited Condensed Consolidated Financial Statements.

4


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
Three Months Ended 
 June 30
 
Six Months Ended 
 June 30
 
2017
 
2016
 
2017
 
2016
Net income
$
17,647

 
$
33,371

 
$
7,888

 
$
72,572

Other comprehensive income (loss):
 
 
 
 
 
 
 
Cumulative translation adjustments

 
(1,208
)
 

 
(1,055
)
Pension and other postretirement liability adjustment, net of tax
1,632

 
1,550

 
3,276

 
3,035

Other comprehensive income
1,632

 
342

 
3,276

 
1,980

Comprehensive income
$
19,279

 
$
33,713

 
$
11,164

 
$
74,552

See Notes to unaudited Condensed Consolidated Financial Statements.

5


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

 
$
906

 
$
653,629

 
$
45,654

 
$
(89,633
)
 
$
610,556

Issuance of common stock
326,823

 
3

 
(883
)
 

 

 
(880
)
Share-based compensation expense

 

 
3,975

 

 

 
3,975

Net income

 

 

 
7,888

 

 
7,888

Dividends

 

 

 
(16,604
)
 

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

 

 

 

 
3,276

 
3,276

Balance, June 30, 2017
90,913,564

 
$
909

 
$
656,721

 
$
36,938

 
$
(86,357
)
 
$
608,211

See Notes to unaudited Condensed Consolidated Financial Statements.

6


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
Common Stock
 
 
 
 
 
 
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
Retained Earnings
(Accumulated
Deficit)
 
Accumulated Other
Comprehensive
Income (Loss)
Balance, January 1, 2016
91,428,274

 
$
914

 
$
679,916

 
$
(49,523
)
 
$
(85,803
)
 
$
545,504

Issuance of common stock, net of tax impact of share-based compensation
354,443

 
4

 
(1,956
)
 

 

 
(1,952
)
Share-based compensation expense

 

 
4,276

 

 

 
4,276

Repurchase of common stock
(1,371,185
)
 
(14
)
 
(24,986
)
 

 

 
(25,000
)
Net income

 

 

 
72,572

 

 
72,572

Dividends

 

 
(8,390
)
 
(8,283
)
 

 
(16,673
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Cumulative translation adjustment

 

 

 

 
(1,055
)
 
(1,055
)
Pension and other postretirement benefit liability adjustment, net of tax of $1,728

 

 

 

 
3,035

 
3,035

Balance, June 30, 2016
90,411,532

 
$
904

 
$
648,860

 
$
14,766

 
$
(83,823
)
 
$
580,707

See Notes to unaudited Condensed Consolidated Financial Statements.


7


DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Six Months Ended 
 June 30
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
7,888

 
$
72,572

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
86,489

 
87,876

Share-based compensation expense
6,659

 
11,797

(Gain) loss on divestitures and other, net
3,423

 
(4,984
)
Write-off of financing costs
1,080

 

Deferred income taxes
7,533

 
17,577

Other, net
(1,269
)
 
(9,626
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Receivables, net
68,351

 
79,875

Inventories
3,555

 
(307
)
Prepaid expenses and other assets
8,837

 
10,454

Accounts payable and accrued expenses
(73,253
)
 
(115,915
)
Income taxes receivable/payable
(1,613
)
 
(5,147
)
Litigation settlement

 
(18,853
)
Contributions to company sponsored pension plans
(38,500
)
 

Net cash provided by operating activities
79,180

 
125,319

Cash flows from investing activities:
 
 
 
Payments for property, plant and equipment
(34,551
)
 
(45,752
)
Payments for acquisitions, net of cash acquired
(21,596
)
 
(157,321
)
Proceeds from sale of fixed assets
2,481

 
10,711

Other investments
(9,000
)
 

Net cash used in investing activities
(62,666
)
 
(192,362
)
Cash flows from financing activities:
 
 
 
Repayments of debt
(832
)
 
(895
)
Payments of financing costs
(1,764
)
 

Proceeds from senior secured revolver
120,900

 
118,100

Payments for senior secured revolver
(128,700
)
 
(104,800
)
Proceeds from receivables securitization facility
1,120,000

 
130,000

Payments for receivables securitization facility
(1,095,000
)
 
(70,000
)
Repurchase of common stock

 
(25,000
)
Cash dividends paid
(16,357
)
 
(16,514
)
Issuance of common stock, net of share repurchases for withholding taxes
(1,232
)
 
(646
)
Tax savings on share-based compensation

 
699

Net cash provided by (used in) financing activities
(2,985
)
 
30,944

Effect of exchange rate changes on cash and cash equivalents

 
(825
)
Change in cash and cash equivalents
13,529

 
(36,924
)
Cash and cash equivalents, beginning of period
17,980

 
60,734

Cash and cash equivalents, end of period
$
31,509

 
$
23,810

See Notes to unaudited Condensed Consolidated Financial Statements.

8


DEAN FOODS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2017 and 2016
(Unaudited)
1. General
Nature of Our Business — We are a leading food and beverage company and the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products in the United States, with a vision to be the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion.
We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our portfolio includes DairyPure®, the country's first and largest fresh, white milk national brand, and TruMoo®, the leading national flavored milk brand, along with well-known regional dairy brands such as Alta Dena®, Berkeley Farms®, Country Fresh®, Dean’s®, Friendly's®, Garelick Farms®, LAND O LAKES ® milk and cultured products (licensed brand), Lehigh Valley Dairy Farms®, Mayfield ®, McArthur®, Meadow Gold ®, Oak Farms®, PET ® (licensed brand), T.G. Lee®, Tuscan® and more. In all, we have more than 50 national, regional and local dairy brands, as well as private labels. Additionally, with our acquisition of Uncle Matt's Organic, Inc., which was completed on June 22, 2017, we now sell and distribute organic juice, probiotic-infused juices, and fruit-infused waters under the Uncle Matt's Organic® brand. Dean Foods also makes and distributes ice cream, cultured products, 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 systems in the United States. We sell our products primarily on a local or regional basis through our local and regional sales forces, and in some instances, with the assistance of national brokers. Some national customer relationships are coordinated by our centralized corporate sales department or national brokers.
Basis of Presentation — The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q have been prepared on the same basis as the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report on Form 10-K”), which we filed with the Securities and Exchange Commission on February 22, 2017. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. Our results of operations for the three and six month periods ended June 30, 2017 may not be indicative of our operating results for the full year. The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements contained in our 2016 Annual Report on Form 10-K.
Unless otherwise indicated, references in this report to “we,” “us,” “our” or "the Company" refer to Dean Foods Company and its subsidiaries, taken as a whole.
Recently Adopted Accounting Pronouncements
Accounting Standards Update ("ASU") No. 2016-09 — In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-09, Compensation — Stock Compensation — Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, the accounting for forfeitures, the classification of awards as either equity or liabilities, and the classification of certain share-based payment transactions on the statement of cash flows. We adopted this ASU effective January 1, 2017, and it has been applied in accordance with the transition methods specified in the guidance. As permitted by the standard, we have not changed our accounting policy for forfeitures of share-based awards and will continue estimating forfeitures when determining compensation cost to be recognized over the vesting period. The presentation of excess tax benefits of share-based awards on the statement of cash flows has been applied prospectively; therefore, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. In addition, we are now recording on a prospective basis excess tax benefits and tax deficiencies related to share-based payments within the provision for income taxes on the statement of operations rather than on the consolidated balance sheet within additional paid-in capital.
ASU No. 2015-17 — In November 2015, the FASB issued ASU No. 2015-17, Income Taxes — Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes and requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments eliminate the guidance in Accounting Standards Codification ("ASC") Topic 740 that requires an entity to separate deferred tax liabilities and

9


assets into a current amount and a noncurrent amount in a classified statement of financial position. We adopted this ASU on a prospective basis effective January 1, 2017.
Recently Issued Accounting Pronouncements
Effective in 2018
ASU No. 2017-09 — In May 2017, the FASB issued ASU No. 2017-09, Compensation — Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance is intended to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: 1) The fair value (or calculated value or intrinsic value) of the modified award is the same as the fair value (or calculated value or intrinsic value) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification, 2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and 3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This guidance is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The amendments should be applied prospectively to an award modified on or after the adoption date. We do not intend to early adopt this ASU. We are currently evaluating the effect that the adoption of this standard will have on the presentation of our financial statements.
ASU No. 2017-07 — In March 2017, the FASB issued ASU No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) are to be reported separately and outside a subtotal of operating income, if one is presented. Currently, we record all components of net periodic benefit cost on the same line item as the employees' respective compensation expense. Beginning in the first quarter of 2018, we will be required to present net periodic cost for pension and postretirement benefits in accordance with the new guidance described above. For public companies, this guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The amendment should be applied on a retrospective basis. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. We do not intend to early adopt this ASU. We are currently evaluating the effect that the adoption of this standard will have on the presentation of our financial statements.
ASU No. 2017-03 — In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections and Investments — Equity Method and Joint Ventures: Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 Emerging Issues Task Force ("EITF") Meetings. The new guidance is intended to provide clarity in relation to the disclosure of the impact that ASU 2014-09 and ASU 2016-02, which are described below, will have on our financial statements when adopted. The effective date for this guidance is the same as the effective date for ASU 2014-09 and ASU 2016-02. We are currently evaluating the effect that the adoption of this standard will have on our financial statements.
ASU No. 2017-01 — In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business. The new guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this standard is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments should be applied prospectively on or after the effective date. Early application of the amendments is allowed with certain restrictions. We do not expect the adoption of ASU 2017-01 to have a material impact on our financial statements and will prospectively apply the guidance to applicable transactions.
ASU No. 2016-16 — In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 reduces complexity by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer (other than inventory) when the transfer occurs. The new guidance is intended to reduce the complexity of GAAP and diversity in practice related to the tax consequences of certain types of intra-entity asset transfers,

10


particularly those involving intellectual property. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the effect that the adoption of this standard will have on our financial statements.
ASU No. 2016-15 — In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for all entities, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. We do not expect the adoption of ASU 2016-15 to have a material impact on our financial statements.
ASU No. 2016-01 — In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities. ASU 2016-01 supersedes existing guidance to classify equity securities with readily determinable fair values into different categories and requires equity securities to be measured at fair value with changes in the fair value recognized through net income. An entity’s equity investments that are accounted for under the equity method of accounting or result in consolidation of an investee are not included within the scope of this amended guidance. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value either upon the occurrence of an observable price change or upon identification of impairment. The amended guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The amendments in this ASU should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the ASU. Early application of certain amendments in this standard to financial statements of fiscal years and interim periods that have not yet been issued is permitted as of the beginning of the fiscal year of adoption. Except for the early application of certain amendments discussed above, early adoption of the standard is not permitted. We do not expect the adoption of ASU 2016-01 to have a material impact on our financial statements.
ASU No. 2014-09 — In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The comprehensive new standard will supersede existing revenue recognition guidance and require 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. Adoption of the new rules could affect the timing of revenue recognition for certain transactions. Additionally, the new standard requires enhanced disclosures, including information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all of the periods presented, or “modified retrospective” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The new standard was originally effective for reporting periods beginning after December 15, 2016 and early adoption was not permitted. On August 12, 2015, the FASB approved a one year delay of the effective date to reporting periods beginning after December 15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies narrow aspects of ASC 606 or corrects unintended application of the guidance. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for ASU 2014-09.

We are currently evaluating the overall impact this guidance will have on our consolidated financial statements. We have formed a steering committee comprised of subject matter experts within the Company to help assess the impact the guidance may have on the classification of bulk cream sales, which are currently presented as a reduction to cost of sales within our unaudited Condensed Consolidated Statements of Operations as we believe this presentation allows us to report our true cost of fluid milk production. The steering committee is in the process of gathering and evaluating quantitative and qualitative information with respect to the Company’s bulk cream sales, which will assist in informing our conclusion with respect to the appropriate income statement presentation of such amounts under ASU 2014-09. Our assessment is ongoing and no final determinations have been made at this time.
Additionally, our evaluation includes the impact of the new standard on certain common practices currently employed by us and by other manufacturers of consumer products, such as slotting fees, co-operative advertising, rebates and other pricing allowances, merchandising funds and consumer coupons. We currently expect to adopt the ASU consistent with the deferred mandatory effective date of January 1, 2018 and to utilize the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts in process as of the adoption date. Under this method, we would not restate the prior financial statements presented; however, we would be required to provide

11


additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the prior guidance. Based on our findings to date, we do not expect the standard to have a material impact on our results of operations or financial position; however, our assessment is not yet complete. Throughout the remainder of 2017, we plan to finalize our review and method of adoption.
Effective in 2019
ASU No. 2016-02 — In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires lessees to recognize lease assets and lease liabilities in the balance sheet and disclose key information about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. The amended guidance will require both operating and finance leases to be recognized in the balance sheet. Additionally, the amended guidance aligns lessor accounting to comparable guidance in ASC Topic 606, Revenue from Contracts with Customers. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be adopted using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. We do not intend to early adopt this ASU. We anticipate the impact of this standard to be significant to our Consolidated Balance Sheet due to the amount of our lease commitments. See Note 17 to the Consolidated Financial Statements contained in our 2016 Annual Report on Form 10-K for further information regarding these commitments. We are currently evaluating the other impacts that ASU 2016-02 will have on our consolidated financial statements.
Effective in 2020
ASU No. 2017-04 — In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds a reporting unit’s fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. For public companies, this guidance is effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not intend to early adopt this ASU. We do not expect the adoption of ASU 2017-04 to have a material impact on our financial statements.

12


2. Acquisitions and Investments in Unconsolidated Affiliates
Acquisitions
Uncle Matt's Organic On June 22, 2017, we completed the acquisition of Uncle Matt's Organic, Inc. ("Uncle Matt's"). Uncle Matt's is a leading organic juice company offering a wide range of organic juices, including probiotic-infused juices and fruit-infused waters. The total purchase price was $22.0 million. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values and include identifiable intangible assets of $8.4 million, of which $6.6 million relates to an indefinite-lived trademark and $1.8 million relates to customer relationships that are subject to amortization over a period of 10 years.
We recorded goodwill of $13.4 million in connection with the acquisition, which consists of the excess of the net purchase price over the fair value of the net assets acquired. This goodwill represents the expected value attributable to our expansion into the organic juice category. The goodwill is not deductible for tax purposes.
The acquisition was funded through a combination of cash on hand and borrowings under our receivables securitization facility. The values reflected above may change as we finalize our assessment of the acquired assets and liabilities. A change in these valuations may also impact the income tax related accounts and goodwill. The pro forma impact of the acquisition on consolidated net earnings would not have materially changed reported net earnings. Uncle Matt's results of operations will be included in our Consolidated Statements of Operations from the date of acquisition.
Friendly's On June 20, 2016, we completed the acquisition of Friendly’s Ice Cream Holdings Corp. (“Friendly’s Holdings”), including its wholly-owned subsidiary, Friendly’s Manufacturing and Retail, LLC (“Friendly’s Manufacturing,” and together with Friendly’s Holdings, “Friendly’s”), the Friendly’s® trademark and all intellectual property associated with the ice cream business. Friendly’s develops, produces, manufactures, markets, distributes and sells ice cream and other frozen dessert-related products, as well as toppings. The total purchase price was $158.2 million. Assets acquired and liabilities assumed in connection with the acquisition have been recorded at their fair values and include identifiable intangible assets of $81.7 million, of which $29.7 million relates to customer relationships that are subject to amortization over a period of 15 years. Additionally, we assumed an unfavorable lease contract with a fair value of $5.4 million, which will be amortized as a reduction of rent expense over the term of the lease agreement.
We recorded goodwill of $67.3 million in connection with the acquisition, which consists of the excess of the net purchase price over the fair value of the net assets acquired. This goodwill represents the expected value attributable to an anticipated increased competitive position in the ice cream market in the Northeastern United States. The goodwill is not deductible for tax purposes.
The acquisition was funded through a combination of cash on hand and borrowings under our senior secured revolving credit facility and receivables securitization facility. Friendly's results of operations have been included in our unaudited Condensed Consolidated Statements of Operations from the date of acquisition. The purchase accounting and the final fair value assessments are complete.
Investment in Unconsolidated 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 milk and yogurt products. This investment allows us to diversify our portfolio to include plant-based dairy alternatives and provides Good Karma the ability to more rapidly expand distribution across the U.S., as well as increase investments in brand building and product innovation. We do not expect our equity in the earnings of this investment to materially impact our consolidated financial statements. We are accounting for this investment under the equity method of accounting based upon our ability to exercise significant influence over the investee through our ownership interest and representation on Good Karma's board of directors.
3. Inventories
Inventories at June 30, 2017 and December 31, 2016 consisted of the following:
 
June 30, 2017
 
December 31, 2016
 
(In thousands)
Raw materials and supplies
$
110,616

 
$
110,095

Finished goods
176,606

 
174,389

Total
$
287,222

 
$
284,484


13


4. Goodwill and Intangible Assets
As of June 30, 2017, the gross carrying value of goodwill was $2.24 billion and accumulated goodwill impairment was $2.08 billion. We recorded a goodwill impairment charge of $2.08 billion in 2011 with no goodwill impairment charges in subsequent years.
The changes in the net carrying amounts of goodwill as of June 30, 2017 and December 31, 2016 were as follows (in thousands):
Balance at December 31, 2016
$
154,112

Acquisitions (Note 2)
13,423

Balance at June 30, 2017
$
167,535

The net carrying amounts of our intangible assets other than goodwill as of June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
 
Acquisition Costs(1)
 
Impairment
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Acquisition Costs
 
Impairment
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(In thousands)
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
$
58,600

 
$

 
$

 
$
58,600

 
$
52,000

 
$

 
$

 
$
52,000

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer-related and other
80,685

 

 
(39,211
)
 
41,474

 
78,925

 

 
(37,050
)
 
41,875

Trademarks
230,709

 
(109,910
)
 
(49,973
)
 
70,826

 
229,777

 
(109,910
)
 
(41,824
)
 
78,043

Total
$
369,994

 
$
(109,910
)
 
$
(89,184
)
 
$
170,900

 
$
360,702

 
$
(109,910
)
 
$
(78,874
)
 
$
171,918

(1)
The increase in the carrying amount of intangible assets from December 31, 2016 to June 30, 2017 is related in part to an indefinite-lived trademark of $6.6 million and a finite-lived customer-related intangible of $1.8 million we recorded as a part of the Uncle Matt's acquisition. See Note 2. Additionally, we acquired a finite-lived trademark of a regional artisan ice cream brand for $0.9 million during the period.
Our trademark values will be amortized on a straight-line basis over their remaining useful lives, which range from approximately 3 to 9 years. Amortization expense on intangible assets for the three months ended June 30, 2017 and 2016 was $5.2 million and $4.1 million, respectively. Amortization expense on intangible assets for the six months ended June 30, 2017 and 2016 was $10.3 million and $10.4 million, respectively. The amortization of intangible assets is reported on a separate line item in our unaudited Condensed Consolidated Statements of Operations.
Estimated aggregate intangible asset amortization expense for the next five years is as follows (in millions):
2017
$
20.7

2018
20.3

2019
20.3

2020
12.2

2021
10.5


14


5. Debt
Our long-term debt as of June 30, 2017 and December 31, 2016 consisted of the following:
 
June 30, 2017
 
 
December 31, 2016
 
 
Amount
 
Interest
Rate
 
 
Amount
 
Interest
Rate
 
 
(In thousands, except percentages)
 
Dean Foods Company debt obligations:
 
 
 
 
 
 
 
 
 
Senior secured revolving credit facility
$
1,300

 
3.06
% *
 
$
9,100

 
2.94
% *
Senior notes due 2023
700,000

 
6.50
 
 
700,000

 
6.50
 
 
701,300

 
 
 
 
709,100

 
 
 
Subsidiary debt obligations:
 
 
 
 
 
 
 
 
 
Senior notes due 2017
142,000

 
6.90
 
 
142,000

 
6.90
 
Receivables securitization facility
65,000

 
2.18
*
 
40,000

 
1.87
*
Capital lease and other
3,148

 
 
 
3,980

 
 
 
210,148

 
 
 
 
185,980

 
 
 
Subtotal
911,448

 
 
 
 
895,080

 
 
 
Unamortized discounts and debt issuance costs
(7,150
)
 
 
 
 
(9,029
)
 
 
 
Total debt
904,298

 
 
 
 
886,051

 
 
 
Less current portion
(142,173
)
 
 
 
 
(140,806
)
 
 
 
Total long-term portion
$
762,125

 
 
 
 
$
745,245

 
 
 
*    Represents a weighted average rate, including applicable interest rate margins.
The scheduled debt maturities at June 30, 2017 were as follows (in thousands):
2017
$
142,457

2018
1,125

2019
1,174

2020
65,392

2021

Thereafter
701,300

Subtotal
911,448

Less unamortized discounts and debt issuance costs
(7,150
)
Total debt
$
904,298

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

15


margin of between 1.75% and 2.50% (2.00% as of June 30, 2017) based on our total net leverage ratio, or (y) the Alternate Base Rate (as defined in the Credit Agreement) plus a margin of between 0.75% and 1.50% (1.00% as of June 30, 2017) based on our total net leverage ratio; (v) modify certain negative covenants to provide additional flexibility for the incurrence of debt, the payment of dividends and the making of certain permitted acquisitions and other investments; (vi) eliminate and release all real property as collateral for loans under the Credit Facility; and (vii) provide the Company the ability to request that increases in the aggregate commitments under the Credit Facility be made available as either revolving loans or term loans.
In connection with the execution of the amendment to the Credit Agreement, we paid certain arrangement fees of approximately $0.7 million to lenders and other fees of approximately $0.3 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $0.9 million of unamortized deferred financing costs in connection with this amendment.
We may make optional prepayments of loans under the Credit Facility, in whole or in part, without premium or penalty (other than applicable breakage costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, but without a corresponding commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds. The Credit Facility is guaranteed by our existing and future domestic material restricted subsidiaries (as defined in the Credit Agreement), which are substantially all of our wholly-owned U.S. subsidiaries other than the receivables securitization facility subsidiaries (the “Guarantors”).
The Credit Facility is secured by a first priority perfected security interest in substantially all of our assets and the assets of the Guarantors, whether consisting of personal, tangible or intangible property, including a pledge of, and a perfected security interest in, (i) all of the shares of capital stock of the Guarantors and (ii) 65% of the shares of capital stock of our and the Guarantors' first-tier foreign subsidiaries that are material restricted subsidiaries, in each case subject to certain exceptions as set forth in the Credit Agreement. The collateral does not include, among other things, (a) any of our real property, (b) the capital stock and any assets of any unrestricted subsidiary, (c) any capital stock of any direct or indirect subsidiary of Dean Holding Company ("Legacy Dean"), a wholly owned subsidiary of the Company, which owns any real property, or (d) receivables sold pursuant to the receivables securitization facility.
 The Credit Agreement contains customary representations, warranties and covenants, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments during a default or non-compliance with the financial covenants, investments, loans and advances, transactions with affiliates and sale and leaseback transactions. The Credit Agreement also contains customary events of default and related cure provisions. We are required to comply with (a) a maximum total net leverage ratio of 4.25x (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility); and (b) a minimum consolidated interest coverage ratio of 2.25x. In addition, the Credit Agreement imposes certain restrictions on our ability to pay dividends and make other restricted payments if our total net leverage ratio (including borrowings under our receivables securitization facility) is in excess of 3.50x.
At June 30, 2017, we had outstanding borrowings of $1.3 million under the Credit Facility. Our average daily balance under the Credit Facility during the six months ended June 30, 2017 was $1.7 million. There were no letters of credit issued under the Credit Facility as of June 30, 2017.
Dean Foods Receivables Securitization Facility — We have a $450 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to two wholly-owned entities intended to be bankruptcy-remote. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our unaudited Condensed Consolidated Balance Sheets, and the securitization is treated as a borrowing for accounting purposes.
On January 4, 2017, we amended the purchase agreement governing the receivables securitization facility to, among other things, (i) extend the liquidity termination date to January 4, 2020, (ii) reduce the maximum size of the receivables securitization facility to $450 million, (iii) replace the senior secured net leverage ratio with a total net leverage ratio to be consistent with the amended leverage ratio covenant under the amended Credit Agreement described above, and (iv) modify certain pricing terms such that advances outstanding under the receivables securitization facility will bear interest between 0.90% and 1.05%, and the Company will pay an unused fee between 0.40% and 0.55% on undrawn amounts, in each case based on the Company's total net leverage ratio.
In connection with the amendment to the receivables purchase agreement, we paid certain arrangement fees of approximately $0.6 million to lenders and other fees of approximately $0.1 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $0.2 million of unamortized deferred financing costs in connection with the amendment.

16


The receivables purchase agreement contains covenants consistent with those contained in the Credit Agreement.
Based on the monthly borrowing base formula, we had the ability to borrow up to $448.4 million of the total commitment amount under the receivables securitization facility as of June 30, 2017. The total amount of receivables sold to these entities as of June 30, 2017 was $561.5 million. During the first six months of 2017, we borrowed $1.1 billion and repaid $1.1 billion under the facility with a remaining balance of $65.0 million as of June 30, 2017. In addition to letters of credit in the aggregate amount of $117.2 million that were issued but undrawn, the remaining available borrowing capacity was $266.2 million at June 30, 2017. Our average daily balance under this facility during the six months ended June 30, 2017 was $44.2 million. The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.
Dean Foods Company Senior Notes due 2023 — On February 25, 2015, we issued $700 million in aggregate principal amount of 6.50% senior notes due 2023 (the “2023 Notes”) at an issue price of 100% of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act.
In connection with the issuance of the 2023 Notes, we paid certain arrangement fees of approximately $7.0 million to initial purchasers and other fees of approximately $1.8 million, which were deferred and netted against the outstanding debt balance, and will be amortized to interest expense over the remaining term of the 2023 Notes.
The 2023 Notes are our senior unsecured obligations. Accordingly, the 2023 Notes rank equally in right of payment with all of our existing and future senior obligations and are effectively subordinated in right of payment to all of our existing and future secured obligations, including obligations under our Credit Facility and receivables securitization facility, to the extent of the value of the collateral securing such obligations. The 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by our subsidiaries that guarantee obligations under the Credit Facility.
The 2023 Notes will mature on March 15, 2023 and bear interest at an annual rate of 6.50%. Interest on the 2023 Notes is payable semi-annually in arrears in March and September of each year.
We may, at our option, redeem all or a portion of the 2023 Notes at any time on or after March 15, 2018 at the applicable redemption prices specified in the indenture governing the 2023 Notes (the "Indenture"), plus any accrued and unpaid interest to, but excluding, the applicable redemption date. We are also entitled to redeem up to 40% of the aggregate principal amount of the 2023 Notes before March 15, 2018 with the net cash proceeds that we receive from certain equity offerings at a redemption price equal to 106.5% of the principal amount of the 2023 Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, prior to March 15, 2018, we may redeem all or a portion of the 2023 Notes, at a redemption price equal to 100% of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
If we undergo certain kinds of changes of control, holders of the 2023 Notes have the right to require us to repurchase all or any portion of such holder’s 2023 Notes at 101% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit our ability to: (i) create certain liens; (ii) enter into sale and lease-back transactions; (iii) assume, incur or guarantee indebtedness for borrowed money that is secured by a lien on certain principal properties (or on any shares of capital stock of our subsidiaries that own such principal properties) without securing the 2023 Notes on a pari passu basis; and (iv) consolidate with or merge with or into, or sell, transfer, convey or lease all or substantially all of our properties and assets, taken as a whole, to another person.
The carrying value under the 2023 Notes at June 30, 2017 was $693.8 million, net of unamortized debt issuance costs of $6.2 million.
Subsidiary Senior Notes due 2017 — Legacy Dean had certain senior notes outstanding at the time of its acquisition, of which one series remains outstanding ($142 million aggregate principal amount) and matures on October 15, 2017. The carrying value under these notes at June 30, 2017 was $141.1 million, net of unamortized discounts of $0.9 million, at 6.90% interest. The indenture governing the Legacy Dean senior notes does not contain financial covenants but does contain certain restrictions, including a prohibition against Legacy Dean and its subsidiaries granting liens on certain of their real property interests and a prohibition against Legacy Dean granting liens on the stock of its subsidiaries. The Legacy Dean senior notes are not guaranteed by Dean Foods Company or Legacy Dean’s wholly-owned subsidiaries.
See Note 6 for information regarding the fair value of the 2023 Notes and the subsidiary senior notes due 2017 as of June 30, 2017.

17


Capital Lease Obligations and Other — Capital lease obligations of $3.1 million and $4.0 million as of June 30, 2017 and December 31, 2016, respectively, were primarily comprised of our leases for information technology equipment.
6. Derivative Financial Instruments and Fair Value Measurements
Derivative Financial Instruments
Commodities — We are exposed to commodity price fluctuations, including in the prices of milk, butterfat, sweeteners and other commodities used in the manufacturing, packaging and distribution of our products, such as natural gas, resin and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month’s to one year’s anticipated requirements, depending on the ingredient or commodity. These contracts are considered normal purchases.
In addition to entering into forward purchase contracts, from time to time we may purchase over-the-counter contracts from qualified financial institutions or enter into exchange-traded commodity futures contracts for raw materials that are ingredients of our products or components of such ingredients. All commodities contracts are marked to market in our income statement at each reporting period and a derivative asset or liability is recorded on our balance sheet.
Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. At June 30, 2017 and December 31, 2016, our derivatives recorded at fair value in our unaudited Condensed Consolidated Balance Sheets consisted of the following:
 
Derivative Assets
 
Derivative Liabilities
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
 
(In thousands)
Commodities contracts — current(1)
$
6,945

 
$
2,416

 
$
2,037

 
$
12

Commodities contracts — non-current(2)
1

 

 
10

 

Total derivatives
$
6,946

 
$
2,416

 
$
2,047

 
$
12

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

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

18


A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of June 30, 2017 is as follows (in thousands):
 
Fair Value as of June 30, 2017
 
Level 1
 
Level 2
 
Level 3
Asset — Commodities contracts
$
6,946

 
$

 
$
6,946

 
$

Liability — Commodities contracts
2,047

 

 
2,047

 

A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 is as follows (in thousands):
 
Fair Value as of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
Asset — Commodities contracts
$
2,416

 
$

 
$
2,416

 
$

Liability — Commodities contracts
12

 

 
12

 


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 values of the 2023 Notes and subsidiary senior notes were 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 values of the 2023 Notes and subsidiary senior notes at June 30, 2017 and December 31, 2016:
 
June 30, 2017
 
December 31, 2016
 
Amount Outstanding
 
Fair Value
 
Amount Outstanding
 
Fair Value
 
(In thousands)
Dean Foods Company senior notes due 2023
$
700,000

 
$
736,750

 
$
700,000

 
$
736,750

Subsidiary senior notes due 2017
142,000

 
143,775

 
142,000

 
146,615

Additionally, we maintain a Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified deferred compensation arrangement for our executive officers and other employees earning compensation in excess of the maximum compensation that can be taken into account with respect to our 401(k) plan. The SERP is designed to provide these employees with retirement benefits from us that are equivalent, as a percentage of total compensation, to the benefits provided to other employees. The assets related to the SERP are primarily invested in money market and mutual funds and are held at fair value. We classify these assets as Level 2 as fair value can be corroborated based on quoted market prices for identical or similar instruments in markets that are not active. The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of June 30, 2017 (in thousands):
 
Total
 
Level 1
 
Level 2
 
Level 3
Money market
$
24

 
$

 
$
24

 
$

Mutual funds
1,754

 

 
1,754

 


The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of December 31, 2016 (in thousands):
 
Total
 
Level 1
 
Level 2
 
Level 3
Money market
$
27

 
$

 
$
27

 
$

Mutual funds
1,673

 

 
1,673

 


19


7. Common Stock and Share-Based Compensation
Our authorized shares of capital stock include one million shares of preferred stock and 250 million shares of common stock with a par value of $0.01 per share.
Cash Dividends — In November 2013, we announced that our Board of Directors had adopted a cash dividend policy. Under the policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. Beginning in 2015, all awards of restricted stock units, performance stock units and phantom shares provide for cash dividend equivalent units, which vest in cash at the same time as the underlying award. Quarterly dividends of $0.09 per share were paid in March and June of 2017 and 2016, totaling approximately $16.4 million and $16.5 million for the first six months of 2017 and 2016, respectively. We expect to pay quarterly dividends of $0.09 per share ($0.36 per share annually) for the remainder of 2017. Our cash dividend policy is subject to modification, suspension or cancellation in any manner and at any time. Dividends are presented as a reduction to retained earnings in our unaudited Condensed Consolidated Statement of Stockholders’ Equity unless we have an accumulated deficit as of the end of the period, in which case they are reflected as a reduction to additional paid-in capital.
Stock Repurchase Program — Since 1998, our Board of Directors has from time to time authorized the repurchase of our common stock up to an aggregate of $2.38 billion, excluding fees and commissions. We made no share repurchases during the three and six months ended June 30, 2017. We repurchased 1,371,185 shares for $25.0 million during the three and six months ended June 30, 2016. As of June 30, 2017, $197.1 million remained available for repurchases under this program (excluding fees and commissions). Our management is authorized to purchase shares from time to time through open market transactions at prevailing prices or in privately-negotiated transactions, subject to market conditions and other factors. Shares, when repurchased, are retired.
Restricted Stock Units — We issue restricted stock units ("RSUs") to certain senior employees and non-employee directors as part of our long-term incentive compensation program. An RSU represents the right to receive one share of common stock in the future. RSUs have no exercise price. RSUs granted to employees generally vest ratably over three years, subject to certain accelerated vesting provisions based primarily on a change of control, or in certain cases upon death or qualified disability. RSUs granted to non-employee directors vest ratably over three years.
The following table summarizes RSU activity during the six months ended June 30, 2017:
 
Employees
 
Non-Employee Directors
 
Total
RSUs outstanding at January 1, 2017
872,785

 
80,207

 
952,992

RSUs granted
395,097

 
45,528

 
440,625

Shares issued upon vesting of RSUs
(221,992
)
 
(37,204
)
 
(259,196
)
RSUs canceled or forfeited(1)
(296,696
)
 
(2,112
)
 
(298,808
)
RSUs outstanding at June 30, 2017
749,194

 
86,419

 
835,613

Weighted average grant date fair value
$
17.91

 
$
18.46

 
$
17.97

(1)
Pursuant to the terms of our plans, employees have the option of forfeiting RSUs to cover their minimum statutory tax withholding when shares are issued. Any RSUs surrendered or canceled in satisfaction of participants’ tax withholding obligations are not available for future grants under the plans.

20


Performance Stock Units — Beginning in 2016, performance share units ("PSUs") were granted as part of our long-term incentive compensation program. PSUs will cliff vest and be settled 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 respective performance periods. The number of shares that may be earned at the end of the vesting period may range from zero to 200 percent of the target award amount based on the achievement of the performance goals. The fair value of PSUs is estimated using the market price of our common stock on the date of grant, and we recognize compensation expense ratably over the vesting period for the portion of the awards that are expected to vest. The following table summarizes PSU activity during the six months ended June 30, 2017:
 
PSUs
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017
90,583

 
$
19.13

Granted
158,402

 
18.84

Vested

 

Forfeited or canceled
(81,217
)
 
19.29

Outstanding at June 30, 2017
167,768

 
$
18.78

Phantom Shares — We grant phantom shares as part of our long-term incentive compensation program, which are similar to RSUs in that they are based on the price of our stock and vest ratably over a three-year period, but are cash-settled based upon the value of our stock at each vesting date. The fair value of the awards is remeasured at each reporting period. Compensation expense is recognized over the vesting period with a corresponding liability, which is recorded in accounts payable and accrued expenses in our unaudited Condensed Consolidated Balance Sheets. The following table summarizes the phantom share activity during the six months ended June 30, 2017:
 
Shares
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017
1,361,062

 
$
17.78

Granted
767,521

 
18.47

Converted/paid
(600,346
)
 
17.00

Forfeited
(140,783
)
 
18.27

Outstanding at June 30, 2017
1,387,454

 
$
18.45

Stock Options — The following table summarizes stock option activity during the six months ended June 30, 2017:
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Options outstanding and exercisable at January 1, 2017
2,038,829

 
$
19.78

 
 
 
 
Forfeited and canceled
(557,329
)
 
26.18

 
 
 
 
Exercised
(49,879
)
 
15.12

 
 
 
 
Options outstanding and exercisable at June 30, 2017
1,431,621

 
$
17.45

 
1.15
 
$
2,709,128

We recognize share-based compensation expense for stock options ratably over the vesting period. The fair value of each option award is estimated on the date of grant using a Black-Scholes valuation model. We did not grant any stock options during 2016 or 2017, nor do we currently plan to in the future. At June 30, 2017, there was no remaining unrecognized stock option expense related to unvested awards.

21


Share-Based Compensation Expense — The following table summarizes the share-based compensation expense recognized during the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
RSUs
$
1,046

 
$
2,068

 
$
2,654

 
$
3,437

PSUs
(1,051
)
 
451

 
(551
)
 
839

Phantom shares
2,707

 
3,210

 
4,556

 
7,521

Total
$
2,702

 
$
5,729

 
$
6,659


$
11,797

8. Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is based on the weighted average number of common shares outstanding during each period. Diluted EPS is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except share data)
Basic earnings (loss) per share computation:
 
 
 
Numerator:
 
 
 
Income
$
17,647

 
$
33,371

 
$
7,888

 
$
72,572

Denominator:
 
 
 
 
 
 
 
Average common shares
90,882,415

 
91,244,745

 
90,796,585

 
91,406,969

Basic earnings per share
$
0.19

 
$
0.37

 
$
0.09

 
$
0.79

Diluted earnings (loss) per share computation:
 
 
 
Numerator:
 
 
 
Income
$
17,647

 
$
33,371

 
$
7,888

 
$
72,572

Denominator:
 
 
 
 
 
 
 
Average common shares — basic
90,882,415

 
91,244,745

 
90,796,585

 
91,406,969

Stock option conversion(1)
220,318

 
232,113

 
232,495

 
258,164

RSUs and PSUs(2)
266,297

 
202,955

 
336,866

 
329,945

Average common shares — diluted
91,369,030

 
91,679,813

 
91,365,946

 
91,995,078

Diluted earnings per share
$
0.19

 
$
0.36

 
$
0.09

 
$
0.79

(1) Anti-dilutive options excluded
655,700

 
1,282,259

 
776,710

 
1,349,300

(2) Anti-dilutive stock units excluded
8,959

 
5,911

 
4,504

 


22


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

 

 
3,278

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

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

 

 
1,632

Balance at June 30, 2017
$
(81,576
)
 
$
(4,781
)
 
$
(86,357
)
(1)
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 10.
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended June 30, 2016 were as follows (in thousands):
 
Pension and 
Other
Postretirement
Benefits Items
 
Foreign 
Currency
Items
 
Total
Balance at March 31, 2016
$
(81,794
)
 
$
(2,371
)
 
$
(84,165
)
Other comprehensive income (loss) before reclassifications
3,015

 
(1,208
)
 
1,807

Amounts reclassified from accumulated other comprehensive income(1)
(1,465
)
 

 
(1,465
)
Net current-period other comprehensive income (loss)
1,550

 
(1,208
)
 
342

Balance at June 30, 2016
$
(80,244
)
 
$
(3,579
)
 
$
(83,823
)
(1)
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 10.

23


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

 

 
6,569

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

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

 

 
3,276

Balance at June 30, 2017
$
(81,576
)
 
$
(4,781
)
 
$
(86,357
)
(1)
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 10.
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the six months ended June 30, 2016 were as follows (in thousands):
 
Pension and 
Other
Postretirement
Benefits Items
 
Foreign 
Currency
Items
 
Total
Balance at December 31, 2015
$
(83,279
)
 
$
(2,524
)
 
$
(85,803
)
Other comprehensive income (loss) before reclassifications
5,964

 
(1,055
)
 
4,909

Amounts reclassified from accumulated other comprehensive income(1)
(2,929
)
 

 
(2,929
)
Net current-period other comprehensive income (loss)
3,035

 
(1,055
)
 
1,980

Balance at June 30, 2016
$
(80,244
)
 
$
(3,579
)
 
$
(83,823
)
(1)
The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 10.

24


10. Employee Retirement and Postretirement Benefits
We sponsor various defined benefit and defined contribution retirement plans, including various employee savings and profit sharing plans, and contribute to various multiemployer pension plans on behalf of our employees. All full-time union and non-union employees who have met requirements pursuant to the plans are eligible to participate in one or more of these plans.
Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation. The following table sets forth the components of net periodic benefit cost for our defined benefit plans during the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
752

 
$
793

 
$
1,504

 
$
1,586

Interest cost
2,927

 
3,043

 
5,854

 
6,086

Expected return on plan assets
(4,758
)
 
(4,633
)
 
(9,516
)
 
(9,266
)
Amortizations:
 
 
 
 
 
 
 
Prior service cost
176

 
214

 
352

 
428

Unrecognized net loss
2,581

 
2,206

 
5,162

 
4,412

Net periodic benefit cost
$
1,678

 
$
1,623

 
$
3,356

 
$
3,246

On April 3, 2017, we made a discretionary contribution of $38.5 million to our company-sponsored pension plans. We expect to contribute an additional $0.8 million to the company-sponsored pension plans during the remainder of 2017.
Postretirement Benefits — Certain of our subsidiaries provide health care benefits to certain retirees who are covered under specific group contracts. The following table sets forth the components of net periodic benefit cost for our postretirement benefit plans during the three and six months ended June 30, 2017 and 2016: 
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
146

 
$
160

 
$
292

 
$
320

Interest cost
240

 
271

 
480

 
542

Amortizations:
 
 
 
 
 
 
 
Prior service cost
23

 
23

 
46

 
46

Unrecognized net gain
(114
)
 
(61
)
 
(228
)
 
(122
)
Net periodic benefit cost
$
295

 
$
393

 
$
590

 
$
786

11. Asset Impairment Charges and Facility Closing and Reorganization Costs
Asset Impairment Charges
We evaluate our finite-lived intangible and long-lived assets for impairment when circumstances indicate that the carrying value may not be recoverable. Indicators of impairment could include, among other factors, significant changes in the business environment or the planned closure of a facility. 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 6.

25


The results of our analysis indicated no impairment of our property, plant and equipment, outside of facility closing and reorganization costs, for the three and six months ended June 30, 2017 and 2016. We can provide no assurance that we will not have impairment charges in future periods as a result of changes in our business environment, operating results or the assumptions and estimates utilized in our impairment tests.
Facility Closing and Reorganization Costs
Costs associated with approved plans within our ongoing network optimization strategies are summarized as follows:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Closure of facilities, net(1)
$
4,203

 
$
(1,400
)
 
$
7,689

 
$
(234
)
Organizational Effectiveness(2)
1,614

 

 
7,414

 

Facility closing and reorganization costs, net
$
5,817

 
$
(1,400
)
 
$
15,103

 
$
(234
)
(1)
Reflects charges, net of gains on the sales of assets, associated with closed facilities that were incurred in 2017 and 2016. These charges are primarily related to facility closures in Orem, Utah; New Orleans, Louisiana; Rochester, Indiana; Riverside, California; Delta, Colorado; Denver, Colorado; Springfield, Virginia; Buena Park, California; and Sheboygan, Wisconsin, as well as other approved closures that have not yet been announced. We have incurred net charges to date of $57.5 million related to these facility closures through June 30, 2017. We expect to incur additional charges related to these facility closures of approximately $6.9 million related to shutdown, contract termination and other costs. As we continue the evaluation of our supply chain and distribution network, it is likely that we will close additional facilities in the future.
(2)
During the first six months of 2017, we embarked on a company-wide, multi-phase organizational effectiveness initiative 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. Efforts with respect to our organizational effectiveness initiative are ongoing and we expect that we will incur additional costs in the coming months associated with the approval and implementation of additional phases of the plan; however, as specific details of these phases have not been finalized and approved, future costs are not yet estimable.


26


Activity with respect to facility closing and reorganization costs during the six months ended June 30, 2017 is summarized below and includes items expensed as incurred:
 
Accrued Charges at December 31, 2016
 
Charges and Adjustments
 
Payments
 
Accrued Charges at June 30, 2017
 
(In thousands)
Cash charges:
 
 
 
 
 
 
 
Workforce reduction costs
$
3,610

 
$
7,464

 
$
(3,572
)
 
$
7,502

Shutdown costs

 
2,557

 
(2,557
)
 

Lease obligations after shutdown
3,932

 
166

 
(814
)
 
3,284

Other

 
163

 
(163
)
 

Subtotal
$
7,542

 
10,350

 
$
(7,106
)
 
$
10,786

Other charges:
 
 
 
 
 
 
 
Write-down of assets(1)
 
 
4,678

 
 
 
 
Loss on sale of related assets
 
 
67

 
 
 
 
Other, net
 
 
8

 
 
 
 
Subtotal
 
 
4,753

 
 
 
 
Total
 
 
$
15,103

 
 
 
 
(1)
The write-down of assets relates primarily to owned buildings, land and equipment of those facilities identified for closure. The assets were tested for recoverability at the time the decision to close the facilities was more likely than not to occur. Over time, refinements to our estimates used in testing for recoverability may result in additional asset write-downs. The write-down of assets can include accelerated depreciation recorded for those facilities identified for closure. Our methodology for testing the recoverability of the assets is consistent with the methodology described in the “Asset Impairment Charges” section above.
12. Commitments and Contingencies
Contingent Obligations Related to Divested Operations — We have divested certain businesses in recent years. In each case, we have retained certain known contingent obligations related to those businesses and/or assumed an obligation to indemnify the purchasers of the businesses for certain unknown contingent liabilities, including environmental liabilities. We believe that we have established adequate reserves, which are immaterial to the financial statements, for potential liabilities and indemnifications related to our divested businesses. Moreover, we do not expect any liability that we may have for these retained liabilities, or any indemnification liability, to materially exceed amounts accrued.
Contingent Obligations Related to Milk Supply Arrangements — On December 21, 2001, in connection with our acquisition of Legacy Dean, we purchased Dairy Farmers of America’s (“DFA”) 33.8% interest in our operations. In connection with that transaction, we issued a contingent, subordinated promissory note to DFA in the original principal amount of $40 million. The promissory note has a 20-year term that bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will become payable only if we materially breach or terminate 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.

27


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 On August 9, 2007, two plaintiffs filed a putative class action antitrust complaint against Dean Foods and other milk processors in the United States District Court for the Eastern District of Tennessee. Plaintiffs alleged generally that we, either acting alone or in conjunction with others in the milk industry, lessened competition in the Southeastern United States for the sale of processed fluid Grade A milk to retail outlets and other customers. Plaintiffs further alleged that the defendants’ conduct artificially inflated wholesale prices paid by direct milk purchasers. On January 25, 2016, the district court denied plaintiffs’ motion for class certification. On February 8, 2016, plaintiffs filed a petition for permission to appeal the district court’s order denying class certification. That petition was denied by the Sixth Circuit on June 14, 2016. Although the courts refused to certify the case as a class action, the two original plaintiffs decided to pursue their individual claims for damages. The case was scheduled for trial on 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. We recorded a charge and a corresponding liability in connection with the settlements in the first quarter of 2017.
In addition to the legal proceeding described above, 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.
13. Segment, Geographic and Customer Information
We operate as a single reportable segment in manufacturing, marketing, selling and distributing a wide variety of branded and private label dairy and dairy case products. We operate 66 manufacturing facilities which are geographically located largely based on local and regional customer needs and other market factors. We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our products are primarily delivered through what we believe to be one of the most extensive refrigerated direct-to-store delivery (“DSD”) systems in the United States. Our Chief Executive Officer evaluates the performance of our business based on sales and operating income or loss before facility closing and reorganization costs, litigation settlements, impairments of long-lived assets, gains and losses on the sale of businesses and certain other non-recurring gains and losses.
Geographic Information — Net sales related to our foreign operations comprised less than 1% of our consolidated net sales during each of the three and six months ended June 30, 2017 and 2016. None of our long-lived assets are associated with our foreign operations.
Significant Customers — Our largest customer accounted for approximately 17.0% and 16.2% of our consolidated net sales in the three months ended June 30, 2017 and 2016, respectively, and accounted for approximately 17.1% and 16.3% of our consolidated net sales in the six months ended June 30, 2017 and 2016, respectively.

28


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are predictions based on our current expectations and our projections about future events, and are not statements of historical fact. Forward-looking statements include statements concerning our business strategy, among other things, including anticipated trends and developments in, and management plans for, our business and the markets in which we operate. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue,” the negative or plural of these words and other comparable terminology. All forward-looking statements included in this Form 10-Q are based upon information available to us as of the filing date of this Form 10-Q, and we undertake no obligation to update any of these forward-looking statements for any reason. You should not place undue reliance on these forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Annual Report on Form 10-K"), as updated herein, and elsewhere in this Form 10-Q. You should carefully consider the risks and uncertainties described under these sections.
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. As we continue to evaluate and seek to maximize the value of our national operational network and our leading brands and product offerings, we have aligned our leadership team, operating strategy, and sales, logistics and supply chain initiatives into a single operating and reportable segment.
We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our portfolio includes DairyPure®, the country's first and largest fresh, white milk national brand, and TruMoo®, the leading national flavored milk brand, along with well-known regional dairy brands such as Alta Dena®, Berkeley Farms®, Country Fresh®, Dean’s®, Friendly's®, Garelick Farms®, LAND O LAKES ® milk and cultured products (licensed brand), Lehigh Valley Dairy Farms®, Mayfield ®, McArthur®, Meadow Gold ®, Oak Farms®, PET ® (licensed brand), T.G. Lee®, Tuscan® and more. In all, we have more than 50 national, regional and local dairy brands as well as private labels. Additionally, with our acquisition of Uncle Matt's Organic, Inc., which was completed on June 22, 2017, we now sell and distribute organic juice, probiotic-infused juices, and fruit-infused waters under the Uncle Matt's Organic® brand. Dean Foods also makes and distributes ice cream, cultured products, juices, teas, and bottled water. Due to the perishable nature of our products, we deliver the majority of our products directly to our customers' locations in refrigerated trucks or trailers that we own or lease. We believe that we have one of the most extensive refrigerated direct-to-store delivery ("DSD") systems in the United States. We sell our products primarily on a local or regional basis through our local and regional sales forces, and in some instances, with the assistance of national brokers. Some national customer relationships are coordinated by our centralized corporate sales department or national brokers.

29


Recent Developments
Uncle Matt's Organic Acquisition
On June 22, 2017, we completed the acquisition of Uncle Matt's Organic, Inc. ("Uncle Matt's"). Uncle Matt's is a leading organic juice company offering a wide range of organic juices, including probiotic-infused juices and fruit-infused waters. The total purchase price was $22.0 million, which was funded through a combination of cash on hand and borrowings under our receivables securitization facility. Uncle Matt's results of operations will be included in our Consolidated Statements of Operations from the date of acquisition.
Investment in Good Karma
On May 4, 2017, we acquired a non-controlling interest in, and entered into a distribution agreement with, Good Karma Foods, Inc. (“Good Karma”), the leading producer of flax-based milk and yogurt products. This investment allows us to diversify our portfolio to include plant-based dairy alternatives and provides Good Karma the ability to more rapidly expand distribution across the U.S., as well as increase investments in brand building and product innovation. We do not expect our equity in the earnings of this investment to materially impact our consolidated financial statements. We are accounting for this investment under the equity method of accounting based upon our ability to exercise significant influence over the investee through our ownership interest and representation on Good Karma's board of directors.
Results of Operations
Our key performance indicators are brand mix, achieving low cost and volume performance, which are reflected in gross profit, operating income and net sales, respectively. We evaluate our financial performance based on sales and operating profit or loss before gains and losses on the sale of businesses, facility closing and reorganization 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:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2017
 
2016
 
2017
 
2016
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,926.7

 
100.0
%
 
$
1,848.8

 
100.0
 %
 
$
3,922.4

 
100.0
%
 
$
3,727.6

 
100.0
%
Cost of sales
1,459.3

 
75.7

 
1,355.5

 
73.3

 
2,992.9

 
76.3

 
2,730.3

 
73.2

Gross profit(1)
467.4

 
24.3

 
493.3

 
26.7

 
929.5

 
23.7

 
997.3

 
26.8

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling and distribution
338.1

 
17.5

 
331.2

 
17.9

 
683.3

 
17.4

 
664.0

 
17.8

General and administrative
73.1

 
3.8

 
86.6

 
4.7

 
172.7

 
4.4

 
171.8

 
4.6

Amortization of intangibles
5.2

 
0.3

 
4.1

 
0.2

 
10.3

 
0.3

 
10.4

 
0.3

Facility closing and reorganization costs, net
5.8

 
0.3

 
(1.4
)
 
(0.1
)
 
15.1

 
0.4

 
(0.2
)
 

Total operating costs and expenses
422.2

 
21.9

 
420.5

 
22.7

 
881.4

 
22.5

 
846.0

 
22.7

Operating income
$
45.2

 
2.3
%
 
$
72.8

 
3.9
 %
 
$
48.1

 
1.2
%
 
$
151.3

 
4.1
%
(1)
As disclosed in Note 1 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales.

30


Quarter Ended June 30, 2017 Compared to Quarter Ended June 30, 2016
Net Sales — The change in net sales was due to the following:
 
Three Months Ended  June 30, 2017 vs. 2016
 
(In millions)
Volume
$
(66.6
)
Pricing and product mix changes
108.0

Acquisitions
36.5

Total increase
$
77.9

Net sales increased $77.9 million, or 4.2%, during the second quarter of 2017 as compared to the second quarter of 2016, primarily due to increased pricing, as a result of increases in dairy commodity costs from year-ago levels. On average, during the second quarter of 2017, the Class I price was 14.7% above prior-year levels. Additionally, volumes associated with the acquisition of Friendly's Ice Cream Holdings Corp. ("Friendly's") contributed $45.2 million to net sales in the second quarter of 2017 as compared to $8.7 million in the second quarter of 2016. The Friendly's acquisition closed on June 20, 2016 and net sales in the second quarter of 2016 reflect 11 days of Friendly's operations. See Note 2 to our unaudited Condensed Consolidated Financial Statements. Net sales increases were partially offset by a 2.7% total sales volume decline across all products from year-ago levels. This decline was in excess of our expectations. Volume declines across our fluid milk business, which accounted for approximately 76% of our total sales volume in the second quarter of 2017, represented an approximately 3.4% year-over-year decrease. Our total branded white milk volumes decreased 6.0% year-over-year. These decreases were partially offset by a 1.4% year-over-year increase in our flavored milk volumes.
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. However, we continue to balance our product pricing with the execution of our strategy to improve net price realization and, in some cases, we are subject to the terms of our sales agreements with respect to the means and/or timing of price increases, which can negatively impact our profitability. The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for the second quarter of 2017 compared to the second quarter of 2016:
 
Three Months Ended June 30*
 
2017
 
2016
 
% Change
Class I mover(1)
$
15.52

 
$
13.53

 
14.7
%
Class I raw skim milk mover(1)(2)
7.41

 
5.88

 
26.0

Class I butterfat mover(2)(3)
2.39

 
2.24

 
6.7

Class II raw skim milk minimum(1)(4)
6.76

 
5.82

 
16.2

Class II butterfat minimum(3)(4)
2.50

 
2.32

 
7.8

*
The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus producer premiums and a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes procurement costs and other related charges that vary by location and supplier. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” in our 2016 Annual Report on Form 10-K and “— Known Trends and Uncertainties — Prices of 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.
</