DEAN FOODS COMPANY A wide range of factors relating to our voluntary petitions for reorganization under Chapter 11 of Title 11 of theU.S. Code ("Chapter 11") could materially affect future developments and performance, including but not limited to: • our ability to continue as a going concern;
• our ability to successfully consummate any proposed sale of the
business pursuant to Section 363 of the Bankruptcy Code to a potential
acquirer through a sale process in Chapter 11 and, if consummated, to
obtain an adequate price;
• our ability to successfully complete a reorganization under Chapter 11
and emerge from bankruptcy;
• the effects of the Chapter 11 Cases on us and on the interests of
various constituents;
• bankruptcy court rulings in the Chapter 11 Cases and the outcome of the
Chapter 11 Cases in general;
• the length of time the Company will operate under the Chapter 11 Cases;
• risks associated with third-party motions in the Chapter 11 Cases;
• the potential adverse effects of the Chapter 11 Cases on our liquidity
and results of operations;
• increased legal and other professional costs necessary to execute our
reorganization;
• our ability to comply with the restrictions imposed by ourDebtor-in-Possession Credit Agreement, our Receivables Securitization
Facility and other financing arrangements;
• the consequences of the acceleration of our debt obligations;
• employee attrition and our ability to retain senior management and key
personnel due to the distractions and uncertainties, including our
ability to provide adequate compensation and benefits during the
Chapter 11 Cases;
• the likely cancellation of our common stock in the Chapter 11 Cases;
• the potential material adverse effect of claims that are not discharged
in the Chapter 11 Cases;
• the diversion of management's attention as a result of the Chapter 11
Cases; and
• volatility of our financial results as a result of the Chapter 11 Cases.
Business Overview We are a leading food and beverage company and the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products inthe 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 acrossthe United States . Our consolidated net sales totaled$7.3 billion in 2019. Due to the perishable nature of our products, we deliver the majority of our products directly to our customers' locations in refrigerated trucks or trailers that we own or lease. We believe that we have one of the most extensive refrigerated DSD systems inthe United States . We sell our products primarily on a local or regional basis through our local and regional sales forces, and in some instances, with the assistance of brokers. Some national customer relationships are coordinated by our centralized corporate sales department. Our Reportable Segment We have aligned our leadership team, operating strategy, and sales, logistics and supply chain initiatives into a single operating and reportable segment. Unless stated otherwise, any reference to income statement items in our financial statements refers to results from continuing operations. Recent Developments See "Part I - Item 1. Business - Developments SinceJanuary 1, 2019 " for further information regarding recent developments that have impacted our financial condition and results of operations. 28
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Matters Affecting Comparability
Our discussion of the results of operations for the twelve months endedDecember 31, 2019 and 2018 is affected by our adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers ("ASC 606"), onJanuary 1, 2018 . Historically, we presented sales of excess raw materials as a reduction of cost of sales within our Consolidated Statements of Operations. On a prospective basis, effectiveJanuary 1, 2018 , in connection with the adoption of ASC 606, we began reporting sales of excess raw materials within the net sales line of our Consolidated Statements of Operations. Sales of excess raw materials included in net sales were$380.3 million and$515.2 million in the twelve months endedDecember 31, 2019 and 2018, respectively. Sales of excess raw materials included as a reduction to cost of sales were$606.9 million in the twelve months endedDecember 31, 2017 . See Notes 1 and 3 to our Consolidated Financial Statements for additional information. Results of Operations Our key performance indicators are brand mix and achieving low cost, which are reflected in gross margin and operating income, respectively. We evaluate our financial performance based on operating income or loss before gains and losses on the sale of businesses, prepetition facility closing and restructuring costs, asset impairment charges, litigation settlements and other nonrecurring gains and losses. The following table presents certain information concerning our financial results, including information presented as a percentage of net sales: Year Ended December 31 2019 2018 2017 Dollars Percent Dollars Percent Dollars Percent (Dollars in millions) Net sales$ 7,328.7 100.0 %$ 7,755.3 100.0 %$ 7,795.0 100.0 % Cost of sales 5,888.9 80.4 6,100.0 78.7 5,976.9 76.7 Gross profit(1) 1,439.8 19.6 1,655.3 21.3 1,818.1 23.3 Operating costs and expenses: Selling and distribution 1,327.9 18.1 1,403.2 18.1 1,346.4 17.3 General and administrative 301.4 4.1 277.6 3.6 307.8 3.9 Amortization of intangibles 20.6 0.3 20.5 0.3 20.7 0.3 Prepetition facility closing and restructuring costs, net 17.0 0.3 75.0 1.0 24.9 0.3 Impairment of goodwill and long-lived assets 177.4 2.4 204.4 2.6 30.7 0.4 Other operating income - - (2.3 ) (0.1 ) - - Equity in (earnings) loss of unconsolidated affiliate (4.8 ) (0.1 ) (7.9 ) (0.1 ) - - Total operating costs
and expenses 1,839.5 25.1 1,970.5 25.4 1,730.5 22.2 Operating income (loss)$ (399.7 ) (5.5 )%$ (315.2 ) (4.1 )%$ 87.6 1.1 % (1) As disclosed in Note 1 to our Consolidated Financial Statements, we include certain shipping and handling costs within selling and
distribution expense. As a result, our gross profit may not be comparable
to other entities that present all shipping and handling costs as a
component of cost of sales.
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Year Ended
Year Ended
December 31,
2019 vs. 2018
(In millions)
Volume $ (873.5 )
Pricing and product mix changes 436.7
Acquisitions 10.2
Total decrease $ (426.6 )
Net sales decreased $426.6 million , or 5.5%, during the year ended December 31,
2019 as compared to the year ended December 31, 2018 , primarily due to fluid
milk volume declines from year-ago levels, partly offset by increased pricing,
as a result of increases in dairy commodity costs from year-ago levels and
pricing actions taken during the year ended December 31, 2019 to offset
inflation. On average, during 2019, the Class I price was 14.5% above prior-year
levels. Fluid milk volume declines were driven predominantly by customer losses,
overall category declines and lower branded fluid milk volumes due to continued
retailer investment in private label products. Net sales declines were further
offset by volumes associated with the acquisition and consolidation of Good
Karma into our Consolidated Financial Statements on June 29, 2018 , which
contributed $19.8 million to net sales during 2019 as compared to $9.7 million
during 2018. Net sales during the year ended December 31, 2018 reflect 186 days
of Good Karma's operations.
We generally increase or decrease the prices of our private label fluid dairy
products on a monthly basis in correlation with fluctuations in the costs of raw
materials, packaging supplies and delivery costs. We manage the pricing of our
branded fluid milk products on a longer-term basis, balancing consumer demand
with net price realization, but in some cases, we are subject to the terms of
our sales agreements with respect to the means and/or timing of price increases,
which can negatively impact our profitability. The following table sets forth
the average monthly Class I "mover" and its components, as well as the average
monthly Class II minimum prices for raw skim milk and butterfat for 2019
compared to 2018:
Year Ended December 31*
2019 2018 % Change
Class I mover(1) $ 16.99 $ 14.84 14.5 %
Class I raw skim milk mover(1)(2) 8.39 6.23 34.7
Class I butterfat mover(2)(3) 2.54 2.52 0.8
Class II raw skim milk minimum(1)(4) 8.24 6.15 34.0
Class II butterfat minimum(3)(4) 2.52 2.53 (0.4 )* The prices noted in this table are not the prices that we actually pay.
The federal order minimum prices applicable at any given location for
Class I raw skim milk or Class I butterfat are based on the Class I mover
prices plus producer premiums and a location differential. Class II prices
noted in the table are federal minimum prices, applicable at all
locations. Our actual cost also includes procurement costs and other
related charges that vary by location and supplier. Please see
"Part I - Item 1. Business - Government Regulation - Milk Industry
Regulation" and "- Known Trends and Uncertainties - Conventional Raw Milk
and Other Inputs" below for a more complete description of raw milk
pricing.
(1) Prices are per hundredweight.
(2) We process Class I raw skim milk and butterfat into fluid milk products.
(3) Prices are per pound.
(4) We process Class II raw skim milk and butterfat into products such as
cottage cheese, creams and creamers, ice cream and sour cream.
Cost of Sales - All expenses incurred to bring a product to completion are
included in cost of sales, such as raw material, ingredient and packaging costs;
labor costs; and plant and equipment costs. Cost of sales decreased $211.1
million , or 3.5%, during the year ended December 31, 2019 as compared to the
year ended December 31, 2018 , primarily due to the volume declines discussed
above. This overall decrease was partly offset by higher dairy commodity costs.
On average, the Class I price was 14.5% above prior-year levels.
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Gross Profit - Our gross margin decreased to 19.6% in 2019 as compared to 21.3% in 2018. The decrease was primarily due to the volume deleverage and Class I raw milk inflation discussed above. Operating Costs and Expenses - Our operating expenses decreased$131.1 million , or 6.7%, during the year endedDecember 31, 2019 in comparison to the year endedDecember 31, 2018 . Significant changes to operating costs and expenses in the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 include the following: • Selling and distribution costs decreased by$75.3 million in comparison to the prior year primarily due to decreases in advertising and marketing costs of approximately$22.3 million , employee-related costs of approximately$18.3 million , fuel costs of approximately$13.6 million , and freight costs of approximately$13.3 million .
• General and administrative costs increased by
year ended
professional fees and separation charges related to the previously
disclosed departure of certain executive officers.
• Prepetition facility closing and restructuring costs decreased by
million during the year ended December 31, 2019 . See Note 18 to our
Consolidated Financial Statements.
• We recorded total impairment charges of
ended December 31, 2019 . This amount includes impairment charges of
$21.5 million to one of our indefinite-lived trademarks. Total
impairment charges during the year ended December 31, 2018 of $204.4
million include the full impairment of our goodwill of
See Note 7 to our Consolidated Financial Statements. We also recorded
impairment charges to our property, plant and equipment of
million and
2018, respectively. See Note 18 to our Consolidated Financial
Statements.
• We recorded
Valley Fresh joint venture during the year ended
Note 4 to our Consolidated Financial Statements.
Other (Income) Expense - Other expense increased$50.9 million during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily due to$44.5 million of reorganization items recorded in 2019 as a result of our Chapter 11 bankruptcy filing. We also had higher interest expense during 2019 compared to the prior year, related to the write off of deferred financing costs for$3.8 million and higher interest rates on our new DIP credit agreement. Income Taxes - Income tax benefit of$9.2 million was recorded at an effective rate of 1.8% for 2019 compared to a 11.3% effective tax rate in 2018. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In 2019, our effective tax rate was impacted by an increase to tax expense of$118.1 million due to the change in valuation allowances recorded against both federal and state deferred tax assets. In 2018, our effective tax rate was impacted by a decrease in tax benefit of$35.1 million related to the non-deductible portion of the goodwill impairment charge and an increase to tax expense of$17.4 million due to a change in valuation allowance primarily related to state deferred tax assets. In 2019, excluding the$118.1 million of tax expense related to our valuation allowance, our effective tax rate in 2019 would have been 25.0%. In 2018, excluding the net tax expense of$35.1 million related to the goodwill impairment and the$17.4 million tax expense related to our valuation allowance, our effective tax rate in 2018 would have been 25.3%. Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 Net Sales - The change in net sales was due to the following: Year Ended December 31, 2018 vs. 2017 (In millions) Volume, pricing and product mix changes$ (573.3 ) Acquisitions 18.4 Sales of excess raw materials 515.2 Total decrease$ (39.7 ) Net sales decreased$39.7 million , or 0.5%, during the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 , primarily due to fluid milk volume declines from year-ago levels, largely offset by the change in reporting of sales of excess raw materials of$515.2 million during 2018. Excluding the impact of sales or excess raw materials, net sales decreased$554.9 million , or 7.1%. Fluid milk volume declines were driven predominantly by the loss of volume from two large retailers, overall category declines and lower branded fluid milk volumes due to continued retailer investment in private label 31
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products. Net sales were further impacted by decreased pricing, as a result of decreases in dairy commodity costs from 2017 levels. On average, during the year endedDecember 31, 2018 , the Class I price was 9.8% below prior-year levels. Net sales declines were partially offset by volumes associated with the Uncle Matt's and Good Karma acquisitions, which contributed$26.4 million to net sales during 2018 as compared to$8.0 million associated with the Uncle Matt's acquisition during 2017. The Uncle Matt's acquisition closed onJune 22, 2017 and net sales during the year endedDecember 31, 2017 reflect 193 days of Uncle Matt's operations. The Good Karma acquisition closed onJune 29, 2018 and net sales during the year endedDecember 31, 2018 reflect 186 days of Good Karma's operations. The following table sets forth the average monthly Class I "mover" and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for 2018 compared to 2017: Year Ended December 31* 2018 2017 % Change Class I mover(1)$ 14.84 $ 16.45 (9.8 )% Class I raw skim milk mover(1)(2) 6.23 7.60 (18.0 ) Class I butterfat mover(2)(3) 2.52 2.61 (3.4 ) Class II raw skim milk minimum(1)(4) 6.15 7.12 (13.6 ) Class II butterfat minimum(3)(4) 2.53 2.62 (3.4 )
* The prices noted in this table are not the prices that we actually pay.
The federal order minimum prices applicable at any given location for
Class I raw skim milk or Class I butterfat are based on the Class I mover
prices plus producer premiums and a location differential. Class II prices
noted in the table are federal minimum prices, applicable at all
locations. Our actual cost also includes procurement costs and other
related charges that vary by location and supplier. Please see "Part I -
Item 1. Business - Government Regulation - Milk Industry Regulation" and
"- Known Trends and Uncertainties - Conventional Raw Milk and Other
Inputs" below for a more complete description of raw milk pricing.
(1) Prices are per hundredweight.
(2) We process Class I raw skim milk and butterfat into fluid milk products.
(3) Prices are per pound.
(4) We process Class II raw skim milk and butterfat into products such as
cottage cheese, creams and creamers, ice cream and sour cream.
Cost of Sales - Cost of sales increased $123.0 million , or 2.1% during the year
ended December 31, 2018 as compared to the year ended December 31, 2017 ,
primarily due to the change in reporting of sales of excess raw materials
discussed above. Excluding the impact of sales of excess raw material, costs of
sales decreased $392.1 million , or 6.6%, primarily due to decreased dairy
commodity costs. The Class I price was 9.8% below prior-year levels. This
decrease was partially offset by higher non-dairy commodity costs and higher
than expected transitory costs related to our plant closure activities.
Gross Profit - Our gross margin decreased to 21.3% in 2018 as compared to 23.3%
in 2017. This decrease was primarily due to the overall volume declines
discussed above, in addition to the change in reporting of excess raw materials
discussed above. Excluding the impact of the change in reporting of excess raw
materials, our gross margin would have been 22.9% in 2018. Our gross margin was
further impacted by continued transitory costs related to our accelerated plant
closure activity, which include incremental product shrink and higher labor and
freight costs.
Operating Costs and Expenses - Our operating expenses increased $240.0 million ,
or 13.9%, during the year ended December 31, 2018 in comparison to the year
ended December 31, 2017 . Significant changes to operating costs and expenses in
the year ended December 31, 2018 as compared to the year ended December 31, 2017
include the following:
• Selling and distribution costs increased by $56.8 million in comparison
to the prior year primarily due to increases in external freight costs
of $33.7 million , fuel costs of $20.6 million and advertising and
promotion costs of $2.6 million .
• General and administrative costs decreased by
year ended
and administrative costs of
of 2017 and the related legal expenses. General and administrative
costs of
decreases in salaries and wages and employee-related costs of
million associated with lower headcount in comparison to the prior year
as we execute our enterprise-wide cost productivity plan. These
decreases were partially offset by costs incurred in connection with
our enterprise-wide cost productivity plan in 2018.
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• Prepetition facility closing and restructuring costs increased by$50.1 million primarily due to costs associated with asset write-downs and other charges in connection with our accelerated facility closure activities. See Note 18 to our Consolidated Financial Statements. • We recorded total impairment charges of$204.4 million during the year endedDecember 31, 2018 . This amount includes the full impairment of our goodwill of$190.7 million . There were no goodwill impairment charges during the year endedDecember 31, 2017 . See Note 7 to our Consolidated Financial Statements. We also recorded impairment charges
to our long-lived assets of
years ended December 31, 2018 and 2017, respectively. See Note 18 to
our Consolidated Financial Statements.
Other (Income) Expense - Other expense decreased $7.0 million during the year
ended December 31, 2018 as compared to the year ended December 31, 2017 . This
decrease in expense was primarily due to lower interest expense during 2018
compared to the prior year, primarily due to the repayment in full of the $142
million outstanding aggregate principal amount of subsidiary senior notes on
October 16, 2017 .
Income Taxes - Income tax benefit was recorded at an effective rate of 11.3% for
2018 compared to a (123.2)% effective tax rate in 2017. Generally, our effective
tax rate varies primarily based on our profitability level and the relative
earnings of our business units. In 2018, our effective tax rate was
significantly impacted by a decrease in tax benefit of $35.1 million related to
the non-deductible portion of the goodwill impairment charge and an increase to
tax expense of $17.4 million due to a change in valuation allowance primarily
related to state deferred tax assets. In 2017, our effective tax rate was
significantly impacted by the enactment of the Tax Cuts and Jobs Act (the "Tax
Act"), which resulted in a one-time benefit of $45.8 million related to the
revaluation of our deferred tax assets and liabilities, partly offset by the
recognition of a $2.1 million income tax expense associated with the mandatory
deemed repatriation of our foreign earnings.
In 2018, excluding the net tax expense of $35.1 million related to the goodwill
impairment and the $17.4 million tax expense related to our valuation allowance,
our effective tax rate in 2018 would have been 25.3%. In 2017, our effective tax
rate was also impacted by the adoption of Accounting Standards Update ("ASU")
2016-09, which requires excess tax benefits and tax deficiencies related to
share-based payments to be recorded in the provision for income taxes, and an
increase in our valuation allowance related to state net operating losses.
Excluding the one-time net tax benefit of $43.7 million related to the Tax Act,
the $3.0 million tax expense related to excess tax deficiencies, and the $5.9
million tax expense related to our valuation allowance, our effective tax rate
in 2017 would have been 41.0%.
Liquidity and Capital Resources
The filing of the Bankruptcy Petitions constituted an event of default that
accelerated our obligations under all of our material debt instruments. As a
result, we are no longer able to borrow under our Senior Secured Revolving
Credit Facility. In addition, pursuant to the Bankruptcy Code, the filing of the
Bankruptcy Petitions automatically stayed most actions against the
debtors-in-possession, including actions to collect indebtedness incurred prior
to the Petition Date or to exercise control over the debtors-in-possession's
property. Accordingly, although the filing of the Bankruptcy Petitions triggered
defaults under the Debt Instruments, creditors are stayed from taking action as
a result of these defaults, other than with respect to our Securitization
Subsidiaries. Additionally, under Section 502(b)(2) of the Bankruptcy Code, and
subject to the terms of the DIP orders providing for adequate protection
payments to certain of our prepetition lenders, we are no longer required to pay
interest on the prepetition Debt Instruments accruing on or after the Petition
Date.
The following table provides a summary of our total liquidity (in thousands):
December 31, 2019
Cash and cash equivalents (1) $ 80,011
Availability under debtors-in-possession financing (2) 92,427
Total liquidity (3) $ 172,438
(1) As of
cash equivalents was attributable to our foreign operations.
(2) The
under our DIP Credit Agreement and amended and restated Receivables
Securitization Facility, subject to compliance with the covenants in such
credit agreements.
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(3) Based on our current financial forecasts, we believe that our cash on
hand, cash generated from the results of our operations and fundsavailable under our debtors-in-possession financing will be sufficient to
fund anticipated cash requirements until a Chapter 11 plan of
reorganization is confirmed for minimum operating and capital expenditures
and for working capital purposes. However, given the current level of
volatility in the market, uncertainty regarding our ability to complete a
sale of the Company, the operation of our business and the commercial
decisions of counter parties in the context of bankruptcy, as well as the
unpredictability of certain costs that could potentially arise in our
operations, our liquidity needs could be significantly higher than we
currently anticipate.
Cash Dividends - In accordance with our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. From 2015 through 2018, all awards of restricted stock units, performance stock units and phantom shares provide for cash dividend equivalent units, which vest in cash at the same time as the underlying award. InFebruary 2019 , our Board of Directors reviewed the Company's dividend policy and determined that it would be in the best interest of the stockholders to suspend dividend payments. As a result, no dividends were paid during the year endedDecember 31, 2019 . Quarterly dividends of$0.09 per share were paid in each quarter of 2018 throughSeptember 30, 2018 , and a quarterly dividend of$0.03 per share was paid inDecember 2018 , totaling approximately$27.4 million for the year endedDecember 31, 2018 . Quarterly dividends of$0.09 per share were paid in each quarter of 2017, totaling approximately$32.7 million for the year endedDecember 31, 2017 . Dividends are presented as a reduction to retained earnings in our Consolidated Statement of Stockholders' Equity unless we have an accumulated deficit as of the end of the period, in which case they are reflected as a reduction to additional paid-in capital. See Note 13 to our Consolidated Financial Statements. Historical Cash Flow The following table summarizes our cash flows from operating, investing and financing activities for the last three years: Year Ended December 31 2019 2018 2017 (In thousands) Cash flows provided by (used in): Operating activities$ (47,336 ) $ 152,962 $ 144,799 Investing activities (83,415 ) (109,224 ) (134,986 ) Financing activities 186,586
(36,074 ) (11,281 )
Net increase (decrease) in cash and cash equivalents
Operating Activities Cash used in operating activities was$47.3 million during the year endedDecember 31, 2019 compared to cash provided by operating activities of$153.0 million and 144.8 million during the years endedDecember 31, 2018 andDecember 31, 2017 , respectively. The 2019 change was primarily attributable to lower operating income and higher dairy commodity costs. The 2018 change was primarily attributable to lower dairy commodity costs and better working capital management in comparison to the prior year, partially offset by lower operating income in 2018. Additionally, we made a discretionary pension contribution of$38.5 million to our company-sponsored pension plans in 2017. Investing Activities Cash used in investing activities was 83.4 million in the year endedDecember 31, 2019 compared to 109.2 million and 135.0 million for the years endedDecember 31, 2018 andDecember 31, 2017 , respectively. The decrease in 2019 was primarily attributable to lower capital expenditures of$26.0 million , partially offset by a reduction of proceeds from the sale of fixed assets of$13.5 million in comparison to 2018. The decrease was also partially caused by the purchase price, net of cash acquired, of$13.3 million paid for the Good Karma acquisition, which closed in the second quarter of 2018. The decrease in 2018 was primarily attributable to$15.1 million of higher proceeds from the sales of fixed assets in 2018 as compared to 2017. Additionally, the purchase price, net of cash acquired, for the Uncle Matt's acquisition was$21.6 million , which closed in the second quarter of 2017, and other investments were$11.0 million in 2017, as compared to the purchase price, net of cash acquired, of$13.3 million paid for the Good Karma acquisition in 2018. Partially offsetting these decreases, capital expenditures were$8.6 million higher in 2018 compared to 2017. 34
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Financing Activities Cash provided by financing activities was$186.6 million in the year endedDecember 31, 2019 compared to cash used in financing activities of$36.1 million and$11.3 million in the years endedDecember 31, 2018 andDecember 31, 2017 , respectively. The change in 2019 was primarily attributable to net debt proceeds of$227.7 million in 2019 as compared to net debt repayments of$8.0 million in 2018. Net debt proceeds were partially offset by payments of financing costs related to our new DIP financing and amendments to our existing credit facilities of$40.6 million in the year endedDecember 31, 2019 . The change in 2019 cash from financing activities was also partially caused by dividend payments of$27.4 million in the year endedDecember 31, 2018 . The change in 2018 was primarily attributable net debt repayments of$8.0 million in 2018 as compared to net debt proceeds of$23.8 million in 2017, partially offset by a decrease of$5.3 million in cash dividends paid in 2018 compared to 2017. Current Debt Obligations Our debt obligations consist of outstanding borrowings and letters of credit issued under our DIP credit facility, receivables securitization facility, ourDean Foods Company Senior Notes Due 2023 and our capital lease obligations, each of which are described more fully below. Senior Secured Debtor-in-Possession Credit Facility - OnNovember 14, 2019 , theBankruptcy Court entered an order approving, on an interim basis, the financing to be provided pursuant to the DIP Credit Agreement. The DIP Credit Agreement was entered into by and among the Company, as borrower, the DIP Lenders and Coöperatieve Rabobank U.A.,New York Branch, as administrative agent and collateral agent for the DIP Lenders. A final order approving the agreement was entered by the Court onDecember 23, 2019 . The DIP Credit Agreement provides for a senior secured superpriority debtor-in-possession credit facility in the aggregate principal amount of up to$425 million consisting of (i) a new money revolving loan facility in an aggregate principal amount of approximately$236.2 million , which may be in the form of revolving loans or, subject to a sub-limit of$25 million , the form of letters of credit and (ii) term loans refinancing the aggregate principal amount of all outstanding loans under our prepetition Credit Agreement as of the Petition Date. In connection with the execution of the DIP Credit Agreement, we paid certain arrangement fees of approximately$14.0 million , which were capitalized and will be amortized to interest expense over the remaining term of the facility. As ofDecember 31, 2019 , we had total outstanding borrowings of$258.8 million under the DIP Credit Agreement, consisting of$188.8 million outstanding for our term loans portion and$70.0 million outstanding for our revolving loan facility portion. Our average daily balance under the DIP Credit Agreement during the year endedDecember 31, 2019 was$200.9 million . There were no letters of credit issued under the DIP Credit Agreement as ofDecember 31, 2019 . Our obligations under the DIP Facility are guaranteed by all of our subsidiaries that are debtors-in-possession in the Chapter 11 Cases. In addition, subject to the terms of the final order entered onDecember 20, 2019 , the claims of the DIP Lenders are (i) entitled superpriority administrative expense claim status and (ii) subject to certain customary exclusions in the credit documentation, secured by (x) a perfected first priority lien on all property of the Loan Parties not subject to valid, perfected and non-avoidable liens in existence on the Petition Date, (y) a perfected first priority priming lien on collateral under the Senior Secured Revolving Credit Facility and (z) a perfected junior lien on all property of the Loan Parties and the proceeds thereof that are subject to valid, perfected and non-avoidable liens in existence on the Petition Date or valid and non-avoidable liens in existence on the Petition Date that are perfected subsequent to the Petition Date to the extent permitted by Section 546(b) of the Bankruptcy Code, in each case subject to a carve-out for the debtors-in-possession's professional fees and certain liens permitted by the terms of the DIP Credit Agreement. The scheduled maturity date of the DIP facility isAugust 14, 2020 . However, we may elect to extend the scheduled maturity date by an additional three months subject to the satisfaction of certain conditions, including the payment of an extension fee of 0.50% of the aggregate principal amount of the DIP loans and commitments outstanding. The DIP loans bear interest at an interest rate per annum equal to, at the Company's option (i) LIBOR plus 7.0% or (ii) the base rate plus 6.0%. In addition, borrowings under the DIP revolving facility are limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount is equal to 65% of the appraised value of certain of our real property and equipment less the carve-out amount and the aggregate principal amount of DIP Term Loans. Our ability to borrow is also limited by the condition that our unrestricted cash (less budgeted disbursements for the immediately succeeding week and the carve-out) does not exceed$30 million after giving effect to such borrowing. Under the DIP Credit Agreement, we may make optional prepayments of the DIP Loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs and the payment of certain other fees as more fully set forth in 35
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the DIP Credit Agreement). In addition, subject to certain exceptions and conditions described in the DIP Credit Agreement, we are obligated to prepay the obligations thereunder with the net cash proceeds of certain asset sales and with casualty insurance proceeds. Furthermore, we are required to prepay obligations to the extent (i) revolving exposure under the DIP revolving facility exceeds the greater of the revolving commitments and the borrowing base or (ii) our unrestricted cash (less budgeted disbursements for the immediately succeeding week and the carve-out) exceeds$30 million for a period of 5 consecutive business days. The DIP Credit Agreement also contains customary representations, warranties and covenants that are typical and customary for debtors-in-possession facilities of this type, including, but not limited to, specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default, including as a result of certain events occurring in the Chapter 11 Cases. Furthermore, the DIP Credit Agreement requires us to comply with a variance covenant that compares actual operating disbursements and receipts and capital expenditures to the budgeted amounts set forth in the DIP budgets delivered to the DIP agent and DIP lenders on or prior to the closing date and updated periodically thereafter pursuant to the terms of the DIP Credit Agreement. In addition, onFebruary 10, 2020 , the Company entered into the first amendment to the DIP Credit Agreement (the "First DIP Amendment") to extend several of the milestone dates set forth in the DIP Credit Agreement, including extending fromFebruary 10, 2020 toFebruary 24, 2020 the date by which the Company must elect whether it intends to pursue a sale of its assets under Section 363 of Title 11 of theU.S. Code or a plan of reorganization, and if it elects a sale to file a motion seeking approval thereof. Dean Foods Receivables Securitization Facility - We have a$425 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to two wholly-owned entities intended to be bankruptcy-remote. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our Consolidated Balance Sheets, and the securitization is treated as a borrowing for accounting purposes. OnJanuary 4, 2017 , we amended the purchase agreement governing the receivables securitization facility to, among other things, (i) extend the liquidity termination date toJanuary 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 theJanuary 4, 2017 amendment to the Credit Agreement described above, and (iv) modify certain pricing terms such that advances outstanding under the receivables securitization facility will bear interest between 0.90% and 1.05%, and the Company will pay an unused fee between 0.40% and 0.55% on undrawn amounts, in each case based on the Company's total net leverage ratio. OnJanuary 17, 2019 , we amended and restated the existing receivables purchase agreement ("Existing RPA") governing our receivables securitization facility to, among other things, (i) waive compliance with the financial covenant in the Existing RPA requiring the Company to maintain a total net leverage ratio (as defined in the Existing RPA) of less than or equal to 4.25 to 1.00 for the test period endedDecember 31, 2018 (the "Financial Covenant") and (ii) any cross default under the Existing RPA arising from non-compliance with the Financial Covenant under the prior Credit Facility. The waiver is subject to termination upon the earliest to occur of (a)March 1, 2019 , (b) the date, if any, on which anySeller Party (as defined in the Existing RPA) breaches its obligations under Amendment No. 2 and (c) the date, if any, on which the Collateral Agent (as defined in the Existing RPA) enters into a forbearance agreement with the Company relating to (x) the prior Credit Agreement, dated as ofMarch 26, 2015 , by and among the Company and the lenders and other parties from time to time party thereto (y) the exercise of remedies with respect to the prior Credit Facility. OnFebruary 22, 2019 , we amended and restated the Existing RPA to, among other things, (i) extend the liquidity termination date toFebruary 22, 2022 and (ii) replace the leverage ratio covenant with a springing fixed charge coverage ratio covenant that requires us to maintain a fixed charge coverage ratio of at least 1.05 to 1.00 at any time that our liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to$25 million for all such cash) is less than 50% of the borrowing base under the Credit Facility (or, at any time prior to inclusion of certain equipment and real property, less than$100 million ). OnNovember 14, 2019 , we amended and restated the Existing RPA to continue the receivables securitization facility during the Chapter 11 cases. The amendment and restatement had been previously approved pursuant to an interim order entered by theBankruptcy Court onNovember 13, 2019 . The amendment and restatement, among other things, (i) modifies certain covenants, representations, events of default and cross defaults arising as a result of the commencement of the Chapter 11 Cases, (ii) modifies the other rights and obligations of the parties to the facility in order to give effect to, and in certain instances be subject to, orders of the Court from time to time, (iii) reduces the total size of the facility from$450 million to$425 million , with a corresponding reduction to availability thereunder, (iv) modifies certain pricing terms and fees payable under the facility, (v) makes 36
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certain other amendments, including in order to give effect to future issuances of letters of credit and (vi) grants superpriority administrative expense claim status to certain indemnification, performance guaranty and other obligations of certain of the debtors-in-possession under the receivables securitization facility documents. It also adjusted the maturity date toAugust 14, 2020 .The Bankruptcy Court approved this amendment and restatement pursuant to a final order onDecember 20, 2019 . OnFebruary 10, 2020 , we further amended the receivables purchase agreement to give effect to the First DIP Amendment for purposes of our compliance with the covenants under the receivables securitization facility. In connection with the amendments to the receivables purchase agreement during the year, we paid certain arrangement fees of approximately$10.8 million to lenders and other fees of approximately$0.6 million , which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off$2.2 million of unamortized deferred financing costs in connection with the amendments. The receivables purchase agreement contains covenants consistent with those contained in the prior Credit Agreement. Based on the monthly borrowing base formula, we had the ability to borrow up to$425.0 million of the total commitment amount under the receivables securitization facility as ofDecember 31, 2019 . The total amount of receivables sold to these entities as ofDecember 31, 2019 was$530.1 million . During the year endedDecember 31, 2019 , we borrowed$0.7 billion and repaid$0.7 billion under the facility with a remaining balance of$180.0 million as ofDecember 31, 2019 . In addition to letters of credit in the aggregate amount of$236.7 million that were issued but undrawn, the remaining available borrowing capacity was$8.3 million atDecember 31, 2019 . Our average daily balance under this facility during the year endedDecember 31, 2019 was$246.0 million . The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.Dean Foods Company Senior Notes due 2023 - OnFebruary 25, 2015 , we issued$700 million in aggregate principal amount of 6.50% senior notes due 2023 (the "2023 Notes") at an issue price of 100% of the principal amount of the 2023 Notes in a private placement for resale to "qualified institutional buyers" as defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and in offshore transactions pursuant to Regulation S under the Securities Act. In connection with the issuance of the 2023 Notes, we paid certain arrangement fees of approximately$7.0 million to initial purchasers and other fees of approximately$1.8 million , which were deferred and netted against the outstanding debt balance, and were amortized to interest expense over the remaining term of the 2023 Notes. In connection with the bankruptcy filing, we wrote off$3.6 million of unamortized deferred financings costs. The 2023 Notes are our senior unsecured obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by our subsidiaries that guarantee obligations under the Credit Facility. The 2023 Notes were scheduled to mature onMarch 15, 2023 . However, as a result of the Bankruptcy Petitions, the payment obligations under the 2023 Notes were accelerated. The carrying value under the 2023 Notes atDecember 31, 2019 was$700.0 million . Due to the unsecured nature of the 2023 Notes, the full amount outstanding was reclassified to Liabilities Subject to Compromise on the Consolidated Balance Sheets and is no longer included as part of long-term debt. See Note 2 for additional information. See Note 12 for information regarding the fair value of the 2023 Notes as ofDecember 31, 2019 and 2018. Capital Lease Obligations and Other - Capital lease obligations of$6.3 million and$1.6 million as ofDecember 31, 2019 and 2018, respectively, were primarily comprised of our leases for information technology equipment. See Note 20. 37
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Contractual Obligations and Other Long-Term Liabilities
In the normal course of business, we enter into contracts and commitments that
obligate us to make payments in the future. The table below summarizes our
obligations for indebtedness, purchase, lease and certain other contractual
obligations at
Payments Due by Period
Total 2020 2021 2022 2023 2024 Thereafter
(in millions)
Receivables
securitization
facility(1) $ 180.0 $ 180.0 $ - $ - $ - $ - $ -
DIP Facility (1) 258.8 258.8 - - - - -
Purchase
obligations(2) 358.0 185.1 36.1 34.2
34.2 34.2 34.2
Operating leases(3) 335.9 101.3 76.0 54.7
40.1 27.9 35.9
Capital leases(4) 6.3 1.7 1.3 1.1
0.9 0.4 0.9
Interest
payments(5) 58.0 58.0 - - - - -
Benefit payments(6) 380.1 21.2 21.5 22.0
22.1 22.5 270.8 Total(7)$ 1,577.1 $ 806.1 $ 134.9 $ 112.0 $ 97.3 $ 85.0 $ 341.8 (1) Represents amounts outstanding under our receivables securitization facility and DIP Facility atDecember 31, 2019 . As ofDecember 31, 2019 ,
the maturity date for these facilities was
14, 2019, the
basis, the DIP Facility, which refinanced and effectively replaced our
Senior Secured Revolving Credit Facility, and the amended Receivables
Securitization Facility. A final order approving the DIP Facility and
Receivables Securitization Facility was entered on
(2) Primarily represents commitments to purchase minimum quantities of raw
materials used in our production processes, including raw milk, diesel
fuel, sugar and cocoa powder. We enter into these contracts from time to
time to ensure a sufficient supply of raw ingredients.
(3) Represents future minimum lease payments under non-cancelable operating
leases with terms more than one year related to our distribution fleet,
corporate offices and certain of our manufacturing and distribution
facilities. See Note 20 to our Consolidated Financial Statements for more
detail about our lease obligations.
(4) Represents future payments, including interest, under capital leases
related to information technology equipment. See Note 20 to our
Consolidated Financial Statements for more detail about our lease
obligations.
(5) Includes fixed rate interest obligations and interest on variable rate
debt based on the outstanding balances and interest rates in effect at
borrowings under the Credit Facility and receivables securitization
facility will vary based on the interest rate in effect at the time and
the borrowings outstanding at the time.
(6) Represents expected future benefit obligations of $348.3 million and $31.8 million related to our company-sponsored pension plans and postretirement
healthcare plans, respectively. In addition to our company-sponsored
plans, we participate in certain multiemployer defined benefit plans. The
cost of these plans is equal to the annual required contributions
determined in accordance with the provisions of negotiated collective
bargaining arrangements. These costs were approximately
2018 and 2017, respectively; however, the future cost of the multiemployer
plans is dependent upon a number of factors, including the funded status
of the plans, the ability of other participating companies to meet ongoing
funding obligations, and the level of our ongoing participation in these
plans. Because the amount of future contributions we would be
contractually obligated to make pursuant to these plans cannot be
reasonably estimated, such amounts have been excluded from the table
above. See Note 16 to our Consolidated Financial Statements.
(7) The table above excludes our liability for uncertain tax positions of
million because the timing of any related cash payments cannot be
reasonably estimated.
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Pension and Other Postretirement Benefit Obligations We offer pension benefits through various defined benefit pension plans and also offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees. Reported costs of providing non-contributory defined pension benefits and other postretirement benefits are dependent upon numerous factors, assumptions and estimates. For example, these costs are impacted by actual employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plan and earnings on plan assets. Pension and postretirement costs also may be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and annual periodic pension costs. In 2019 and 2018, we made contributions of$0.7 million and$0.8 million , respectively, to our defined benefit pension plans. Our pension plan assets are primarily comprised of equity and fixed income investments. Changes made to the provisions of the plan may impact current and future pension costs. Fluctuations in actual equity market returns, as well as changes in general interest rates may result in increased or decreased pension costs in future periods. In accordance with Accounting Standards related to "Employers' Accounting for Pensions," changes in obligations associated with these factors may not be immediately recognized as pension costs on the income statement, but generally are recognized in future years over the remaining average service period of plan participants. As such, significant portions of pension costs recorded in any period may not reflect the actual level of cash benefits provided to plan participants. In 2019 and 2018, we recorded non-cash pension expense of$9.2 million and$5.5 million , respectively, substantially all of which was attributable to periodic expense. Almost 90% of our defined benefit plan obligations are frozen as to future participation or increases in projected benefit obligation. Many of these obligations were acquired in prior strategic transactions. As an alternative to defined benefit plans, we offer defined contribution plans for eligible employees. The weighted average discount rate reflects the rate at which our defined benefit plan obligations could be effectively settled. The rate, which is updated annually with the assistance of an independent actuary, uses a model that reflects a bond yield curve. The weighted average discount rate for our pension plan obligations decreased from 4.38% atDecember 31, 2018 to 3.35% atDecember 31, 2019 . We expect that our net periodic benefit cost in 2020 will be lower than 2019. We do not currently expect to make any contributions to the pension plans in 2020. Substantially all of our qualified pension plans are consolidated into one master trust. Our investment objectives are to minimize the volatility of the value of our pension assets relative to our pension liabilities and to ensure assets are sufficient to pay plan benefits. In 2014, we adopted a broad pension de-risking strategy intended to align the characteristics of our assets relative to our liabilities. The strategy targets investments depending on the funded status of the obligation. We anticipate this strategy will continue in future years and will be dependent upon market conditions and plan characteristics. AtDecember 31, 2019 , our master trust was invested as follows: investments in equity securities were at 31%; investments in fixed income were at 69%; and cash equivalents were less than 1%. We believe the allocation of our master trust investments as ofDecember 31, 2019 is generally consistent with the targets set forth by our Investment Committee. See Notes 16 and 17 to our Consolidated Financial Statements for additional information regarding retirement plans and other postretirement benefits. Other Commitments and Contingencies In 2001, in connection with our acquisition of Legacy Dean, we purchased DFA's 33.8% interest in our operations. In connection with that transaction, we issued a contingent, subordinated promissory note to DFA in the original principal amount of$40 million . The promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of$96 million . We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we materially breach or terminate one of our related milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire in 2021, without any obligation to pay any portion of the principal or interest. Payments made under the note, if any, would be expensed as incurred. We have not terminated, and we have not materially breached, any of our milk supply agreements with DFA related to the promissory note. We have previously terminated unrelated supply agreements with respect to several plants that were supplied by DFA. In connection with our goals of cost control and supply chain efficiency, we continue to evaluate our sources of raw milk supply. 39
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We also have the following commitments and contingent liabilities, in addition
to contingent liabilities related to ordinary course litigation, investigations
and audits:
• certain indemnification obligations related to businesses that we have
divested;
• certain lease obligations, which require us to guarantee the minimum
value of the leased asset at the end of the lease;
• selected levels of property and casualty risks, primarily related to
employee health care, workers' compensation claims and other casualty
losses; and
• certain litigation-related contingencies.
See Note 20 to our Consolidated Financial Statements for more information regarding our commitments and contingent obligations. Future Capital Requirements During 2020, we intend to invest a total of approximately$85 million to$115 million in capital expenditures, primarily in support of our existing manufacturing facilities. For 2020, we expect cash interest to be approximately$39 million to$40 million based upon current debt levels and projected forward interest rates under our DIP Credit Facility and Receivables Securitization Facility. Cash interest excludes amortization of deferred financing fees of approximately$20 million . AtMarch 12, 2020 , the Receivables Securitization Facility was fully utilized between borrowings and standby letters of credit, with$161.2 million also available under the DIP Credit Facility, subject to compliance with the covenants in our credit agreements. Availability under the Receivables Securitization Facility is calculated using the current receivables balance for the seller entities, less adjustments for vendor concentration limits, reserve requirements and other adjustments as described in our amended and restated receivables purchase agreement, not to exceed the total commitment amount less current borrowings and outstanding letters of credit. Availability under the DIP Credit Facility is calculated using the borrowing base availability less current borrowings and outstanding letters of credit. There are currently no letters of credit outstanding under the DIP Credit Facility. Known Trends and Uncertainties Filing Under Chapter 11 of the United States Bankruptcy Code On the Petition Date, the debtors-in-possession filed the Bankruptcy Petitions under the Bankruptcy Code in theBankruptcy Court . The Chapter 11 Cases are being jointly administered under the caption In reSouthern Foods Group, LLC , Case No. 19-36313. Each debtor-in-possession will continue to operate its business as a "debtor in possession" under the jurisdiction of theBankruptcy Court in accordance with the applicable provisions of the Bankruptcy Code and the orders of theBankruptcy Court . For further information on the risks and uncertainties associated with the Bankruptcy Petitions, see "Item 1A. Risk Factors". Going Concern As a result of extremely challenging current market conditions, continuing losses from operations, our current financial condition and the resulting risks and uncertainties surrounding our Chapter 11 proceedings, there is substantial doubt about our ability to continue as a going concern within one year after the date of issuance of these financial statements. Our ability to continue as a going concern is dependent upon, among other things, our ability to become profitable, maintain profitability and successfully implement our Chapter 11 plan of reorganization. Competitive Environment and Volume Performance The fluid milk industry remains highly competitive, and we are currently navigating a number of challenging dynamics across our cost structure, volumes, customers, consumers and product mix. We continue to navigate a rapidly-changing industry landscape and a dynamic retail environment. Within private label fluid milk, competition for volume has increased significantly, and in some cases, we have lost volume. As a result, we have experienced increased levels of volume deleverage that have negatively impacted our operating income. In addition, retailers continue to aggressively price their private label products, which we believe negatively impacts our branded product sales, resulting in compressed margins. During the year endedDecember 31, 2019 , we experienced fluid milk volume declines from year-ago levels, driven predominantly by customer losses and overall category declines. We expect volume and mix challenges to continue into 2020. 40
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Conventional Raw Milk and Other Inputs Conventional Raw Milk and Butterfat - The primary raw materials used in the products we manufacture, distribute and sell are conventional raw milk (which contains both raw skim milk and butterfat) and bulk cream. On a monthly basis, the federal government and certain state governments set minimum prices for raw milk. The regulated minimum prices differ based on how the raw milk is utilized. Raw milk processed into fluid milk is priced at the Class I price and raw milk processed into products such as cottage cheese, creams and creamers, ice cream and sour cream is priced at the Class II price. Generally, we pay the federal minimum prices for raw milk, plus certain producer premiums (or "over-order" premiums) and location differentials. We also incur other raw milk procurement costs in some locations (such as hauling and field personnel). A change in the federal minimum price does not necessarily mean an identical change in our total raw milk costs as over-order premiums may increase or decrease. This relationship is different in every region of the country and can sometimes differ within a region based on supplier arrangements. However, in general, the overall change in our raw milk costs can be linked to the change in federal minimum prices. Because our Class II products typically have a higher fat content than that contained in raw milk, we also purchase bulk cream for use in some of our Class II products. Bulk cream is typically purchased based on a multiple of the Grade AA butter price on theChicago Mercantile Exchange . Prices for conventional raw milk during the fourth quarter of 2019 were approximately 18% higher than year-ago levels and increased approximately 5% sequentially from the third quarter of 2019. We are currently projecting Class I raw milk costs to increase during 2020 as compared to 2019. Commodity price changes primarily impact our branded business as the changes in raw milk costs are essentially a pass-through cost on our private label products. Given the multitude of factors that influence the dairy commodity environment, we expect the volatility of raw milk prices to continue. Fuel, Resin and External Freight Costs - We purchase diesel fuel to operate our extensive DSD system, and we incur fuel surcharge expense related to the products we deliver through third-party carriers. Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuations, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. Another significant raw material we use is resin, which is a fossil fuel-based product used to make plastic bottles. The prices of diesel and resin are subject to fluctuations based on changes in petroleum feed stock prices. Additionally, in some cases we incur expenses associated with utilizing third-party carriers to deliver our products. The expenses we incur for external freight may vary based on capacity, carrier acceptance rates and other factors. During the year endedDecember 31, 2019 , we experienced a decline in fuel, external freight and resin costs. Overall freight and fuel expense and usage was down in the year endedDecember 31, 2019 primarily driven by lower volume and network optimization activities. We expect the favorability for resin to continue and for freight and fuel costs to remain stable into the first quarter of 2020. Tax Rate The income tax benefit of$9.2 million was recorded at an effective rate of 1.8% for 2019 compared to a 11.3% effective tax rate in 2018. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In 2019, our effective tax rate was impacted by an increase to tax expense of$118.1 million due to the change in valuation allowance recorded against both federal and state deferred tax assets. In 2018, our effective tax rate was impacted by a decrease in tax benefit of$35.1 million related to the non-deductible portion of the goodwill impairment charge and an increase to tax expense of$17.4 million due to a change in valuation allowance primarily related to state deferred tax assets. In 2019, excluding the$118.1 million of tax expense related to our valuation allowance, our effective tax rate in 2019 would have been 25.0%. In 2018, excluding the net tax expense of$35.1 million related to the goodwill impairment and the$17.4 million tax expense related to our valuation allowance, our effective tax rate in 2018 would have been 25.3%. We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets, including net operating loss carryforwards. A valuation allowance is recorded against deferred tax assets to reduce the net carrying value when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Our assessment is made on a jurisdiction-by-jurisdiction basis. In making such a determination, we consider the future reversals of taxable temporary differences, projected future taxable income, and prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. The effective tax rate for 2020 and beyond could vary based upon our profitability level and the relative earnings of our business units and is also subject to change based on our assessment of the realizability of our deferred tax assets. 41
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Critical Accounting Policies and Use of Estimates
In certain circumstances, the preparation of our Consolidated Financial
Statements in conformity with generally accepted accounting principles requires
us to use our judgment to make certain estimates and assumptions. These
estimates affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the Consolidated Financial
Statements and the reported amounts of net sales and expenses during the
reporting period. Our senior management has discussed the development and
selection of these critical accounting policies, as well as our significant
accounting policies (see Note 1 to our Consolidated Financial Statements), with
the Audit Committee of our Board of Directors. The following accounting policies
are the most critical to aid in fully understanding and evaluating our reported
financial results, and the estimates they involve require our most difficult,
subjective or complex judgments.
Judgment and/or Potential Impact if
Estimate Description Uncertainty Results Differ
Goodwill and Intangible Considerable management We believe that the
Assets judgment is necessary to assumptions used in
initially value intangible valuing our intangible
Our goodwill and intangible assets upon acquisition assets and in our
assets have resulted from and to evaluate those impairment analysis are
acquisitions and primarily assets and goodwill for reasonable, but variations
include trademarks with impairment going forward. in any of the assumptions
finite lives and indefinite We determine fair value may result in different
lives and customer-related using widely acceptable calculations of fair
intangible assets. valuation techniques values that could result
including discounted cash in a material impairment
Goodwill and flows, market multiples charge.indefinite-lived trademarks analyses and relief from are evaluated for
royalty analyses. In the fourth quarter of
impairment quarterly and 2018, we early adopted ASU
when circumstances arise Assumptions used in our 2017-04, Intangibles -
that indicate a possible valuations, such as Goodwill and Other:
impairment to ensure that forecasted growth rates Simplifying the Test for
the carrying value is and our cost of capital, Goodwill Impairment, which
recoverable. An are consistent with our simplifies the subsequentindefinite-lived trademark internal projections and measurement of goodwill by is impaired if its book operating plans.
removing the second step
value exceeds its estimated of the two-step
impairment
fair value.
one valuation of goodwill,
we determine that it is indefinite life if it has which indicated the more likely than not that a history of strong sales carrying value of our the book value of a and cash flow performance reporting unit exceeded reporting unit exceeds its that we expect to continue the fair value by estimated fair value. for the foreseeable approximately$381 million future. If these or 25.9%. As a result, we Finite-lived intangible indefinite-lived trademark recorded a$190.7 million assets are evaluated for criteria are not met, the impairment charge which impairment upon a trademarks are amortized reduced goodwill to
zero
significant change in the over their expected useful as of December 31, 2018. operating environment or lives. Determining the whenever circumstances expected life of a Results of the annual indicate that the carrying trademark requires impairment testing of our value may not be considerable management indefinite-lived recoverable. If an judgment and is based on trademarks completed evaluation of the an evaluation of a number during the fourth quarter undiscounted cash flows of factors including the of 2018 indicated no indicates impairment, the competitive environment, impairment. asset is written down to trademark history and its estimated fair value, anticipated future In the fourth quarter of which is generally based on trademark support. 2019, we recorded a$21.5 discounted future cash million impairment charge flows. to reduce the carrying value of one of our Goodwill was zero as of indefinite-lived December 31, 2019 (the trademarks to its$30.5 gross carrying value was million estimated fair$2.26 billion and value. The impairment was accumulated goodwill the result of declining impairment was$2.26 volume and projected billion). future cash flows. Intangible assets totaled We can provide no$111.5 million as of assurance that we will not December 31, 2019 after a have additional impairment$21.5 million non-cash charges in future periods impairment charge recorded as a result of changes in in 2019. our operating results or our assumptions. 42
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Judgment and/or Potential Impact if
Estimate Description Uncertainty Results Differ
Property, Plant and Considerable management If actual results are not
Equipment judgment is necessary to consistent with our
evaluate the impact of estimates and assumptionsWe perform impairment tests operating changes and to used to calculate when circumstances indicate estimate future cash flows estimated future cash that the carrying value may for purposes of
flows or the proceeds
not be recoverable. determining whether an expected to be realized
Indicators of impairment asset group needs to be upon liquidation, we may
could include significant tested for recoverability. be exposed to impairment
changes in business The testing of an asset losses that could be
environment or planned group for recoverability material. Additionally, we
closure of a facility. involves assumptions can provide no assurance
regarding the future cash that we will not have
The results of our 2019 flows of the asset group additional impairment impairment analysis (which often includes charges in future periods indicated an impairment of consideration of a as a result of changes in our property, plant, and probability weighting of our operating results or equipment at 13 of our estimated future cash our assumptions. production facilities, flows), the growth rate of totaling$155.9 million . those cash flows, and the The impairments were the remaining useful life over result of declines in which the asset group is operating cash flows at expected to generate cash these production facilities flows. In the event we on both a historical and determine an asset group forecasted basis. is not recoverable, the Additionally, within measurement of an prepetition facility estimated impairment loss closing and restructuring involves a number of costs, we recognized$5.1 management judgments, million of impairment including the selection of charges during the year an appropriate discount ended December 31, 2019 rate, and estimates related to the write-down regarding the cash flows of property, plant and that would ultimately be equipment at facilities realized upon liquidation approved for closure. of the asset group. Our property, plant and equipment, net of accumulated depreciation, totaled$820.4 million as ofDecember 31, 2019 . Insurance Accruals Accrued liabilities If actual results differ related to these retained from our assumptions, we We retain selected levels risks are calculated based could be exposed to of employee health care, upon loss development material gains or losses. property and casualty factors, which contemplate risks, primarily related to a number of variables A 10% change in our employee health care, including claims history insurance liabilities workers' compensation and expected trends. These could affect net earnings claims and other casualty loss development factors by approximately$9.2 losses. Many of these are developed in million. potential losses are consultation with covered under conventional third-party actuaries. insurance programs with third-party insurers with high deductibles. In other areas, we are self-insured. AtDecember 31, 2019 , we recorded accrued liabilities related to these retained risks of$93.5 million , including both current and long-term liabilities. 43
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Judgment and/or Potential Impact if
Estimate Description Uncertainty Results Differ
Income Taxes Considerable management Our judgments and
judgment is necessary to estimates concerning
A liability for uncertain assess the inherent uncertain tax positions
tax positions is recorded uncertainties related to may change as a result of
to the extent a tax the interpretations of evaluation of new
position taken or expected complex tax laws, information, such as the
to be taken in a tax return regulations and taxing outcome of tax audits or
does not meet certain authority rulings, as well changes to or further
recognition or measurement as to the expiration of interpretations of tax
criteria. A valuation statutes of limitations in laws and regulations. Our
allowance is recorded the jurisdictions in which judgments and estimates
against a deferred tax we operate. concerning realizability
asset if it is not more of deferred tax
assets
likely than not that the Additionally, several could change if any of the asset will be realized. factors are considered in evaluation factors change.
evaluating the
At December 31, 2019, our realizability of our If such changes take
liability for uncertain tax deferred tax assets, place, there is a risk
positions, including including the remaining that our effective tax
accrued interest, was $4.8 years available for carry rate could increase or
million, and our valuation forward, the tax laws for decrease in any period,
allowance was $155.8 the applicable impacting our net
million. jurisdictions, the future earnings.
profitability of the
specific business units,
and tax planning
strategies.
Employee Benefit Plans We record annual amounts Different assumptions
relating to these plans, could result in the
We provide a range of which include various recognition of different
benefits including pension actuarial assumptions, amounts of expense over
and postretirement benefits such as discount rates, different periods of time.
to our eligible employees assumed investment rates
and retirees. of return, compensation A 0.25% reduction in the
increases, employee assumed rate of return on
turnover rates and health plan assets or a 0.25%
care cost trend rates. We reduction in the discount
review our actuarial rate would result in an
assumptions on an annual increase in our annual
basis and make pension expense of $0.7
modifications to the million and $0.5 million ,
assumptions based on respectively.
current rates and trends
when it is deemed A 1% increase in assumed
appropriate. The effect of healthcare costs trends
the modifications is would increase the
generally recorded and aggregate postretirement
amortized over future medical obligation by
periods. approximately $3.3
million.
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Table of Contents
Recent Accounting Pronouncements See Note 1 to our Consolidated Financial Statements.
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