Quarterly Report (10-q)

false--12-31Q3201900009313364.251.05599400052780000.090.090.01914387689190873591438768919087350.010.010.0100P1Y35800000052100053900078000029100029100029100000P3YP3Y000 0000931336 2019-01-01 2019-09-30 0000931336 2019-11-08 0000931336 2018-12-31 0000931336 2019-09-30 0000931336 2018-07-01 2018-09-30 0000931336 2018-01-01 2018-09-30 0000931336 2019-07-01 2019-09-30 0000931336 2018-04-01 2018-06-30 0000931336 us-gaap:CommonStockMember 2018-04-01 2018-06-30 0000931336 us-gaap:CommonStockMember 2018-09-30 0000931336 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-03-31 0000931336 us-gaap:CommonStockMember 2018-03-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-06-30 0000931336 us-gaap:RetainedEarningsMember 2018-07-01 2018-09-30 0000931336 us-gaap:NoncontrollingInterestMember 2017-12-31 0000931336 us-gaap:RetainedEarningsMember 2018-06-30 0000931336 us-gaap:CommonStockMember 2018-07-01 2018-09-30 0000931336 us-gaap:RetainedEarningsMember 2018-04-01 2018-06-30 0000931336 us-gaap:RetainedEarningsMember 2018-03-31 0000931336 2018-01-01 2018-03-31 0000931336 us-gaap:RetainedEarningsMember 2018-01-01 2018-03-31 0000931336 2018-09-30 0000931336 2018-03-31 0000931336 us-gaap:AdditionalPaidInCapitalMember 2018-07-01 2018-09-30 0000931336 us-gaap:RetainedEarningsMember 2018-09-30 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-03-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-03-31 0000931336 us-gaap:CommonStockMember 2017-12-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-09-30 0000931336 us-gaap:NoncontrollingInterestMember 2018-06-30 0000931336 us-gaap:AdditionalPaidInCapitalMember 2018-04-01 2018-06-30 0000931336 2017-12-31 0000931336 us-gaap:RetainedEarningsMember 2017-12-31 0000931336 us-gaap:AdditionalPaidInCapitalMember 2018-06-30 0000931336 us-gaap:CommonStockMember 2018-01-01 2018-03-31 0000931336 us-gaap:NoncontrollingInterestMember 2018-07-01 2018-09-30 0000931336 us-gaap:AdditionalPaidInCapitalMember 2018-03-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-04-01 2018-06-30 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0000931336 us-gaap:NoncontrollingInterestMember 2018-09-30 0000931336 us-gaap:NoncontrollingInterestMember 2018-03-31 0000931336 2018-06-30 0000931336 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0000931336 us-gaap:CommonStockMember 2018-06-30 0000931336 us-gaap:NoncontrollingInterestMember 2018-04-01 2018-06-30 0000931336 us-gaap:AdditionalPaidInCapitalMember 2018-09-30 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-07-01 2018-09-30 0000931336 2019-01-01 2019-03-31 0000931336 2019-04-01 2019-06-30 0000931336 us-gaap:CommonStockMember 2019-07-01 2019-09-30 0000931336 us-gaap:RetainedEarningsMember 2019-07-01 2019-09-30 0000931336 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0000931336 us-gaap:AdditionalPaidInCapitalMember 2019-04-01 2019-06-30 0000931336 us-gaap:NoncontrollingInterestMember 2019-07-01 2019-09-30 0000931336 us-gaap:NoncontrollingInterestMember 2019-03-31 0000931336 us-gaap:CommonStockMember 2019-09-30 0000931336 us-gaap:AdditionalPaidInCapitalMember 2019-07-01 2019-09-30 0000931336 us-gaap:RetainedEarningsMember 2019-09-30 0000931336 us-gaap:CommonStockMember 2019-04-01 2019-06-30 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-09-30 0000931336 us-gaap:CommonStockMember 2019-06-30 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-07-01 2019-09-30 0000931336 us-gaap:CommonStockMember 2019-01-01 2019-03-31 0000931336 us-gaap:NoncontrollingInterestMember 2018-12-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-03-31 0000931336 2019-06-30 0000931336 us-gaap:RetainedEarningsMember 2019-01-01 2019-03-31 0000931336 us-gaap:CommonStockMember 2018-12-31 0000931336 us-gaap:AdditionalPaidInCapitalMember 2019-09-30 0000931336 2019-03-31 0000931336 us-gaap:RetainedEarningsMember 2019-06-30 0000931336 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-03-31 0000931336 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0000931336 us-gaap:RetainedEarningsMember 2019-04-01 2019-06-30 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0000931336 us-gaap:AdditionalPaidInCapitalMember 2019-06-30 0000931336 us-gaap:NoncontrollingInterestMember 2019-01-01 2019-03-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-06-30 0000931336 us-gaap:RetainedEarningsMember 2019-03-31 0000931336 us-gaap:CommonStockMember 2019-03-31 0000931336 us-gaap:NoncontrollingInterestMember 2019-04-01 2019-06-30 0000931336 us-gaap:RetainedEarningsMember 2018-12-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-04-01 2019-06-30 0000931336 us-gaap:NoncontrollingInterestMember 2019-09-30 0000931336 us-gaap:NoncontrollingInterestMember 2019-06-30 0000931336 us-gaap:AccountingStandardsUpdate201602Member 2019-01-01 0000931336 df:PrivateLabelDairyProductsMember 2018-07-01 2018-09-30 0000931336 df:SalesofExcessRawMaterialsandBulkCommoditiesMember 2019-01-01 2019-09-30 0000931336 df:SalesofExcessRawMaterialsandBulkCommoditiesMember 2018-07-01 2018-09-30 0000931336 df:SalesofOtherBulkCommoditiesMember 2018-07-01 2018-09-30 0000931336 df:PrivateLabelDairyProductsMember 2019-01-01 2019-09-30 0000931336 df:SalesofOtherBulkCommoditiesMember 2018-01-01 2018-09-30 0000931336 df:BrandedDairyProductsMember 2019-07-01 2019-09-30 0000931336 us-gaap:ProductMember 2019-07-01 2019-09-30 0000931336 df:BrandedDairyProductsMember 2018-01-01 2018-09-30 0000931336 df:BrandedDairyProductsMember 2019-01-01 2019-09-30 0000931336 us-gaap:ProductMember 2018-01-01 2018-09-30 0000931336 df:SalesofOtherBulkCommoditiesMember 2019-07-01 2019-09-30 0000931336 us-gaap:ProductMember 2018-07-01 2018-09-30 0000931336 df:PrivateLabelDairyProductsMember 2018-01-01 2018-09-30 0000931336 df:PrivateLabelDairyProductsMember 2019-07-01 2019-09-30 0000931336 df:BrandedDairyProductsMember 2018-07-01 2018-09-30 0000931336 df:SalesofOtherBulkCommoditiesMember 2019-01-01 2019-09-30 0000931336 df:SalesofExcessRawMaterialsandBulkCommoditiesMember 2018-01-01 2018-09-30 0000931336 df:SalesofExcessRawMaterialsandBulkCommoditiesMember 2019-07-01 2019-09-30 0000931336 us-gaap:ProductMember 2019-01-01 2019-09-30 0000931336 df:CulturedMember 2019-01-01 2019-09-30 0000931336 df:OtherProductRevenuesMember 2019-07-01 2019-09-30 0000931336 df:CulturedMember 2018-07-01 2018-09-30 0000931336 df:IceCreamMember 2019-07-01 2019-09-30 0000931336 df:OtherBeveragesMember 2018-01-01 2018-09-30 0000931336 df:FluidMilkMember 2019-07-01 2019-09-30 0000931336 df:FluidMilkMember 2018-07-01 2018-09-30 0000931336 df:IceCreamMember 2018-01-01 2018-09-30 0000931336 df:IceCreamMember 2019-01-01 2019-09-30 0000931336 df:FluidMilkMember 2019-01-01 2019-09-30 0000931336 df:IceCreamMember 2018-07-01 2018-09-30 0000931336 df:FreshCreamMember 2019-07-01 2019-09-30 0000931336 df:FreshCreamMember 2018-07-01 2018-09-30 0000931336 df:FreshCreamMember 2018-01-01 2018-09-30 0000931336 df:OtherBeveragesMember 2018-07-01 2018-09-30 0000931336 df:FreshCreamMember 2019-01-01 2019-09-30 0000931336 df:CulturedMember 2019-07-01 2019-09-30 0000931336 df:ESLandOtherDairyProductsMember 2018-07-01 2018-09-30 0000931336 df:ESLandOtherDairyProductsMember 2019-07-01 2019-09-30 0000931336 df:OtherProductRevenuesMember 2019-01-01 2019-09-30 0000931336 df:OtherBeveragesMember 2019-01-01 2019-09-30 0000931336 df:OtherProductRevenuesMember 2018-01-01 2018-09-30 0000931336 df:OtherBeveragesMember 2019-07-01 2019-09-30 0000931336 df:CulturedMember 2018-01-01 2018-09-30 0000931336 df:FluidMilkMember 2018-01-01 2018-09-30 0000931336 df:OtherProductRevenuesMember 2018-07-01 2018-09-30 0000931336 df:ESLandOtherDairyProductsMember 2018-01-01 2018-09-30 0000931336 df:ESLandOtherDairyProductsMember 2019-01-01 2019-09-30 0000931336 df:OrganicValleyFreshJointVentureMember 2019-07-01 2019-09-30 0000931336 df:OrganicValleyFreshJointVentureMember 2018-07-01 2018-09-30 0000931336 df:OrganicValleyFreshJointVentureMember 2017-07-01 2017-09-30 0000931336 df:GoodKarmaMember 2018-06-29 0000931336 df:GoodKarmaMember 2018-06-29 2018-06-29 0000931336 df:OrganicValleyFreshJointVentureMember 2017-09-30 0000931336 df:GoodKarmaMember 2019-09-30 0000931336 df:OrganicValleyFreshJointVentureMember 2019-01-01 2019-09-30 0000931336 df:GoodKarmaMember 2018-10-12 2018-10-12 0000931336 df:OrganicValleyFreshJointVentureMember 2018-01-01 2018-09-30 0000931336 us-gaap:TrademarksMember 2019-01-01 2019-09-30 0000931336 us-gaap:TrademarksMember 2018-12-31 0000931336 us-gaap:CustomerRelationshipsMember 2019-01-01 2019-09-30 0000931336 us-gaap:CustomerRelationshipsMember 2018-12-31 0000931336 us-gaap:TrademarksMember 2019-09-30 0000931336 us-gaap:CustomerRelationshipsMember 2019-09-30 0000931336 us-gaap:TrademarksMember 2018-01-01 2018-12-31 0000931336 us-gaap:TrademarksMember 2018-12-31 0000931336 2018-01-01 2018-12-31 0000931336 us-gaap:CustomerRelationshipsMember 2018-01-01 2018-12-31 0000931336 us-gaap:TrademarksMember 2019-09-30 0000931336 srt:MaximumMember us-gaap:TrademarksMember 2019-01-01 2019-09-30 0000931336 srt:MinimumMember us-gaap:TrademarksMember 2019-01-01 2019-09-30 0000931336 2018-12-01 2018-12-31 0000931336 srt:MaximumMember 2019-01-01 2019-09-30 0000931336 srt:MinimumMember 2019-01-01 2019-09-30 0000931336 srt:ParentCompanyMember 2019-09-30 0000931336 srt:ParentCompanyMember us-gaap:SecuredDebtMember 2019-09-30 0000931336 srt:ParentCompanyMember df:SeniorNotesDue2023Member 2018-12-31 0000931336 srt:ParentCompanyMember df:SeniorNotesDue2023Member 2019-09-30 0000931336 srt:SubsidiariesMember 2019-09-30 0000931336 srt:ParentCompanyMember us-gaap:SecuredDebtMember 2018-12-31 0000931336 srt:SubsidiariesMember df:ReceivablesSecuritizationFacilityMember 2019-09-30 0000931336 srt:SubsidiariesMember df:ReceivablesSecuritizationFacilityMember 2018-12-31 0000931336 srt:SubsidiariesMember 2018-12-31 0000931336 srt:ParentCompanyMember 2018-12-31 0000931336 us-gaap:RevolvingCreditFacilityMember df:ReceivablesSecuritizationFacilityMember 2019-02-22 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember 2019-08-27 0000931336 df:SeniorNotesDue2023Member us-gaap:SeniorNotesMember 2015-02-25 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember 2019-02-22 0000931336 us-gaap:RevolvingCreditFacilityMember df:ReceivablesSecuritizationFacilityMember 2019-02-22 2019-02-22 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember 2019-02-22 2019-02-22 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember 2019-09-30 0000931336 us-gaap:RevolvingCreditFacilityMember df:ReceivablesSecuritizationFacilityMember 2019-09-30 0000931336 2019-08-27 2019-08-27 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember 2019-01-01 2019-09-30 0000931336 us-gaap:RevolvingCreditFacilityMember df:ReceivablesSecuritizationFacilityMember 2019-01-01 2019-09-30 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember us-gaap:LetterOfCreditMember 2019-02-22 0000931336 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember us-gaap:LetterOfCreditMember 2019-02-22 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember 2019-06-28 2019-06-28 0000931336 df:SeniorNotesDue2023Member us-gaap:SeniorNotesMember 2019-01-01 2019-09-30 0000931336 df:SeniorNotesDue2023Member us-gaap:SeniorNotesMember 2019-09-30 0000931336 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember us-gaap:BaseRateMember 2019-02-22 2019-02-22 0000931336 us-gaap:RevolvingCreditFacilityMember df:ReceivablesSecuritizationFacilityMember us-gaap:LetterOfCreditMember 2019-09-30 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember us-gaap:LetterOfCreditMember 2019-09-30 0000931336 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember us-gaap:BaseRateMember 2019-02-22 2019-02-22 0000931336 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember us-gaap:EurodollarMember 2019-02-22 2019-02-22 0000931336 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember us-gaap:EurodollarMember 2019-02-22 2019-02-22 0000931336 us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember df:SwingLineLoanMember 2019-02-22 0000931336 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember df:CreditFacilityMember 2019-02-22 0000931336 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember df:ReceivablesSecuritizationFacilityMember 2019-01-17 0000931336 us-gaap:FairValueInputsLevel1Member df:MutualFundsMember 2019-09-30 0000931336 us-gaap:FairValueInputsLevel3Member df:MutualFundsMember 2019-09-30 0000931336 us-gaap:FairValueInputsLevel2Member df:MutualFundsMember 2019-09-30 0000931336 df:MutualFundsMember 2019-09-30 0000931336 us-gaap:FairValueInputsLevel3Member us-gaap:MoneyMarketFundsMember 2019-09-30 0000931336 us-gaap:FairValueInputsLevel2Member us-gaap:MoneyMarketFundsMember 2019-09-30 0000931336 us-gaap:FairValueInputsLevel1Member us-gaap:MoneyMarketFundsMember 2019-09-30 0000931336 us-gaap:MoneyMarketFundsMember 2019-09-30 0000931336 us-gaap:NondesignatedMember 2018-12-31 0000931336 us-gaap:OtherCurrentAssetsMember us-gaap:CommodityContractMember us-gaap:NondesignatedMember 2018-12-31 0000931336 us-gaap:OtherCurrentAssetsMember us-gaap:CommodityContractMember us-gaap:NondesignatedMember 2019-09-30 0000931336 us-gaap:NondesignatedMember 2019-09-30 0000931336 us-gaap:OtherNoncurrentAssetsMember us-gaap:CommodityContractMember us-gaap:NondesignatedMember 2019-09-30 0000931336 us-gaap:OtherNoncurrentAssetsMember us-gaap:CommodityContractMember us-gaap:NondesignatedMember 2018-12-31 0000931336 us-gaap:CommodityContractMember us-gaap:FairValueInputsLevel2Member 2018-12-31 0000931336 us-gaap:CommodityContractMember us-gaap:FairValueInputsLevel1Member 2018-12-31 0000931336 us-gaap:CommodityContractMember us-gaap:FairValueInputsLevel3Member 2018-12-31 0000931336 us-gaap:CommodityContractMember 2018-12-31 0000931336 us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2019-01-01 2019-09-30 0000931336 us-gaap:PensionPlansDefinedBenefitMember 2019-01-01 2019-09-30 0000931336 us-gaap:FairValueInputsLevel1Member us-gaap:MoneyMarketFundsMember 2018-12-31 0000931336 us-gaap:MoneyMarketFundsMember 2018-12-31 0000931336 us-gaap:FairValueInputsLevel2Member df:MutualFundsMember 2018-12-31 0000931336 us-gaap:FairValueInputsLevel3Member df:MutualFundsMember 2018-12-31 0000931336 df:MutualFundsMember 2018-12-31 0000931336 us-gaap:FairValueInputsLevel2Member us-gaap:MoneyMarketFundsMember 2018-12-31 0000931336 us-gaap:FairValueInputsLevel3Member us-gaap:MoneyMarketFundsMember 2018-12-31 0000931336 us-gaap:FairValueInputsLevel1Member df:MutualFundsMember 2018-12-31 0000931336 us-gaap:CommodityContractMember us-gaap:FairValueInputsLevel3Member 2019-09-30 0000931336 us-gaap:CommodityContractMember us-gaap:FairValueInputsLevel1Member 2019-09-30 0000931336 us-gaap:CommodityContractMember us-gaap:FairValueInputsLevel2Member 2019-09-30 0000931336 us-gaap:CommodityContractMember 2019-09-30 0000931336 us-gaap:PerformanceSharesMember 2019-01-01 2019-09-30 0000931336 us-gaap:PerformanceSharesMember 2019-09-30 0000931336 us-gaap:PerformanceSharesMember 2018-12-31 0000931336 us-gaap:PerformanceSharesMember 2019-07-01 2019-09-30 0000931336 us-gaap:PhantomShareUnitsPSUsMember 2019-07-01 2019-09-30 0000931336 us-gaap:RestrictedStockUnitsRSUMember 2018-01-01 2018-09-30 0000931336 us-gaap:RestrictedStockUnitsRSUMember 2019-07-01 2019-09-30 0000931336 us-gaap:RestrictedStockUnitsRSUMember 2018-07-01 2018-09-30 0000931336 us-gaap:PerformanceSharesMember 2018-01-01 2018-09-30 0000931336 us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-09-30 0000931336 us-gaap:PhantomShareUnitsPSUsMember 2019-01-01 2019-09-30 0000931336 us-gaap:PerformanceSharesMember 2018-07-01 2018-09-30 0000931336 us-gaap:PhantomShareUnitsPSUsMember 2018-07-01 2018-09-30 0000931336 us-gaap:PhantomShareUnitsPSUsMember 2018-01-01 2018-09-30 0000931336 df:EmployeesMember us-gaap:RestrictedStockUnitsRSUMember 2019-09-30 0000931336 df:NonEmployeeDirectorsMember us-gaap:RestrictedStockUnitsRSUMember 2018-12-31 0000931336 us-gaap:RestrictedStockUnitsRSUMember 2019-09-30 0000931336 df:NonEmployeeDirectorsMember us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-09-30 0000931336 df:EmployeesMember us-gaap:RestrictedStockUnitsRSUMember 2018-12-31 0000931336 df:EmployeesMember us-gaap:RestrictedStockUnitsRSUMember 2019-01-01 2019-09-30 0000931336 df:NonEmployeeDirectorsMember us-gaap:RestrictedStockUnitsRSUMember 2019-09-30 0000931336 us-gaap:RestrictedStockUnitsRSUMember 2018-12-31 0000931336 us-gaap:PhantomShareUnitsPSUsMember 2018-12-31 0000931336 us-gaap:PhantomShareUnitsPSUsMember 2019-09-30 0000931336 srt:MinimumMember us-gaap:PerformanceSharesMember 2019-01-01 2019-09-30 0000931336 srt:MaximumMember us-gaap:PerformanceSharesMember 2019-01-01 2019-09-30 0000931336 2018-03-01 2018-03-31 0000931336 us-gaap:CommonStockMember 2019-01-01 2019-09-30 0000931336 us-gaap:CommonStockMember 2018-01-01 2018-09-30 0000931336 2018-09-01 2018-09-30 0000931336 2018-06-01 2018-06-30 0000931336 df:RestrictedStockUnitsandPerformanceStockUnitsMember 2019-07-01 2019-09-30 0000931336 us-gaap:EmployeeStockOptionMember 2019-07-01 2019-09-30 0000931336 us-gaap:EmployeeStockOptionMember 2018-01-01 2018-09-30 0000931336 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-09-30 0000931336 us-gaap:EmployeeStockOptionMember 2019-01-01 2019-09-30 0000931336 df:RestrictedStockUnitsandPerformanceStockUnitsMember 2018-07-01 2018-09-30 0000931336 df:RestrictedStockUnitsandPerformanceStockUnitsMember 2018-01-01 2018-09-30 0000931336 us-gaap:EmployeeStockOptionMember 2018-07-01 2018-09-30 0000931336 df:RestrictedStockUnitsandPerformanceStockUnitsMember 2019-01-01 2019-09-30 0000931336 df:RestrictedStockUnitsandPerformanceStockUnitsMember 2019-07-01 2019-09-30 0000931336 df:RestrictedStockUnitsandPerformanceStockUnitsMember 2018-07-01 2018-09-30 0000931336 us-gaap:EmployeeStockOptionMember 2018-07-01 2018-09-30 0000931336 df:RestrictedStockUnitsandPerformanceStockUnitsMember 2019-01-01 2019-09-30 0000931336 us-gaap:EmployeeStockOptionMember 2019-07-01 2019-09-30 0000931336 df:RestrictedStockUnitsandPerformanceStockUnitsMember 2018-01-01 2018-09-30 0000931336 us-gaap:EmployeeStockOptionMember 2018-01-01 2018-09-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-09-30 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-09-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-01-01 2018-09-30 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2018-09-30 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2018-01-01 2018-09-30 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2017-12-31 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2017-12-31 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2018-12-31 0000931336 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-09-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-01-01 2019-09-30 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2019-01-01 2019-09-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-09-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-12-31 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2019-09-30 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2018-07-01 2018-09-30 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2018-06-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-06-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-07-01 2018-09-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-07-01 2019-09-30 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2019-07-01 2019-09-30 0000931336 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-06-30 0000931336 us-gaap:AccumulatedTranslationAdjustmentMember 2019-06-30 0000931336 us-gaap:PensionPlansDefinedBenefitMember 2018-07-01 2018-09-30 0000931336 us-gaap:PensionPlansDefinedBenefitMember 2019-07-01 2019-09-30 0000931336 us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-09-30 0000931336 us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2018-07-01 2018-09-30 0000931336 us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2018-01-01 2018-09-30 0000931336 us-gaap:OtherPostretirementBenefitPlansDefinedBenefitMember 2019-07-01 2019-09-30 0000931336 df:FacilityClosingandReorganizationMember 2018-01-01 2018-09-30 0000931336 us-gaap:FacilityClosingMember 2018-01-01 2018-09-30 0000931336 df:FacilityClosingandReorganizationMember 2018-07-01 2018-09-30 0000931336 us-gaap:FacilityClosingMember 2018-07-01 2018-09-30 0000931336 df:FacilityClosingandReorganizationMember 2019-01-01 2019-09-30 0000931336 df:FacilityClosingandReorganizationMember 2019-07-01 2019-09-30 0000931336 us-gaap:FacilityClosingMember 2019-01-01 2019-09-30 0000931336 us-gaap:FacilityClosingMember 2019-07-01 2019-09-30 0000931336 df:RestructuringChargesCashMember df:RestructuringChargesOtherMember 2019-01-01 2019-09-30 0000931336 df:RestructuringChargesCashMember df:ShutdownCostsMember 2018-12-31 0000931336 df:RestructuringChargesCashMember df:RestructuringChargesOtherMember 2019-09-30 0000931336 df:RestructuringChargesCashMember 2019-09-30 0000931336 df:RestructuringChargesCashMember df:RestructuringChargesOtherMember 2018-12-31 0000931336 df:RestructuringChargesCashMember us-gaap:EmployeeSeveranceMember 2019-01-01 2019-09-30 0000931336 df:RestructuringChargesNoncashMember 2019-01-01 2019-09-30 0000931336 df:RestructuringChargesCashMember 2019-01-01 2019-09-30 0000931336 df:RestructuringChargesNoncashMember df:GainonSaleofRelatedAssetsMember 2019-01-01 2019-09-30 0000931336 df:RestructuringChargesNoncashMember df:LossOnSaleOfRelatedAssetsMember 2019-01-01 2019-09-30 0000931336 df:RestructuringChargesCashMember df:ShutdownCostsMember 2019-01-01 2019-09-30 0000931336 df:RestructuringChargesCashMember us-gaap:EmployeeSeveranceMember 2019-09-30 0000931336 df:RestructuringChargesCashMember df:ShutdownCostsMember 2019-09-30 0000931336 df:RestructuringChargesCashMember df:LeaseObligationsAfterFacilityClosingMember 2019-01-01 2019-09-30 0000931336 df:RestructuringChargesCashMember us-gaap:EmployeeSeveranceMember 2018-12-31 0000931336 df:RestructuringChargesCashMember 2018-12-31 0000931336 df:RestructuringChargesCashMember df:LeaseObligationsAfterFacilityClosingMember 2019-09-30 0000931336 df:RestructuringChargesCashMember df:LeaseObligationsAfterFacilityClosingMember 2018-12-31 0000931336 df:RestructuringChargesNoncashMember df:RestructuringChargesOtherMember 2019-01-01 2019-09-30 0000931336 us-gaap:FacilityClosingMember 2019-09-30 0000931336 df:ContingentPromissoryNoteMember 2001-12-21 0000931336 srt:MaximumMember 2019-09-30 0000931336 df:ContingentPromissoryNoteMember 2001-12-21 2001-12-21 0000931336 2001-12-21 0000931336 srt:MinimumMember 2019-09-30 0000931336 us-gaap:SalesMember 2018-01-01 2018-09-30 0000931336 us-gaap:SalesMember 2018-07-01 2018-09-30 0000931336 us-gaap:SalesMember df:ForeignOperationsMember 2019-07-01 2019-09-30 0000931336 us-gaap:SalesMember 2019-07-01 2019-09-30 0000931336 us-gaap:SalesMember 2019-01-01 2019-09-30 0000931336 us-gaap:SalesMember df:ForeignOperationsMember 2018-07-01 2018-09-30 0000931336 us-gaap:SalesMember df:ForeignOperationsMember 2019-01-01 2019-09-30 0000931336 us-gaap:SalesMember df:ForeignOperationsMember 2018-01-01 2018-09-30 0000931336 us-gaap:RevolvingCreditFacilityMember df:ReceivablesSecuritizationFacilityMember us-gaap:SubsequentEventMember 2019-11-12 0000931336 us-gaap:RevolvingCreditFacilityMember df:DIPRevolvingLoansMember us-gaap:SubsequentEventMember 2019-11-12 0000931336 us-gaap:LetterOfCreditMember df:DIPLettersofCreditMember us-gaap:SubsequentEventMember 2019-11-12 df:lease df:entity iso4217:USD xbrli:pure iso4217:USD xbrli:shares xbrli:shares df:Facility df:tranche

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



(Mark One)
☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2019



☐	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)



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)



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value	DF	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

As of November 8, 2019, the number of shares of the registrant's common stock outstanding was: 91,940,015.

Table of Contents



			Page
Part I — Financial Information

Item 1	—	Condensed Consolidated Financial Statements (Unaudited)	3
Item 2	—	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3	—	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4	—	Controls and Procedures	45

Part II — Other Information

Item 1	—	Legal Proceedings	46
Item 1A	—	Risk Factors	46
Item 3	—	Defaults Upon Senior Securities	49
Item 5	—	Other Information	49
Item 6	—	Exhibits	52

Signatures			53

Table of Contents

Part I — Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)



	September 30, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	36,756		$	24,176
Receivables, net of allowances of $5,278 and $5,994	508,586			589,263
Inventories	269,036			255,484
Other current assets	43,089			43,357
Total current assets	857,467			912,280
Property, plant and equipment, net	960,599			1,006,182
Operating lease right of use assets	287,084			—
Identifiable intangible and other assets, net	189,682			197,512
Deferred income taxes	—			2,518
Total	$	2,294,832		$	2,118,492

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	595,590		$	699,661
Current maturities of long-term debt and finance leases	1,888			1,174
Operating lease liabilities	88,871			—
Total current liabilities	686,349			700,835
Long-term debt, net	1,117,854			905,170
Deferred income taxes	5,927			13,707
Long-term operating lease liabilities	213,157			—
Other long-term liabilities	153,720			184,048
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock, none issued	—			—
Common stock, 91,908,735 and 91,438,768 shares issued and outstanding, with a par value of $0.01 per share	919			914
Additional paid-in capital	663,684			661,630
Accumulated deficit	(466,099		)	(260,977		)
Accumulated other comprehensive loss	(91,639		)	(98,607		)
Total Dean Foods Company stockholders’ equity	106,865			302,960
Non-controlling interest	10,960			11,772
Total stockholders’ equity	117,825			314,732
Total	$	2,294,832		$	2,118,492

See Notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share data)



	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
Net sales	$	1,849,710		$	1,894,066		$	5,488,642		$	5,825,803
Cost of sales	1,499,369			1,503,469			4,385,068			4,553,919
Gross profit	350,341			390,597			1,103,574			1,271,884
Operating costs and expenses:
Selling and distribution	335,693			349,244			1,009,257			1,031,961
General and administrative	76,086			66,582			220,717			208,076
Amortization of intangibles	5,150			5,150			15,450			15,306
Facility closing and reorganization costs, net	3,806			(2,679		)	15,538			73,444
Impairment of long-lived assets	—			—			11,860			2,232
Other operating income	—			—			—			(2,289		)
Equity in (earnings) loss of unconsolidated affiliate	(694		)	(1,917		)	(3,337		)	(5,516		)
Total operating costs and expenses	420,041			416,380			1,269,485			1,323,214
Operating loss	(69,700		)	(25,783		)	(165,911		)	(51,330		)
Other expense:
Interest expense	17,330			13,810			52,530			41,912
Other (income) expense, net	(6,189		)	432			(4,477		)	1,684
Total other expense	11,141			14,242			48,053			43,596
Loss before income taxes	(80,841		)	(40,025		)	(213,964		)	(94,926		)
Income tax benefit	(1,448		)	(13,377		)	(7,881		)	(25,997		)
Loss from continuing operations	(79,393		)	(26,648		)	(206,083		)	(68,929		)
Gain on sale of discontinued operations, net of tax	—			—			—			1,922
Net loss	(79,393		)	(26,648		)	(206,083		)	(67,007		)
Net loss attributable to non-controlling interest	139			224			784			224
Net loss attributable to Dean Foods Company	$	(79,254	)	$	(26,424	)	$	(205,299	)	$	(66,783	)
Average common shares:
Basic	91,889,977			91,372,325			91,726,349			91,302,990
Diluted	91,889,977			91,372,325			91,726,349			91,302,990
Basic loss per common share:
Loss from continuing operations attributable to Dean Foods Company	$	(0.86	)	$	(0.29	)	$	(2.24	)	$	(0.75	)
Income from discontinued operations attributable to Dean Foods Company	—			—			—			0.02
Net loss attributable to Dean Foods Company	$	(0.86	)	$	(0.29	)	$	(2.24	)	$	(0.73	)
Diluted loss per common share:
Loss from continuing operations attributable to Dean Foods Company	$	(0.86	)	$	(0.29	)	$	(2.24	)	$	(0.75	)
Income from discontinued operations attributable to Dean Foods Company	—			—			—			0.02
Net loss attributable to Dean Foods Company	$	(0.86	)	$	(0.29	)	$	(2.24	)	$	(0.73	)

See Notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)



	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
Net loss	$	(79,393	)	$	(26,648	)	$	(206,083	)	$	(67,007	)
Other comprehensive income (loss):
Pension and other postretirement liability adjustment, net of tax	2,420			1,363			6,968			4,589
Other comprehensive income	2,420			1,363			6,968			4,589
Reclassification of stranded tax effects related to the Tax Act	—			—			—			(16,847		)
Comprehensive loss	(76,973		)	(25,285		)	(199,115		)	(79,265		)
Comprehensive loss attributable to non-controlling interest	139			224			784			224
Comprehensive loss attributable to Dean Foods Company	$	(76,834	)	$	(25,061	)	$	(198,331	)	$	(79,041	)

See Notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)



	Dean Foods Company Stockholders
	Common Stock					Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)				Accumulated Other Comprehensive Income (Loss)				Non- controlling Interest			Total Stockholders’ Equity
	Shares		Amount			Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)				Accumulated Other Comprehensive Income (Loss)				Non- controlling Interest			Total Stockholders’ Equity
Balance, January 1, 2018	91,123,759			$	911	$	659,227			$	74,219			$	(78,410	)	$	—		$	655,947
Issuance of common stock	246,180			2		40				—				—			—			42
Repurchase of shares for withholding taxes	(37,612	)		—		(365		)		—				—			—			(365		)
Share-based compensation expense	—			—		1,742				—				—			—			1,742
Net loss	—			—		—				(265		)		—			—			(265		)
Dividends	—			—		—				(8,365		)		—			—			(8,365		)
Reclassification of stranded tax effects related to the Tax Act(1)	—			—		—				16,847				(16,847		)	—			—
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $521	—			—		—				—				1,624			—			1,624
Balance, March 31, 2018	91,332,327			913		660,644				82,436				(93,633		)	—			650,360
Issuance of common stock	41,628			1		337				—				—			—			338
Repurchase of shares for withholding taxes	(5,426	)		—		(48		)		—				—			—			(48		)
Share-based compensation expense	—			—		1,950				—				—			—			1,950
Net loss attributable to Dean Foods Company	—			—		—				(40,094		)		—			—			(40,094		)
Dividends	—			—		—				(8,399		)		—			—			(8,399		)
Fair value of non-controlling interest acquired	—			—		—				—				—			11,752			11,752
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $539	—			—		—				—				1,602			—			1,602
Balance, June 30, 2018	91,368,529			914		662,883				33,943				(92,031		)	11,752			617,461
Issuance of common stock	35,414			—		195				—				—			—			195
Share-based compensation expense	—			—		(25		)		—				—			—			(25		)
Repurchase of shares for withholding taxes	(2,354	)		—		(22		)		—				—			—			(22		)
Net loss attributable to Dean Foods Company	—			—		—				(26,424		)		—			—			(26,424		)
Net loss attributable to non-controlling interest	—			—		—				—				—			(224		)	(224		)
Issuance of subsidiary's common stock	—			—		—				—				—			354			354
Dividends	—			—		—				(8,344		)		—			—			(8,344		)
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $780	—			—		—				—				1,363			—			1,363
Balance, September 30, 2018	91,401,589			$	914	$	663,031			$	(825	)		$	(90,668	)	$	11,882		$	584,334

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

See Notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)



	Dean Foods Company Stockholders
	Common Stock						Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)				Accumulated Other Comprehensive Income (Loss)				Non- controlling Interest			Total Stockholders’ Equity
	Shares		Amount				Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)				Accumulated Other Comprehensive Income (Loss)				Non- controlling Interest			Total Stockholders’ Equity
Balance, January 1, 2019	91,438,768			$	914		$	661,630			$	(260,977	)		$	(98,607	)	$	11,772		$	314,732
Issuance of common stock	390,640			4			159				—				—			—			163
Repurchase of shares for withholding taxes	(90,937	)		(1		)	(375		)		—				—			—			(376		)
Share-based compensation expense	—			—			1,293				—				—			—			1,293
Net loss attributable to Dean Foods Company	—			—			—				(61,574		)		—			—			(61,574		)
Net loss attributable to non-controlling interest	—			—			—				—				—			(253		)	(253		)
Repurchase of subsidiary's common stock																		(28		)	(28		)
Dividends forfeited(1)	—			—			—				61				—			—			61
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $291	—			—			—				—				2,128			—			2,128
Balance, March 31, 2019	91,738,471			917			662,707				(322,490		)		(96,479		)	11,491			256,146
Issuance of common stock	163,826			2			209				—				—			—			211
Repurchase of shares for withholding taxes	(17,977	)		—			(31		)		—				—			—			(31		)
Share-based compensation expense	—			—			1,847				—				—			—			1,847
Net loss attributable to Dean Foods Company	—			—			—				(64,471		)		—			—			(64,471		)
Net loss attributable to non-controlling interest	—			—			—				—				—			(392		)	(392		)
Dividends forfeited(1)	—			—			—				29				—			—			29
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $291	—			—			—				—				2,420			—			2,420
Balance, June 30, 2019	91,884,320			919			664,732				(386,932		)		(94,059		)	11,099			195,759
Issuance of common stock	27,391			—			127				—				—			—			127
Repurchase of shares for withholding taxes	(2,976	)		—			(5		)		—				—			—			(5		)
Share-based compensation expense	—			—			(1,170		)		—				—			—			(1,170		)
Net loss attributable to Dean Foods Company	—			—			—				(79,254		)		—			—			(79,254		)
Net loss attributable to non-controlling interest	—			—			—				—				—			(139		)	(139		)
Dividends forfeited(1)	—			—			—				87				—			—			87
Other comprehensive income:
Pension and other postretirement benefit liability adjustment, net of tax of $291	—			—			—				—				2,420			—			2,420
Balance, September 30, 2019	91,908,735			$	919		$	663,684			$	(466,099	)		$	(91,639	)	$	10,960		$	117,825

(1) During the three months ended March 31, 2019, three months ended June 30, 2019, and three months ended September 30,

2019, participants forfeited accrued dividends related to previously-granted restricted share units ("RSUs") and performance

share units ("PSUs"), causing a reduction to our accumulated deficit position. Under our long-term incentive compensation

program, cash dividend equivalent units for RSUs and PSUs are accrued over time as our Board of Directors declares cash

dividends and vest in cash at the same time as the underlying award. No dividends were declared or paid during the three

months ended March 31, 2019, three months ended June 30, 2019, or three months ended September 30, 2019.

See Notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



	Nine Months Ended September 30
	2019			2018
Operating activities:
Net loss	$	(206,083	)	$	(67,007	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization	113,880			118,210
Non-cash lease expense	93,958			—
Share-based compensation expense	3,230			7,245
Non-cash facility closing and reorganization costs, net	1,622			38,862
Impairment of long-lived assets	11,860			2,232
Write-off of financing costs	3,755			—
Other operating income	—			(2,289		)
Equity in (earnings) loss of unconsolidated affiliate	(3,337		)	(5,516		)
Deferred income taxes	(5,553		)	(26,727		)
Other, net	(3,955		)	(4,138		)
Changes in operating assets and liabilities:
Receivables, net	80,677			65,058
Inventories	(13,668		)	16,565
Prepaid expenses and other assets	5,576			9,231
Accounts payable and accrued expenses	(104,474		)	(31,928		)
Operating lease liabilities	(92,744		)	—
Cash provided by (used in) operating activities	(115,256		)	119,798
Investing activities:
Capital spending	(65,585		)	(68,680		)
Payments for acquisitions, net of cash acquired	—			(13,324		)
Proceeds from sale of fixed assets	5,300			19,083
Cash used in investing activities	(60,285		)	(62,921		)
Financing activities:
Debt repayments	(1,296		)	(759		)
Payments of financing costs	(17,543		)	—
Proceeds from senior secured revolver	1,143,701			236,200
Payments for senior secured revolver	(1,001,301		)	(247,300		)
Proceeds from receivables securitization facility	660,000			1,810,000
Payments for receivables securitization facility	(595,000		)	(1,825,000		)
Proceeds from issuance of subsidiary's common stock	—			354
Repurchase of subsidiary's common stock	(28		)	—
Cash dividends paid	—			(24,663		)
Issuance of common stock, net of share repurchases for withholding taxes	(412		)	(436		)
Cash provided by (used in) financing activities	188,121			(51,604		)
Increase in cash and cash equivalents	12,580			5,273
Cash and cash equivalents, beginning of period	24,176			16,512
Cash and cash equivalents, end of period	$	36,756		$	21,785

See Notes to unaudited Condensed Consolidated Financial Statements.

Table of Contents

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2019 and 2018

(Unaudited)

1. Basis of Presentation and Recently Adopted Accounting Pronouncements

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.

Basis of Presentation — The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information as well as instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have reflected all material adjustments of a normal and recurring nature necessary for the fair presentation of the results for the periods presented.

For further information, refer to the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for the years ended December 31, 2019 and 2018.

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 Standards

ASU No. 2016-02 — We adopted ASU 2016-02, Leases (Topic 842) (the New Lease Standard) as of January 1, 2019. The New Lease Standard requires lessees to recognize a right-of-use (ROU) asset and a lease liability on the balance sheet for operating leases. Accounting for finance leases is substantially unchanged.

We adopted the New Lease Standard using the comparative reporting at adoption method. Under this method, financial results reported in periods prior to January 1, 2019 are unchanged. We also elected the package of practical expedients which among other things, does not require reassessment of lease classification. We have implemented processes and a lease accounting system to ensure adequate internal controls are in place to assess our contracts and enable proper accounting and reporting of financial information.

The adoption of this standard had a significant impact to our condensed consolidated balance sheet due to the recognition of approximately $358 million of operating lease liabilities with corresponding operating lease ROU assets as of January 1, 2019. We do not expect it to have a significant impact to our condensed consolidated statement of operations or condensed consolidated statement of cash flows in the periods after adoption. See Note 6 for further discussion.

Accounting Standards Issued - Not Yet Adopted

Effective in 2020

ASU No. 2018-13 — The FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) in August 2018 to modify disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.

ASU No. 2018-15 —The FASB also issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) in August 2018. The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.

Table of Contents

Effective in 2021

ASU No. 2018-14 — The FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20) in August 2018. The new guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2020, and is to be applied on a retrospective basis to all periods presented. The effects of this standard on our financial position, results of operations or cash flows are not expected to be material.

2. Revenue Recognition

Disaggregation of Net Sales

The following table presents a disaggregation of our net sales by product type and revenue source. We believe these categories most appropriately depict the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with our customers.



	Three Months Ended				Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(In thousands)
Fluid milk	$	1,134,055	$	1,118,474	$	3,361,807	$	3,535,696
Ice cream(1)	289,601		303,740		831,200		864,343
Fresh cream(2)	112,396		99,771		312,914		291,537
Extended shelf life and other dairy products(3)	39,460		44,379		127,615		135,804
Cultured	66,818		65,343		193,564		195,013
Other beverages(4)	62,757		71,506		196,746		208,550
Other(5)	24,205		32,577		70,857		95,675
Subtotal	1,729,292		1,735,790		5,094,703		5,326,618
Sales of excess raw materials	81,085		112,446		289,600		387,128
Sales of other bulk commodities	39,333		45,830		104,339		112,057
Total net sales	$	1,849,710	$	1,894,066	$	5,488,642	$	5,825,803


(1)	Includes ice cream, ice cream mix and ice cream novelties.


(2)	Includes half-and-half and whipping creams.


(3)	Includes creamers and other extended shelf life fluids.


(4)	Includes fruit juice, fruit flavored drinks, iced tea, water and flax-based milk.


(5)	Includes items for resale such as butter, cheese, eggs and milkshakes.

Table of Contents

The following table presents a disaggregation of our net product sales between sales of Company-branded products versus sales of private label products:



	Three Months Ended				Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(In thousands)
Branded products	$	840,445	$	844,356	$	2,548,924	$	2,607,751
Private label products	888,847		891,434		2,545,779		2,718,867
Subtotal	1,729,292		1,735,790		5,094,703		5,326,618
Sales of excess raw materials	81,085		112,446		289,600		387,128
Sales of other bulk commodities	39,333		45,830		104,339		112,057
Total net sales	$	1,849,710	$	1,894,066	$	5,488,642	$	5,825,803

Revenue Recognition and Nature of Products and Services

We manufacture, market and distribute a wide variety of branded and private label dairy and dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Revenue is recognized upon transfer of control of promised goods or services to our customers’ facility in an amount that reflects the consideration we expect to ultimately receive in exchange for those promised goods or services. Revenue is recognized net of allowances for product returns, trade promotions and prompt pay and other discounts.

Our portfolio of products includes fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy and dairy case products. We sell these products under national, regional and local proprietary or licensed brands, or under private labels. Our sales of excess raw materials consist primarily of bulk cream sales. As a result of the purchase of raw milk, we obtain more butterfat than is needed in our production process. Excess butterfat is sold, primarily in the form of bulk cream, to third parties.

In all cases, we recognize revenue upon delivery to our customers as we have determined that this is the point at which control is transferred, our performance obligation is complete, and we are entitled to consideration.

Contractual Arrangements with Customers

The majority of our sales are to retailers, warehouse clubs, distributors, foodservice outlets, educational institutions and governmental entities with whom we have contractual agreements. Our sales of excess raw materials and other bulk commodities are primarily to dairy cooperatives, dairy processors or other manufacturers for use as a raw ingredient in their respective manufacturing processes. Our customer contracts typically contain standard terms and conditions and a term sheet. In some cases, upon expiration, these arrangements may continue with the same terms and may not be formally renewed. Additionally, we have a number of informal sales arrangements with certain local and regional customers, which we consider to be contracts based on the criteria outlined in ASC 606. Payment terms and conditions vary by customer, but we generally provide credit terms to customers ranging up to 30 days; therefore, we have determined that our contracts do not include a significant financing component. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses based on our historical experience.

We have determined that we satisfy our performance obligations related to our customer contracts at a point in time, as opposed to over time, and accordingly, revenue is recognized at a point in time across all of our revenue streams. Therefore, we do not have any contract balances with our customers recorded on our unaudited Condensed Consolidated Balance Sheets.

Sales Incentives and Other Promotional Programs

We routinely offer sales incentives and discounts through various regional and national programs to our customers and consumers. These programs include scan backs, product rebates, product returns, trade promotions and co-op advertising, product discounts, product coupons and amounts paid to customers for shelf space in retail stores. The expenses associated with these programs are accounted for as reductions to the transaction price of our products and are therefore recorded as reductions to gross sales.

Some of our sales incentives are recorded by estimating incentive costs or redemption rates based on our historical experience and expected levels of performance of the trade promotion or other program. We maintain liabilities at the end of each

Table of Contents

period for the estimated incentive costs incurred but unpaid for these programs. Differences between estimated and actual incentive costs are normally not material and are recognized in earnings in the period such differences are determined.

3. Investment in Affiliates and Discontinued Operations

Unconsolidated Affiliate and Related Party

Organic Valley Fresh Joint Venture — In the third quarter of 2017, we commenced the operations of our 50/50 strategic joint venture with Cooperative Regions of Organic Producer Pools (“CROPP”), an independent farmer cooperative that distributes organic milk and other organic dairy products under the Organic Valley^® brand. The joint venture, called Organic Valley Fresh, combines our processing plants and refrigerated DSD system with CROPP's portfolio of recognized brands and products, marketing expertise, and access to an organic milk supply from America's largest cooperative of organic dairy farmers to bring the Organic Valley^® brand to retailers. We and CROPP each made a capital contribution of $2.0 million to the joint venture during the third quarter of 2017.

We have concluded that Organic Valley Fresh is a variable interest entity, but we have determined that we are not the primary beneficiary of the Organic Valley Fresh joint venture because we do not have the power to direct the activities that most significantly affect the economic performance of the joint venture; therefore, the financial results of the joint venture have not been consolidated in our unaudited Condensed Consolidated Financial Statements. We are accounting for this investment under the equity method of accounting. Our equity in the earnings of the joint venture is included as a component of operating income as we have determined that the joint venture's operations are integral to, and an extension of, our business operations. Our equity in the earnings of the joint venture was $0.7 million and $1.9 million for the three months ended September 30, 2019 and 2018, respectively, and $3.3 million and $5.5 million for the nine months ended September 30, 2019 and 2018, respectively.

Controlling Interest in Consolidated Affiliate

Good Karma — On May 4, 2017, we acquired a non-controlling interest in, and entered into a distribution agreement with, Good Karma Foods, Inc. (“Good Karma”), the leading producer of flax-based beverage and yogurt products. This investment allows us to diversify our portfolio to include plant-based dairy alternatives and provides Good Karma the ability to more rapidly expand distribution across the U.S., as well as increase investments in brand building and product innovation.

On June 29, 2018, we increased our ownership interest in Good Karma to 67% with an additional investment of $15.0 million, resulting in control under acquisition method accounting. Good Karma’s results of operations have been consolidated in our unaudited Condensed Consolidated Statements of Operations from the date of acquisition.

Prior to the June 29, 2018 step-acquisition, we accounted for our investment in Good Karma under the equity method of accounting based upon our ability to exercise significant influence over the investee through our ownership interest and representation on Good Karma's board of directors. Our equity in the earnings of this investment was not material to our unaudited Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2018.

On October 12, 2018, we made a capital contribution to Good Karma of $3 million. Our current ownership interest in Good Karma is 69%.

Discontinued Operations

During the second quarter of 2018, we recognized a net gain from discontinued operations of $1.9 million resulting from a tax refund received from the settlement of a state tax refund claim related to our 2013 sale of Morningstar Foods, LLC.

4. Inventories

Inventories at September 30, 2019 and December 31, 2018 consisted of the following:



	September 30, 2019		December 31, 2018
	(In thousands)
Raw materials and supplies	$	108,322	$	101,620
Finished goods	160,714		153,864
Total	$	269,036	$	255,484

Table of Contents

5. Goodwill and Intangible Assets

As of September 30, 2019 and December 31, 2018, the net carrying value of goodwill was zero. We recorded a total goodwill impairment charge of $190.7 million in December 2018 in connection with our quantitative impairment analysis. We have not acquired additional goodwill during the nine months ended September 30, 2019.

The net carrying amounts of our intangible assets other than goodwill as of September 30, 2019 and December 31, 2018 were as follows:



	September 30, 2019										December 31, 2018
	Acquisition Costs		Impairment			Accumulated Amortization			Net Carrying Amount		Acquisition Costs		Impairment			Accumulated Amortization			Net Carrying Amount
	(In thousands)
Intangible assets with indefinite lives:
Trademarks	$	69,315	$	—		$	—		$	69,315	$	69,315	$	—		$	—		$	69,315
Intangible assets with finite lives:
Customer-related and other	83,545		—			(48,549		)	34,996		83,545		—			(45,423		)	38,122
Trademarks	230,709		(109,910		)	(86,945		)	33,854		230,709		(109,910		)	(74,621		)	46,178
Total	$	383,569	$	(109,910	)	$	(135,494	)	$	138,165	$	383,569	$	(109,910	)	$	(120,044	)	$	153,615

Our finite-lived trademarks will be amortized on a straight-line basis over their remaining useful lives, which range from approximately 1 to 7 years, with a weighted-average remaining useful life of approximately 5 years.

Estimated aggregate intangible asset amortization expense for the next five years is as follows (in millions):



2019	$	20.6
2020	12.5
2021	10.8
2022	8.1
2023	7.3

6. Leases

We determine if an arrangement is or contains a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, operating lease liabilities and long-term operating lease liabilities in our unaudited Condensed Consolidated Balance Sheet. Finance leases are included in property, plant, and equipment, the current maturities of long-term debt and finance leases, as well as long-term debt, net in our unaudited Condensed Consolidated Balance Sheet. Our finance leases are not material.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. We use our estimated incremental borrowing rate derived from information available at the lease commencement date to determine the present value of our lease payments if a discount rate is not stated within the lease agreement. To estimate the incremental borrowing rate, we utilize a risk-free rate plus our incremental interest rate spread for collateralized debt, which is updated on a quarterly basis. We use multiple incremental borrowing rates that correspond to the term of the lease.

We lease certain property, vehicles used in the distribution of our product, and equipment. As of September 30, 2019, we had approximately 1,600 leases with remaining terms ranging from less than one year to 20 years. Our leases primarily consist of:

•Land and buildings of our manufacturing facilities and corporate office

•Leased vehicles within our direct-to-store delivery (“DSD”) system

Table of Contents

•Leased equipment primarily related to equipment used in the production of our products.

We also have certain storage service agreements that may be treated as real estate leases. Storage agreements providing us with both fully dedicated square footage and the right to designate how the space is utilized are classified as a lease and included in the ROU asset and corresponding lease liability. To determine if a storage agreement has an embedded real estate lease we analyze the agreement to determine if the facility has space that is fully dedicated to storing and managing our products. If the space is fully dedicated to our products, we analyze whether or not we have the right and ability to dictate how the designated space will be utilized to manage our refrigerated and frozen products. Fixed payment amounts related to those agreements are included in the determination of the ROU asset and lease liability.

Our senior secured revolving credit facility and our receivables backed securitization facility contain certain restrictions on finance lease activities as these are treated as indebtedness and subject to the indebtedness covenants pursuant to these credit agreements. See further discussion of debt facilities and covenant restrictions in Note 7.

Our lease terms may include options to extend or terminate the lease. We include options to extend the lease when it is reasonably certain that we will exercise that option based on the individual lease and our business objectives at lease inception. We have elected to not record leases with a term of 12 months or less on the balance sheet. Certain vehicle leases contain residual value guarantees (“RVG”). We continue to monitor whether amounts related to RVGs are probable of being owed. As of September 30, 2019 and December 31, 2018, we do not expect to make any payments related to RVGs, and our maximum exposure under those guarantees is not a material amount; therefore, we have excluded from the determination of lease payments.

We have elected the practical expedient to combine the lease and non-lease components for all asset classes, except vehicles. For vehicles, we have three separate full service agreements, wherein the agreements provide for certain maintenance services to be included in the overall cost to lease the asset. We determined the stand-alone prices for each of the lease and non-lease components based on comparisons to similar supplier arrangements (such as the cost to lease a vehicle without maintenance services and the cost to obtain maintenance services for a non-leased vehicle). The total transaction price is allocated to the lease and non-lease components on a relative stand-alone price basis.

The components of lease expenses were as follows (in thousands):



	Three months ended			Nine months ended
	September 30, 2019			September 30, 2019
Operating lease cost	$	30,930		$	93,958
Finance lease cost	699			1,372
Amortization of ROU assets	604			1,213
Interest on lease liability	95			159
Short term lease cost (1)	$	2,642		$	11,383
Variable lease cost (2)	3,023			8,817
Sublease income	(1,359		)	(4,683		)
Total net lease cost	$	35,935		$	110,847

(1)Related to leases with a term of 12 months or less that are not recorded on the balance sheet.


(2)	Certain operating lease agreements require the payment of additional amounts for maintenance, along with additional rentals based on miles driven or units produced.

Supplemental balance sheet information related to leases was as follows (in thousands):



	As of
	September 30, 2019
Operating leases:
Operating lease ROU asset	$	287,084

Current operating lease liabilities	88,871
Long-term operating lease liabilities	213,157
Total operating lease liabilities	$	302,028

Table of Contents

The weighted-average remaining lease term of our operating leases as of June 30, 2019 was 4.7 years, and our weighted-average discount rate was 6.4%.

Supplemental cash flow and other information related to leases was as follows (in thousands):



	Three months ended		Nine months ended
	September 30, 2019		September 30, 2019
Operating cash flows information:
Cash paid for amounts included in the measurement of lease liabilities	$	30,521	$	92,744

Non-cash activity:
Right of use assets obtained in exchange for operating lease obligations	$	7,933	$	33,016

Maturities of operating lease liabilities were as follows (in thousands):



	As of
	September 30, 2019
2019 (excluding the nine months ended September 30, 2019)	$	29,292
2020	97,770
2021	72,463
2022	52,034
2023	38,414
2024	26,341
Thereafter	34,051
Total lease payments	$	350,365
Less: imputed interest	(48,337		)
Total lease obligations	$	302,028
Less: current obligations	88,871
Long-term lease obligations	$	213,157

Disclosures related to periods prior to adoption of the New Lease Standard

Prior to the adoption of this standard, our future minimum payments under non-cancelable operating leases with terms in excess of one year were as follows (in thousands):



	As of
	December 31, 2018
2019	$	118,827
2020	90,615
2021	64,501
2022	45,049
2023	32,771
Thereafter	50,998
Total minimum lease payments	$	402,761

Table of Contents

7. Debt

Our long-term debt as of September 30, 2019 and December 31, 2018 consisted of the following:



	September 30, 2019					December 31, 2018
	Amount			Interest Rate		Amount			Interest Rate
	(In thousands, except percentages)
Dean Foods Company debt obligations:
Senior secured revolving credit facility	$	161,700		6.79	% *	$	19,300		4.65	% *
Senior notes due 2023	700,000			6.50		700,000			6.50
	861,700					719,300
Subsidiary debt obligations:
Receivables securitization facility	255,000			3.53	*	190,000			3.54	*
Finance lease and other	6,794			—		1,618			—
	261,794					191,618
Subtotal	1,123,494					910,918
Unamortized debt issuance costs	(3,752		)			(4,574		)
Total debt	1,119,742					906,344
Less current portion	(1,888		)			(1,174		)
Total long-term portion	$	1,117,854				$	905,170

* Represents a weighted average rate, including applicable interest rate margins.

The scheduled debt maturities were as follows (in thousands):



	As of September 30, 2019
2019	$	599
2020	1,658
2021	1,341
2022	256,058
2023	700,873
Thereafter(1)	162,965
Subtotal	1,123,494
Less unamortized debt issuance costs	(3,752		)
Total debt	$	1,119,742

(1) Our senior secured revolving credit facility was extended on February 22, 2019 to a maturity date of February 22, 2024 that springs to September 15, 2022 in the event we don’t repay or refinance $700 million in aggregate principal amount of 6.50% senior notes due 2023 (the “2023 Notes”) on or prior to July 15, 2022.

Senior Secured Revolving Credit Facility — On February 22, 2019, we entered into that certain Credit Agreement, by and among the Company, Coöperatieve Rabobank U.A., New York Branch, as administrative agent, and the lenders party thereto (the “Credit Agreement”), pursuant to which the lenders party thereto have provided us with a senior secured revolving borrowing base credit facility with a maximum facility amount of up to $265 million (the “Credit Facility”). Borrowings under the Credit Facility are limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount is equal to 65% of the appraised value of certain of our real property and equipment. We elected to include real estate and equipment with appraised values sufficient to support a borrowing base of $265 million. Our ability to access the full borrowing base is limited by the requirement under the Credit Agreement to maintain liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) in an amount equal to the lesser of 50% of the borrowing base under the Credit Facility and $175 million at any time when the Company's fixed charge coverage ratio is less than 1.05 to 1.00. The Credit Facility matures on

Table of Contents

February 22, 2024, with a September 15, 2022 springing maturity date in the event the 2023 Notes are not refinanced or repaid on or prior to July 15, 2022. A portion of the Credit Facility is available for the issuance of up to $25 million of standby letters of credit and up to $10 million of swing line loans.

Loans outstanding under the Credit Facility bear interest, at our option, at either: (i) the Base Rate (as defined in the Credit Agreement) or (ii) the Adjusted Eurodollar Rate (as defined in the Credit Agreement), plus a margin of between 1.25% and 1.75% (in the case of Base Rate loans) or 2.25% and 2.75% (in the case of Eurodollar Rate loans), in each case based on our total net leverage ratio.

We may make optional prepayments of the loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, and with a 50% commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds relating to the assets not included in the borrowing base. The Credit Facility is guaranteed by our existing and future wholly owned material domestic subsidiaries, which are substantially all of our existing domestic subsidiaries other than the subsidiaries that are sellers under the Receivables Securitization Facility.

The Credit Agreement contains customary representations, warranties and covenants, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of the 2023 Notes, investments, loans and advances, transactions with affiliates and sale and leaseback transactions. The Credit Agreement also contains customary events of default and related cure provisions. The Credit Agreement includes a fixed charge covenant that requires us to maintain a fixed charge coverage ratio of at least 1.05 to 1.00 at any time that our liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) at such time is less than the lesser of 50% of the borrowing base under the Credit Facility and $175 million.

On June 28, 2019, we amended the Credit Agreement to, among other things, permit our borrowing base to equal 65% of the appraised value of the real property and equipment included in the appraisal report delivered to the administrative agent (up to maximum facility amount).

On August 27, 2019, we entered into supplements to the Credit Agreement and elected to exercise our right to increase the aggregate principal amount of the commitments under the Credit Agreement by $85 million to an aggregate principal amount of $350 million.

In connection with the execution of the Credit Agreement, including the amendment and supplements thereof, as well as post-closing appraisal work, we paid certain arrangement fees of approximately $11.9 million to lenders and other fees of approximately $2.7 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $3.3 million of unamortized deferred financing costs in connection with the termination of that certain Credit Agreement, originally dated as of March 26, 2015, among the Company, Bank of America, N.A., as Administrative Agent and the lenders party thereto (as amended, the “prior credit agreement”).

As of September 30, 2019, we had $161.7 million outstanding borrowings under the Credit Facility. Our average daily balance under the Credit Facility during the nine months ended September 30, 2019 was $38.4 million. There were no letters of credit issued under the Credit Facility as of September 30, 2019.

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 ("Securitization Subsidiaries"), as is customary for receivables securitization facilities. 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 Receivables Securitization Facility is treated as a borrowing for accounting purposes.

On January 17, 2019, we amended and restated the existing receivables purchase agreement ("Receivables Purchase Agreement") governing our Receivables Securitization Facility to, among other things, (i) waive compliance with the financial covenant in the Receivables Purchase Agreement requiring the Company to maintain a total net leverage ratio (as defined in the Receivables Purchase Agreement) of less than or equal to 4.25 to 1.00 for the test period ended December 31, 2018 (the “Financial Covenant”) and (ii) any cross default under the Receivables Purchase Agreement arising from non-compliance with the Financial Covenant under the prior Credit Facility.

Table of Contents

On February 22, 2019, we amended and restated the Receivables Purchase Agreement to, among other things, extend the liquidity termination date. The Receivables Purchase Agreement contains covenants consistent with those contained in the Credit Agreement.

In connection with the execution of this amendment and restatement of the Receivables Purchase Agreement, we paid certain arrangement fees of approximately $2.2 million to lenders and other fees of approximately $0.7 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility. Additionally, we wrote off $0.4 million of unamortized deferred financing costs in connection with prior amendments to the Receivables Purchase Agreement.

Based on the monthly borrowing base formula, we had the ability to borrow up to $415.8 million of the total commitment amount under the Receivables Securitization Facility as of September 30, 2019. The total amount of receivables sold to these entities as of September 30, 2019 was $509.0 million. During the first nine months of 2019, we borrowed $660.0 million and repaid $595.0 million under the facility with a remaining balance of $255.0 million as of September 30, 2019. In addition to letters of credit in the aggregate amount of $154.5 million that were issued but undrawn, the remaining available borrowing capacity was $6.3 million at September 30, 2019. Our average daily balance under this facility during the nine months ended September 30, 2019 was $260.8 million. The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.

Dean Foods Company Senior Notes due 2023 — On February 25, 2015, we issued $700 million in aggregate principal amount of 6.50% senior notes due 2023 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 the applicable redemption prices specified in the indenture governing the 2023 Notes (the "Indenture"), plus any accrued and unpaid interest to, but excluding, the applicable redemption date. If we undergo certain kinds of changes of control, holders of the 2023 Notes have the right to require us to repurchase all or any portion of such holder’s 2023 Notes at 101% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.

The Indenture contains covenants that, among other things, limit our ability to: (i) create certain liens; (ii) enter into sale and lease-back transactions; (iii) assume, incur or guarantee indebtedness for borrowed money that is secured by a lien on certain principal properties (or on any shares of capital stock of our subsidiaries that own such principal properties) without securing the 2023 Notes on a pari passu basis; and (iv) consolidate with or merge with or into, or sell, transfer, convey or lease all or substantially all of our properties and assets, taken as a whole, to another person unless certain customary conditions are met.

The carrying value under the 2023 Notes at September 30, 2019 was $696.2 million, net of unamortized debt issuance costs of $3.8 million.

See Note 8 for information regarding the fair value of the 2023 Notes as of September 30, 2019.

Finance Lease Obligations and Other — Finance lease obligations of $6.8 million and $1.6 million as of September 30, 2019 and December 31, 2018, respectively, were primarily comprised of our leases for information technology equipment. See further discussion of our lease obligations in Note 6.

Table of Contents

8. Derivative Financial Instruments and Fair Value Measurements

Derivative Financial Instruments

Commodities — We are exposed to commodity price fluctuations, including in the prices of milk, butterfat, sweeteners and other commodities used in the manufacturing, packaging and distribution of our products, such as natural gas, resin and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month’s to one year’s anticipated requirements, depending on the ingredient or commodity. These contracts are considered normal purchases.

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 September 30, 2019 and December 31, 2018, our derivatives recorded at fair value in our unaudited Condensed Consolidated Balance Sheets consisted of the following:



	Derivative Assets				Derivative Liabilities
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
	(In thousands)
Commodities contracts — current(1)	$	53	$	11	$	2,111	$	4,328
Commodities contracts — non-current(2)	—		—		37		—
Total derivatives	$	53	$	11	$	2,148	$	4,328


(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.

Table of Contents

A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 is as follows (in thousands):



	Fair Value as of September 30, 2019		Level 1		Level 2		Level 3
Asset — Commodities contracts	$	53	$	—	$	53	$	—
Liability — Commodities contracts	2,148		—		2,148		—

A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 is as follows (in thousands):



	Fair Value as of December 31, 2018		Level 1		Level 2		Level 3
Asset — Commodities contracts	$	11	$	—	$	11	$	—
Liability — Commodities contracts	4,328		—		4,328		—

Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on our Credit Facility, receivables securitization facility, and certain other debt are variable, their fair values approximate their carrying values.

The fair value of the 2023 Notes was determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined these fair values to be Level 2 measurements as all significant inputs into the quotes provided by our pricing source are observable in active markets. The following table presents the outstanding principal amount and fair value of the 2023 Notes at September 30, 2019 and December 31, 2018:



	September 30, 2019				December 31, 2018
	Amount Outstanding		Fair Value		Amount Outstanding		Fair Value
	(In thousands)
Dean Foods Company senior notes due 2023	$	700,000	$	371,000	$	700,000	$	560,000

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 similar instruments in active markets. The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of September 30, 2019 (in thousands):



	Total		Level 1		Level 2		Level 3
Money market	$	2	$	—	$	2	$	—
Mutual funds	1,871		—		1,871		—

The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of December 31, 2018 (in thousands):



	Total		Level 1		Level 2		Level 3
Money market	$	6	$	—	$	6	$	—
Mutual funds	1,693		—		1,693		—

Table of Contents

9. Common Stock and Share-Based Compensation

Our authorized shares of capital stock include one million shares of preferred stock and 250 million shares of common stock with a par value of $0.01 per share.

Cash Dividends — In accordance with our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. In February 2019, our Board of Directors reviewed the Company's dividend policy and determined that it would be in the best interest of the stockholders to suspend dividend payments. Consequently, no dividends were paid in the first nine months of 2019. From 2015 through 2018, all awards of restricted stock units, performance stock units and phantom shares provided for cash dividend equivalent units, which vested in cash at the same time as the underlying award. A quarterly dividend of $0.09 per share was paid in March, June, and September 2018, totaling approximately $24.7 million for the first nine months of 2018. 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 nine months ended September 30, 2019 and 2018. As of September 30, 2019, $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 nine months ended September 30, 2019:



	Employees			Non-Employee Directors			Total
RSUs outstanding at January 1, 2019	840,431			140,539			980,970
RSUs granted	1,464,256			268,373			1,732,629
Shares issued upon vesting of RSUs	(208,229		)	(93,670		)	(301,899		)
RSUs canceled or forfeited(1)	(1,149,139		)	(17,528		)	(1,166,667		)
RSUs outstanding at September 30, 2019	947,319			297,714			1,245,033
Weighted average grant date fair value	$	4.05		$	4.84		$	4.24


(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.

Table of Contents

Performance Stock Units — In 2016, we began granting performance stock units ("PSUs") as a part of our long-term incentive compensation program. PSUs cliff vest and settle in shares of our common stock at the end of a three-year performance period contingent upon the achievement of specific performance goals established for each calendar year during the performance period. The PSUs are deemed granted in three separate one year tranches on the dates in which our Compensation Committee establishes the applicable annual performance goals. The number of shares that may be earned at the end of the vesting period may range from zero to 200 percent of the target award amount based on the achievement of the performance goals. The fair value of PSUs is estimated using the market price of our common stock on the date of grant, and we recognize compensation expense ratably over the vesting period for the portion of the awards that are expected to vest. The fair value of the PSUs is remeasured at each reporting period. The following table summarizes PSU activity during the nine months ended September 30, 2019:



	PSUs		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	291,773		$	9.94
Granted	761,335		3.06
Vested	(26,734	)	18.93
Forfeited or canceled	(411,107	)	3.42
Performance adjustment(1)	(240,761	)	8.92
Outstanding at September 30, 2019	374,506		$	3.13


(1)	Represents an adjustment to the 2018 tranche of the 2016, 2017 and 2018 PSU awards based on actual performance during the 2018 annual performance period in relation to the established performance goal for that period. The actual performance for the 2018 annual performance period was certified by the Compensation Committee of our Board of Directors in the first quarter of 2019.

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 nine months ended September 30, 2019:



	Shares		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	2,007,427		$	11.35
Granted	5,094,759		2.84
Converted/paid	(821,840	)	12.5
Forfeited	(1,032,881	)	5.27
Outstanding at September 30, 2019	5,247,465		$	4.11

Stock Options — The following table summarizes stock option activity during the nine months ended September 30, 2019:



	Options		Weighted Average Exercise Price		Weighted Average Contractual Life (Years)	Aggregate Intrinsic Value
Options outstanding and exercisable at January 1, 2019	385,538		$	14.55
Forfeited and canceled	(240,679	)	16.39
Options outstanding and exercisable at September 30, 2019	144,859		$	11.50	1.07	—

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

Table of Contents

during 2018 or 2019, nor do we currently plan to in the future. At September 30, 2019, there was no remaining unrecognized stock option expense related to unvested awards.

Share-Based Compensation Expense — The following table summarizes the share-based compensation expense recognized during the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
	(In thousands)
RSUs(1)	$	(100	)	$	1,190		$	1,984		$	3,735
PSUs(2)	(1,066		)	(1,215		)	(287		)	(68		)
Phantom shares	665			645			1,533			3,578
Total	$	(501	)	$	620		$	3,230		$	7,245


(1)	The net credit to RSU expense for the three months ended September 30, 2019 is primarily the result of cumulative forfeitures of previously outstanding, but unvested awards.


(2)	The net credit to PSU expense for the three and nine months ended September 30, 2019 and 2018 is primarily the result of lower expected performance (relative to the established performance metric) associated with the 2019 and 2018 tranches of these awards, respectively.

Table of Contents

10. Earnings (Loss) Per Share

Basic earnings (loss) per share (“EPS”) is based on the weighted average number of common shares outstanding during each period. Diluted EPS is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period. Stock option and stock unit conversions were not included in the computation of diluted loss per share for the three and nine months ended September 30, 2019 and 2018 as we incurred a loss from continuing operations for these periods and any effect on loss per share would have been anti-dilutive. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:



	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
	(In thousands, except share data)
Basic loss per share computation:
Numerator:
Loss from continuing operations	$	(79,393	)	$	(26,648	)	$	(206,083	)	$	(68,929	)
Net loss attributable to non-controlling interest	139			224			784			224
Loss from continuing operations attributable to Dean Foods Company	$	(79,254	)	$	(26,424	)	$	(205,299	)	$	(68,705	)
Denominator:
Average common shares	91,889,977			91,372,325			91,726,349			91,302,990
Basic loss per share from continuing operations attributable to Dean Foods Company	$	(0.86	)	$	(0.29	)	$	(2.24	)	$	(0.75	)
Diluted loss per share computation:
Numerator:
Loss from continuing operations	$	(79,393	)	$	(26,648	)	$	(206,083	)	$	(68,929	)
Net loss attributable to non-controlling interest	139			224			784			224
Loss from continuing operations attributable to Dean Foods Company	$	(79,254	)	$	(26,424	)	$	(205,299	)	$	(68,705	)
Denominator:
Average common shares — basic	91,889,977			91,372,325			91,726,349			91,302,990
Stock option conversion(1)	—			—			—			—
RSUs and PSUs(2)	—			—			—			—
Average common shares — diluted	91,889,977			91,372,325			91,726,349			91,302,990
Diluted loss per share from continuing operations attributable to Dean Foods Company	$	(0.86	)	$	(0.29	)	$	(2.24	)	$	(0.75	)
(1) Anti-dilutive options excluded	150,830			401,269			197,518			448,925
(2) Anti-dilutive stock units excluded	1,691,409			1,142,746			1,709,445			1,085,982

Table of Contents

11. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended September 30, 2019 were as follows (in thousands):



	Pension and Other Postretirement Benefits Items			Foreign Currency Items			Total
Balance at June 30, 2019	$	(89,278	)	$	(4,781	)	$	(94,059	)
Amounts reclassified from accumulated other comprehensive loss(1)	2,420			—			2,420
Net current-period other comprehensive income	2,420			—			2,420
Balance at September 30, 2019	$	(86,858	)	$	(4,781	)	$	(91,639	)


(1)	The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12.

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended September 30, 2018 were as follows (in thousands):



	Pension and Other Postretirement Benefits Items			Foreign Currency Items			Total
Balance at June 30, 2018	$	(87,250	)	$	(4,781	)	$	(92,031	)
Other comprehensive income before reclassifications	(235		)	—			(235		)
Amounts reclassified from accumulated other comprehensive loss(1)	1,598			—			1,598
Net current-period other comprehensive income	1,363			—			1,363
Balance at September 30, 2018	$	(85,887	)	$	(4,781	)	$	(90,668	)


(1)	The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12.

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the nine months ended September 30, 2019 were as follows (in thousands):



	Pension and Other Postretirement Benefits Items			Foreign Currency Items			Total
Balance at December 31, 2018	$	(93,826	)	$	(4,781	)	$	(98,607	)
Amounts reclassified from accumulated other comprehensive loss(1)	6,968			—			6,968
Net current-period other comprehensive income	6,968			—			6,968
Balance at September 30, 2019	$	(86,858	)	$	(4,781	)	$	(91,639	)


(1)	The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12.

Table of Contents

The changes in accumulated other comprehensive income (loss) by component, net of tax, during the nine months ended September 30, 2018 were as follows (in thousands):



	Pension and Other Postretirement Benefits Items			Foreign Currency Items			Total
Balance at December 31, 2017	$	(73,629	)	$	(4,781	)	$	(78,410	)
Other comprehensive income before reclassifications	(215		)	—			(215		)
Amounts reclassified from accumulated other comprehensive loss(1)	4,804			—			4,804
Net current-period other comprehensive income	4,589			—			4,589
Reclassification of stranded tax effects related to the Tax Act(2)	(16,847		)	—			(16,847		)
Balance at September 30, 2018	$	(85,887	)	$	(4,781	)	$	(90,668	)


(1)	The accumulated other comprehensive loss reclassification is related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic benefit cost. See Note 12.


(2)	The accumulated other comprehensive loss reclassification is related to a one-time reclassification to retained earnings for the stranded tax effects associated with our pension and post-retirement benefit plans resulting from the Tax Cuts and Jobs Act ("Tax Act").

Table of Contents

12. Employee Retirement and Postretirement Benefits

We sponsor various defined benefit and defined contribution retirement plans, including various employee savings and profit sharing plans, and contribute to various multiemployer pension plans on behalf of our employees. All full-time union and non-union employees who have met requirements pursuant to the plans are eligible to participate in one or more of these plans.

Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation. The following table sets forth the components of net periodic benefit cost for our defined benefit plans during the three and nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	672		$	732		$	2,016		$	2,196
Interest cost	3,084			2,828			9,252			8,484
Expected return on plan assets	(3,996		)	(4,411		)	(11,988		)	(13,233		)
Amortizations:
Prior service cost	108			108			324			324
Unrecognized net loss	2,440			2,130			7,320			6,390
Net periodic benefit cost	$	2,308		$	1,387		$	6,924		$	4,161

We do not expect to make any contributions to the company-sponsored pension plans in 2019.

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 nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30						Nine Months Ended September 30
	2019			2018			2019			2018
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	154		$	170		$	462		$	510
Interest cost	281			235			843			705
Amortizations:
Prior service cost	23			23			69			69
Unrecognized net gain	(151		)	(118		)	(453		)	(354		)
Net periodic benefit cost	$	307		$	310		$	921		$	930

13. Asset Impairment Charges and Facility Closing and Reorganization Costs

Asset Impairment Charges

We evaluate our finite-lived intangible and long-lived assets for impairment when circumstances indicate that the carrying value may not be recoverable. Indicators of impairment could include, among other factors, significant changes in the business environment, the planned closure of a facility, or deteriorations in operating cash flows. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows.

Testing the assets for recoverability involves developing estimates of future cash flows directly associated with, and that are expected to arise as a direct result of, the use and eventual disposition of the assets. Other inputs are based on assessment of an individual asset’s alternative use within other production facilities, evaluation of recent market data and historical liquidation sales values for similar assets. As the inputs for testing recoverability are largely based on management’s judgments and are not generally observable in active markets, we consider such measurements to be Level 3 measurements in the fair value hierarchy. See Note 8.

Table of Contents

The results of our analysis indicated an impairment to our property, plant and equipment outside of facility closing and reorganization costs at two of our production facilities of $11.9 million during the nine months ended September 30, 2019 and at one production facility of $2.2 million during the nine months ended September 30, 2018, respectively. The impairments were the result of declines in profitability both on a historical and forecasted basis. No impairment was recorded in the three months ended September 30, 2019 and 2018, respectively.

We can provide no assurance that we will not have impairment charges in future periods as a result of changes in our business environment, operating results or the assumptions and estimates utilized in our impairment tests.

Facility Closing and Reorganization Costs

Costs associated with approved plans within our ongoing network optimization and reorganization strategies are summarized as follows:



	Three Months Ended September 30					Nine Months Ended September 30
	2019		2018			2019		2018
	(In thousands)
Closure of facilities, net(1)	$	3,806	$	(2,679	)	$	10,129	$	58,912
Organizational effectiveness(2)	—		—			—		(331		)
Enterprise-wide cost productivity plan(3)	—		—			5,409		14,863
Facility closing and reorganization costs, net	$	3,806	$	(2,679	)	$	15,538	$	73,444

(1)

Reflects charges, net of gains on the sales of assets, associated with closed facilities that were incurred in 2019 and 2018. These charges are primarily related to facility closures in McKinney, TX; Braselton, GA; Louisville, KY; Erie, PA; Huntley, IL; Thief River Falls, MN; Lynn, MA; Livonia, MI; Richmond, VA; Orem, UT; New Orleans, LA; Rochester, IN; Riverside, CA; Denver, CO; and Buena Park, CA. The net gain during the three months ended September 30, 2018 was primarily due to gains from the sale of properties for which we recognized restructuring charges in previous periods. We have incurred net charges to date of $121.7 million related to these facility closures through September 30, 2019. We expect to incur additional charges related to these facility closures of approximately $4.0 million related to shutdown, contract termination and other costs.

(2)

During 2017, we initiated a company-wide, multi-phase organizational effectiveness assessment to better align each key function of the Company with our strategic plan. This initiative has resulted in headcount reductions due to changes to our organizational structure, and the charges shown in the table above are primarily comprised of severance benefits and other employee-related costs associated with these organizational changes. We do not expect to incur any material additional costs associated with this initiative.

(3)

In the fourth quarter of 2017, we announced an enterprise-wide cost productivity plan, which includes rescaling our supply chain, optimizing spend management and integrating our operating model. This plan has resulted in headcount reductions due to changes to our organizational structure, and the charges shown in the table above are primarily comprised of severance benefits and other employee-related costs associated with these changes. Efforts with respect to the enterprise-wide cost productivity plan are ongoing, and we expect that we will incur additional costs in the coming months associated with the approval and implementation of additional phases of the plan; however, as specific details of these phases have not been finalized and approved, future costs are not yet estimable.

Table of Contents

Activity with respect to facility closing and reorganization costs during the nine months ended September 30, 2019 is summarized below and includes items expensed as incurred:



	Accrued Charges at December 31, 2018		Charges and Adjustments			Payments			Accrued Charges at September 30, 2019
	(In thousands)
Cash charges:
Workforce reduction costs	$	13,213	$	4,920		$	(10,069	)	$	8,064
Shutdown costs	—		6,285			(6,285		)	—
Lease obligations after shutdown	1,368		312			(1,116		)	564
Other	—		2,428			(2,428		)	—
Subtotal	$	14,581	13,945			$	(19,898	)	$	8,628
Non-cash charges:
Write-down of assets (1)			3,225
Gain on sale/disposal of related assets			(1,726		)
Other, net			94
Subtotal			1,593
Total			$	15,538

(1) The write-down of assets relates primarily to owned buildings, land and equipment of previously closed facilities. 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 previously closed. Our methodology for testing the recoverability of the assets is consistent with the methodology described in the "Asset Impairment Charges" section above.

14. 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 our milk supply agreement 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, our milk supply agreement with DFA related to the promissory note. 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.

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

Table of Contents

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. See further discussion of our lease obligations within Note 6.

We have entered into various contracts, in the normal course of business, obligating us to purchase minimum quantities of raw materials used in our production and distribution processes, including conventional raw milk, diesel fuel, sugar and other ingredients that are inputs into our finished products. We enter into these contracts from time to time to ensure a sufficient supply of raw ingredients. In addition, we have contractual obligations to purchase various services that are part of our production process.

Litigation, Investigations and Audits — We are party from time to time to certain pending or threatened legal proceedings in the ordinary course of our business. Potential liabilities associated with these matters are not expected to have a material adverse impact on our financial position, results of operations, or cash flows.

15. Segment, Geographic and Customer Information

We operate as a single reportable segment in manufacturing, marketing, selling and distributing a wide variety of branded and private label dairy and dairy case products. We operate 58 manufacturing facilities which are geographically located largely based on local and regional customer needs and other market factors. We manufacture, market and distribute a wide variety of branded and private label dairy 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 DSD systems in the United States. Our Chief Executive Officer evaluates the performance of our business based on operating income or loss and operating cash flows 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 nine months ended September 30, 2019 and 2018. None of our long-lived assets are associated with our foreign operations.

Significant Customers — Our largest customer accounted for approximately 16.2% and 15.0% of our consolidated net sales in the three months ended September 30, 2019 and 2018, respectively and accounted for 15.0% and 15.8% of our consolidated net sales in the nine months ended September 30, 2019 and 2018, respectively.

16. Subsequent Events

On November 12, 2019 (the “Petition Date”), we and substantially all of our wholly owned subsidiaries (other than our Securitization Subsidiaries) (the “Filing Subsidiaries” and, together with the Company, the “Debtors”) filed voluntary petitions for reorganization (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Court”). The Debtors’ Chapter 11 cases (collectively, the “Chapter 11 Cases”) are being jointly administered under the caption In re Southern Foods Group, LLC Case No. 19-36313. Each Debtor will continue to operate its business as a “debtor in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court.

The filing of the Bankruptcy Petitions constituted an event of default that accelerated our obligations under the documents governing the Senior Secured Revolving Credit Facility, the Receivables Securitization Facility and our 2023 Notes (collectively, the “Debt Instruments”) and substantially all of our other indebtedness.

In connection with the Chapter 11 Cases, we are seeking the approval of the Bankruptcy Court to enter into a proposed Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), among us, as borrower, the lenders from time to time party thereto (the “DIP Lenders”) and Coöperatieve Rabobank U.A., New York Branch, as administrative agent and collateral agent for the DIP Lenders (in such capacities, the “DIP Agent”). The proposed DIP Credit Agreement provides for a senior secured superpriority debtor-in-possession credit facility (the “DIP Facility”) consisting of (i) a new money revolving loan facility in an aggregate principal amount of up to approximately $234.8 million, which will be in the form of revolving loans (the “DIP Revolving Loans”) or, subject to a sub-limit of $25 million, the form of letters of credit (the “DIP Letters of Credit”) and (ii) upon the entry of the final DIP order, term loans (the “DIP Term Loans” and, together with the DIP Revolving Loans, the “DIP Loans”) refinancing the loans outstanding under the Senior Secured Revolving Credit Facility as of the Petition Date plus interest and fees that are accrued and unpaid prior to the date of entry of such order. Our obligations under the proposed DIP Facility will be guaranteed by all of our subsidiaries that are Debtors in the Chapter 11 Cases. In addition, upon entry and subject to the terms of the interim DIP order approving the proposed DIP Facility (or the final DIP order, when entered), the claims of the DIP Lenders will be (i) entitled to superpriority administrative expense claim status and, subject to certain customary exclusions in the credit documentation, (ii) secured by (x) a perfected first priority lien on all property of the Debtors not subject to valid,

Table of Contents

perfected and non-avoidable liens in existence on the Petition Date, (y) a perfected first priority priming lien on collateral under the Senior Secured Revolving Credit Facility and (z) a perfected junior lien on all property of the Debtors 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’ professional fees and certain liens permitted by the terms of the proposed DIP Credit Agreement.

We have reached an agreement with the lenders under our Receivables Securitization Facility and are seeking approval of the Court to amend and restate certain agreements governing our Receivables Securitization Facility to, among other things, (i) modify certain covenants, representations, events of default and cross defaults arising as a result of the commencement of the Chapter 11 Cases, (ii) modify the other rights and obligations of the parties to the facility in order to give effect to, and in certain instances be subject to, orders of the Court from time to time, (iii) reduce the total size of the facility to $425 million, with a corresponding reduction to availability thereunder, (iv) after giving effect to the commencement of the Chapter 11 Cases, ensure that the facility continues in effect (as amended) and liquidity continues to be available during the pendency of the Chapter 11 Cases, subject to the terms and conditions therein and subject to the orders of the Court, (v) modify certain pricing terms and fees payable under the facility and (vi) make certain other amendments, including in order to give effect to future issuances of letters of credit and to issue a letter of credit thereunder to backstop all of our letters of credit issued and outstanding under the facility in order to, among other things, help ensure that such letters of credit remain in effect to secure our obligations owed to the beneficiaries thereunder.

On November 12, 2019, the NYSE suspended trading in our common stock at the market opening and we received written notice from the NYSE that it had determined to commence proceedings to delist our common stock because we are no longer suitable for listing pursuant to Listed Company Manual Section 802.01D following the filing of the Bankruptcy Petitions. In reaching its delisting determination, the NYSE noted the uncertainty as to the timing and outcome of the bankruptcy process, as well as the uncertainty as to the ultimate effect of this process on the value of our common stock.

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. As a result of the Bankruptcy Petitions, the realization of the Debtors’ assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Court or as otherwise permitted in the ordinary course of business for amounts other than those reflected in the accompanying unaudited Condensed Consolidated Financial Statements. Further, a Chapter 11 plan is likely to materially change the amounts and classifications of assets and liabilities reported in our unaudited Condensed Consolidated Balance Sheet as of September 30, 2019. As the progress of these plans is subject to approval of the Court and therefore not within our control, successful reorganization and emergence from bankruptcy cannot be considered probable and such plans do not alleviate substantial doubt about our ability to continue as a going concern.

Table of Contents

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, 2018 (the "2018 Annual Report on Form 10-K"), as updated herein, as well as the additional factors included below and elsewhere in this Form 10-Q. You should carefully consider the risks and uncertainties described under these sections.

A wide range of factors relating to the Chapter 11 Cases 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 the planned sale of the business pursuant to Section 363 of the Bankruptcy Code to DFA or any other potential acquirer through an auction 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;


•	the conditions to which our debtor-in-possession financing is subject, including the condition that the amendment and restatement of the Receivables Securitization Facility described herein be completed, and the risk that these conditions may not be satisfied for various reasons, including for reasons outside of our control;


•	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;


•	our ability to comply with the restrictions imposed by our proposed DIP Credit Agreement, our Receivables Securitization Facility and other financing arrangements;


•	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.

Table of Contents

Recent Developments

Filing Under Chapter 11 of the United States Bankruptcy Code

The Company is engaged in advanced discussions with Dairy Farmers of America, Inc. (“DFA”) regarding a potential sale of substantially all assets of the Company. If the parties ultimately reach agreement on the terms of a sale, such transaction would be subject to regulatory approval and would be subject to higher or otherwise better offers in the bankruptcy. The Company intends to file bidding procedures with the court to conduct a sale of its business in accordance with Section 363 of the U.S. Bankruptcy Code.

On the Petition Date, the Debtors filed a number of motions with the Court generally designed to stabilize their operations and facilitate the Debtors’ transition into Chapter 11. Certain of these motions sought authority from the Court for the Debtors to make payments upon, or otherwise honor, certain pre-petition obligations (e.g., obligations related to certain employee wages, salaries and benefits and certain vendors and other providers essential to the Debtors’ businesses).

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases also automatically stayed the filing of most legal proceedings and other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

As required by the Bankruptcy Code, the U.S. Trustee for the Southern District of Texas will appoint an official committee of unsecured creditors (the “Creditors’ Committee”) as soon as practicable after the order for relief under Chapter 11 of the Bankruptcy Code is granted. The Creditors’ Committee represents all unsecured creditors of the Debtors and has a right to be heard on all matters that come before the Court.

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. As a result of the Bankruptcy Petitions, the realization of the Debtors’ assets and the satisfaction of liabilities are subject to significant uncertainty. While operating as a debtor-in-possession pursuant to the Bankruptcy Code, we may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Court or as otherwise permitted in the ordinary course of business for amounts other than those reflected under “Part I - Item 1 - Unaudited Condensed Consolidated Financial Statements” in this Form 10-Q. Further, a Chapter 11 plan is likely to materially change the amounts and classifications of assets and liabilities reported under “Part I - Item 1 - Unaudited Condensed Consolidated Financial Statements” in this Form 10-Q. As the progress of these plans is subject to approval of the Court and therefore not within our control, successful reorganization and emergence from bankruptcy cannot be considered probable and such plans do not alleviate substantial doubt about our ability to continue as a going concern.

Table of Contents

Leadership Changes

On October 25, 2019, we announced that Gary W. Rahlfs will serve as the Company's new Senior Vice President and Chief Financial Officer, effective October 23, 2019. Mr. Rahlfs, 52, had served as the Company's Interim Chief Financial Officer since September 24, 2019, replacing Jody Macedonio. Ms. Macedonio will receive compensation and benefits pursuant to that certain Letter Agreement regarding Severance Benefits, dated January 9, 2018, between the Company and Ms. Macedonio. Mr. Rahlfs previously served as the Company's Senior Vice President, Finance & Strategy since May 2019. From March 2018 to May 2019, Mr. Rahlfs served as the Chief Financial Officer/Vice Chancellor for Finance at the University of North Texas. From 1994 until February 2017, Mr. Rahlfs was employed at PepsiCo, Inc., where he held several positions, including Vice President Finance, Global Groups for PepsiCo, Chief Financial Officer – PepsiCo Foods Canada, and Vice President Sales Finance – Frito-Lay US-South Division.

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 and cash flow from operations before facility closing and reorganization costs, asset impairment charges 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 September 30										Nine Months Ended September 30
	2019					2018					2019					2018
	Dollars			Percent		Dollars			Percent		Dollars			Percent		Dollars			Percent
	(Dollars in millions)
Net sales	$	1,849.7		100.0	%	$	1,894.1		100.0	%	$	5,488.6		100.0	%	$	5,825.8		100.0	%
Cost of sales	1,499.4			81.1		1,503.5			79.4		4,385.0			79.9		4,553.9			78.2
Gross profit(1)	350.3			18.9		390.6			20.6		1,103.6			20.1		1,271.9			21.8
Operating costs and expenses:
Selling and distribution	335.7			18.1		349.2			18.4		1,009.3			18.4		1,032.0			17.7
General and administrative	76.0			4.1		66.6			3.5		220.6			4.0		208.1			3.6
Amortization of intangibles	5.2			0.3		5.2			0.3		15.5			0.3		15.3			0.3
Facility closing and reorganization costs, net	3.8			0.2		(2.7		)	(0.1	)	15.5			0.3		73.4			1.2
Impairment of long-lived assets	—			—		—			—		11.9			0.2		2.2			—
Other operating income	—			—		—			—		—			—		(2.3		)	—
Equity in (earnings) loss of unconsolidated affiliate	(0.7		)	—		(1.9		)	(0.1	)	(3.3		)	(0.1	)	(5.5		)	(0.1	)
Total operating costs and expenses	420.0			22.7		416.4			22.0		1,269.5			23.1		1,323.2			22.7
Operating loss	$	(69.7	)	(3.8	)%	$	(25.8	)	(1.4	)%	$	(165.9	)	(3.0	)%	$	(51.3	)	(0.9	)%


(1)	As disclosed in Note 1 to the Consolidated Financial Statements in our 2018 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.

Table of Contents

Quarter Ended September 30, 2019 Compared to Quarter Ended September 30, 2018

Net Sales — The change in net sales was due to the following:



	Three Months Ended September 30, 2019 vs. 2018
	(In millions)
Volume	$	(183.7	)
Pricing and product mix changes	139.3
Total decrease	$	(44.4	)

Net sales decreased $44.4 million, or 2.3%, during the third quarter of 2019 as compared to the third quarter of 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 third quarter of 2019 to offset inflation. On average, during the third quarter of 2019, the Class I price was 19.3% above prior-year levels. Fluid milk volume declines were driven predominantly by the loss of volume from two large retailers, overall category declines and other volume pressure.

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 the third quarter of 2019 compared to the third quarter of 2018:



	Three Months Ended September 30*
	2019		2018		% Change
Class I mover(1)	$	17.64	$	14.79	19.3	%
Class I raw skim milk mover(1)(2)	8.62		5.88		46.6
Class I butterfat mover(2)(3)	2.66		2.60		2.3
Class II raw skim milk minimum(1)(4)	8.50		6.38		33.2
Class II butterfat minimum(3)(4)	2.62		2.56		2.3

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 2018 Annual Report on Form 10-K 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 $4.1 million, or 0.3%, in the third quarter of 2019 as compared to the third quarter of 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 19.3% above prior-year levels.

Gross Margin — Our gross margin decreased to 18.9% in the third quarter of 2019 as compared to 20.6% in the third quarter of 2018. The decrease was primarily due to the volume deleverage and Class I raw milk inflation discussed above.

Operating Costs and Expenses — Operating costs and expenses increased $3.6 million, or 0.9%, in the third quarter of 2019 as compared to the third quarter of 2018. Significant changes to operating costs and expenses in the third quarter of 2019 as compared to the third quarter of 2018 include the following:

Table of Contents


•	Selling and distribution costs decreased by $13.5 million during the third quarter of 2019 primarily due to decreases in advertising and marketing costs of approximately $5.4 million, and employee-related costs of approximately $5.4 million.


•	General and administrative costs increased by $9.4 million during the third quarter of 2019 primarily due to increases in professional fees and separation charges related to the previously disclosed departures of certain executive officers.


•	Facility closing and reorganization costs, net increased by $6.5 million during the third quarter of 2019. See Note 13 to our unaudited Condensed Consolidated Financial Statements.


•	We recorded $0.7 million of equity in the earnings of our Organic Valley Fresh joint venture during the third quarter of 2019. See Note 3 to our unaudited Condensed Consolidated Financial Statements.

Other Expense — Other expense decreased $3.1 million during the third quarter of 2019 as compared to the third quarter of 2018. This decrease was primarily due to the gain on the sale of an immaterial investment, partially offset by higher interest expense related to increased borrowings under our credit facilities.

Income Taxes — Income tax benefit of $1.4 million was recorded at an effective rate of 1.8% for the third quarter of 2019 compared to $13.4 million at a 33.4% effective tax rate for the third quarter of 2018. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In the third quarter of 2019, the Company recorded a discrete tax benefit of $2.6 million, primarily related to a reduction of uncertain tax reserves for statute expiration. Excluding the impact of these discrete items, our effective tax rate for the third quarter of 2019 was (1.4%). Additional federal and state valuation allowances of $38.3 million were recorded as part of the annual effective tax rate.

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Net Sales — The change in net sales was due to the following:



	Nine Months Ended September 30, 2019 vs. 2018
	(In millions)
Volume	$	(708.9	)
Pricing and product mix changes	361.5
Acquisitions	10.2
Total decrease	$	(337.2	)

Net sales decreased $337.2 million, or 5.8%, during the first nine months of 2019 as compared to the first nine months of 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 first nine months of 2019 to offset inflation. On average, during the first nine months of 2019, the Class I price was 13.2% above prior-year levels. 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 products. Net sales declines were further offset by volumes associated with the acquisition and consolidation of Good Karma into our unaudited Condensed Consolidated Financial Statements on June 29, 2018, which contributed $14.7 million to net sales during the first nine months of 2019 as compared to $4.6 million during the first nine months of 2018. Net sales during the first nine months of 2018 reflect 94 days of Good Karma 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 the first nine months of 2019 compared to the first nine months of 2018:



	Nine Months Ended September 30*
	2019		2018		% Change
Class I mover(1)	$	16.51	$	14.58	13.2	%
Class I raw skim milk mover(1)(2)	7.74		5.98		29.4
Class I butterfat mover(2)(3)	2.58		2.52		2.4
Class II raw skim milk minimum(1)(4)	7.99		5.88		35.9
Class II butterfat minimum(3)(4)	2.58		2.53		2.0

Table of Contents


(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 $168.9 million, or 3.7%, in the first nine months of 2019 as compared to the first nine months of 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 13.2% above prior-year levels.

Gross Margin — Our gross margin decreased to 20.1% in the first nine months of 2019 as compared to 21.8% in the first nine months of 2018. The decrease was primarily due to the volume deleverage and Class I raw milk inflation discussed above.

Operating Costs and Expenses — Operating costs and expenses decreased $53.8 million, or 4.1%, in the first nine months of 2019 as compared to the first nine months of 2018. Significant changes to operating costs and expenses in the first nine months of 2019 as compared to the first nine months of 2018 include the following:


•	Selling and distribution costs decreased by $22.8 million during the first nine months of 2019 primarily due to decreases in advertising and marketing costs of approximately $17.8 million and employee-related costs of approximately $2.9 million.


•	General and administrative costs increased by $12.5 million during the first nine months of 2019 primarily due to increases in professional fees and separation charges related to the previously disclosed departures of certain executive officers.


•	Facility closing and reorganization costs, net decreased by $57.9 million during the first nine months of 2019. See Note 13 to our unaudited Condensed Consolidated Financial Statements.


•	We recorded impairment charges to our long-lived assets of $11.9 million during the first nine months of 2019 compared to $2.2 million during the first nine months of 2018. See Note 13 to our unaudited Condensed Consolidated Financial Statements.


•	We recorded $3.3 million of equity in the earnings of our Organic Valley Fresh joint venture during the first nine months of 2019. See Note 3 to our unaudited Condensed Consolidated Financial Statements.

Other Expense — Other expense increased $4.5 million during the first nine months of 2019 as compared to the first nine months of 2018. This increase was primarily due to higher interest expense related to the write off of deferred financing costs for $3.8 million and increased borrowings under our credit facilities, partially offset by the gain on the sale of an immaterial investment.

Income Taxes — Income tax benefit of $7.9 million was recorded at an effective rate of 3.7% for the first nine months of 2019 compared to $26.0 million at a 27.4% effective tax rate for the first nine months of 2018. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In the first nine months of 2019, the Company recorded a discrete tax benefit of $0.1 million. Excluding the impact of these discrete items, our effective tax rate for the first nine months of 2019 was 3.7%. Additional federal and state valuation allowances of $51.9 million were recorded as part of the annual effective tax rate.

Liquidity and Capital Resources

The filing of the Bankruptcy Petitions constituted an event of default that accelerated our obligations under our Debt Instruments, all as further described under “- Recent Developments - Filing Under Chapter 11 of the United States Bankruptcy Code” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. As a result thereof, we are no longer able to borrow under our Senior Secured Revolving Credit Facility. In addition, pursuant to the Bankruptcy Code,

Table of Contents

the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including most actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ 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 Debt Instruments accruing on or after the Petition Date.

As of September 30, 2019, we had total cash and cash equivalents on hand of $36.8 million. Based on our current internal financial forecasts, we believe that our cash on hand, cash generated from the results of our operations and funds available under our proposed DIP Credit Agreement and proposed amended and restated Receivables Securitization Facility will be sufficient to fund anticipated cash requirements until a 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.

At September 30, 2019, we had $1,123.5 million of long-term debt obligations, excluding unamortized debt issuance costs of $3.8 million, and $47.4 million of combined available future borrowing capacity under our senior secured revolving credit facility and receivables securitization facility, subject to compliance with the covenants in our credit agreements.

Cash Dividends — In accordance with our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. In February 2019, our Board of Directors reviewed the Company's dividend policy and determined that it would be in the best interest of the stockholders to suspend dividend payments. Consequently, no dividends were paid in the first nine months of 2019. From 2015 to 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. A quarterly dividend of $0.09 per share was paid in March, June, and September 2018, totaling approximately $24.7 million for the first nine months of 2018. 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. See Note 9 to our unaudited Condensed Consolidated Financial Statements.

Debtor-In-Possession Financing - As previously disclosed, in connection with the Chapter 11 Cases, pursuant to that certain commitment letter, dated as of November 11, 2019, between the Company and Coöperatieve Rabobank U.A., New York Branch (“Rabo”), Rabo has committed to provide approximately $425 million in debtor-in-possession financing, approximately $189 million of which will refinance our existing term loans, on terms and conditions set forth in a proposed proposed Senior Secured Superpriority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), among us, as borrower, the lenders from time to time party thereto (the “DIP Lenders”) and Rabo, as administrative agent and collateral agent for the DIP Lenders (in such capacities, the “DIP Agent”). We are currently seeking the approval of the Bankruptcy Court to enter into the proposed DIP Credit Agreement. The proposed DIP Credit Agreement provides for a senior secured superpriority debtor-in-possession credit facility (the “DIP Facility”) consisting of (i) a new money revolving loan facility in an aggregate principal amount of approximately $234.8 million, which will be in the form of revolving loans (the “DIP Revolving Loans”) or, subject to a sub-limit of $25 million, the form of letters of credit (the “DIP Letter of Credit”) and (ii) upon the entry of the final DIP order, term loans (the “DIP Term Loans” and, together with the DIP Revolving Loans, the “DIP Loans”) refinancing the loans under the Senior Secured Revolving Credit Facility as of the Petition Date plus interest and fees that are accrued and unpaid prior to the date of entry of such order.

Our obligations under the proposed DIP Facility will be guaranteed by all of our subsidiaries that are Debtors in the Chapter 11 Cases. In addition, upon entry and subject to the terms of the interim DIP order approving the proposed DIP Facility (or the final DIP order, when entered), the claims of the DIP Lenders will be (i) entitled superpriority administrative expense claim status and, subject to certain customary exclusions in the credit documentation, (ii) 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’ professional fees and certain liens permitted by the terms of the proposed DIP Credit Agreement.

The scheduled maturity date of the proposed DIP Facility will be the nine-month anniversary following the Petition Date. However, the Borrower 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 then outstanding. The DIP Loans will bear interest at an interest rate per annum equal to, at the Company’s option (i)

Table of Contents

LIBOR plus 7.0% or (ii) the base rate plus 6.0%. In addition, borrowings under the proposed DIP Revolving Facility will be limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount will be equal to 65% of the appraised value of certain of our real property and equipment. Our ability to borrow will also be 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. Furthermore, upon entry of the interim DIP order and prior to the entry of the final DIP order, availability under the proposed DIP Revolving Facility will not exceed $25 million.

Under the proposed DIP Credit Agreement, we will be able to make optional prepayments of the DIP Loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs and the payment of certain other fees as more fully set forth in the proposed DIP Credit Agreement). In addition, subject to certain exceptions and conditions described in the proposed DIP Credit Agreement, we will be obligated to prepay the obligations thereunder with the net cash proceeds of certain asset sales and with casualty insurance proceeds. Furthermore, we will be 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 and (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 proposed DIP Credit Agreement will contain customary representations, warranties and covenants that are typical and customary for debtor-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 proposed DIP Credit Agreement also contains customary events of default, including as a result of certain events occurring in the Chapter 11 Cases. The proposed DIP Credit Agreement will also require compliance with a variance covenant that compares actual operating disbursements and receipts and capital expenditures to the budgeted amounts set forth in the DIP budgets delivered to the DIP Agent and DIP Lenders on or prior to the closing date and updated periodically thereafter pursuant to the terms of the proposed DIP Credit Agreement. The proposed DIP Credit Agreement is subject to approval by the Bankruptcy Court and will be subject to customary conditions precedent, as well as the condition that the amendment and restatement of the Receivables Securitization Facility described herein is completed.

Senior Secured Revolving Credit Facility — On February 22, 2019, we entered into that certain Credit Agreement, by and among the Company, Coöperatieve Rabobank U.A., New York Branch, as administrative agent, and the lenders party thereto (the “Credit Agreement”), pursuant to which the lenders party thereto have provided us with a senior secured revolving borrowing base credit facility with a maximum facility amount of up to $265 million (the “Credit Facility”). Borrowings under the Credit Facility are limited to the lower of the maximum facility amount and borrowing base availability. The borrowing base availability amount is equal to 65% of the appraised value of certain of our real property and equipment. We elected to include real estate and equipment with appraised values sufficient to support a borrowing base of $265 million. However, our ability to access the full borrowing base is limited by the requirement under the Credit Agreement to maintain liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) in an amount equal to the lesser of 50% of the borrowing base under the Credit Facility and $175 million. On August 27, 2019 we exercised our right to increase the aggregate principal amount of the commitments under the Credit Agreement to $350 million. The Credit Facility matures on February 22, 2024, with a September 15, 2022 springing maturity date in the event the 2023 Notes are not refinanced or repaid on or prior to July 15, 2022. A portion of the Credit Facility is available for the issuance of up to $25 million of standby letters of credit and up to $10 million of swing line loans.

Loans outstanding under the Credit Facility bear interest, at the Company’s option, at either: (i) the Base Rate (as defined in the Credit Agreement) or (ii) the Adjusted Eurodollar Rate (as defined in the Credit Agreement), plus a margin ranging between 1.25% and 1.75% (in the case of Base Rate loans) or 2.25% and 2.75% (in the case of Eurodollar Rate loans), in each case based on the Company’s total net leverage ratio at such time.

We may make optional prepayments of the loans, in whole or in part, without penalty (other than applicable breakage and redeployment costs). Subject to certain exceptions and conditions described in the Credit Agreement, we will be obligated to prepay the Credit Facility, and with a 50% commitment reduction, with the net cash proceeds of certain asset sales and with casualty insurance proceeds relating to the assets not included in the borrowing base. The Credit Facility is guaranteed by our existing and future wholly owned material domestic subsidiaries, which are substantially all of our existing domestic subsidiaries other than the subsidiaries who are sellers under the Receivables Securitization Facility.

Table of Contents

investments, loans and advances, transactions with affiliates and sale and leaseback transactions. The Credit Agreement also contains customary events of default and related cure provisions. The Credit Agreement includes a fixed charge covenant that requires us to maintain a fixed charge coverage ratio of at least 1.05 to 1.00 at any time that our liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) at such time is less than the lesser of 50% of the borrowing base under the Credit Facility and $175 million.

Dean Foods Receivables Securitization Facility — We have a $450 million receivables securitization facility (the "Receivables Securitization Facility") pursuant to which certain of our subsidiaries sell their accounts receivable to two wholly-owned entities intended to be bankruptcy-remote, as is customary for receivables securitization facilities. 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 Receivables Securitization Facility is treated as a borrowing for accounting purposes.

On February 22, 2019, we amended and restated the Receivables Purchase Agreement to extend the liquidity termination date. 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 $415.8 million of the total commitment amount under the receivables securitization facility as of September 30, 2019. The total amount of receivables sold to these entities as of September 30, 2019 was $509.0 million. During the first nine months of 2019, we borrowed $0.7 billion and repaid $0.6 billion under the facility with a remaining balance of $255.0 million as of September 30, 2019. In addition to letters of credit in the aggregate amount of $154.5 million that were issued but undrawn, the remaining available borrowing capacity was $6.3 million at September 30, 2019. Our average daily balance under this facility during the nine months ended September 30, 2019 was $260.8 million. The receivables securitization facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our total net leverage ratio.

As of November 8, 2019, we had $368.8 million of outstanding borrowings under the Credit Facility and the receivables securitization facility, excluding letters of credit in the aggregate amount of $195.2 million that were issued but undrawn.

In connection with the Bankruptcy Petitions, we have reached an agreement with the lenders under the Company's Receivables Securitization Facility and are seeking approval of the Court to amend and restate certain agreements governing our Receivables Securitization Facility to, among other things, (i) modify certain covenants, representations, events of default and cross defaults arising as a result of the commencement of the Chapter 11 Cases, (ii) modify the other rights and obligations of the parties to the facility in order to give effect to, and in certain instances be subject to, orders of the Court from time to time, (iii) reduce the total size of the facility to $425 million, with a corresponding reduction to availability thereunder, (iv) after giving effect to the commencement of the Chapter 11 Cases, ensure that the facility continues in effect (as amended) and for liquidity to continue to be available during the pendency of the Chapter 11 cases, subject to the terms and conditions therein and subject to the orders of the Court, (v) modify certain pricing terms and fees payable under the facility and (vi) make certain other amendments, including in order to give effect to future issuances of letters of credit and to issue a letter of credit thereunder to backstop all of our letters of credit issued and outstanding under the facility in order to, among other things, help ensure that such letters of credit remain in effect to secure our obligations owed to the beneficiaries thereunder.

Covenant Compliance — We are required to comply with a springing fixed charge coverage ratio set at 1.05 to 1.00, which is triggered and applicable in the event our liquidity (defined to include available commitments under the Credit Facility and unrestricted cash on hand and/or cash restricted in favor of the lenders in an aggregate amount of up to $25 million for all such cash) at such time is less than the lesser of 50% of the borrowing base under the Credit Facility and $175 million. As of September 30, 2019, the fixed charge coverage covenant has not sprung.

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

Table of Contents

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.

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.

The carrying value under the 2023 Notes at September 30, 2019 was $696.2 million, net of unamortized debt issuance costs of $3.8 million.

Historical Cash Flow

The following table summarizes our cash flows provided by (used in) operating, investing and financing activities:



	Nine Months Ended September 30
	2019			2018			Change
	(In thousands)
Cash flows provided by (used in):
Operating activities	$	(115,256	)	$	119,798		$	(235,054	)
Investing activities	(60,285		)	(62,921		)	2,636
Financing activities	188,121			(51,604		)	239,725
Net increase in cash and cash equivalents	$	12,580		$	5,273		$	7,307

Operating Activities

Cash used in operating activities was $115.3 million in the nine months ended September 30, 2019 compared to cash provided by operating activities of $119.8 million the nine months ended September 30, 2018. The change was primarily attributable to lower operating income and higher dairy commodity costs.

Investing Activities

Cash used in investing activities decreased by $2.6 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. In the first nine months of 2019, capital expenditures increased by $3.1 million and proceeds from the sale of fixed assets decreased by $13.8 million in comparison to the prior period. 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.

Financing Activities

Cash provided by financing activities was $188.1 million in the nine months ended September 30, 2019 compared to cash used in financing activities of $51.6 million in the nine months ended September 30, 2018. This change was primarily

Table of Contents

attributable to net debt proceeds of $206.1 million in the first nine months of 2019 as compared to net debt repayments of $26.9 million in the first nine months of 2018. Net debt proceeds were partially offset by payments of financing costs related to the amendments to our Credit Agreement and receivables purchase agreement of $17.5 million in the first nine months of 2019.

Contractual Obligations

Other than as disclosed in this report with respect to the filing of the Bankruptcy Petitions and the acceleration of substantially all of our debt as a result, there have been no material changes outside the ordinary course of business to the information provided with respect to our contractual obligations, including indebtedness and purchase and lease obligations, as disclosed in our 2018 Annual Report on Form 10-K.

Other Long-Term Liabilities

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.

We did not make a discretionary contribution to our company-sponsored pension plans during the three months ended September 30, 2019, and do not expect to make any contributions to our company-sponsored pension plans for the remainder of 2019.

Other Commitments and Contingencies

In 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 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 become payable only if we materially breach or terminate our related milk supply agreement 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 related milk supply agreements with DFA related to the promissory note. In connection with our goals of cost control and supply chain efficiency, we continue to evaluate our sources of raw milk supply.

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;


•	certain obligations, which require us to issue letters of credit for our property and casualty insurance risks; and


•	certain litigation-related contingencies.

See Note 14 to our unaudited Condensed Consolidated Financial Statements.

Future Capital Requirements

During 2019, we intend to invest a total of approximately $95 million to $105 million in capital expenditures, primarily in support of our enterprise-wide cost productivity plan, other strategic initiatives and for our existing manufacturing facilities.

Table of Contents

Known Trends and Uncertainties

Filing Under Chapter 11 of the United States Bankruptcy Code

On the Petition Date, the Debtors filed the Bankruptcy Petitions under the Bankruptcy Code in the Court. The Chapter 11 Cases are being jointly administered under the caption In re Southern Foods Group, LLC Case No. 19-36313. Each Debtor will continue to operate its business as a “debtor in possession” under the jurisdiction of the Court an in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court. For further information on the risks and uncertainties associated with the Bankruptcy Petitions, see "Item 1A. Risk Factors".

Competitive Environment, Volume Performance and Enterprise-Wide Cost Productivity Plan

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 nine months ended September 30, 2019, we experienced fluid milk volume declines from year-ago levels, driven predominantly by the loss of volume from two large retailers, overall category declines and other volume pressures and lower branded fluid milk volumes due to continued retailer investment in private label products. We expect volume and mix challenges to continue for the remainder of 2019. The effects of the volume declines on our operating results are being compounded by our accelerated facility closure activity. With the impact of the lost volumes, production cost declines lagged the decline in volumes, resulting in lower overall operating results. While we continue to be impacted by these increased costs related to our accelerated facility closure activity, we are experiencing improvement and we expect these costs to continue to stabilize as we move forward in 2019.

We are executing an aggressive enterprise-wide cost productivity plan to significantly reset our cost structure with targeted cost savings incremental to our annual productivity savings. We currently have legacy processes and systems that are fragmented and decentralized in many areas, which has created a cost structure that is disproportionately sensitive to small percentage declines in volume. We have organized our enterprise-wide cost productivity plan into three targeted work streams: rescaling our supply chain, optimizing spend management and integrating our operating model. We believe this plan is necessary to support our business strategy and deliver more consistent earnings and cash flow over the long term. The plan is phased over several years and requires significant one-time investments, including investments in people, infrastructure, technology and systems, which will negatively impact our profitability and cash flows.

Due to the phased implementation and timing of our initiatives and investments, we do not expect to generate enough cost savings in 2019 to offset the planned investments, cost inflation and overall volume pressures. In addition, inflation, declining volumes and competitive pricing pressures have negated, and may continue to negate, some of the impact of our cost saving efforts. Furthermore, some of our counterparties could attempt to modify their terms with us due to our financial performance. We also must execute our plans within our projected time frames in order to meet our financial projections and to remain competitive in the marketplace. In addition, if we continue to experience deteriorations in our profitability and cash flows, we may incur material asset impairments in the future. For further discussion of the risks relating to our cost productivity plan, see “Part I - Item 1A. Risk Factors - Business, Competitive and Strategic Risks - We may not realize anticipated benefits from our enterprise-wide cost productivity plan, and we may not complete this plan within our projected time frames, either of which could materially adversely impact our business, financial condition, results of operations and cash flows" in our 2018 Annual Report on Form 10-K.

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

Table of Contents

cream for use in some of our Class II products. Bulk cream is typically purchased based on a multiple of the Grade AA butter price on the Chicago Mercantile Exchange.

Prices for conventional raw milk during the third quarter of 2019 were approximately 19% higher than year-ago levels and increased approximately 19% sequentially from the second quarter of 2019. We expect raw milk inflation in the fourth quarter of 2019 and are currently projecting full-year dairy commodity inflation. 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 acknowledge the potential for future volatility.

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 crude oil and natural gas 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. In the first nine months of 2019, our fuel, freight and resin costs moderated compared to the prior period. While our freight and fuel usage has increased due to recent facility closure activity, we have worked to mitigate these headwinds through usage reductions and other route optimization activities. We expect these trends to continue during 2019.

Tax Rate

Income tax benefit was recorded at an effective rate of 3.7% in the first nine months of 2019 compared to 27.4% in the first nine months of 2018. Our effective tax rate decreased in the first nine months of 2019, primarily due to an increase in the federal and state valuation allowances. Changes in our profitability levels and the relative earnings of our business units, as well as changes to federal, state, and foreign tax laws, may cause our tax rate to change from historical rates. Our assessment of the realizability of deferred tax assets and the potential for an additional valuation allowance could also impact our future effective rate.

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.

A valuation allowance has been recorded against the deferred tax assets, as a portion of these deferred tax assets are not more likely than not to be realized. As a result of the valuation allowance, a deferred tax liability related to our trademark remains on our consolidated balance sheet as of September 30, 2019. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as projected future taxable income.

See the risk factors described in “Part I — Item 1A — Risk Factors” in our 2018 Annual Report on Form 10-K and elsewhere in this Form 10-Q for a description of various other risks and uncertainties concerning our business.

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our quantitative and qualitative disclosures about market risk as set forth in our 2018 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Controls Evaluation and Related Certifications

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), referred to herein as “Disclosure Controls”) as of the end of the period covered by this quarterly report. The controls evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon our most recent controls evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of September 30, 2019.

Changes in Internal Control over Financial Reporting

Management of the Company has evaluated the changes in our internal controls over financial reporting that occurred during the three months ended September 30, 2019. During this period, we implemented a software solution to process our trade promotion spending as part of our ongoing enterprise-wide cost productivity plan to enhance our internal controls and the overall effectiveness of our trade promotion programs. Additionally, we updated our accounting policies affected by the adoption of ASU No. 2016-02, “Leases (Topic 842)” and implemented a software solution to calculate our right-of-use assets and lease liabilities and to provide related disclosures.

The Company has appropriately considered and integrated these software solutions into our control design and related tests of the operating effectiveness of our internal controls over financial reporting as of September 30, 2019.

Other than as described above, there have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) in the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Table of Contents

Part II — Other Information

Item 1. Legal Proceedings

Filing Under Chapter 11 of the United States Bankruptcy Code

On November 12, 2019 (the “Petition Date”), we and substantially all of our wholly owned subsidiaries (other than our Securitization Subsidiaries) (the “Filing Subsidiaries” and, together with the Company, the “Debtors”) filed voluntary petitions for reorganization (collectively, the “Bankruptcy Petitions”) under Chapter 11 of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Court”). The Debtors’ Chapter 11 cases (collectively, the “Chapter 11 cases”) are being jointly administered under the caption In re Southern Foods Group, LLC Case No. 19-36313. Each Debtor will continue to operate its business as a “debtor in possession” under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Court. See “Part I - Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q for further discussion of these proceedings.

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property. Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

Environmental Regulations

In December 2018, the Massachusetts Department of Environmental Protection issued a Unilateral Administrative Order and the Charles River Pollution Control District (“CRPCD”) issued a Notice of Violation alleging violations of state environmental regulations and the terms of the wastewater discharge permit (the “Permit”) for the Company’s subsidiary, Garelick Farms, LLC (“Garelick Farms”). The alleged violations relate to the release of wastewater from Garelick Farm’s wastewater tank in excess of limits established in the Permit. The Company took measures to stop the discharge, recover the wastewater, and clean the affected area. On July 8, 2019, the Company agreed to settle with the CRPCD for a total penalty of $215 thousand. An agreement regarding the terms of the settlement is currently being negotiated by the parties.

From time to time we receive notices of potential violations from the Environmental Protection Agency (“EPA”) resulting from inspections of our facilities. We have cooperated with the EPA with respect to these inspections and in addressing any potential violations, many of which relate to compliance documentation and training. As of November 8, 2019, no fines have been assessed as a result of any of these inspections. We are discussing possible monetary sanctions with the EPA. Monetary sanctions, if imposed as a result of these inspections, may exceed $100 thousand individually or in the aggregate. If we are assessed monetary sanctions in excess of $100 thousand we will disclose such fact in subsequent filings.

Item 1A. Risk Factors

In addition to the Company's risk factors set forth in our 2018 Annual Report on Form 10-K, in connection with the filing of the Bankruptcy Petitions, we are subject to the following additional risks.

Risks Related to Our Chapter 11 Cases

The Chapter 11 Cases may have a material adverse impact on our business, financial condition, results of operations, and cash flows. In addition, the Chapter 11 Cases may have a material adverse impact on the trading price and may result in the cancellation and discharge of our securities, including our common stock. If approved by the Bankruptcy Court, a plan of reorganization will govern distributions to and the recoveries of holders of our securities.

We have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic financial alternatives to address our liquidity and capital structure, including strategic financial alternatives to restructure our indebtedness. These efforts led to the commencement of the Chapter 11 Cases in the Bankruptcy Court on November 12, 2019.

The Chapter 11 Cases could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 Cases continue, our management may be required to spend a significant amount of time and effort dealing with the restructuring instead of focusing on our business operations. Bankruptcy Court protection and operating as debtors in possession also may make it more difficult to retain management and the key personnel necessary to the success and growth of our business. In addition, during the pendency of the Chapter 11 Cases, our customers and suppliers might lose confidence

Table of Contents

in our ability to reorganize our business successfully and may seek to establish alternative commercial relationships, which may cause, among other things, our suppliers, vendors, counterparties and service providers to renegotiate the terms of our agreements, attempt to terminate their relationship with us or require financial assurances from us. Although we remain committed to providing safe, reliable operations and we believe that we have sufficient resources to do so, customers may lose confidence in our ability to provide them the level of service they expect, resulting in a significant decline in our revenues, profitability and cash flow.

We have received notice of the NYSE determining to commence proceedings to delist our common stock. Trading in our securities during the pendency of the Chapter 11 Cases is highly speculative and poses substantial risks. We expect that the existing common stock of the Company will be extinguished and existing equity holders will not receive consideration in respect of their equity interests.

As a consequence of the Chapter 11 Cases, on November 12, 2019, the NYSE suspended trading in our common stock at the market opening and we received written notice from the NYSE that it had determined to commence proceedings to delist our common stock because we are no longer suitable for listing pursuant to Listed Company Manual Section 802.01D following the filing of the Bankruptcy Petitions. As a result of the notice of delisting, our common stock may commence trading on the OTC Pink Marketplace, but we can provide no assurance that our common stock will commence or continue to trade on this market, whether broker-dealers will continue to provide public quotes of our common stock on this market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue on this market in the future. We expect that the existing common stock of the Company will be extinguished upon the Company’s emergence from Chapter 11 and that existing equity holders will not receive consideration in respect of their equity interests. The delisting by the NYSE could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell shares of our common stock.

If we are not able to obtain confirmation of a Chapter 11 plan of reorganization or complete the proposed sale of the Company pursuant to Section 363 of the Bankruptcy Code, or if current financing is insufficient or exit financing is not available, we could be required to liquidate under Chapter 7 of the Bankruptcy Code.

In order to successfully emerge from Chapter 11 bankruptcy protection, we must obtain confirmation of a Chapter 11 plan of reorganization by the Court (possibly subsequent to a sale of the Company or certain of its material assets pursuant to Section 363 of the Bankruptcy Code). If confirmation by the Court does not occur, we could be forced to liquidate under Chapter 7 of the Bankruptcy Code.

We have not entered into a sale agreement with DFA for the proposed sale to them of our business. We may not be able to do so or to find another buyer for the business. In addition, we expect that the price we obtain for the business, if a sale is completed, may be substantially less than would be needed to satisfy our debts.

There can be no assurance that our current cash position and amounts of cash from future operations will be sufficient to fund operations. In the event that we do not have sufficient cash to meet our liquidity requirements, and our current financing is insufficient or exit financing is not available, we may be required to seek additional financing. There can be no assurance that such additional financing would be available, or, if available, would be available on acceptable terms. Failure to secure any necessary exit financing or additional financing would have a material adverse effect on our operations and ability to continue as a going concern.

Any plan of reorganization that we may implement will be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, or adverse market conditions persist or worsen, our plan may be unsuccessful in its execution.

Any plan of reorganization that we may implement will affect both our capital structure and the ownership, structure and operation of our businesses and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to (i) our ability to substantially change our capital structure; (ii) our ability to obtain adequate liquidity and financing sources; (iii) our ability to maintain customers’ confidence in our viability as a continuing entity and to attract and retain sufficient business from them; (iv) our ability to retain key employees, and (v) the overall strength and stability of general economic conditions of the financial industry, both in the U.S. and in global markets. The failure of any of these factors could materially adversely affect the successful reorganization of our businesses.

In addition, any plan of reorganization will rely upon financial projections, including with respect to revenues, gross profit, adjusted EBITDA, capital expenditures, net debt and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our

Table of Contents

capital structure. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us and our subsidiaries or our businesses or operations. The failure of any such results or developments to materialize as anticipated could materially adversely affect the successful execution of any plan of reorganization.

As a result of the Chapter 11 Cases, the realization of our assets and liquidation of our liabilities are subject to uncertainty, and our historical financial information will not be indicative of our future financial performance.

If a plan of reorganization is ultimately confirmed by the Court, our capital structure will likely be significantly altered under such plan (whether or not following a sale of the Company or certain of its material assets pursuant to Section 363 of the Bankruptcy Code). Under fresh-start reporting rules that may apply to us upon the effective date of a plan of reorganization, our assets and liabilities would be adjusted to fair values and our accumulated deficit would be restated to zero. Accordingly, if fresh-start reporting rules apply, our financial condition and results of operations following our emergence from Chapter 11 would not be comparable to the financial condition and results of operations reflected in our historical financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in our consolidated historical financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

While operating under the protection of the Bankruptcy Code, and subject to Court approval or otherwise as permitted in the normal course of business, we may seek a sale of the Company or certain of its material assets pursuant to Section 363 of the Bankruptcy Code in conjunction with, or instead of, a plan of reorganization. Any sales or disposals of assets and liquidations or settlements of liabilities may be for amounts other than those reflected in our consolidated financial statements. In connection with the Chapter 11 Cases, the development of a plan of reorganization and/or sale of the Company or certain of its material assets pursuant to Section 363 of the Bankruptcy Code, it is also possible that additional restructuring and related charges may be identified and recorded in future periods. Such sales, disposals, liquidations, settlements or charges could be material to our consolidated financial position and results of operations in any given period.

We may be unable to comply with restrictions imposed by our proposed DIP Credit Agreement, our Receivables Securitization Facility and other financing arrangements.

The agreements governing our outstanding financing arrangements impose a number of restrictions on us. For example, the terms of our credit facilities, leases and other financing arrangements contain financial and other covenants that create limitations on our ability to borrow the full amount under our credit facilities, effect acquisitions or dispositions and incur additional debt. The agreements will also require us to maintain minimum levels of liquidity and various financial ratios and comply with various other financial covenants. Specifically, the terms of the proposed DIP Credit Agreement will require us to comply with covenants that are customary for debtor-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 proposed DIP Credit Agreement will also require compliance with a variance covenant that compares actual operating disbursements and receipts and capital expenditures to the budgeted amounts set forth in the DIP budgets delivered to the DIP Agent and DIP Lenders on or prior to the closing date and updated periodically thereafter pursuant to the terms of the proposed DIP Credit Agreement. Our ability to comply with these provisions may be affected by events beyond our control and our failure to comply could result in an event of default under the proposed DIP Credit Agreement, the Receivables Securitization Facility or our other financing arrangements.

In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.

Upon a showing of cause, the Bankruptcy Court may convert our Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in the plan of reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.

Table of Contents

We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our financial condition and results of operations.

The Bankruptcy Court provides that the confirmation of a plan of reorganization discharges a debtor from, among other things, substantially all debts arising prior to consummation of a plan of reorganization. With few exceptions, all claims against the Debtors that arose prior to the Petition Date or before consummation of the plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. Subject to the terms of the plan of reorganization and orders of the Bankruptcy Court, any claims not ultimately discharged pursuant to the plan of reorganization could be asserted against the reorganized entities and may have an adverse effect on our financial condition and results of operations on a post-reorganization basis.

We may experience employee attrition as a result of the Chapter 11 Cases.

As a result of the Chapter 11 Cases, we may experience employee attrition, and our employees may face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our financial condition, liquidity and results of operations.

Item 3. Defaults Upon Senior Securities

As discussed in “Part I - Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q, on the Petition Date, the Debtors filed the Chapter 11 Cases in the Bankruptcy Court seeking relief under Chapter 11 of the Bankruptcy Code. The Debtors continue to operate their businesses and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The commencement of the Chapter 11 Cases constituted an event of default under the instruments enumerated below, resulting in the acceleration of our payment obligations under those instruments, and triggering cross-default and/or cross-acceleration provisions in substantially all of our other debt instruments. As such, substantially all of our debt, with balances of approximately $1,123.5 million in the aggregate as of September 30, 2019, is in default and accelerated, but subject to stay under the Bankruptcy Code.

The filing of the Chapter 11 Cases constituted an event of default that accelerated the Debtors’ obligations under the following instruments and agreements:


•	the Indenture, dated as of February 25, 2015, among the Company, the guarantors named therein and our 6.50% senior notes due 2023 issued thereunder;


•	the Receivables Securitization Facility; and


•	the Senior Secured Revolving Credit Facility.

The instruments and agreements described above provide that, as a result of the commencement of the Chapter 11 Cases, the financial obligations thereunder, including for the debt instruments any principal amount, together with accrued interest thereon, are immediately due and payable. However, as disclosed elsewhere in this Form 10-Q, any efforts to enforce the payment obligations under the Debt Instruments and such other instruments and agreements are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the Debt Instruments and such other instruments and agreements are subject to the applicable provisions of the Bankruptcy Code.

Item 5. Other Information

Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard

On November 12, 2019, the NYSE suspended trading in our common stock at the market opening and we received written notice (the “Notice”) from the NYSE that it had determined to commence proceedings to delist our common stock because we are no longer suitable for listing pursuant to Listed Company Manual Section 802.01D following the filing of the Bankruptcy Petitions. In reaching its delisting determination, the NYSE noted the uncertainty as to the timing and outcome of the bankruptcy process, as well as the uncertainty as to the ultimate effect of this process on the value of our common stock.

Table of Contents

Under the NYSE listing procedures, we have a right to a review of this determination by a Committee of the Board of Directors of the NYSE, provided a written request for such review is filed with the Assistant Corporate Secretary of the NYSE within ten business days after receiving the Notice. We have decided not to seek this review.

As a result of the Notice, our common stock may commence trading on the OTC Pink Marketplace, but we can provide no assurance that our common stock will commence or continue to trade on this market, whether broker-dealers will continue to provide public quotes of our common stock on this market, whether the trading volume of our common stock will be sufficient to provide for an efficient trading market or whether quotes for our common stock will continue on this market in the future.

Compensation Program

The Board of Directors (the “Board”) of Dean Foods Company (the “Company”) and its compensation advisors have reviewed the Company’s compensation program to determine whether it continues to provide assurance to key employees that they will be compensated for their services while supporting the Company’s strategic goals. It was determined that the current program does not sufficiently incentivize the retention of key employees due to a lack of meaningful payouts under the Company’s short-term incentive compensation program (“STIP”) and a lack of value under its long-term incentive program due to the decreased value of the Company’s ordinary shares.

In order to enhance the Company’s ability to attract, retain and incentivize the employees necessary to maximize the value of the business, on November 6, 2019, the Board, on the recommendation of its compensation advisors, approved the following for certain key employees : (a) market increases in base salary, (b) accelerated payment under the 2019 STIP, and (c) a retention bonus program.

Base Salary Increases

The Board approved increases in the base salary for certain key employees to better align their base pay with the applicable market median. The table below sets forth any adjusted base salary for the Company’s named executive officers (each an “NEO”).



NEO	Current Base Salary	Adjusted Base Salary
Eric Beringause	$800,000	$1,050,000
Gary W. Rahlfs	$500,000	$600,000
David Bernard	$350,000	N/A

Payment of 2019 Short-Term Incentive

In March, 2019, the Company adopted the 2019 STIP, under which participants are eligible to earn cash bonuses based 25% on the achievement of individual performance objectives and 75% on the achievement of Company financial performance objectives. The Board has determined that the Company will not achieve the minimal threshold required for payment of the Company financial performance objective portion of the 2019 STIP. Therefore, to provide current incentive and retention value, the Board approved the payment of the individual performance objective portion, and as applicable, any other previously guaranteed minimum portion, of the 2019 STIP to certain key employees (“STI Bonus”).

On November 7, 2019, the Company entered into letter agreements (each an “STI Bonus Agreement”) with each of the applicable employees, pursuant to which the STI Bonuses were paid on November 8, 2019. Mr. Beringause did not participate in the 2019 STIP and therefore did not receive an STI Bonus. Mr. Rahlfs received an STI Bonus in the amount of $175,000, the amount of his minimum guaranteed bonus under the 2019 STI pursuant to the terms of the letter agreement between him and the Company dated May 8, 2019. Mr. Bernard received an STI Bonus in the amount of $48,125, the amount of his 2019 STIP opportunity that was subject to his achievement of individual performance objectives.

Under the terms of the STI Bonus Agreements with Messrs. Rahlfs and Bernard, repayment of the full amount of the STI Bonus will be required upon a voluntarily termination of employment without good reason or by the Company for cause, in either case prior to March 15, 2020. Repayment will not be required upon a termination of employment for any other reason.

The description of the STI Bonus Agreements does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the form of STI Bonus Agreement attached to this Quarterly Report on Form 10-Q as Exhibit 10.1.

Table of Contents

Retention Bonus Program

On November 7, 2019, the Company entered into retention award letter agreements (each a “Retention Agreement”) with certain key employees, including each of the NEOs, pursuant to which retention payments were paid to such employees on November 8, 2019.

The NEOs received the following retention payments:



NEO	Retention Award Amount
Eric Beringause	$4,675,000
Gary W. Rahlfs	$790,000
David Bernard	$542,500

Under the terms of the Retention Agreements with each NEO, repayment of the full amount of the retention payment will be required upon a voluntarily termination of employment without good reason or by the Company for cause, in either case before the earliest of November 8, 2020, the consummation of a sale of all or substantially all of the Company’s assets and the effective date of the Company’s emergence from bankruptcy. Repayment will not be required upon a termination of employment for any other reason.

The description of the Retention Agreements does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the form of Retention Agreement attached to this Quarterly Report on Form 10-Q as Exhibit 10.2 and incorporated herein by reference.

Table of Contents

Item 6. Exhibits



10.1	Form of Short-Term Incentive Bonus Letter Agreement
10.2	Form of Retention Award Letter Agreement
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

101.INS XBRL Instance Document(1).
101.SCH XBRL Taxonomy Extension Schema Document(1).
101.CAL XBRL Taxonomy Calculation Linkbase Document(1).
101.DEF XBRL Taxonomy Extension Definition Linkbase Document(1).
101.LAB XBRL Taxonomy Label Linkbase Document(1).
101.PRE XBRL Taxonomy Presentation Linkbase Document(1).
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


(1)	Filed electronically herewith.

Table of Contents

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.