e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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þ
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Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the Quarterly Period Ended
March 31, 2007
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or
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o
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Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
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For the Transition Period
from to
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Commission File Number
001-12755
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Dean Foods Company
(Exact name of the registrant as
specified in its charter)
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Delaware
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75-2559681
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification no.)
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2515
McKinney Avenue, Suite 1200
Dallas, Texas 75201
(214) 303-3400
(Address, including zip code, and
telephone number, including
area code, of the registrants
principal executive offices)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer þ; Accelerated
filer o; Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act.) Yes o No þ
As of May 4, 2007, the number of shares outstanding of each
class of common stock was:
Common Stock, par value $0.01 129,997,167
Part I
Financial Information
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Item 1.
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Financial
Statements
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DEAN
FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
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March 31,
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December 31,
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2007
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2006
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Assets
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Current assets:
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Cash and cash equivalents
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$
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37,954
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$
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31,140
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Receivables, net
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803,952
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799,038
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Inventories
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380,137
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360,754
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Deferred income taxes
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133,770
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|
117,991
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Prepaid expenses and other current
assets
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58,492
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70,367
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|
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Total current assets
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1,414,305
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1,379,290
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Property, plant and equipment, net
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1,785,656
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1,786,907
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Goodwill
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3,060,052
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2,943,139
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Identifiable intangible and other
assets
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636,402
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640,857
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Assets of discontinued operations
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19,980
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Total
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$
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6,896,415
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$
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6,770,173
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Liabilities and
Stockholders Equity
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Current liabilities:
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Accounts payable and accrued
expenses
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$
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841,904
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$
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822,122
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Income taxes payable
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9,638
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30,776
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Current portion of long-term debt
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478,275
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483,658
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Total current liabilities
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1,329,817
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1,336,556
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Long-term debt
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2,885,166
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2,872,193
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Deferred income taxes
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502,875
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504,552
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Other long-term liabilities
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284,049
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238,682
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Liabilities of discontinued
operations
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8,791
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Commitments and contingencies
(Note 11)
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Stockholders equity:
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Preferred stock, none issued
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Common stock, 129,521,702 and
128,371,104 shares issued and outstanding, with a par value
of $0.01 per share
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1,295
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1,284
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Additional paid-in capital
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656,307
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624,475
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Retained earnings
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1,287,520
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1,229,427
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Accumulated other comprehensive
loss
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(50,614
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)
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(45,787
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)
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Total stockholders equity
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1,894,508
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1,809,399
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Total
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$
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6,896,415
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$
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6,770,173
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See Notes to Condensed Consolidated Financial Statements.
-3-
DEAN
FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share data)
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Three Months Ended
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March 31
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2007
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2006
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Net sales
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$
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2,629,749
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$
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2,509,041
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Cost of sales
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1,942,474
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1,857,695
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Gross profit
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687,275
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651,346
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Operating costs and expenses:
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Selling and distribution
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415,635
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405,145
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General and administrative
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109,390
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102,281
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Amortization of intangibles
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2,322
|
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1,421
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Facility closing and
reorganization costs
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5,775
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4,402
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Total operating costs and expenses
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533,122
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513,249
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Operating income
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154,153
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138,097
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Other (income) expense:
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Interest expense
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52,241
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47,536
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Other (income) expense, net
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300
|
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|
100
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|
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Total other expense
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52,541
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47,636
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Income from continuing operations
before income taxes
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|
101,612
|
|
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90,461
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Income taxes
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|
38,409
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|
|
|
35,767
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|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
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|
63,203
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|
|
|
54,694
|
|
Income (loss) from discontinued
operations, net of tax
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|
617
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|
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|
(1,902
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)
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|
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Net income
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$
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63,820
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$
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52,792
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|
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Average common shares:
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Basic
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128,889,506
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135,170,111
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Diluted
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134,521,467
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142,409,989
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Basic earnings per common share:
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Income from continuing operations
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$
|
0.49
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|
$
|
0.40
|
|
Income (loss) from discontinued
operations
|
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|
0.01
|
|
|
|
(0.01
|
)
|
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|
|
|
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|
|
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Net income
|
|
$
|
0.50
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|
$
|
0.39
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|
|
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Diluted earnings per common share:
|
|
|
|
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|
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|
Income from continuing operations
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|
$
|
0.47
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|
|
$
|
0.38
|
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Loss from discontinued operations
|
|
|
|
|
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|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.47
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
-4-
DEAN
FOODS COMPANY
CONDENSED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(In thousands, except share data)
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|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Income
|
|
|
Balance, December 31,
2006
|
|
|
128,371,104
|
|
|
$
|
1,284
|
|
|
$
|
624,475
|
|
|
$
|
1,229,427
|
|
|
$
|
(45,787
|
)
|
|
$
|
1,809,399
|
|
|
|
|
|
Issuance of common stock
|
|
|
1,150,598
|
|
|
|
11
|
|
|
|
23,834
|
|
|
|
|
|
|
|
|
|
|
|
23,845
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
8,303
|
|
|
|
|
|
|
|
|
|
|
|
8,303
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,820
|
|
|
|
|
|
|
|
63,820
|
|
|
$
|
63,820
|
|
Other comprehensive income
(Note 8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative
instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,192
|
)
|
|
|
(3,192
|
)
|
|
|
(3,192
|
)
|
Amounts reclassified to income
statement related to hedging activities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,240
|
)
|
|
|
(1,240
|
)
|
|
|
(1,240
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(395
|
)
|
|
|
(395
|
)
|
|
|
(395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
(305
|
)
|
|
|
(5,727
|
)
|
|
|
|
|
|
|
(6,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31,
2007
|
|
|
129,521,702
|
|
|
$
|
1,295
|
|
|
$
|
656,307
|
|
|
$
|
1,287,520
|
|
|
$
|
(50,614
|
)
|
|
$
|
1,894,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
-5-
DEAN
FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
63,820
|
|
|
$
|
52,792
|
|
(Income) loss from discontinued
operations
|
|
|
(617
|
)
|
|
|
1,902
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
57,343
|
|
|
|
55,518
|
|
Share-based compensation expense
|
|
|
8,303
|
|
|
|
9,389
|
|
Loss on disposition of assets
|
|
|
802
|
|
|
|
618
|
|
Write-down of impaired assets
|
|
|
4,760
|
|
|
|
1,424
|
|
Deferred income taxes
|
|
|
|
|
|
|
38,106
|
|
Other
|
|
|
(133
|
)
|
|
|
(193
|
)
|
Changes in operating assets and
liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
469
|
|
|
|
42,258
|
|
Inventories
|
|
|
(17,126
|
)
|
|
|
4,976
|
|
Prepaid expenses and other assets
|
|
|
8,681
|
|
|
|
(4,939
|
)
|
Accounts payable and accrued
expenses
|
|
|
9,740
|
|
|
|
(128,199
|
)
|
Income taxes payable
|
|
|
1,966
|
|
|
|
(48,403
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operations
|
|
|
138,008
|
|
|
|
25,249
|
|
Net cash used in discontinued
operations
|
|
|
|
|
|
|
(3,155
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
138,008
|
|
|
|
22,094
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Additions to property, plant and
equipment
|
|
|
(51,781
|
)
|
|
|
(54,989
|
)
|
Payments for acquisitions and
investments, net of cash received
|
|
|
(125,839
|
)
|
|
|
(9,760
|
)
|
Proceeds from divestitures
|
|
|
10,706
|
|
|
|
|
|
Proceeds from sale of fixed assets
|
|
|
1,550
|
|
|
|
1,836
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing
operations
|
|
|
(165,364
|
)
|
|
|
(62,913
|
)
|
Net cash used in discontinued
operations
|
|
|
|
|
|
|
(5,509
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(165,364
|
)
|
|
|
(68,422
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
83,500
|
|
|
|
65,198
|
|
Repayment of debt
|
|
|
(73,175
|
)
|
|
|
(37,792
|
)
|
Issuance of common stock related
to share-based compensation
|
|
|
18,026
|
|
|
|
5,440
|
|
Tax savings on share-based
compensation
|
|
|
5,819
|
|
|
|
22,680
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(15,357
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operations
|
|
|
34,170
|
|
|
|
40,169
|
|
Net cash provided by discontinued
operations
|
|
|
|
|
|
|
8,588
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
34,170
|
|
|
|
48,757
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash
equivalents
|
|
|
6,814
|
|
|
|
2,429
|
|
Cash and cash equivalents,
beginning of period
|
|
|
31,140
|
|
|
|
24,456
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
37,954
|
|
|
$
|
26,885
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
-6-
DEAN
FOODS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Periods
ended March 31, 2007 and 2006
(Unaudited)
Basis of Presentation The unaudited Condensed
Consolidated Financial Statements contained in this Quarterly
Report have been prepared on the same basis as the Consolidated
Financial Statements in our Annual Report on
Form 10-K
for the year ended December 31, 2006. In our opinion, we
have made all necessary adjustments (which include only normal
recurring adjustments) in order to present fairly, in all
material respects, our consolidated financial position, results
of operations and cash flows as of the dates and for the periods
presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been omitted. Our results of operations for the
period ended March 31, 2007 may not be indicative of our
operating results for the full year. The Condensed Consolidated
Financial Statements contained in this Quarterly Report should
be read in conjunction with our 2006 Consolidated Financial
Statements contained in our Annual Report on
Form 10-K
(filed with the Securities and Exchange Commission on
March 1, 2007).
Certain reclassifications have been made to conform the prior
years Condensed Consolidated Financial Statements to the
current years classifications. During 2006, we
reclassified the presentation of expense recognition for
reusable packaging utilized in the distribution of our products
from cost of sales to distribution expense. The reclassification
reduced cost of sales and increased distribution expense by
$5.5 million for the three months ended March 31,
2006. The reclassification had no impact on net income.
On September 14, 2006, we completed the sale of our
operations based in Spain. The sale of our remaining Iberian
operations was completed in January 2007 following the
conclusion of Portuguese regulatory proceedings. In our
Condensed Consolidated Financial Statements for the three-month
period ended March 31, 2007, the gain on the sale of the
Iberian operations is presented as discontinued operations.
Unless otherwise indicated, references in this report to
we, us or our refer to Dean
Foods Company and its subsidiaries, taken as a whole.
Shipping and Handling Fees Our shipping and
handling costs are included in both cost of sales and selling
and distribution expense, depending on the nature of such costs.
Shipping and handling costs included in cost of sales reflect
inventory warehouse costs, product loading and handling costs.
Our Dairy Group includes costs associated with transporting
finished products from our manufacturing facilities to our own
distribution warehouses within cost of sales while WhiteWave
Foods Company includes these costs in selling and distribution
expense. Shipping and handling costs included in selling and
distribution expense consist primarily of route delivery costs
for both company-owned delivery routes and independent
distributor routes, to the extent that such independent
distributors are paid a delivery fee, and the cost of shipping
products to customers through third-party carriers. Shipping and
handling costs recorded as a component of selling and
distribution expense were approximately $326.0 million and
$309.3 million for the first three months of 2007 and 2006,
respectively.
Recently Adopted Accounting Pronouncements
Effective January 1, 2007, we adopted Financial
Interpretation No. (FIN) 48, Accounting for
Uncertainty in Income Taxes. As a result of adopting the
provisions of FIN 48, we recognized a $25.9 million
increase in our liability for uncertain tax positions to
$41.6 million, a $20.1 million increase in deferred
income tax assets, a $305,000 decrease to additional paid-in
capital, a $265,000 decrease to goodwill, and a
$5.7 million decrease to beginning retained earnings.
The amount of unrecognized tax benefits at March 31, 2007
recorded in other long-term liabilities is $42.5 million,
of which $19.0 million would impact our effective tax rate
and $3.4 million would reduce goodwill if recognized. We do
not expect any material changes to our liability for uncertain
tax positions during the next 12 months.
-7-
Consistent with periods prior to the adoption of FIN 48, we
recognize accrued interest related to uncertain tax positions as
a component of income tax expense. Penalties, if incurred, are
recognized as a component of operating income. As of
March 31, 2007, we have accrued approximately
$5.4 million for the payment of tax-related interest and
penalties.
Our U.S. federal income tax returns for the years 2004 and
2005 are currently under examination by the Internal Revenue
Service. We expect the examination of those years to be
completed no earlier than the fourth quarter of 2008. State
income tax returns are generally subject to examination for a
period of 3 to 5 years after filing. We have various state
income tax returns in the process of examination or appeals.
Recently Issued Accounting Pronouncements The
Financial Accounting Standards Board (FASB) issued
SFAS No. 157, Fair Value Measurements in
September 2006. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands
disclosures about fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements
but does not require any new fair value measurements. We do not
believe the adoption of this standard will have a material
impact on our Consolidated Financial Statements. This standard
will become effective for us in the first quarter of 2008.
|
|
2.
|
Acquisitions
and Discontinued Operations
|
Acquisitions
Friendship Dairies On March 13, 2007,
our Dairy Group completed the acquisition of Friendship Dairies,
Inc., a manufacturer, marketer and distributor of cultured dairy
products primarily in the northeastern United States. This
transaction expanded our cultured dairy product capabilities and
added a strong regional brand. We paid approximately
$130 million, including transaction costs, for the purchase
of Friendship Dairies and funded the purchase price with
borrowings under our senior credit facility. We have not
completed a final allocation of the purchase price to the fair
values of Friendships assets and liabilities. The pro
forma impact of this acquisition on consolidated net earnings
would not have materially changed reported net earnings.
Discontinued
Operations
Iberian Operations Our former Iberian
operations included the manufacture and distribution of private
label and branded milk across Spain and Portugal. On
September 14, 2006, we completed the sale of our operations
in Spain. In connection with the sale of our operations in
Spain, we entered into an agreement to sell our Portuguese
operations (that comprised the remainder of our Iberian
operations) for approximately $11.4 million subject to
regulatory approvals and working capital settlements. We
completed the sale of our Portuguese operations in January 2007,
resulting in a gain of $617,000.
Our financial statements have been reclassified to give effect
to our Iberian operations as discontinued operations.
Major classes of assets and liabilities of our Iberian
operations included in Assets and Liabilities of Discontinued
Operations were as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current assets
|
|
$
|
14,255
|
|
Non-current assets
|
|
|
5,725
|
|
Current liabilities
|
|
|
8,791
|
|
-8-
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Raw materials and supplies
|
|
$
|
170,380
|
|
|
$
|
173,208
|
|
Finished goods
|
|
|
209,757
|
|
|
|
187,546
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
380,137
|
|
|
$
|
360,754
|
|
|
|
|
|
|
|
|
|
|
Changes in the carrying amount of goodwill for the three months
ended March 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WhiteWave
|
|
|
|
|
|
|
|
|
|
Foods
|
|
|
|
|
|
|
Dairy Group
|
|
|
Company
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2006
|
|
$
|
2,408,413
|
|
|
$
|
534,726
|
|
|
$
|
2,943,139
|
|
Acquisitions(1)
|
|
|
117,521
|
|
|
|
|
|
|
|
117,521
|
|
Purchase accounting adjustments
|
|
|
(608
|
)
|
|
|
|
|
|
|
(608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007
|
|
$
|
2,525,326
|
|
|
$
|
534,726
|
|
|
$
|
3,060,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have not completed a final allocation of the purchase price
to the fair value of Friendships assets and liabilities. |
The gross carrying amount and accumulated amortization of our
intangible assets other than goodwill as of March 31, 2007
and December 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Intangible assets with indefinite
lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
511,735
|
|
|
$
|
(5,877
|
)
|
|
$
|
505,858
|
|
|
$
|
511,294
|
|
|
$
|
(5,877
|
)
|
|
$
|
505,417
|
|
Intangible assets with finite
lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
|
|
70,177
|
|
|
|
(21,962
|
)
|
|
|
48,215
|
|
|
|
72,789
|
|
|
|
(21,490
|
)
|
|
|
51,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
581,912
|
|
|
$
|
(27,839
|
)
|
|
$
|
554,073
|
|
|
$
|
584,083
|
|
|
$
|
(27,367
|
)
|
|
$
|
556,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on intangible assets for the three months
ended March 31, 2007 and 2006 was $1.6 million in both
periods.
Estimated aggregate intangible asset amortization expense for
the next five years is as follows:
|
|
|
|
|
2007
|
|
$
|
6.1 million
|
|
2008
|
|
|
5.9 million
|
|
2009
|
|
|
5.8 million
|
|
2010
|
|
|
5.7 million
|
|
2011
|
|
|
3.9 million
|
|
-9-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Amount
|
|
|
Interest
|
|
|
Amount
|
|
|
Interest
|
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding
|
|
|
Rate
|
|
|
|
(In thousands)
|
|
|
Dean Foods debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility
|
|
$
|
1,784,500
|
|
|
|
7.74
|
%
|
|
$
|
1,757,250
|
|
|
|
5.99
|
%
|
Senior notes
|
|
|
498,148
|
|
|
|
7.00
|
|
|
|
498,112
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,282,648
|
|
|
|
|
|
|
|
2,255,362
|
|
|
|
|
|
Subsidiary debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
|
572,980
|
|
|
|
6.625-8.15
|
|
|
|
572,037
|
|
|
|
6.625-8.15
|
|
Receivables-backed facility
|
|
|
500,400
|
|
|
|
5.67
|
|
|
|
512,500
|
|
|
|
5.68
|
|
Capital lease obligations and other
|
|
|
7,413
|
|
|
|
|
|
|
|
15,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080,793
|
|
|
|
|
|
|
|
1,100,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,363,441
|
|
|
|
|
|
|
|
3,355,851
|
|
|
|
|
|
Less current portion
|
|
|
(478,275
|
)
|
|
|
|
|
|
|
(483,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,885,166
|
|
|
|
|
|
|
$
|
2,872,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility During the three
months ended March 31, 2007, our senior credit facility
provided for a $1.5 billion revolving credit facility and a
$1.39 billion term loan. At March 31, 2007, there was
$397 million outstanding under the revolving credit
facility. Letters of credit in the aggregate amount of
$145.3 million were issued but undrawn. At March 31,
2007 approximately $957.7 million was available for future
borrowings under the revolving credit facility, subject to
satisfaction of certain ordinary course conditions contained in
the credit agreement.
During the three months ended March 31, 2007, both the
revolving credit facility and term loan bore interest, at our
election, at the base rate plus a margin that varied from zero
to 25 basis points depending on our credit ratings (as
issued by Standard & Poors and Moodys), or
LIBOR plus a margin that varied from 50 to 150 basis
points, depending on our credit ratings (as issued by
Standard & Poors and Moodys). The weighted
average blended interest rate in effect on borrowings under the
senior credit facility, including the applicable interest rate
margin, was 6.03% for the three months ended March 31,
2007. However, we had interest rate swap agreements in place
that hedged $450 million of our borrowings under the senior
credit facility at an average rate of 4.21%, plus the applicable
interest rate margin. Interest is payable quarterly or at the
end of the applicable interest period.
Principal payments on the term loan were scheduled as follows:
|
|
|
|
|
$56.3 million quarterly beginning December 31, 2006
through September 30, 2008;
|
|
|
|
$262.5 million quarterly beginning on December 31,
2008 through June 30, 2009; and
|
|
|
|
A final payment of $262.5 million on the maturity date of
August 13, 2009.
|
No principal payments were due on the $1.5 billion
revolving credit facility until maturity on August 13, 2009.
The credit agreement also required mandatory principal
prepayments upon the occurrence of certain asset dispositions or
recovery events.
In consideration for the revolving commitment, we paid a
quarterly commitment fee on unused amounts of the revolving
credit facility that ranged from 12.5 to 30 basis points,
depending on our credit ratings (as issued by
Standard & Poors and Moodys).
-10-
The senior credit facility contained various financial and other
restrictive covenants and required that we maintain certain
financial ratios, including a maximum leverage and minimum
interest coverage ratio. As of March 31, 2007, we were in
compliance with all covenants contained in this credit agreement.
On April 2, 2007, we entered into an amended and restated
credit agreement that replaced our senior credit facility in
existence at March 31, 2007. See Note 13 for more
information.
Dean Foods Senior Notes On May 17, 2006,
we issued $500 million aggregate principal amount of
7.0% senior unsecured notes. The senior unsecured notes
mature on June 1, 2016 and interest is payable on
June 1 and December 1 of each year, beginning
December 1, 2006. The outstanding balance at March 31,
2007 was $498.1 million.
The indenture under which we issued the senior unsecured notes
does not contain financial covenants but does contain covenants
that, among other things, limit our ability to incur secured
indebtedness, enter into sale-leaseback transactions and engage
in mergers, consolidations and sales of all or substantially all
of our assets.
The notes are senior unsecured obligations and are effectively
subordinated to the indebtedness outstanding under our senior
credit facility and any other secured debt we may incur. The
notes are fully and unconditionally guaranteed by the
subsidiaries that are guarantors under our senior credit
facility, which are substantially all of our wholly owned
U.S. subsidiaries other than our receivables securitization
subsidiaries.
We may, at our option, redeem some or all of the notes at any
time at a redemption price equal to the greater of:
|
|
|
|
|
100% of the principal amount of the notes being
redeemed; and
|
|
|
|
The sum of the present values of the remaining scheduled
payments of principal and interest on the notes being redeemed
(excluding interest accrued to the redemption date) from the
redemption date to the maturity date discounted to the date of
redemption on a semi-annual basis (assuming a
360-day year
consisting of twelve
30-day
months) at a discount rate equal to the Treasury rate plus
50 basis points, plus, in each case, accrued and unpaid
interest on the principal amount being redeemed to the
redemption date.
|
If we experience a change in control, we may be required to
offer to purchase the notes at a purchase price equal to 101% of
the principal amount, plus accrued and unpaid interest.
We used all of the net proceeds from the sale of the notes to
reduce a corresponding amount of borrowings under our senior
credit facility.
Subsidiary Senior Notes The former Dean Foods
Company (Legacy Dean) had certain senior notes
outstanding at the time of the acquisition, which remain
outstanding. The notes carry the following interest rates and
maturities:
|
|
|
|
|
$250 million ($250 million face value), at 8.15%
interest, maturing in August 2007;
|
|
|
|
$193.5 million ($200 million face value), at 6.625%
interest, maturing in May 2009; and
|
|
|
|
$129.5 million ($150 million face value), at 6.9%
interest, maturing in October 2017.
|
The related indentures do not contain financial covenants but
they do contain certain restrictions, including a prohibition
against Legacy Dean and its subsidiaries granting liens on
certain of their real property interests and a prohibition
against Legacy Dean granting liens on the stock of its
subsidiaries.
Receivables-Backed Facility We entered into a
$600 million receivables securitization facility pursuant
to which certain of our subsidiaries sell their accounts
receivable to three wholly-owned special purpose entities
intended to be bankruptcy-remote. The special purpose entities
then transfer the receivables to third party asset-backed
commercial paper conduits sponsored by major financial
institutions. The assets and liabilities of these three special
purpose entities are fully reflected on our Condensed
Consolidated Balance Sheet, and the securitization is treated as
a borrowing for accounting purposes. During the first quarter of
-11-
2007, we made net payments of $12.1 million on this
facility leaving an available and drawn balance of
$500.4 million at March 31, 2007. The
receivables-backed facility bears interest at a variable rate
based on the commercial paper yield as defined in the agreement.
The average interest rate on this facility was 5.67% at
March 31, 2007. Our ability to re-borrow under this
facility is subject to a borrowing base formula.
On April 2, 2007 we entered into an amendment and
restatement of our receivables facility. See Note 13 for
more information.
Capital Lease Obligations and Other Capital
lease obligations and other subsidiary debt includes various
promissory notes for the purchase of property, plant and
equipment and capital lease obligations. The various promissory
notes payable provide for interest at varying rates and are
payable in monthly installments of principal and interest until
maturity, when the remaining principal balances are due. Capital
lease obligations represent machinery and equipment financing
obligations, which are payable in monthly installments of
principal and interest and are collateralized by the related
assets financed.
Interest Rate Agreements We have interest
rate swap agreements in place that have been designated as cash
flow hedges against variable interest rate exposure on a portion
of our debt, with the objective of minimizing the impact of
interest rate fluctuations and stabilizing cash flows. These
swap agreements provide hedges for loans under our senior credit
facility by fixing the LIBOR interest rates specified in the
senior credit facility at the interest rates noted below until
the indicated expiration dates of these interest rate swap
agreements. In anticipation of the recapitalization of our
balance sheet, in March 2007 we entered into a
$2.95 billion forward starting interest rate swap. The
notional amount of the swap will decline from $2.95 billion
to $1.25 billion over its term. This swap became effective
on April 2, 2007. For additional information see
Note 13.
The following table summarizes our various interest rate
agreements at March 31, 2007:
|
|
|
|
|
|
|
Fixed Interest Rates
|
|
Expiration Date
|
|
Notional Amounts
|
|
|
|
|
|
(In millions)
|
|
|
4.07% to 4.27%
|
|
December 2010
|
|
$
|
450
|
|
4.907%
|
|
March 2008-March 2012
|
|
|
2,950
|
|
The following table summarizes our various interest rate
agreements at December 31, 2006:
|
|
|
|
|
|
|
|
|
Fixed Interest Rates
|
|
Expiration Date
|
|
|
Notional Amounts
|
|
|
|
|
|
|
(In millions)
|
|
|
4.81% to 4.84%
|
|
|
December 2007
|
|
|
$
|
500
|
|
4.07% to 4.27%
|
|
|
December 2010
|
|
|
|
450
|
|
During the three months ended March 31, 2007, we settled
the interest rate swaps expiring in 2007. Amounts included in
Other Comprehensive Income related to these swaps will be
recognized over the originally forecasted period.
These swaps are required to be recorded as an asset or liability
on our Condensed Consolidated Balance Sheet at fair value, with
an offset to other comprehensive income to the extent the hedge
is effective. Derivative gains and losses included in other
comprehensive income are reclassified into earnings as the
underlying transaction occurs. Any ineffectiveness in our hedges
is recorded as an adjustment to interest expense.
-12-
As of March 31, 2007 and December 31, 2006, our
derivative asset and liability balances were:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current derivative asset
|
|
$
|
3,405
|
|
|
$
|
6,525
|
|
Long-term derivative asset
|
|
|
6,656
|
|
|
|
8,322
|
|
|
|
|
|
|
|
|
|
|
Total derivative asset
|
|
$
|
10,061
|
|
|
$
|
14,847
|
|
|
|
|
|
|
|
|
|
|
Long-term derivative liability
|
|
|
(2,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative liability
|
|
$
|
(2,600
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
There was no hedge ineffectiveness for the quarter ended
March 31, 2007. Approximately $1.2 million of interest
income (net of taxes) was reclassified to interest expense from
other comprehensive income during the quarter ended
March 31, 2007. We estimate that approximately
$3.0 million of net derivative income (net of taxes)
included in other comprehensive income will be reclassified into
earnings within the next 12 months. These gains will
partially offset the higher interest payments recorded on our
variable rate debt.
We are exposed to market risk under these arrangements due to
the possibility of interest rates on the credit facilities
falling below the rates on our interest rate swap agreements.
Credit risk under these arrangements is remote because the
counterparties to our interest rate swap agreements are major
financial institutions.
Guarantor Information On May 17, 2006,
we issued $500 million aggregate principal amount of
7.0% senior notes. The senior notes are unsecured
obligations and are fully and unconditionally guaranteed by
substantially all of our wholly-owned U.S. subsidiaries
other than our receivables securitization subsidiaries.
-13-
The following condensed consolidating financial statements
present the financial position, results of operations and cash
flows of Dean Foods (Parent), the subsidiary
guarantors of the senior notes and separately the combined
results of the subsidiaries that are not a party to the
guarantees. The non-guarantor subsidiaries reflect our foreign
subsidiary operations in addition to our three receivables
securitization subsidiaries. We do not allocate interest expense
from the receivables-backed facility to the three receivables
securitization subsidiaries. Therefore, the interest costs
related to this facility are reflected within the guarantor
financial information presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet as of March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,943
|
|
|
$
|
28,838
|
|
|
$
|
4,173
|
|
|
$
|
|
|
|
$
|
37,954
|
|
Receivables, net
|
|
|
|
|
|
|
23,110
|
|
|
|
780,842
|
|
|
|
|
|
|
|
803,952
|
|
Intercompany receivables
|
|
|
353,573
|
|
|
|
3,003,857
|
|
|
|
278,216
|
|
|
|
(3,635,646
|
)
|
|
|
|
|
Other current assets
|
|
|
116,964
|
|
|
|
455,425
|
|
|
|
10
|
|
|
|
|
|
|
|
572,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
475,480
|
|
|
|
3,511,230
|
|
|
|
1,063,241
|
|
|
|
(3,635,646
|
)
|
|
|
1,414,305
|
|
Property, plant and equipment, net
|
|
|
214
|
|
|
|
1,767,164
|
|
|
|
18,278
|
|
|
|
|
|
|
|
1,785,656
|
|
Goodwill
|
|
|
|
|
|
|
3,059,961
|
|
|
|
91
|
|
|
|
|
|
|
|
3,060,052
|
|
Identifiable intangible and other
assets
|
|
|
50,291
|
|
|
|
586,107
|
|
|
|
4
|
|
|
|
|
|
|
|
636,402
|
|
Investment in subsidiaries
|
|
|
6,752,808
|
|
|
|
|
|
|
|
|
|
|
|
(6,752,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,278,793
|
|
|
$
|
8,924,462
|
|
|
$
|
1,081,614
|
|
|
$
|
(10,388,454
|
)
|
|
$
|
6,896,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
58,886
|
|
|
$
|
782,696
|
|
|
$
|
322
|
|
|
$
|
|
|
|
$
|
841,904
|
|
Income taxes payable
|
|
|
41,396
|
|
|
|
(31,890
|
)
|
|
|
132
|
|
|
|
|
|
|
|
9,638
|
|
Intercompany notes
|
|
|
2,499,573
|
|
|
|
633,178
|
|
|
|
502,895
|
|
|
|
(3,635,646
|
)
|
|
|
|
|
Current portion of long-term debt
|
|
|
225,000
|
|
|
|
253,275
|
|
|
|
|
|
|
|
|
|
|
|
478,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,824,855
|
|
|
|
1,637,259
|
|
|
|
503,349
|
|
|
|
(3,635,646
|
)
|
|
|
1,329,817
|
|
Long-term debt
|
|
|
2,057,648
|
|
|
|
327,118
|
|
|
|
500,400
|
|
|
|
|
|
|
|
2,885,166
|
|
Other long-term liabilities
|
|
|
501,782
|
|
|
|
285,142
|
|
|
|
|
|
|
|
|
|
|
|
786,924
|
|
Total stockholders equity
|
|
|
1,894,508
|
|
|
|
6,674,943
|
|
|
|
77,865
|
|
|
|
(6,752,808
|
)
|
|
|
1,894,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,278,793
|
|
|
$
|
8,924,462
|
|
|
$
|
1,081,614
|
|
|
$
|
(10,388,454
|
)
|
|
$
|
6,896,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet as of December 31,
2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
579
|
|
|
$
|
26,254
|
|
|
|
$4,307
|
|
|
$
|
|
|
|
$
|
31,140
|
|
Receivables, net
|
|
|
301
|
|
|
|
32,720
|
|
|
|
766,017
|
|
|
|
|
|
|
|
799,038
|
|
Intercompany receivables
|
|
|
126,707
|
|
|
|
2,702,858
|
|
|
|
309,747
|
|
|
|
(3,139,312
|
)
|
|
|
|
|
Other current assets
|
|
|
105,882
|
|
|
|
443,210
|
|
|
|
20
|
|
|
|
|
|
|
|
549,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
233,469
|
|
|
|
3,205,042
|
|
|
|
1,080,091
|
|
|
|
(3,139,312
|
)
|
|
|
1,379,290
|
|
Property, plant and equipment, net
|
|
|
608
|
|
|
|
1,767,734
|
|
|
|
18,565
|
|
|
|
|
|
|
|
1,786,907
|
|
Goodwill
|
|
|
|
|
|
|
2,943,048
|
|
|
|
91
|
|
|
|
|
|
|
|
2,943,139
|
|
Identifiable intangible and other
assets
|
|
|
54,410
|
|
|
|
586,443
|
|
|
|
4
|
|
|
|
|
|
|
|
640,857
|
|
Investment in subsidiaries
|
|
|
6,507,028
|
|
|
|
|
|
|
|
|
|
|
|
(6,507,028
|
)
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
19,980
|
|
|
|
|
|
|
|
19,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,795,515
|
|
|
$
|
8,502,267
|
|
|
|
$1,118,731
|
|
|
$
|
(9,646,340
|
)
|
|
$
|
6,770,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
39,077
|
|
|
$
|
782,507
|
|
|
|
$538
|
|
|
$
|
|
|
|
$
|
822,122
|
|
Income taxes payable
|
|
|
28,347
|
|
|
|
2,295
|
|
|
|
134
|
|
|
|
|
|
|
|
30,776
|
|
Intercompany notes
|
|
|
2,194,952
|
|
|
|
437,725
|
|
|
|
506,635
|
|
|
|
(3,139,312
|
)
|
|
|
|
|
Current portion of long-term debt
|
|
|
225,000
|
|
|
|
258,658
|
|
|
|
|
|
|
|
|
|
|
|
483,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,487,376
|
|
|
|
1,481,185
|
|
|
|
507,307
|
|
|
|
(3,139,312
|
)
|
|
|
1,336,556
|
|
Long-term debt
|
|
|
2,030,362
|
|
|
|
329,331
|
|
|
|
512,500
|
|
|
|
|
|
|
|
2,872,193
|
|
Other long-term liabilities
|
|
|
468,378
|
|
|
|
274,856
|
|
|
|
|
|
|
|
|
|
|
|
743,234
|
|
Liabilities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
8,791
|
|
|
|
|
|
|
|
8,791
|
|
Total stockholders equity
|
|
|
1,809,399
|
|
|
|
6,416,895
|
|
|
|
90,133
|
|
|
|
(6,507,028
|
)
|
|
|
1,809,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,795,515
|
|
|
$
|
8,502,267
|
|
|
|
$1,118,731
|
|
|
$
|
(9,646,340
|
)
|
|
$
|
6,770,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-15-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Income
|
|
|
|
for the Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
2,628,457
|
|
|
$
|
1,292
|
|
|
$
|
|
|
|
$
|
2,629,749
|
|
Cost of sales
|
|
|
|
|
|
|
1,941,495
|
|
|
|
979
|
|
|
|
|
|
|
|
1,942,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
686,962
|
|
|
|
313
|
|
|
|
|
|
|
|
687,275
|
|
Selling and distribution
|
|
|
|
|
|
|
415,495
|
|
|
|
140
|
|
|
|
|
|
|
|
415,635
|
|
General and administrative
|
|
|
1,402
|
|
|
|
109,402
|
|
|
|
908
|
|
|
|
|
|
|
|
111,712
|
|
Facility closing and
reorganization costs
|
|
|
|
|
|
|
5,775
|
|
|
|
|
|
|
|
|
|
|
|
5,775
|
|
Interest expense
|
|
|
33,691
|
|
|
|
18,503
|
|
|
|
47
|
|
|
|
|
|
|
|
52,241
|
|
Other (income) expense, net
|
|
|
378
|
|
|
|
(90
|
)
|
|
|
12
|
|
|
|
|
|
|
|
300
|
|
Income from subsidiaries
|
|
|
(137,083
|
)
|
|
|
|
|
|
|
|
|
|
|
137,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
101,612
|
|
|
|
137,877
|
|
|
|
(794
|
)
|
|
|
(137,083
|
)
|
|
|
101,612
|
|
Income taxes
|
|
|
38,409
|
|
|
|
52,019
|
|
|
|
(306
|
)
|
|
|
(51,713
|
)
|
|
|
38,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
63,203
|
|
|
|
85,858
|
|
|
|
(488
|
)
|
|
|
(85,370
|
)
|
|
|
63,203
|
|
Income from discontinued
operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
63,203
|
|
|
$
|
85,858
|
|
|
$
|
129
|
|
|
$
|
(85,370
|
)
|
|
$
|
63,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-16-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Income
|
|
|
|
for the Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
2,507,606
|
|
|
$
|
1,435
|
|
|
$
|
|
|
|
$
|
2,509,041
|
|
Cost of sales
|
|
|
|
|
|
|
1,856,590
|
|
|
|
1,105
|
|
|
|
|
|
|
|
1,857,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
651,016
|
|
|
|
330
|
|
|
|
|
|
|
|
651,346
|
|
Selling and distribution
|
|
|
|
|
|
|
404,983
|
|
|
|
162
|
|
|
|
|
|
|
|
405,145
|
|
General and administrative
|
|
|
1,577
|
|
|
|
101,892
|
|
|
|
233
|
|
|
|
|
|
|
|
103,702
|
|
Facility closing and
reorganization costs
|
|
|
|
|
|
|
4,402
|
|
|
|
|
|
|
|
|
|
|
|
4,402
|
|
Interest expense
|
|
|
28,927
|
|
|
|
18,682
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
47,536
|
|
Other (income) expense, net
|
|
|
(10
|
)
|
|
|
(235
|
)
|
|
|
345
|
|
|
|
|
|
|
|
100
|
|
Income from subsidiaries
|
|
|
(120,955
|
)
|
|
|
|
|
|
|
|
|
|
|
120,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
90,461
|
|
|
|
121,292
|
|
|
|
(337
|
)
|
|
|
(120,955
|
)
|
|
|
90,461
|
|
Income taxes
|
|
|
35,767
|
|
|
|
46,988
|
|
|
|
(133
|
)
|
|
|
(46,855
|
)
|
|
|
35,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
54,694
|
|
|
|
74,304
|
|
|
|
(204
|
)
|
|
|
(74,100
|
)
|
|
|
54,694
|
|
Loss from discontinued operations,
net of tax
|
|
|
|
|
|
|
|
|
|
|
(1,902
|
)
|
|
|
|
|
|
|
(1,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
54,694
|
|
|
$
|
74,304
|
|
|
$
|
(2,106
|
)
|
|
$
|
(74,100
|
)
|
|
$
|
52,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
for the Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
41,955
|
|
|
$
|
111,309
|
|
|
$
|
(15,256
|
)
|
|
$
|
138,008
|
|
Additions to property, plant and
equipment
|
|
|
(262
|
)
|
|
|
(51,431
|
)
|
|
|
(88
|
)
|
|
|
(51,781
|
)
|
Payments for acquisitions and
investments, net of cash received
|
|
|
(125,839
|
)
|
|
|
|
|
|
|
|
|
|
|
(125,839
|
)
|
Net proceeds from divestitures
|
|
|
10,706
|
|
|
|
|
|
|
|
|
|
|
|
10,706
|
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
1,550
|
|
|
|
|
|
|
|
1,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(115,395
|
)
|
|
|
(49,881
|
)
|
|
|
(88
|
)
|
|
|
(165,364
|
)
|
Proceeds from issuance of debt
|
|
|
83,500
|
|
|
|
|
|
|
|
|
|
|
|
83,500
|
|
Repayment of debt
|
|
|
(56,250
|
)
|
|
|
(4,825
|
)
|
|
|
(12,100
|
)
|
|
|
(73,175
|
)
|
Issuance of common stock, net of
expenses
|
|
|
18,026
|
|
|
|
|
|
|
|
|
|
|
|
18,026
|
|
Tax savings on share-based
compensation
|
|
|
5,819
|
|
|
|
|
|
|
|
|
|
|
|
5,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
51,095
|
|
|
|
(4,825
|
)
|
|
|
(12,100
|
)
|
|
|
34,170
|
|
Net change in intercompany balances
|
|
|
26,709
|
|
|
|
(54,019
|
)
|
|
|
27,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
4,364
|
|
|
|
2,584
|
|
|
|
(134
|
)
|
|
|
6,814
|
|
Cash and cash equivalents,
beginning of period
|
|
|
579
|
|
|
|
26,254
|
|
|
|
4,307
|
|
|
|
31,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
4,943
|
|
|
$
|
28,838
|
|
|
$
|
4,173
|
|
|
$
|
37,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-17-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
for the Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Entities
|
|
|
Subsidiaries
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
(25,826
|
)
|
|
$
|
(14,735
|
)
|
|
$
|
62,655
|
|
|
$
|
22,094
|
|
Additions to property, plant and
equipment
|
|
|
(439
|
)
|
|
|
(53,337
|
)
|
|
|
(1,213
|
)
|
|
|
(54,989
|
)
|
Payments for acquisitions and
investments, net of cash received
|
|
|
(9,760
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,760
|
)
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
1,836
|
|
|
|
|
|
|
|
1,836
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(5,509
|
)
|
|
|
(5,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(10,199
|
)
|
|
|
(51,501
|
)
|
|
|
(6,722
|
)
|
|
|
(68,422
|
)
|
Proceeds from issuance of debt
|
|
|
65,198
|
|
|
|
|
|
|
|
|
|
|
|
65,198
|
|
Repayment of debt
|
|
|
|
|
|
|
(2,280
|
)
|
|
|
(35,512
|
)
|
|
|
(37,792
|
)
|
Issuance of common stock, net of
expenses
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
|
|
5,440
|
|
Tax savings on share-based
compensation
|
|
|
22,680
|
|
|
|
|
|
|
|
|
|
|
|
22,680
|
|
Repurchase of common stock
|
|
|
(15,357
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,357
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
8,588
|
|
|
|
8,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
77,961
|
|
|
|
(2,280
|
)
|
|
|
(26,924
|
)
|
|
|
48,757
|
|
Net change in intercompany balances
|
|
|
(42,134
|
)
|
|
|
71,898
|
|
|
|
(29,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
(198
|
)
|
|
|
3,382
|
|
|
|
(755
|
)
|
|
|
2,429
|
|
Cash and cash equivalents,
beginning of period
|
|
|
250
|
|
|
|
18,677
|
|
|
|
5,529
|
|
|
|
24,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
52
|
|
|
$
|
22,059
|
|
|
$
|
4,774
|
|
|
$
|
26,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Share-Based
Compensation
|
Stock Options The following table summarizes
stock option activity during the first three months of 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Value
|
|
|
Options outstanding at
December 31, 2006
|
|
|
15,322,398
|
|
|
$
|
23.09
|
|
|
|
|
|
|
|
|
|
Options granted during the first
three months
|
|
|
2,020,175
|
|
|
|
44.28
|
|
|
|
|
|
|
|
|
|
Options canceled or forfeited
during the first three months(1)
|
|
|
(51,696
|
)
|
|
|
31.66
|
|
|
|
|
|
|
|
|
|
Options exercised during the first
three months
|
|
|
(1,021,643
|
)
|
|
|
18.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
March 31, 2007
|
|
|
16,269,234
|
|
|
|
25.96
|
|
|
|
6.40
|
|
|
$
|
338,121,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
March 31, 2007
|
|
|
11,697,456
|
|
|
|
20.76
|
|
|
|
5.35
|
|
|
|
303,921,185
|
|
|
|
|
(1) |
|
Pursuant to the terms of our stock option plans, options that
are canceled or forfeited become available for future grants. |
During the three months ended March 31, 2007 and 2006, we
recognized stock option expense of $5.1 million and
$5.0 million, respectively.
-18-
Stock Units The following table summarizes
stock unit activity during the first three months of 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
|
Directors
|
|
|
Total
|
|
|
Stock units outstanding at
December 31, 2006
|
|
|
774,261
|
|
|
|
69,676
|
|
|
|
843,937
|
|
Stock units issued during the
first three months
|
|
|
413,500
|
|
|
|
|
|
|
|
413,500
|
|
Shares issued during first three
months upon vesting of stock units
|
|
|
(122,089
|
)
|
|
|
|
|
|
|
(122,089
|
)
|
Stock units cancelled or forfeited
during the first three months(1)
|
|
|
(60,716
|
)
|
|
|
|
|
|
|
(60,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock units outstanding at
March 31, 2007
|
|
|
1,004,956
|
|
|
|
69,676
|
|
|
|
1,074,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair
value
|
|
$
|
38.21
|
|
|
$
|
35.47
|
|
|
$
|
38.07
|
|
|
|
|
(1) |
|
Pursuant to the terms of our stock unit plans, stock units that
are canceled or forfeited become available for future grants. |
During the three months ended March 31, 2007 and 2006, we
recognized stock unit expense of $3.2 million and
$4.4 million, respectively.
The stock option and stock unit information listed above has not
been adjusted for the special cash dividend that occurred on
April 2, 2007. See Note 13 for more information.
Basic earnings per share is based on the weighted average number
of common shares outstanding during each period. Diluted
earnings per share is based on the weighted average number of
common shares outstanding and the effect of all dilutive common
stock equivalents outstanding during each period.
The following table reconciles the numerators and denominators
used in the computations of both basic and diluted earnings per
share (EPS):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
Basic EPS computation:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
63,203
|
|
|
$
|
54,694
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Average common shares
|
|
|
128,889,506
|
|
|
|
135,170,111
|
|
Basic EPS from continuing
operations
|
|
$
|
0.49
|
|
|
$
|
0.40
|
|
Diluted EPS computation:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
63,203
|
|
|
$
|
54,694
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Average common shares
basic
|
|
|
128,889,506
|
|
|
|
135,170,111
|
|
Stock option conversion(1)
|
|
|
5,406,785
|
|
|
|
6,165,261
|
|
Stock units
|
|
|
225,176
|
|
|
|
1,074,617
|
|
|
|
|
|
|
|
|
|
|
Average common shares
diluted
|
|
|
134,521,467
|
|
|
|
142,409,989
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS from continuing
operations
|
|
$
|
0.47
|
|
|
$
|
0.38
|
|
|
|
|
(1) |
|
Stock option conversion excludes anti-dilutive shares of
1,121,578 and 2,359,901 at March 31, 2007 and 2006,
respectively. |
-19-
|
|
8.
|
Comprehensive
Income (Loss)
|
The components of comprehensive income (loss) are summarized
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Tax
|
|
|
Tax Benefit
|
|
|
Net
|
|
|
|
Income (Loss)
|
|
|
(Expense)
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Accumulated other comprehensive
income (loss), December 31, 2006
|
|
$
|
(75,156
|
)
|
|
$
|
29,369
|
|
|
$
|
(45,787
|
)
|
Cumulative translation adjustment
arising during period
|
|
|
(395
|
)
|
|
|
|
|
|
|
(395
|
)
|
Net change in fair value of
derivative instruments
|
|
|
(5,506
|
)
|
|
|
2,314
|
|
|
|
(3,192
|
)
|
Amounts reclassified to income
statement related to derivatives
|
|
|
(1,993
|
)
|
|
|
753
|
|
|
|
(1,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (loss), March 31, 2007
|
|
$
|
(83,050
|
)
|
|
$
|
32,436
|
|
|
$
|
(50,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
Employee
Retirement and Postretirement Benefits
|
Defined Benefit Plans The benefits under our
defined benefit plans are based on years of service and employee
compensation.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Components of net period cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
675
|
|
|
$
|
689
|
|
Interest cost
|
|
|
4,246
|
|
|
|
3,833
|
|
Expected return on plan assets
|
|
|
(4,681
|
)
|
|
|
(3,843
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
Unrecognized transition obligation
|
|
|
28
|
|
|
|
28
|
|
Prior service cost
|
|
|
211
|
|
|
|
156
|
|
Unrecognized net loss
|
|
|
719
|
|
|
|
931
|
|
Effect of settlement
|
|
|
|
|
|
|
584
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,198
|
|
|
$
|
2,378
|
|
|
|
|
|
|
|
|
|
|
We expect to contribute $23.2 million to our defined
benefit plans during 2007.
Postretirement Benefits Certain of our
subsidiaries provide healthcare benefits to certain retirees who
are covered under specific group contracts.
-20-
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Components of net period cost:
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
358
|
|
|
$
|
301
|
|
Interest cost
|
|
|
411
|
|
|
|
333
|
|
Amortizations:
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(17
|
)
|
|
|
(18
|
)
|
Unrecognized net loss
|
|
|
266
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,018
|
|
|
$
|
715
|
|
|
|
|
|
|
|
|
|
|
We expect to contribute $2.4 million to our postretirement
health plans during 2007.
|
|
10.
|
Facility
Closing And Reorganization Costs
|
We recorded net facility closing and reorganization costs of
$5.8 million and $4.4 million during the three months
ended March 31, 2007 and 2006, respectively.
The charges recorded during the first three months of 2007 are
primarily related to the realignment of our Dairy Groups
finance organization and the closing of Dairy Group facilities
in Akron, Ohio; Detroit, Michigan; and Union, New Jersey.
Activity for the first three months of 2007 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Charges at
|
|
|
|
|
|
|
|
|
Charges at
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
Charges
|
|
|
Payments
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction costs
|
|
$
|
4,322
|
|
|
$
|
3,502
|
|
|
$
|
(3,319
|
)
|
|
$
|
4,505
|
|
Shutdown costs
|
|
|
16
|
|
|
|
759
|
|
|
|
(760
|
)
|
|
|
15
|
|
Lease obligations after shutdown
|
|
|
1,313
|
|
|
|
267
|
|
|
|
(418
|
)
|
|
|
1,162
|
|
Other
|
|
|
216
|
|
|
|
442
|
|
|
|
(530
|
)
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
5,867
|
|
|
|
4,970
|
|
|
$
|
(5,027
|
)
|
|
$
|
5,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down of assets
|
|
|
|
|
|
|
805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charges
|
|
|
|
|
|
$
|
5,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The write-down of assets relate primarily to owned buildings,
land and equipment of those facilities identified for closure.
The assets are written down to their estimated fair value and
held for sale. The effect of suspending depreciation on the
buildings and equipment related to the closed facilities was not
significant. The carrying value of closed facilities at
March 31, 2007 was approximately $11.9 million. We are
marketing these properties for sale.
We expect to incur additional charges related to these
restructuring plans of approximately $12.9 million,
including approximately $7.4 million in work force
reduction costs and approximately $5.5 million in shutdown
and other costs. Approximately $12.0 million and $800,000
of these additional charges are expected to be completed by
December 31, 2007 and 2008, respectively.
-21-
The principal components of our continuing reorganization and
cost reduction efforts include the following:
|
|
|
|
|
Workforce reductions as a result of facility closings, facility
reorganizations and consolidation of administrative functions;
|
|
|
|
Shutdown costs, including those costs necessary to prepare
abandoned facilities for closure; and
|
|
|
|
Costs incurred after shutdown, such as lease obligations or
termination costs, utilities and property taxes.
|
We consider several factors when evaluating a potential facility
closure, including, among other things, the impact of such a
closure on our customers, the impact on production, distribution
and overhead costs, the investment required to complete any such
closure, and the impact on future investment decisions. Some
facility closures are pursued to improve our operating cost
structure, while others enable us to avoid unnecessary capital
expenditures, allowing us to more prudently invest our capital
expenditure dollars in our production facilities and better
serve our customers.
|
|
11.
|
Commitments
and Contingencies
|
Contingent Obligations Related to Divested
Operations We have divested several 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 we have established
adequate reserves 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 the former Dean Foods
Company, we purchased Dairy Farmers of Americas
(DFA) 33.8% interest in our Dairy Group. In
connection with that transaction, we entered into two agreements
with DFA designed to ensure that DFA has the opportunity to
continue to supply raw milk to certain of our facilities, or be
paid for the loss of that business. One such agreement is a
promissory note with a
20-year term
that bears interest based on the consumer price index. Interest
will not be paid in cash but will be added to the principal
amount of the note annually, up to a maximum principal amount of
$96 million. We may prepay the note in whole or in part at
any time, without penalty. The note will only become payable if
we materially breach or terminate one of our milk supply
agreements with DFA without renewal or replacement. Otherwise,
the note will expire in 2021, without any obligation to pay any
portion of the principal or interest. Payments made under the
note, if any, would be expensed as incurred. The other agreement
would require us to pay damages to DFA if we fail to offer DFA
the right to supply milk to certain facilities that we acquired
as part of the former Dean Foods after the pre-existing
agreements with certain other suppliers or producers expire. We
have not breached or terminated any of our milk supply
agreements with DFA.
Insurance We retain selected levels of
property and casualty risks, primarily related to employee
health care, workers compensation claims and other
casualty losses. Many of these potential losses are covered
under conventional insurance programs with third party carriers
with high deductible limits. In other areas, we are self-insured
with stop-loss coverages. These deductibles range from $350,000
for medical claims to $2.0 million for casualty claims. We
believe we have established adequate reserves to cover these
claims.
During 2005, we experienced operational disruptions in our Dairy
Group segment caused by Hurricanes Katrina and Rita. Our
insurance policies cover a portion of our business interruption
losses for 12 months following the restoration of our
property. During the first quarter of 2006, we settled certain
business interruption claims for $3.1 million. During the
first quarter of 2007, we settled the remaining claims for
$4.8 million. These amounts are recorded within cost of
sales.
Leases 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, have
lease terms ranging from one to 20 years. Certain of the
operating lease
-22-
agreements require the payment of additional rentals for
maintenance, along with additional rentals based on miles driven
or units produced. Certain leases require us to guarantee a
minimum value of the leased asset at the end of the lease. Our
maximum exposure under those guarantees is not a material amount.
We have entered into various contracts obligating us to purchase
minimum quantities of raw materials used in our production
processes, including organic soybeans and organic raw milk. We
enter into these contracts from time to time to ensure a
sufficient supply of raw ingredients. We expect to utilize all
quantities under the purchase commitments in the normal course
of business. In addition, we have contractual obligations to
purchase various services that are part of our production
process.
Litigation, Investigations and Audits We are
not party to, nor are our properties the subject of, any
material pending legal proceedings. However, we are parties from
time to time to certain claims, litigation, audits and
investigations. We believe that we have established adequate
reserves to satisfy any potential liability we may have under
all such claims, litigations, audits and investigations that are
currently pending. In our opinion, the settlement of any such
currently pending or threatened matter is not expected to have a
material adverse impact on our financial position, results of
operations or cash flows.
Two shareholder derivative complaints were filed in July and
October 2006 in the district court of Dallas County, Texas,
which alleged stock option backdating. The complaints named
certain current and former members of the Board of Directors and
certain current and former members of management. In response to
the litigation, a special litigation committee of our Board of
Directors was established in August 2006. The Committee,
consisting of independent board members not named in the
litigation, conducted its own independent review of our stock
option grants and the allegations made in the complaints and
determined that there were no fraudulent acts by management. The
derivative actions were settled in the first quarter of 2007.
The settlement resolves all claims and includes no finding of
wrongdoing on the part of any of the defendants and no cash
payment other than attorneys fees. The Company has agreed
to adoption and implementation of stock option grant procedures
that reflect developing best practices. The district court
approved the settlement and the actions were dismissed.
As previously announced, the staff of the SEC began an informal
inquiry into our historical stock option practices. On
May 7, 2007, the staff of the SEC notified us that the
informal inquiry was closed without any recommended enforcement
action.
We have two reportable segments: the Dairy Group and WhiteWave
Foods Company.
Our Dairy Group segment is our largest segment. It manufactures,
markets and distributes a wide variety of branded and private
label dairy case products, such as milk, cream, ice cream,
cultured dairy products and juices, to retailers, distributors,
foodservice outlets, schools and governmental entities across
the United States.
Our WhiteWave Foods Company segment manufactures, develops,
markets and sells a variety of nationally branded soy, dairy and
dairy-related products, such as
Silk®
soymilk and cultured soy products, Horizon
Organic®
dairy products, International
Delight®
coffee creamers, LAND
OLAKES®
creamer and fluid dairy products and Rachels
Organic®
dairy products. WhiteWave Foods Company sells its products to a
variety of customers, including grocery stores, club stores,
natural foods stores, mass merchandisers, convenience stores and
foodservice outlets. A portion of our WhiteWave Foods
Companys products are sold through the Dairy Groups
distribution network. Those sales, together with their related
costs, are included in WhiteWave Foods Company for segment
reporting purposes.
We evaluate the performance of our segments based on operating
profit or loss before gains and losses on the sale of assets,
facility closing and reorganization costs and foreign exchange
gains and losses. In addition, the expense related to
share-based compensation has not been allocated to our segments
and is reflected entirely within the caption
Corporate. Therefore, the measure of segment profit
or loss presented below is before such items. The accounting
policies of our segments are the same as those described in the
summary of
-23-
significant accounting policies set forth in Note 1 to our
2006 Consolidated Financial Statements contained in our 2006
Annual Report on
Form 10-K.
Due to changes in the Companys business strategy, primary
responsibility for the Hershey relationship has been moved into
the Dairy Group beginning in the first quarter of 2007. In
addition, we aligned the results related to the sales of certain
foodservice products between segments. In order to present
results on a comparable basis, segment results for 2006 have
been adjusted to reflect the way management evaluates
performance related to the Hershey relationship, as well as
certain foodservice relationships. These changes had no impact
on consolidated operating income.
The amounts in the following tables are obtained from reports
used by our executive management team and do not include any
allocated income taxes or management fees. There are no
significant non-cash items reported in segment profit or loss
other than depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
Dairy Group
|
|
$
|
2,307,062
|
|
|
$
|
2,207,660
|
|
WhiteWave Foods Company
|
|
|
322,687
|
|
|
|
301,381
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,629,749
|
|
|
$
|
2,509,041
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales:
|
|
|
|
|
|
|
|
|
Dairy Group
|
|
$
|
4,211
|
|
|
$
|
3,423
|
|
WhiteWave Foods Company
|
|
|
24,081
|
|
|
|
23,122
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,292
|
|
|
$
|
26,545
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Dairy Group
|
|
$
|
171,053
|
|
|
$
|
156,632
|
|
WhiteWave Foods Company
|
|
|
27,775
|
|
|
|
22,213
|
|
Corporate/Other
|
|
|
(38,900
|
)
|
|
|
(36,346
|
)
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
159,928
|
|
|
|
142,499
|
|
Facility closing and
reorganization costs
|
|
|
(5,775
|
)
|
|
|
(4,402
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,153
|
|
|
$
|
138,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Dairy Group
|
|
$
|
5,287,890
|
|
|
$
|
5,141,662
|
|
WhiteWave Foods Company
|
|
|
1,363,200
|
|
|
|
1,372,946
|
|
Corporate
|
|
|
245,325
|
|
|
|
235,585
|
|
Discontinued operations
|
|
|
|
|
|
|
19,980
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,896,415
|
|
|
$
|
6,770,173
|
|
|
|
|
|
|
|
|
|
|
Geographic Information Less than 1% of our
net sales and long-lived assets relate to operations outside of
the United States.
Significant Customers Our WhiteWave Foods
Company and Dairy Group segments each had a single customer that
represented greater than 10% of their net sales in the first
three months of 2007 and 2006.
-24-
Approximately 18.8% and 17.8% of our consolidated net sales in
the first quarter of 2007 and 2006, respectively, were to this
same customer.
Credit
Facilities and Special Cash Dividend
On April 2, 2007, we recapitalized our balance sheet
through the completion of $4.8 billion of new senior credit
facilities and the return of $1.94 billion to shareholders
of record on March 27, 2007, through a $15.00 per
share special cash dividend. The number and exercise price of
stock options and stock units outstanding at the time of the
special cash dividend were proportionately adjusted to maintain
their aggregate fair value before and after the special cash
dividend.
We entered into an amended and restated credit agreement that
consists of a combination of a $1.5 billion
5-year
senior secured revolving credit facility, a $1.5 billion
5-year
senior secured term loan A, and a $1.8 billion
7-year
senior secured term loan B. The proceeds of the new senior
credit facilities may be used:
|
|
|
|
|
To finance a special cash dividend to our shareholders;
|
|
|
|
To refinance the existing senior credit facilities;
|
|
|
|
To finance our working capital needs; and
|
|
|
|
For general corporate purposes of the Company and its
subsidiaries in the ordinary course of business, including
acquisitions.
|
The term loan A is payable in 12 consecutive quarterly
installments of:
|
|
|
|
|
$56.25 million in each of the first eight installments,
beginning on June 30, 2009 and ending on March 31,
2011 and;
|
|
|
|
$262.5 million in each of the next four installments,
beginning on June 30, 2011 and ending on April 2, 2012.
|
The term loan B will amortize 1% per year on a
quarterly basis, with any remaining principal balance due at
final maturity, April 2, 2014. The revolving credit
facility will be available for the issuance of up to
$350 million of letters of credit and up to
$150 million for swing line loans. No principal payments
are due on the new $1.5 billion revolving credit facility
until maturity on April 2, 2012. The new credit agreement
also requires mandatory principal prepayments upon the
occurrence of certain asset dispositions or recovery events.
The new credit facility contains various financial and other
restrictive covenants and requires that we comply with certain
financial ratios, including a maximum leverage ratio and a
minimum interest coverage ratio.
Our new credit agreement permits us to complete acquisitions
that meet the following conditions without obtaining prior
approval: (1) the acquired company is involved in the
manufacture, processing and distribution of food or packaging
products or any other line of business in which we are currently
engaged, (2) the net cash purchase price for any single
acquisition is not greater than $500 million, (3) we
acquire at least 51% of the acquired entity, (4) the
transaction is approved by the board of directors or
shareholders, as appropriate, of the target and (5) after
giving effect to such acquisition on a pro forma basis, we would
have been in compliance with all financial covenants. All other
acquisitions must be approved in advance by the required lenders.
The new senior credit facility contains limitations on liens,
investments and the incurrence of additional indebtedness, and
prohibits certain dispositions of property and conditionally
restricts certain payments, including dividends. The new senior
credit facility is secured by liens on substantially all of our
domestic assets including the assets of our subsidiaries, but
excluding the capital stock of Legacy Deans subsidiaries,
and the real property owned by Legacy Dean and its subsidiaries.
-25-
The new credit agreement contains standard default triggers,
including without limitation: failure to maintain compliance
with the financial and other covenants contained in the credit
agreement, default on certain of our other debt, a change in
control and certain other material adverse changes in our
business. The new credit agreement does not contain any default
triggers based on our credit rating.
Interest on the outstanding balances under the new senior credit
facilities is payable, at our election, at the Alternative Base
Rate plus a margin depending on our Leverage Ratio (as defined
in our new credit agreement) or LIBOR plus a margin depending on
our Leverage Ratio (as defined in our new credit agreement). The
Applicable Base Rate margin under our revolving credit and term
loan A facilities varies from zero to 75 basis points while
the Applicable LIBOR Rate margin varies from 62.5 to
175 basis points. The Applicable Base Rate margin under our
term loan facility B varies from 37.5 to 75 basis points
while the Applicable LIBOR Rate margin varies from 137.5 to
175 basis points.
As discussed in Note 5, consistent with our overall risk
management strategy, we entered into a $2.95 billion interest
rate swap at a fixed interest rate of 4.907%.
In consideration for the new revolving commitment, we are
required to pay a quarterly commitment fee on unused amounts of
the revolving credit facility that range from 12.5 to
37.5 basis points, depending on our Leverage Ratio (as
defined under our new credit agreement).
In addition, on April 2, 2007 we entered into an amendment
and restatement of our receivables facility which extended the
facility termination date from November 15, 2009 to
April 2, 2010. We believe that other modifications related
to this amendment will slightly increase our borrowing capacity
under the facility.
The pro forma effect of the recapitalization completed on
April 2, 2007 is included in the table below:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
|
As Reported
|
|
|
Pro forma
|
|
|
|
(In thousands)
|
|
|
Total debt
|
|
$
|
3,363,441
|
|
|
$
|
5,324,541
|
|
Stockholders equity (deficit)
|
|
|
1,894,508
|
|
|
|
(49,193
|
)
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
5,257,949
|
|
|
$
|
5,275,348
|
|
|
|
|
|
|
|
|
|
|
-26-
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Business
Overview
We are a leading food and beverage company. Our Dairy Group is
the largest processor and distributor of milk and various other
dairy products in the United States. The Dairy Group
manufactures and sells its products under a variety of local and
regional brand names and under private labels. Our WhiteWave
Foods Company segment manufactures, markets and sells a variety
of well known soy, dairy and dairy-related nationally branded
products.
Dairy Group Our Dairy Group segment is our
largest segment, with approximately 88% of our consolidated net
sales in the three months ended March 31, 2007. Our Dairy
Group manufactures, markets and distributes a wide variety of
branded and private label dairy case products, such as milk,
cream, ice cream, cultured dairy products and juices to
retailers, distributors, foodservice outlets, schools and
governmental entities across the United States. Due to the
perishable nature of the Dairy Groups products, our Dairy
Group delivers the majority of its products directly to its
customers stores in refrigerated trucks or trailers that
we own or lease. This form of delivery is called a direct
store delivery or DSD system and we believe we
have one of the most extensive refrigerated DSD systems in the
United States. The Dairy Group sells its products primarily on a
local or regional basis through its local and regional sales
forces, although some national customer relationships are
coordinated by the Dairy Groups corporate sales
department. Most of the Dairy Groups customers, including
its largest customer, purchase products from the Dairy Group
either by purchase order or pursuant to contracts that are
generally terminable at will by the customer.
WhiteWave Foods Company WhiteWave Foods
Company manufactures, develops, markets and sells a variety of
nationally-branded soy, dairy and dairy-related products, such
as Silk soymilk and cultured soy products; Horizon
Organic dairy and other products; International Delight
coffee creamers; LAND OLAKES creamers and fluid
dairy products and Rachels Organic dairy products.
WhiteWave Foods Company also sells The Organic
Cow®
organic dairy products; White
Wave®
and Tofu
Town®
branded tofu. We license the LAND OLAKES name
from third parties.
Developments
Since January 1, 2007
Credit Facilities and Special Cash Dividend
On April 2, 2007, we recapitalized our balance sheet
through the completion of $4.8 billion of new senior credit
facilities and the return of $1.94 billion to shareholders
of record on March 27, 2007, through a $15.00 per
share special cash dividend. We entered into an amended and
restated credit agreement that consists of a combination of a
$1.5 billion
5-year
secured revolving credit facility, a $1.5 billion
5-year
senior secured term loan A, and a $1.8 billion
7-year
senior secured term loan B. This will result in increased
interest expense in the future.
In addition, we entered into an amendment and restatement of our
receivables facility which extended the facility termination
date from November 15, 2009 to April 2, 2010. We
believe that other modifications related to this amendment will
slightly increase our borrowing capacity under the facility.
See Note 13 to our Condensed Consolidated Financial
Statements for more information.
Dairy Group Settlement In the first quarter
of 2007, we entered into a settlement agreement with a customer
to exit a supply agreement. In connection with the settlement,
we evaluated the realization of certain customer-related
intangible assets for potential impairment. The gain from
settlement of $7.2 million, net of an impairment charge,
was recognized in the first quarter. As the exiting of the
supply agreement impacts anticipated product volumes, the gain
will likely be offset by reduced operating income in future
periods.
Friendship Dairies On March 13, 2007,
our Dairy Group completed the acquisition of Friendship Dairies,
Inc., a manufacturer, marketer and distributor of cultured dairy
products primarily in the northeastern United States. This
transaction expanded our cultured dairy product capabilities and
added a strong regional brand. We paid approximately
$130 million, including transaction costs, for the purchase
of Friendship Dairies and funded the purchase price with
borrowings under our senior credit facility. We have not
completed a final allocation of the purchase price to the fair
values of Friendships assets and liabilities.
-27-
Discontinued
Operations
Iberian Operations Our former Iberian
operations included the manufacture and distribution of private
label and branded milk across Spain and Portugal. On
September 14, 2006, we completed the sale of our operations
in Spain. In connection with the sale of our operations in
Spain, we entered into an agreement to sell our Portuguese
operations (that comprised the remainder of our Iberian
operations) for approximately $11.4 million subject to
regulatory approvals and working capital settlements. We
completed the sale of our Portuguese operations in January 2007,
resulting in a gain of $617,000.
Our financial statements have been reclassified to give effect
to our Iberian operations as discontinued operations.
Facility
Closing and Reorganization Activities
We recorded a total of approximately $5.8 million in
facility closing and reorganization costs during the first three
months of 2007, related to the realignment of our Dairy
Groups finance organization and the closing of Dairy Group
facilities in Detroit, Michigan as well as other previously
announced plans. We expect to incur additional charges related
to these restructuring plans of approximately
$12.9 million. Approximately $12.0 million and
$800,000 of these additional charges are expected to be
completed by December 31, 2007 and 2008, respectively.
These charges include the following costs:
|
|
|
|
|
Workforce reductions as a result of facility closings, facility
reorganizations and consolidation of administrative functions;
|
|
|
|
Shutdown costs, including those costs necessary to prepare
abandoned facilities for closure; and
|
|
|
|
Costs incurred after shutdown, such as lease obligations or
termination costs, utilities and property taxes.
|
See Note 10 to our Condensed Consolidated Financial
Statements for more information regarding our facility closing
and reorganization activities.
Results
of Operations
The following table presents certain information concerning our
financial results, including information presented as a
percentage of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
2,629.8
|
|
|
|
100.0
|
%
|
|
$
|
2,509.0
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
1,942.5
|
|
|
|
73.9
|
|
|
|
1,857.7
|
|
|
|
74.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
687.3
|
|
|
|
26.1
|
|
|
|
651.3
|
|
|
|
26.0
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution
|
|
|
415.6
|
|
|
|
15.8
|
|
|
|
405.1
|
|
|
|
16.1
|
|
General and administrative
|
|
|
109.4
|
|
|
|
4.1
|
|
|
|
102.3
|
|
|
|
4.1
|
|
Amortization of intangibles
|
|
|
2.3
|
|
|
|
0.1
|
|
|
|
1.4
|
|
|
|
0.1
|
|
Facility closing and
reorganization costs
|
|
|
5.8
|
|
|
|
0.2
|
|
|
|
4.4
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
533.1
|
|
|
|
20.2
|
|
|
|
513.2
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
154.2
|
|
|
|
5.9
|
%
|
|
$
|
138.1
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-28-
Quarter
Ended March 31, 2007 Compared to Quarter Ended
March 31, 2006 Consolidated
Results
Net Sales Consolidated net sales increased
approximately $120.8 million to $2.63 billion during
the first quarter of 2007 from $2.51 billion in the first
quarter of 2006. Net sales by segment are shown in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31,
|
|
|
|
|
|
|
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
Dairy Group
|
|
$
|
2,307.1
|
|
|
$
|
2,207.7
|
|
|
$
|
99.4
|
|
|
|
4.5
|
%
|
WhiteWave Foods Company
|
|
|
322.7
|
|
|
|
301.3
|
|
|
|
21.4
|
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,629.8
|
|
|
$
|
2,509.0
|
|
|
$
|
120.8
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in net sales was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2007
|
|
|
|
vs Quarter ended March 31, 2006
|
|
|
|
|
|
|
Pricing, Volume
|
|
|
|
|
|
|
|
|
|
And Product
|
|
|
Total Increase/
|
|
|
|
Acquisitions
|
|
|
Mix Changes
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
Dairy Group
|
|
$
|
9.7
|
|
|
$
|
89.7
|
|
|
$
|
99.4
|
|
WhiteWave Foods Company
|
|
|
|
|
|
|
21.4
|
|
|
|
21.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9.7
|
|
|
$
|
111.1
|
|
|
$
|
120.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in net sales resulted from higher fluid milk volumes
combined with the pass-through of higher overall dairy commodity
costs in the Dairy Group, as well as continued sales growth at
WhiteWave Foods.
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, including costs to operate and
maintain our coolers and freezers. In addition, our Dairy Group
includes costs associated with transporting finished products
from our manufacturing facilities to our own distribution
facilities. Our cost of sales as a percentage of net sales
decreased slightly to 73.9% in the first quarter of 2007
compared to 74.0% in the first quarter of 2006. Higher raw milk
costs were partially offset by lower resin costs in the first
quarter of 2007. In addition, we recorded a favorable contract
settlement with a customer related to the loss of a portion of
that customers business.
Operating Costs and Expenses The dollar
amount of operating expenses increased approximately
$19.9 million during the first quarter of 2007 as compared
to the same period in the prior year. Our operating expense as a
percentage of net sales was 20.2% in the first quarter of 2007
compared to 20.5% during the first quarter of 2006. Operating
expenses increased primarily due to an increase in distribution
costs of $16.7 million resulting from higher freight costs
and increased volumes. In addition, general and administrative
expenses increased approximately $7.1 million due primarily
to higher salaries and benefits and professional services.
Facility closing and reorganization costs increased
$1.4 million due to charges related to the closing of
certain Dairy Group facilities and the reorganization of our
finance organization. These increases were offset by a decline
in marketing expenses of $6.2 million. See
Results by Segment for more information.
Operating Income Operating income during the
first quarter of 2007 was $154.2 million, an increase of
$16.1 million from the first quarter of 2006 operating
income of $138.1 million. Our operating margin in the first
quarter of 2007 was 5.9% compared to 5.5% in the first quarter
of 2006.
Other (Income) Expense Total other expense
increased to $52.5 million in the first quarter of 2007
compared to $47.6 million in the first quarter of 2006.
Interest expense increased to $52.2 million in the first
-29-
quarter of 2007 from $47.5 million in the first quarter of
2006 primarily due to higher average debt balances and higher
interest rates.
Income Taxes Income tax expense was recorded
at an effective rate of 37.8% in the first quarter of 2007
compared to 39.5% in the first quarter of 2006. Our tax rate
during the first quarter of 2007 was favorably impacted by
relatively higher stock option exercises in the first quarter of
2007 compared to the prior year. In addition, our tax rate
varies as the mix of earnings contributed by our various
business units changes.
Quarter
Ended March 31, 2007 Compared to Quarter Ended
March 31, 2006 Results by Segment
Dairy Group
The key performance indicators of our Dairy Group are sales
volumes, gross profit and operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
2,307.1
|
|
|
|
100.0
|
%
|
|
$
|
2,207.7
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
1,727.7
|
|
|
|
74.9
|
|
|
|
1,660.5
|
|
|
|
75.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
579.4
|
|
|
|
25.1
|
|
|
|
547.2
|
|
|
|
24.8
|
|
Operating costs and expenses
|
|
|
408.3
|
|
|
|
17.7
|
|
|
|
390.6
|
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
171.1
|
|
|
|
7.4
|
%
|
|
$
|
156.6
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Dairy Groups net sales increased approximately
$99.4 million, or 4.5%, in the first quarter of 2007 versus
the first quarter of 2006. The change in net sales from the
first quarter of 2006 to the first quarter of 2007 was due to
the following:
|
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
2006 Net sales
|
|
$
|
2,207.7
|
|
|
|
|
|
Acquisitions
|
|
|
9.7
|
|
|
|
0.4
|
%
|
Volume
|
|
|
21.5
|
|
|
|
1.0
|
|
Pricing and product mix
|
|
|
68.2
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
2007 Net sales
|
|
$
|
2,307.1
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
The Dairy Groups net sales increased primarily due to the
effects of higher selling prices resulting from the pass-through
of higher raw material prices. In general, we change the prices
that we charge our customers for fluid dairy products on a
monthly basis, as the costs of our raw materials fluctuate. The
Dairy Group generally has been effective at passing through the
changes in the prices of the underlying commodities. However,
industry estimates of the rising prices of raw skim milk for the
remainder of 2007 may make this more challenging.
A common industry measure for evaluating changes in fluid dairy
raw material costs is the blended Class I price, assuming
3.5% butterfat, often referred to as the Class I
mover. The following table sets forth the
-30-
average monthly component prices of the Class I mover and
average monthly Class II minimum prices for raw skim milk
and butterfat for the first quarter of 2007 compared to the
first quarter of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31*
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
Class I mover(1)(3)
|
|
$
|
13.74
|
|
|
$
|
13.08
|
|
|
|
5
|
%
|
Class I raw skim milk
mover(1)(3)
|
|
|
9.45
|
|
|
|
8.29
|
|
|
|
14
|
|
Class I butterfat mover(2)(3)
|
|
|
1.32
|
|
|
|
1.45
|
|
|
|
(9
|
)
|
Class II raw skim milk
minimum(1)(4)
|
|
|
8.80
|
|
|
|
8.02
|
|
|
|
10
|
|
Class II butterfat
minimum(2)(4)
|
|
|
1.34
|
|
|
|
1.37
|
|
|
|
(2
|
)
|
|
|
|
* |
|
The prices noted in this table are not the prices that we
actually pay. The federal order minimum prices at any given
location for Class I raw skim milk or Class I
butterfat are based on the Class I mover prices plus a
location differential. Class II prices noted in the table
are federal minimum prices, applicable at all locations. Our
actual cost also includes producer premiums, procurement costs
and other related charges that vary by location and vendor.
Please see Part I Item 1.
Business Government Regulation Milk
Industry Regulation in our Annual Report on
Form 10-K
for 2006, and Known Trends and
Uncertainties Prices of Raw Milk and Other
Inputs in this Quarterly Report for a more complete
description of raw milk pricing. |
|
(1) |
|
Prices are per hundredweight. |
|
(2) |
|
Prices are per pound. |
|
(3) |
|
We process Class I raw skim milk and butterfat into fluid
milk products. |
|
(4) |
|
We process Class II raw skim milk and butterfat into
products such as cottage cheese, creams and creamers, ice cream
and sour cream. |
Net sales were further increased by fluid milk volume increases
during the first quarter of 2007. Fluid milk volumes (which
represented approximately 71% of the Dairy Groups sales
volume during the quarter) increased approximately 2.0%. We
believe the increase in volumes is a result of the general rise
of healthier food and drink choices and the superior value and
service that we are able to offer our customers as the largest
dairy processor in the nation.
The Dairy Groups cost of sales as a percentage of net
sales decreased to 74.9% in the first quarter of 2007 compared
to 75.2% in the first quarter of 2006, as the increase in raw
milk costs compared to the prior year was partially offset by
lower resin costs of approximately $13.4 million. Resin is
the primary component used in our plastic bottles. Included in
cost of sales for the first quarter of 2007 and 2006 is
$4.8 million and $3.1 million, respectively, related
to the settlement of certain business interruption claims.
In addition, in the first quarter of 2007 we entered into a
settlement agreement with a customer to exit a supply agreement.
In connection with the settlement, we evaluated the realization
of certain customer-related intangible assets for potential
impairment. The gain from settlement of $7.2 million, net
of an impairment charge, was recognized in the first quarter. As
the exiting of the supply agreement impacts anticipated product
volumes, the gain will likely be offset by reduced operating
income in future periods.
The Dairy Groups operating expenses increased
approximately $17.7 million to $408.3 million during
the first quarter of 2007 compared to $390.6 million in the
first quarter of 2006, primarily due to a $15.2 million
increase in distribution costs. Distribution costs increased as
a result of increased freight, labor costs and volume. General
and administrative expenses increased approximately
$1.3 million primarily due to higher salaries and benefits.
WhiteWave Foods Company
The key performance indicators of WhiteWave Foods Company are
sales dollars, gross profit and operating income.
-31-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
322.7
|
|
|
|
100.0
|
%
|
|
$
|
301.3
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
214.5
|
|
|
|
66.5
|
|
|
|
196.8
|
|
|
|
65.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
108.2
|
|
|
|
33.5
|
|
|
|
104.5
|
|
|
|
34.7
|
|
Operating costs and expenses
|
|
|
80.4
|
|
|
|
24.9
|
|
|
|
82.3
|
|
|
|
27.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
27.8
|
|
|
|
8.6
|
%
|
|
$
|
22.2
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WhiteWave Foods Companys net sales increased by
$21.4 million, or 7.1%, in the first quarter of 2007 versus
the first quarter of 2006. The change in net sales from the
first quarter of 2006 to the first quarter of 2007 was due to
the following:
|
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
2006 Net sales
|
|
$
|
301.3
|
|
|
|
|
|
Volume
|
|
|
9.5
|
|
|
|
3.1
|
%
|
Pricing and product mix
|
|
|
11.9
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
2007 Net sales
|
|
$
|
322.7
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
The increase in net sales was driven by a combination of higher
volumes, higher pricing, and a mix shift to higher revenue
products. Volumes increased 3.1% driven by growth in our core
brands, while price increased principally in response to higher
raw material costs.
We are experiencing increasing competitive pressure from branded
and private label participants as the industry moves from a
supply shortage of organic milk to an oversupply situation. This
supply-demand imbalance in the organic milk market could exert
downward pricing pressure on the sale of our products.
Cost of sales as a percentage of net sales for WhiteWave Foods
Company increased to 66.5% in the first quarter of 2007 from
65.3% in the first quarter of 2006. Cost of sales dollars
increased $17.7 million primarily due to higher sales
volumes and higher commodity costs, principally organic milk.
Operating expenses decreased approximately $1.9 million in
the first quarter of 2007 compared to the same period in the
prior year primarily driven by a decrease in marketing expenses.
This decrease was partially offset by higher general and
administrative expenses due to higher amortization related to
our SAP operating software installed in 2006.
Liquidity
and Capital Resources
Historical
Cash Flow
During the first quarter of 2007, we met our working capital
needs with cash flow from operations.
Net cash provided by operating activities from continuing
operations was $138.0 million for the first quarter of 2007
as contrasted to $25.2 million for the same period in 2006,
an increase of $112.8 million. Net cash provided by
operating activities was primarily impacted by changes in
operating assets and liabilities, which improved approximately
$138.0 million in the first quarter of 2007 compared to the
first quarter of the prior year. The improvement primarily
relates to higher working capital needs in the first quarter of
2006 as well as a payment made in the first quarter of 2006 in
settlement of contractual obligations under a co-pack agreement
entered into prior to our acquisition of an entity.
Net cash used in investing activities from continuing operations
was $165.4 million in the first quarter of 2007 compared to
$62.9 million in the first quarter of 2006, an increase of
$102.5 million largely due to the Friendship Dairy
acquisition. Our capital expenditures totaled $51.8 million
in the first quarter of 2007
-32-
compared to $55.0 million in the first quarter of 2006. We
received net proceeds of approximately $10.7 million for
divestitures in the first quarter of 2007.
We borrowed a net amount of $10.3 million of debt in the
first quarter of 2007.
Debt
Obligations as of March 31, 2007
The table below summarizes our obligations for indebtedness and
purchase and lease obligations at March 31, 2007. See
Notes 5 and 13 to our Condensed Consolidated Financial
Statements for additional information regarding our indebtedness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Indebtedness,
Purchase &
|
|
|
|
|
4/1/07-
|
|
|
4/1/08-
|
|
|
4/1/09-
|
|
|
4/1/10-
|
|
|
4/1/11-
|
|
|
|
|
Lease Obligations(1)
|
|
Total
|
|
|
3/31/08
|
|
|
3/31/09
|
|
|
3/31/10
|
|
|
3/31/11
|
|
|
3/31/12
|
|
|
Thereafter
|
|
|
|
(In millions)
|
|
|
Senior credit facility(2)
|
|
$
|
1,784.5
|
|
|
$
|
225.0
|
|
|
$
|
637.5
|
|
|
$
|
922.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Dean Foods senior notes(3)
|
|
|
500.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500.0
|
|
Subsidiary senior notes(3)
|
|
|
600.0
|
|
|
|
250.0
|
|
|
|
|
|
|
|
200.0
|
|
|
|
|
|
|
|
|
|
|
|
150.0
|
|
Receivables-backed facility(2)
|
|
|
500.4
|
|
|
|
|
|
|
|
|
|
|
|
500.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations and other
|
|
|
7.4
|
|
|
|
3.2
|
|
|
|
1.3
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
1.5
|
|
Purchase obligations(4)
|
|
|
715.0
|
|
|
|
317.1
|
|
|
|
241.3
|
|
|
|
46.4
|
|
|
|
14.9
|
|
|
|
12.2
|
|
|
|
83.1
|
|
Operating leases
|
|
|
497.5
|
|
|
|
110.6
|
|
|
|
99.0
|
|
|
|
85.8
|
|
|
|
69.1
|
|
|
|
52.6
|
|
|
|
80.4
|
|
Interest payments(5)
|
|
|
725.6
|
|
|
|
185.5
|
|
|
|
164.8
|
|
|
|
81.0
|
|
|
|
45.3
|
|
|
|
45.4
|
|
|
|
203.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,330.4
|
|
|
$
|
1,091.4
|
|
|
$
|
1,143.9
|
|
|
$
|
1,836.1
|
|
|
$
|
129.8
|
|
|
$
|
110.6
|
|
|
$
|
1,018.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excluded from this table are estimated obligations accrued under
FIN 48 Accounting for Uncertainty in Income
Taxes as the timing of such payments cannot be reasonably
determined. |
|
(2) |
|
On April 2, 2007 we replaced the senior credit facility
with a new $4.8 billion senior credit facility, as well as
entered into an amendment and restatement of our
receivables-backed facility. See Note 13 for a description
of the repayment terms. |
|
(3) |
|
Represents face value. |
|
(4) |
|
Primarily represents commitments to purchase minimum quantities
of raw materials used in our production processes, including
organic soybeans and organic raw milk. We enter into these
contracts from time to time in an effort 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. |
|
(5) |
|
Includes fixed rate interest obligations, as well as interest on
our variable rate debt based on the average rates for the three
months ended March 31, 2007, and balances in effect at
March 31, 2007. Interest that may be due in the future on
the variable rate portion of our senior credit facility and
receivables backed-facility will vary based on the interest rate
in effect at the time and the borrowings outstanding at the time. |
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. Our pension plan assets
are primarily made up of equity and fixed income investments.
Changes made to the provisions of the plan may impact current
and future pension costs. Fluctuations in actual equity market
returns, as well as changes in general interest rates may result
in increased or decreased pension costs in future periods.
Pension costs may be
-33-
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 pension costs.
We expect to contribute approximately $23.2 million to our
defined benefit plans and approximately $2.4 million to our
postretirement health plans in 2007.
Other
Commitments and Contingencies
On December 21, 2001, in connection with our acquisition of
Legacy Dean, we issued a contingent, subordinated promissory
note to Dairy Farmers of America (DFA) in the
original principal amount of $40 million. DFA is our
primary supplier of raw milk, and the promissory note is
designed to ensure that DFA has the opportunity to continue to
supply raw milk to certain of our facilities until 2021, or be
paid for the loss of that business. The promissory note has a
20-year term
and bears interest based on the consumer price index. Interest
will not be paid in cash, but will be added to the principal
amount of the note annually, up to a maximum principal amount of
$96 million. We may prepay the note in whole or in part at
any time, without penalty. The note will only become payable if
we materially breach or terminate one of our milk supply
agreements with DFA without renewal or replacement. Otherwise,
the note will expire at the end of 20 years, without any
obligation to pay any portion of the principal or interest.
Payments we make under this note, if any, will be expensed as
incurred. We have not breached or terminated any of our milk
supply agreements with DFA.
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; and
|
|
|
|
Selected levels of property and casualty risks, primarily
related to employee health care, workers compensation
claims and other casualty losses.
|
See Note 11 to our Condensed Consolidated Financial
Statements for more information about our commitments and
contingent obligations.
Future
Capital Requirements
During 2007, we intend to invest a total of approximately
$250 million in capital expenditures primarily for our
existing manufacturing facilities and distribution capabilities.
We expect cash interest to be approximately $305 million to
$315 million based on current debt levels under our new
senior credit facility. Cash interest excludes amortization of
deferred financing fees and bond discounts. We expect cash taxes
to be approximately $115 million.
As a result of our recapitalization the portion of our long-term
debt due within the next 12 months totals
$271.2 million. We expect that cash flow from operations
together with availability under our new senior credit facility
will be sufficient to meet our anticipated future capital
requirements. As of May 4, 2007, approximately
$1.00 billion was available for future borrowings under new
senior credit facility.
Known
Trends and Uncertainties
Prices
of Raw Milk and Other Inputs
Dairy Group The primary raw material used in
our Dairy Group is raw milk (which contains both raw skim milk
and butterfat). The federal government and certain state
governments set minimum prices for raw milk, and those prices
are set on a monthly basis. 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
-34-
(such as hauling, field personnel, etc.). 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 sometimes within a region based on
supplier arrangements. However, in general, the overall change
in our raw milk costs can be linked to the change in federal
minimum prices.
Because our Class II products typically have a higher fat
content than that contained in raw milk, we also purchase bulk
cream for use in some of our Class II products. Bulk cream
is typically purchased based on a multiple of the AA butter
price on the Chicago Mercantile Exchange (CME).
Another significant raw material used by our Dairy Group is
resin, which is used to make plastic bottles. We purchase
approximately 27 million pounds of resin and bottles per
month. Resin is a petroleum-based product, and the price of
resin is subject to fluctuations based on changes in crude oil
prices. Our Dairy Group purchases approximately 4 million
gallons of diesel fuel per month to operate our extensive direct
store delivery system.
In general, our Dairy Group changes the prices that it charges
for Class I dairy products on a monthly basis, as the costs
of raw milk, packaging, fuel and other materials fluctuate.
Prices for some Class II products are also changed monthly
while others are changed from time to time as circumstances
warrant. However, there can be a lag between the time of a raw
material cost increase or decrease and a corresponding price
change to our customers, especially in the case of Class II
butterfat because Class II butterfat prices for each month
are not announced by the government until after the end of that
month. Also, in some cases we are competitively or contractually
constrained with the means and timing of implementing price
changes. These factors can cause volatility in our earnings. Our
sales and operating profit margin fluctuate with the price of
our raw materials and other inputs.
During the first quarter of 2007, prices for raw skim milk
increased. We expect raw skim milk, butterfat and cream prices
to increase throughout the remainder of 2007. However, raw skim
milk, butterfat and cream prices are difficult to predict, and
we change our forecasts frequently based on current market
activity. The Dairy Group generally has been effective at
passing through the changes in the prices of the underlying
commodities. However, industry estimates of the rising prices of
raw skim milk for the remainder of 2007 may make this more
challenging.
During the first quarter of 2007, the prices of resin decreased
while diesel prices were largely unchanged. As resin supplies
have from time to time been insufficient to meet demand, we are
undertaking all reasonable measures in an attempt to secure an
adequate resin supply; however, there can be no assurance that
we will always be successful in our attempts. We expect prices
of both resin and diesel fuel to fluctuate throughout 2007.
WhiteWave Foods Company A significant raw
material used to manufacture products sold by WhiteWave Foods
Company is organic soybeans. We have entered into supply
agreements for organic soybeans, which we believe will meet our
needs for 2007. These agreements provide for pricing at fixed
levels. However, should our need for organic soybeans exceed the
quantity that we have under contract, or if the suppliers do not
perform under the contracts, we may have difficulty obtaining
sufficient supply, and the price we could be required to pay
could be significantly higher.
Significant raw materials used in our products include organic
raw milk and sugar. We obtain our supply of organic raw milk by
entering into one to two year agreements with farmers pursuant
to which the farmers agree to sell us specified quantities of
organic raw milk for fixed prices for the duration of the
agreement. We also source approximately 20% of our organic raw
milk supply from our own farms. In the past, the industry-wide
demand for organic raw milk has generally exceeded supply,
resulting in our inability to fully meet customer demand.
However, due to the recent industry efforts to grow the supply
of organic raw milk, there currently is a significant over
supply of organic raw milk which may increase competitive
pressure both from branded and private label participants,
resulting in downward pricing pressure on the sale of our
products, which may negatively impact our profitability. We have
entered into supply agreements for organic sugar, which we
believe will meet our needs in 2007.
-35-
Competitive
Environment
There has been significant consolidation in the retail grocery
industry in recent years, and this trend is continuing. As our
customer base consolidates, we expect competition to intensify
as we compete for the business of fewer customers. There can be
no assurance that we will be able to keep our existing
customers, or gain new customers. There are several large
regional grocery chains that have captive dairy operations. As
the consolidation of the grocery industry continues, we could
lose sales if any one or more of our existing customers were to
be sold to a chain with captive dairy operations.
Many of our retail customers have become increasingly price
sensitive in the current intensely competitive environment. Over
the past few years, we have been subject to a number of
competitive bidding situations in our Dairy Group, which reduced
our profitability on sales to several customers. We expect this
trend to continue. In bidding situations, we are subject to the
risk of losing certain customers altogether. The loss of any of
our largest customers could have a material adverse impact on
our financial results. We do not have contracts with many of our
largest customers, and most of the contracts that we do have are
generally terminable at will by the customer.
The supply-demand imbalance in the organic milk market has
increased competition in the marketplace as competitors attempt
to stimulate demand through lower retail prices and aggressive
distribution expansion. As a result, we could experience
downward pricing pressure on the sale of our organic products.
Both the difficult economic environment and the increased
competitive environment at the retail level have caused
competition to become increasingly intense at the processor
level.
Tax
Rate
Income tax expense was recorded at an effective rate of 37.8% in
the first quarter of 2007. Our tax rate during the first quarter
of 2007 was favorably impacted by relatively higher stock option
exercises in the first quarter of 2007 compared to the prior
year. We estimate the effective tax rate will be approximately
39% for the remainder of 2007. Changes in the relative
profitability of our operating segments, as well as changes to
federal and state tax laws may cause the rate to change from
historical rates.
See Part II Item 1A Risk
Factors for a description of various other risks and
uncertainties concerning our business.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Fluctuations
In order to reduce the volatility of earnings that arises from
changes in interest rates, we manage interest rate risk through
the use of interest rate swap agreements. These swap agreements
provide hedges for loans under our senior credit facility by
limiting or fixing the LIBOR interest rates specified in the
senior credit facility at the interest rates noted below until
the indicated expiration dates.
The following table summarizes our various interest rate
agreements at March 31, 2007:
|
|
|
|
|
|
|
Fixed Interest Rates
|
|
Expiration Date
|
|
Notional Amounts
|
|
|
|
|
|
(In millions)
|
|
|
4.07% to 4.27%
|
|
December 2010
|
|
$
|
450
|
|
4.907%
|
|
March 2008-March 2012
|
|
|
2,950
|
|
The following table summarizes our various interest rate
agreements at December 31, 2006:
|
|
|
|
|
|
|
|
|
Fixed Interest Rates
|
|
Expiration Date
|
|
|
Notional Amounts
|
|
|
|
|
|
|
(In millions)
|
|
|
4.81% to 4.84%
|
|
|
December 2007
|
|
|
$
|
500
|
|
4.07% to 4.27%
|
|
|
December 2010
|
|
|
|
450
|
|
During the three months ended March 31, 2007, we settled
the interest rate swaps expiring in 2007. Amounts included in
Other Comprehensive Income related to these swaps will be
recognized over the originally forecasted period.
-36-
We are exposed to market risk under these arrangements due to
the possibility of interest rates on our senior credit facility
falling below the rates on our interest rate derivative
agreements. We recorded $1.2 million of interest income,
net of taxes, during the first quarter of 2007 primarily as a
result of interest rates on our variable rate debt rising above
the
agreed-upon
interest rate on our existing swap agreements. Credit risk under
these arrangements is remote since the counterparties to our
interest rate derivative agreements are major financial
institutions.
A majority of our debt obligations are currently at variable
rates. We have performed a sensitivity analysis assuming a
hypothetical 10% adverse movement in interest rates. As of
March 31, 2007, the analysis indicated that such interest
rate movement would not have a material effect on our financial
position, results of operations or cash flows. However, actual
gains and losses in the future may differ materially from that
analysis based on changes in the timing and amount of interest
rate movement and our actual exposure and hedges.
Other
Market risk with respect to butterfat has not materially changed
from prior periods.
We currently do not have material exposure to foreign currency
risk as we do not have significant amounts of operating cash
flows denominated in foreign currencies.
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Item 4.
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Controls
and Procedures
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Controls
Evaluation and Related Certifications
We conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and
procedures (Disclosure Controls) as of the end
of the period covered by this quarterly report. The controls
evaluation was done under the supervision and with the
participation of management, including our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO).
Attached as exhibits to this quarterly report are certifications
of the CEO and the CFO, which are required in accordance with
Rule 13a-14
of the Exchange Act. This Controls and Procedures section
includes the information concerning the controls evaluation
referred to in the certifications and it should be read in
conjunction with the certifications for a more complete
understanding of the topics presented.
Definition
of Disclosure Controls
Disclosure Controls are controls and procedures designed to
reasonably assure that information required to be disclosed in
our reports filed with the Securities and Exchange Commission
(the SEC) is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms. Disclosure Controls are also designed to
reasonably assure that such information is accumulated and
communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure. Our Disclosure Controls include components of our
internal control over financial reporting, which consists of
control processes designed to provide reasonable assurance
regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with US
generally accepted accounting principles.
Limitations
on the Effectiveness of Controls
We do not expect that our Disclosure Controls or our internal
control over financial reporting will prevent all errors and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control systems objectives will be met. Further,
the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Controls can also
be
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circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Scope of
the Controls Evaluation
Our evaluations of our Disclosure Controls include reviews of
the controls objectives and design, our implementation of
the controls and the effect of the controls on the information
generated for use in our SEC filings. In the course of our
controls evaluations, we seek to identify data errors, controls
problems or acts of fraud and confirm that appropriate
corrective actions, including process improvements, are
undertaken. Many of the components of our Disclosure Controls
are evaluated on an ongoing basis by our Audit Services
department. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls, and to modify
them as necessary. Our intent is to maintain the Disclosure
Controls as dynamic systems that change as conditions warrant.
Changes
in Internal Control over Financial Reporting
During the third quarter of 2006, WhiteWave Foods Company
implemented SAP as its primary financial reporting and resource
planning system. SAP was implemented at all locations of
WhiteWave Foods Company in the United States except for the
manufacturing facilities located in City of Industry, CA,
Jacksonville, FL and Mt. Crawford, VA. WhiteWave Foods Company
will implement SAP at these facilities during 2007.
Conclusions
Based upon our most recent controls evaluation, our CEO and CFO
have concluded that as of the end of the period covered by this
quarterly report, our Disclosure Controls were effective at the
reasonable assurance level. Other than ongoing control
enhancements related to the implementation of SAP as discussed
above, there was no change in our internal control over
financial reporting in the quarter ended March 31, 2007
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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Part II
Other Information
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Item 1.
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Legal
Proceedings
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We are not party to, nor are our properties the subject of, any
material pending legal proceedings. However, we are party from
time to time to certain claims, litigation, audits and
investigations. We believe that we have established adequate
reserves to satisfy any potential liability we may have under
all such claims, litigations, audits and investigations that are
currently pending. In our opinion, the settlement of any such
currently pending or threatened matter is not expected to have a
material adverse impact on our financial position, results of
operations or cash flows.
Two shareholder derivative complaints were filed in July and
October 2006 in the district court of Dallas County, Texas,
which alleged stock option backdating. The complaints named
certain current and former members of the Board of Directors and
certain current and former members of management. In response to
the litigation, a special litigation committee of our Board of
Directors was established in August 2006. The committee,
consisting of independent board members not named in the
litigation, conducted its own independent review of our stock
option grants and the allegations made in the complaints and
determined that there were no fraudulent acts by management. The
derivative actions were settled in the first quarter of 2007.
The settlement resolves all claims and includes no finding of
wrongdoing on the part of any of the defendants and no cash
payment other than attorneys fees. The Company has agreed
to adoption and implementation of stock option grant procedures
that reflect developing best practices. The district court
approved the settlement and the actions were dismissed.
As previously announced, the staff of the SEC began an informal
inquiry into our historical stock option practices. On
May 7, 2007, the staff of the SEC notified us that the
informal inquiry was closed without any recommended enforcement
action.
Item 1A. Risk
Factors
This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act.
Statements that are not historical in nature are forward-looking
statements about our future that are not statements of
historical fact. Most of these statements are found in this
report under the following subheadings: Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Quantitative and Qualitative
Disclosures About Market Risk. In some cases, you can
identify these statements by terminology such as
may, should, could,
expects, seek to,
anticipates, plans,
believes, estimates,
intends, predicts, projects,
potential or continue or the negative of
such terms and other comparable terminology. These statements
are only predictions, and in evaluating those statements, you
should carefully consider the information above, including in
Known Trends and Uncertainties, as well
as the risks outlined below. Actual performance or results may
differ materially and adversely. Except as discussed below,
there have been no material changes from the risk factors
disclosed in our Annual Report on
Form 10-K
for the year ended December 31, 2006.
Availability
and Changes in Raw Material and Other Input Costs Can Adversely
Affect Us
Raw skim milk is the most significant raw material that we use
in our Dairy Group. Organic raw milk, organic soybeans and sugar
are significant inputs utilized by WhiteWave Foods Company. The
prices of these materials increase and decrease based on supply
and demand, and in some cases, governmental regulation. Weather
also affects the availability and pricing of these inputs. In
many cases we are able to adjust our pricing to reflect changes
in raw material costs. Volatility in the cost of our raw
materials can adversely affect our performance as price changes
often lag changes in costs. These lags tend to erode our profit
margins. Furthermore, cost increases may exceed the price
increases we are able to pass along to our customers. Extremely
high raw material costs also can put downward pressure on our
margins and our volumes. We expect certain raw material prices,
including raw skim milk prices, to increase in 2007.
In the recent past, the industry-wide demand for organic raw
milk has generally exceeded supply, resulting in our inability
to fully meet customer demand. However, due to the recent
industry efforts to grow
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the supply of organic raw milk, there currently is a significant
over supply of organic raw milk which may increase competitive
pressure both from branded and private label participants,
resulting in downward pricing pressure on the sale of our
products, which may negatively impact our profitability.
Because our Dairy Group delivers the majority of its products
directly to customers through its direct store
delivery system, we are a large consumer of fuel.
Similarly, our WhiteWave Foods business is impacted by the costs
of petroleum-based products through the use of common carriers
in delivering their products. The Dairy Group utilizes a
significant amount of resin, which is the primary component used
in our plastic bottles. Resin supplies have from time to time
been insufficient to meet demand. Increases in fuel and resin
prices can adversely affect our results of operations. In
addition, a disruption in our ability to secure an adequate
resin supply could adversely affect our operations.
We
Have Substantial Debt and Other Financial Obligations and We May
Incur Even More Debt
We have substantial debt and other financial obligations and
significant unused borrowing capacity. See Liquidity and
Capital Resources.
We have pledged substantially all of our assets (including the
assets of our subsidiaries) to secure our indebtedness. Our debt
level and related debt service obligations:
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Require us to dedicate significant cash flow to the payment of
principal and interest on our debt which reduces the funds we
have available for other purposes,
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May limit our flexibility in planning for or reacting to changes
in our business and market conditions,
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Impose on us additional financial and operational restrictions,
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Expose us to interest rate risk since a portion of our debt
obligations are at variable rates, and
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Restrict our ability to fund acquisitions.
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Our ability to make scheduled payments on our debt and other
financial obligations depends on our financial and operating
performance. Our financial and operating performance is subject
to prevailing economic conditions and to financial, business and
other factors, some of which are beyond our control. A
significant increase in interest rates could adversely impact
our net income. If we do not comply with the financial and other
restrictive covenants under our credit facilities, we may
default under them. Upon default, our lenders could accelerate
the indebtedness under the facilities, foreclose against their
collateral or seek other remedies, which would jeopardize our
ability to continue our current operations. As a result of the
recapitalization of our balance sheet, which is more fully
described in Note 13 to our Condensed Consolidated
Financial Statements, we entered into $4.8 billion of new
senior credit facilities. This represents a significant increase
in leverage compared to recent years, which will intensify the
risks described above.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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As of March 31, 2007, approximately $218.7 million
remained available pursuant to the stock repurchase program
approved by our Board of Directors. The amount can be increased
by actions of our Board of Directors.
No stock has been repurchased during the period January 1,
2007 through May 4, 2007.
(a) Exhibits
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31
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.1
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Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
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31
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.2
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Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
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32
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.1
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Certification of Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
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32
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.2
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Certification of Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
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99
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Supplemental Financial Information
for Dean Holding Company (filed herewith)
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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.
DEAN FOODS COMPANY
Ronald L. McCrummen
Senior Vice President and Chief Accounting Officer
May 10, 2007
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