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 September 30, 2008
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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
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(I.R.S. employer
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incorporation or organization)
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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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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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 October 31, 2008, the number of shares outstanding of
each class of common stock was: 153,949,142
Common Stock, par value $.01
Part I
Financial Information
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Item 1.
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Financial
Statements
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DEAN
FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
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September 30,
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December 31,
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2008
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2007
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Assets
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Current assets:
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Cash and cash equivalents
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$
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24,720
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$
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32,555
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Receivables, net
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894,302
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913,074
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Income tax receivable
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17,885
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Inventories
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427,203
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379,773
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Deferred income taxes
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118,521
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128,841
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Prepaid expenses and other current assets
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60,786
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59,856
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Total current assets
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1,525,532
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1,531,984
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Property, plant and equipment, net
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1,821,800
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1,798,378
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Goodwill
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3,053,763
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3,017,746
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Identifiable intangible and other assets
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674,772
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685,248
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Total
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$
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7,075,867
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$
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7,033,356
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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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1,034,801
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$
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907,270
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Current portion of long-term debt
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336,282
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25,246
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Total current liabilities
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1,371,083
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932,516
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Long-term debt
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4,299,145
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5,247,105
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Deferred income taxes
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516,748
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482,212
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Other long-term liabilities
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270,097
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320,256
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Commitments and contingencies (Note 12)
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Stockholders equity:
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Preferred stock, none issued
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Common stock, 153,928,905 and 132,236,217 shares issued and
outstanding, with a par value of $0.01 per share
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1,539
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1,322
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Additional paid-in capital
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522,747
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70,214
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Retained earnings
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184,942
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67,533
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Accumulated other comprehensive loss
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(90,434
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)
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(87,802
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)
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Total stockholders equity
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618,794
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51,267
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Total
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$
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7,075,867
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$
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7,033,356
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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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Nine Months Ended
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September 30
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September 30
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2008
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2007
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2008
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2007
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Net sales
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$
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3,194,669
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$
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3,116,796
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$
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9,374,188
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$
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8,590,190
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Cost of sales
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2,462,949
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2,457,473
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7,214,574
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6,555,543
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Gross profit
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731,720
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659,323
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2,159,614
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2,034,647
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Operating costs and expenses:
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Selling and distribution
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468,474
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430,816
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1,368,086
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1,275,026
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General and administrative
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120,705
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103,098
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345,013
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312,911
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Amortization of intangibles
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1,767
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2,287
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5,049
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6,223
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Facility closing and reorganization costs
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8,960
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19,469
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16,370
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27,702
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Other operating loss
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347
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1,689
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Total operating costs and expenses
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599,906
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556,017
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1,734,518
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1,623,551
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Operating income
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131,814
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103,306
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425,096
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411,096
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Other (income) expense:
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Interest expense
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74,709
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89,657
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235,026
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244,384
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Other (income) expense, net
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(242
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)
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612
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515
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5,458
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Total other expense
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74,467
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90,269
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235,541
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249,842
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Income from continuing operations before income taxes
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57,347
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13,037
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189,555
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161,254
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Income taxes
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19,544
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6,520
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72,095
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63,357
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Income from continuing operations
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37,803
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6,517
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117,460
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97,897
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Income (loss) from discontinued operations, net of tax
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(51
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)
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(35
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)
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(51
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)
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821
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Net income
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$
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37,752
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$
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6,482
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$
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117,409
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$
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98,718
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Average common shares:
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Basic
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153,137,212
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130,671,408
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147,688,222
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129,866,142
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Diluted
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157,286,164
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137,669,254
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152,434,628
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137,068,051
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Basic earnings per common share:
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Income from continuing operations
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$
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0.25
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$
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0.05
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$
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0.80
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|
$
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0.75
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Income from discontinued operations
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|
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|
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|
|
|
|
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0.01
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|
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Net income
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$
|
0.25
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|
$
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0.05
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$
|
0.80
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$
|
0.76
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Diluted earnings per common share:
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Income from continuing operations
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$
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0.24
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|
$
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0.05
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|
$
|
0.77
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|
$
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0.71
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Income from discontinued operations
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|
|
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0.01
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Net income
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$
|
0.24
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|
$
|
0.05
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|
|
$
|
0.77
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|
|
$
|
0.72
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|
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|
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Cash dividend paid
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$
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$
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$
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$
|
15.00
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|
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|
|
|
|
|
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|
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|
See Notes to Condensed Consolidated Financial Statements.
-4-
DEAN
FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited)
(In thousands, except share data)
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Accumulated
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Additional
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Other
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Total
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Common Stock
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Paid-In
|
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Retained
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Comprehensive
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Stockholders
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Comprehensive
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Shares
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Amount
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Capital
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Earnings
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Income (Loss)
|
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Equity
|
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Income (Loss)
|
|
|
Balance, December 31, 2007
|
|
|
132,236,217
|
|
|
$
|
1,322
|
|
|
$
|
70,214
|
|
|
$
|
67,533
|
|
|
$
|
(87,802
|
)
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|
$
|
51,267
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|
|
|
|
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Issuance of common stock
|
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|
2,992,361
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|
|
|
30
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|
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|
26,604
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|
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|
|
|
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26,634
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|
|
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Share-based compensation expense
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|
|
|
|
|
|
|
|
|
26,639
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|
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|
|
26,639
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|
|
|
|
|
Public offering of equity securities
|
|
|
18,700,327
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|
|
|
187
|
|
|
|
399,290
|
|
|
|
|
|
|
|
|
|
|
|
399,477
|
|
|
|
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Net income
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|
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|
|
|
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|
|
|
|
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|
|
|
117,409
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|
|
|
|
|
|
|
117,409
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|
|
$
|
117,409
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|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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Change in fair value of derivative instruments, net of tax
benefit of $14,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,720
|
)
|
|
|
(21,720
|
)
|
|
|
(21,720
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)
|
Amounts reclassified to income statement related to hedging
activities, net of tax of $(12,720)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,199
|
|
|
|
21,199
|
|
|
|
21,199
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,111
|
)
|
|
|
(2,111
|
)
|
|
|
(2,111
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
114,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2008
|
|
|
153,928,905
|
|
|
$
|
1,539
|
|
|
$
|
522,747
|
|
|
$
|
184,942
|
|
|
$
|
(90,434
|
)
|
|
$
|
618,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
See Notes to Condensed Consolidated Financial Statements.
-5-
DEAN
FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
117,409
|
|
|
$
|
98,718
|
|
(Income) loss from discontinued operations
|
|
|
51
|
|
|
|
(821
|
)
|
Adjustments to reconcile net income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
177,726
|
|
|
|
174,185
|
|
Share-based compensation expense
|
|
|
26,639
|
|
|
|
27,188
|
|
Loss on disposition of assets
|
|
|
1,237
|
|
|
|
1,343
|
|
Write-down of impaired assets
|
|
|
9,398
|
|
|
|
6,318
|
|
Loss on divestitures of operations
|
|
|
|
|
|
|
1,688
|
|
Write-off of financing costs
|
|
|
|
|
|
|
13,545
|
|
Deferred income taxes
|
|
|
45,775
|
|
|
|
4,897
|
|
Other
|
|
|
(1,331
|
)
|
|
|
1,075
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
25,115
|
|
|
|
(136,329
|
)
|
Inventories
|
|
|
(38,965
|
)
|
|
|
(55,828
|
)
|
Prepaid expenses and other assets
|
|
|
7,268
|
|
|
|
13,349
|
|
Accounts payable and accrued expenses
|
|
|
67,618
|
|
|
|
121,168
|
|
Income taxes payable/receivable
|
|
|
20,783
|
|
|
|
(49,807
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
458,723
|
|
|
|
220,689
|
|
Net cash used in discontinued operations
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
458,260
|
|
|
|
220,689
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments for property, plant and equipment
|
|
|
(171,008
|
)
|
|
|
(165,192
|
)
|
Payments for acquisitions and investments, net of cash received
|
|
|
(75,200
|
)
|
|
|
(131,689
|
)
|
Net proceeds from divestitures
|
|
|
|
|
|
|
12,169
|
|
Proceeds from sale of fixed assets
|
|
|
7,121
|
|
|
|
11,831
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(239,087
|
)
|
|
|
(272,881
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of debt
|
|
|
|
|
|
|
1,912,500
|
|
Repayment of debt
|
|
|
(27,741
|
)
|
|
|
(327,804
|
)
|
Net proceeds from (payments for) revolver and receivables-backed
facility
|
|
|
(625,378
|
)
|
|
|
413,100
|
|
Payments of financing costs
|
|
|
|
|
|
|
(31,281
|
)
|
Issuance of common stock
|
|
|
418,746
|
|
|
|
27,752
|
|
Payment of special cash dividend
|
|
|
|
|
|
|
(1,942,738
|
)
|
Tax savings on share-based compensation
|
|
|
7,365
|
|
|
|
14,529
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(227,008
|
)
|
|
|
66,058
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(7,835
|
)
|
|
|
13,866
|
|
Cash and cash equivalents, beginning of period
|
|
|
32,555
|
|
|
|
31,140
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
24,720
|
|
|
$
|
45,006
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
-6-
DEAN
FOODS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Periods ended September 30, 2008 and 2007
(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 2007 Annual Report on
Form 10-K
for the year ended December 31, 2007. 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 September 30, 2008 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 Consolidated
Financial Statements contained in our 2007 Annual Report on
Form 10-K
(filed with the Securities and Exchange Commission on
February 28, 2008).
Effective January 1, 2008, we changed our presentation of
reportable segments to reflect changes in the way our chief
operating decision maker evaluates the performance of our
operations, develops strategy, and allocates capital resources.
Our reporting segments now consist of our DSD Dairy and
WhiteWave-Morningstar operations. Included in the
WhiteWave-Morningstar segment are the operations previously
included in our former WhiteWave reportable segment and our
Morningstar operations that were previously included in our
former Dairy Group segment. Our historical segment disclosures
have been recast to be consistent with our current presentation.
Unless otherwise indicated, references in this report to
we, us or our refer to Dean
Foods Company and its subsidiaries, taken as a whole.
Recently Adopted Accounting Pronouncements
The Financial Accounting Standards Board (FASB)
issued staff position
No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active (FSP
FAS 157-3)
in October 2008. FSP
FAS 157-3
clarifies the application of Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements (which we adopted effective January 1,
2008), in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not
active. FSP
FAS 157-3
was effective for us on September 30, 2008 for all
financial assets and liabilities recognized or disclosed at fair
value in our Condensed Consolidated Financial Statement on a
recurring basis (at least annually). The adoption of this
provision did not have a material impact on our Condensed
Consolidated Financial Statements.
Recently Issued Accounting Pronouncements The
FASB issued staff position
No. 157-2
(FSP FAS 157-2),
Effective Date of FASB Statement No. 157, in
February 2008. FSP
FAS 157-2
delays the effective date of SFAS No. 157, one year
for all non-financial assets and non-financial liabilities that
are not measured at fair value on a recurring basis. We do not
believe the adoption of this delayed provision will have a
material impact on our Condensed Consolidated Financial
Statements.
The FASB issued SFAS No. 141(R), Business
Combinations in December 2007. SFAS No. 141(R)
contains a number of major changes affecting the allocation of
the value of acquired assets and liabilities, including
requiring an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any noncontrolling
interest in the acquiree at their fair values on the acquisition
date, with goodwill being the excess value over the net
identifiable assets acquired. This standard also requires the
fair value measurement of certain other assets and liabilities
related to the acquisition such as contingencies and research
and development. In addition, acquisition-related costs must be
expensed as incurred. The provisions of
-7-
SFAS No. 141(R) apply only to acquisition transactions
completed in fiscal years beginning after December 15,
2008. However, in the fourth quarter, we may elect to write-off
deferred transaction costs related to transactions expected to
close subsequent to December 31, 2008. We are currently
evaluating what impact the adoption of this revised standard
will have on our future Condensed Consolidated Financial
Statements. This standard will become effective for us on
January 1, 2009.
The FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements in December
2007. SFAS No. 160 clarifies that a noncontrolling
interest in a subsidiary should be reported as equity in the
condensed consolidated financial statements. Consolidated net
income should include the net income for both the parent and the
noncontrolling interest with disclosure of both amounts on the
condensed consolidated statement of income. The calculation of
earnings per share will continue to be based on income amounts
attributable to the parent. We do not believe the adoption of
this standard will have a material impact on our Condensed
Consolidated Financial Statements. This standard will become
effective for us on January 1, 2009.
The FASB issued SFAS No. 161, Disclosure About
Derivative Instruments and Hedging Activities an
amendment of FASB Statement No. 133 in March 2008.
SFAS No. 161 requires enhanced disclosures about an
entitys derivative and hedging activities and thereby
improves the transparency of financial reporting. We do not
believe the adoption of this standard will have a material
impact on our Condensed Consolidated Financial Statements. This
standard will become effective for us on January 1, 2009.
The FASB issued SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles in May 2008.
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be
used in the preparation of financial statements.
SFAS No. 162 is effective 60 days following the
SECs approval of the Public Company Accounting Oversight
Board (PCAOB) amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles . We do not
believe the adoption of this standard will have a material
impact on our Condensed Consolidated Financial Statements.
For the nine months ended September 30, 2008, our DSD Dairy
segments acquisition activities totaled approximately
$75 million, including transaction costs. These activities
included purchases of the following:
|
|
|
|
|
On January 9, 2008, a milk, cottage cheese and sour cream
products manufacturing facility in Le Mars, Iowa.
|
|
|
|
On February 21, 2008, a fluid dairy manufacturing facility
in Richmond, Virginia.
|
|
|
|
On April 7, 2008, a fluid dairy business in Atlanta,
Georgia.
|
|
|
|
On September 22, 2008, an ice cream manufacturing facility
in Decatur, Indiana.
|
These transactions were funded with borrowings under our senior
credit facility. The assets acquired and liabilities assumed in
these acquisitions are recorded at their estimated fair values
at the date of acquisition. The fair values are subject to
refinement as we complete our analyses relative to the fair
values at the respective acquisition dates. These analyses have
not been completed as of September 30, 2008. The pro forma
impact of these acquisitions, in the aggregate, on consolidated
net earnings would not have materially changed reported net
earnings.
-8-
Inventories at September 30, 2008 and December 31,
2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Raw materials and supplies
|
|
$
|
186,574
|
|
|
$
|
172,099
|
|
Finished goods
|
|
|
240,629
|
|
|
|
207,674
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
427,203
|
|
|
$
|
379,773
|
|
|
|
|
|
|
|
|
|
|
Changes in the carrying amount of goodwill for the nine months
ended September 30, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WhiteWave-
|
|
|
|
|
|
|
DSD Dairy
|
|
|
Morningstar
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2007
|
|
$
|
2,149,233
|
|
|
$
|
868,513
|
|
|
$
|
3,017,746
|
|
Acquisitions(1)
|
|
|
33,324
|
|
|
|
514
|
|
|
|
33,838
|
|
Purchase accounting adjustments
|
|
|
801
|
|
|
|
1,378
|
|
|
|
2,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
2,183,358
|
|
|
$
|
870,405
|
|
|
$
|
3,053,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have not completed a final allocation of the purchase price
to the fair value of assets acquired and liabilities assumed,
associated with the acquisitions completed during 2008. |
The gross carrying amount and accumulated amortization of our
intangibles other than goodwill as of September 30, 2008
and December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
517,516
|
|
|
$
|
|
|
|
$
|
517,516
|
|
|
$
|
517,756
|
|
|
$
|
|
|
|
$
|
517,756
|
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related and other
|
|
|
101,072
|
|
|
|
(32,951
|
)
|
|
|
68,121
|
|
|
|
98,273
|
|
|
|
(27,621
|
)
|
|
|
70,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
618,588
|
|
|
$
|
(32,951
|
)
|
|
$
|
585,637
|
|
|
$
|
616,029
|
|
|
$
|
(27,621
|
)
|
|
$
|
588,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on intangibles for the three months ended
September 30, 2008 and 2007 was $1.8 million and
$2.3 million, respectively. Amortization expense on
intangibles for the nine months ended September 30, 2008
and 2007 was $5.0 million and $6.2 million,
respectively. Estimated aggregate intangible amortization
expense for the next five years is as follows:
|
|
|
|
|
2008
|
|
$
|
6.8 million
|
|
2009
|
|
|
7.8 million
|
|
2010
|
|
|
7.6 million
|
|
2011
|
|
|
6.7 million
|
|
2012
|
|
|
6.5 million
|
|
-9-
The Internal Revenue Service concluded the examination of our
U.S. federal income tax returns for the years 2004 and 2005
during the third quarter of 2008. The IRS began examining our
2006 U.S. federal income tax return in the second quarter
of 2008 with field work scheduled for completion in the fourth
quarter of 2009. State income tax returns are generally subject
to examination for a period of three to five years after
filing. We have various state income tax returns in the process
of examination, appeals, or settlement. Our gross unrecognized
tax benefits, including accrued interest, decreased by
approximately $6 million during the nine months ended
September 30, 2008, primarily as a result of settlements of
tax authority examinations, adjustments to tax credit
carryforwards and the effects of state tax law changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
Amount
|
|
|
Interest
|
|
|
Amount
|
|
|
Interest
|
|
|
|
Outstanding
|
|
|
Rate
|
|
|
Outstanding
|
|
|
Rate
|
|
|
|
(In thousands)
|
|
|
Dean Foods Company debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility
|
|
$
|
3,273,000
|
|
|
|
5.16
|
%
|
|
$
|
3,836,800
|
|
|
|
6.44
|
%
|
Senior notes
|
|
|
498,375
|
|
|
|
7.00
|
|
|
|
498,258
|
|
|
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,771,375
|
|
|
|
|
|
|
|
4,335,058
|
|
|
|
|
|
Subsidiary debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
|
329,217
|
|
|
|
6.625-6.90
|
|
|
|
325,973
|
|
|
|
6.625-6.90
|
|
Receivables-backed facility
|
|
|
524,922
|
|
|
|
4.88
|
|
|
|
600,000
|
|
|
|
6.00
|
|
Capital lease obligations and other
|
|
|
9,913
|
|
|
|
|
|
|
|
11,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
864,052
|
|
|
|
|
|
|
|
937,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,635,427
|
|
|
|
|
|
|
|
5,272,351
|
|
|
|
|
|
Less current portion
|
|
|
(336,282
|
)
|
|
|
|
|
|
|
(25,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term portion
|
|
$
|
4,299,145
|
|
|
|
|
|
|
$
|
5,247,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility During the nine months
ended September 30, 2008, our senior credit facility
consisted 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. At September 30, 2008, there
were outstanding borrowings of $1.5 billion under the
senior secured term loan A and $1.77 billion under the
senior secured term loan B. There were no outstanding borrowings
under the senior secured revolving credit facility. Letters of
credit in the aggregate amount of $158.8 million were
issued but undrawn. At September 30, 2008, approximately
$1.34 billion was available for future borrowings under the
senior secured revolving credit facility, subject to the maximum
leverage and minimum interest coverage ratios and the
satisfaction of certain ordinary course conditions contained in
the credit agreement.
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, or $4.5 million
on a quarterly basis, with any remaining principal balance due
at final maturity on April 2, 2014. The senior secured
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 $1.5 billion senior secured revolving credit
facility until maturity
-10-
on April 2, 2012. The credit agreement also requires
mandatory principal prepayments upon the occurrence of certain
asset dispositions, recovery events, or as a result of exceeding
certain leverage limits.
Under the senior credit facility, we are required to maintain
certain financial covenants, including, but not limited to,
maximum leverage and minimum interest coverage ratios. As of
September 30, 2008, we were in compliance with all
covenants contained in this agreement.
Dean Foods Company 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 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 certain indebtedness, enter into sale-leaseback
transactions and engage in mergers, consolidations and sales of
all or substantially all of our assets. The outstanding balance
at September 30, 2008 was $498.4 million.
Subsidiary Senior Notes The former Dean Foods
Company (Legacy Dean) had certain senior notes
outstanding at the time of its acquisition, of which two remain
outstanding. The outstanding notes carry the following interest
rates and maturities:
|
|
|
|
|
$197.9 million ($200 million face value), at 6.625%
interest, maturing May 15, 2009; and
|
|
|
|
$131.3 million ($150 million face value), at 6.9%
interest, maturing October 15, 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. The subsidiary senior notes are not guaranteed by
Dean Foods Company or Legacy Deans wholly owned
subsidiaries.
Receivables-Backed Facility We have 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. On April 30, 2008, we
amended the facility to reflect the reallocation of commitments
among the financial institutions following the assignment of the
rights and obligations of one financial institution under the
facility to an existing financial institution. The
March 30, 2010 facility termination date remains unchanged.
During the first nine months of 2008, we made payments of
$75.1 million on this facility leaving a drawn balance of
$524.9 million at September 30, 2008. The
receivables-backed facility bears interest at a variable rate
based on the commercial paper yield plus an applicable margin as
defined in the agreement. The average interest rate on this
facility was 4.88% at September 30, 2008. Our ability to
re-borrow under this facility is subject to a borrowing base
formula. This facility had $75.1 million of availability at
September 30, 2008.
Capital Lease Obligations and Other Capital
lease obligations and other subsidiary debt includes various
promissory notes for financing current year property and
casualty insurance premiums, as well as 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.
-11-
The following table summarizes our various interest rate swap
agreements in effect as of September 30, 2008:
|
|
|
|
|
|
|
Fixed Interest Rates
|
|
Expiration Date
|
|
Notional Amounts
|
|
|
|
|
|
(In millions)
|
|
|
4.07% to 4.27%
|
|
December 2010
|
|
$
|
450
|
|
4.91%(1)
|
|
March 2009-2012
|
|
|
2,800
|
|
|
|
|
(1) |
|
The notional amount of the swap agreements decrease by
$500 million on March 31, 2009, $800 million on
March 31, 2010, and $250 million on March 31,
2011, and the balance on March 30, 2012. |
These swap agreements 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. There was no hedge ineffectiveness for the
three and nine months ended September 30, 2008 and 2007.
As of September 30, 2008 and December 31, 2007, our
derivative liability balances were:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Current derivative liability
|
|
$
|
44,850
|
|
|
$
|
24,750
|
|
Long-term derivative liability
|
|
|
39,309
|
|
|
|
57,278
|
|
|
|
|
|
|
|
|
|
|
Total derivative liability
|
|
$
|
84,159
|
|
|
$
|
82,028
|
|
|
|
|
|
|
|
|
|
|
The impact of our interest rate swaps reclassified from
accumulated other comprehensive income to interest expense (net
of taxes) was $10.4 million and $21.2 million during
the three and nine months ended September 30, 2008,
respectively. Based on current interest rates, we estimate that
$28.0 million of hedging activity will be reclassified as
interest expense within the next 12 months.
We are exposed to market risk under these arrangements due to
the possibility of interest rates on our senior credit facility
rising above the rates on our interest rate swap agreements.
Credit risk under these arrangements is believed to be remote as
the counterparties to our interest rate swap agreements are
major financial institutions. However, recently a number of
financial institutions similar to those that serve as
counterparties to our hedging arrangements have been adversely
affected by the global credit crisis and in some cases have been
unable to fulfill their debts and other obligations. If any of
the counterparties to our hedging arrangements become unable to
fulfill their obligations to us, we may lose the financial
benefits of these arrangements.
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, joint and
severally guaranteed by substantially all of our wholly-owned
U.S. subsidiaries other than our receivables securitization
subsidiaries.
-12-
The following condensed consolidating financial statements
present the financial position, results of operations and cash
flows of Dean Foods Company (Parent), the
wholly-owned subsidiary guarantors of the senior notes and
separately the combined results of the wholly-owned subsidiaries
that are not a party to the guarantees. The wholly-owned
non-guarantor subsidiaries reflect certain foreign and other
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 September 30,
2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
19,647
|
|
|
$
|
5,073
|
|
|
$
|
|
|
|
$
|
24,720
|
|
Receivables, net
|
|
|
655
|
|
|
|
12,782
|
|
|
|
880,865
|
|
|
|
|
|
|
|
894,302
|
|
Income tax receivable
|
|
|
(664
|
)
|
|
|
664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
427,203
|
|
|
|
|
|
|
|
|
|
|
|
427,203
|
|
Intercompany receivables
|
|
|
1,718,606
|
|
|
|
5,220,293
|
|
|
|
218,641
|
|
|
|
(7,157,540
|
)
|
|
|
|
|
Other current assets
|
|
|
99,689
|
|
|
|
79,544
|
|
|
|
74
|
|
|
|
|
|
|
|
179,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,818,286
|
|
|
|
5,760,133
|
|
|
|
1,104,653
|
|
|
|
(7,157,540
|
)
|
|
|
1,525,532
|
|
Property, plant and equipment, net
|
|
|
1,215
|
|
|
|
1,806,570
|
|
|
|
14,015
|
|
|
|
|
|
|
|
1,821,800
|
|
Goodwill
|
|
|
|
|
|
|
3,053,763
|
|
|
|
|
|
|
|
|
|
|
|
3,053,763
|
|
Identifiable intangible and other assets
|
|
|
59,772
|
|
|
|
613,939
|
|
|
|
1,061
|
|
|
|
|
|
|
|
674,772
|
|
Investment in subsidiaries
|
|
|
7,826,828
|
|
|
|
|
|
|
|
|
|
|
|
(7,826,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,706,101
|
|
|
$
|
11,234,405
|
|
|
$
|
1,119,729
|
|
|
$
|
(14,984,368
|
)
|
|
$
|
7,075,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
118,102
|
|
|
$
|
916,433
|
|
|
$
|
266
|
|
|
$
|
|
|
|
$
|
1,034,801
|
|
Intercompany notes
|
|
|
4,698,297
|
|
|
|
1,940,241
|
|
|
|
519,002
|
|
|
|
(7,157,540
|
)
|
|
|
|
|
Current portion of long-term debt
|
|
|
130,500
|
|
|
|
205,782
|
|
|
|
|
|
|
|
|
|
|
|
336,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,946,899
|
|
|
|
3,062,456
|
|
|
|
519,268
|
|
|
|
(7,157,540
|
)
|
|
|
1,371,083
|
|
Long-term debt
|
|
|
3,640,875
|
|
|
|
133,348
|
|
|
|
524,922
|
|
|
|
|
|
|
|
4,299,145
|
|
Other long-term liabilities
|
|
|
499,996
|
|
|
|
286,699
|
|
|
|
150
|
|
|
|
|
|
|
|
786,845
|
|
Total stockholders equity
|
|
|
618,331
|
|
|
|
7,751,902
|
|
|
|
75,389
|
|
|
|
(7,826,828
|
)
|
|
|
618,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,706,101
|
|
|
$
|
11,234,405
|
|
|
$
|
1,119,729
|
|
|
$
|
(14,984,368
|
)
|
|
$
|
7,075,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-13-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet as of December 31,
2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
601
|
|
|
$
|
26,557
|
|
|
$
|
5,397
|
|
|
$
|
|
|
|
$
|
32,555
|
|
Receivables, net
|
|
|
162
|
|
|
|
14,723
|
|
|
|
898,189
|
|
|
|
|
|
|
|
913,074
|
|
Income tax receivable
|
|
|
15,504
|
|
|
|
2,381
|
|
|
|
|
|
|
|
|
|
|
|
17,885
|
|
Inventories
|
|
|
|
|
|
|
379,773
|
|
|
|
|
|
|
|
|
|
|
|
379,773
|
|
Intercompany receivables
|
|
|
1,312,750
|
|
|
|
4,247,006
|
|
|
|
357,341
|
|
|
|
(5,917,097
|
)
|
|
|
|
|
Other current assets
|
|
|
109,844
|
|
|
|
78,843
|
|
|
|
10
|
|
|
|
|
|
|
|
188,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,438,861
|
|
|
|
4,749,283
|
|
|
|
1,260,937
|
|
|
|
(5,917,097
|
)
|
|
|
1,531,984
|
|
Property, plant and equipment, net
|
|
|
197
|
|
|
|
1,786,063
|
|
|
|
12,118
|
|
|
|
|
|
|
|
1,798,378
|
|
Goodwill
|
|
|
|
|
|
|
3,017,746
|
|
|
|
|
|
|
|
|
|
|
|
3,017,746
|
|
Identifiable intangible and other assets
|
|
|
69,971
|
|
|
|
614,218
|
|
|
|
1,059
|
|
|
|
|
|
|
|
685,248
|
|
Investment in subsidiaries
|
|
|
7,103,613
|
|
|
|
|
|
|
|
|
|
|
|
(7,103,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,612,642
|
|
|
$
|
10,167,310
|
|
|
$
|
1,274,114
|
|
|
$
|
(13,020,710
|
)
|
|
$
|
7,033,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
62,179
|
|
|
$
|
844,886
|
|
|
$
|
205
|
|
|
$
|
|
|
|
$
|
907,270
|
|
Other current liabilities
|
|
|
(232
|
)
|
|
|
441
|
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
Intercompany notes
|
|
|
3,652,553
|
|
|
|
1,670,913
|
|
|
|
593,631
|
|
|
|
(5,917,097
|
)
|
|
|
|
|
Current portion of long-term debt
|
|
|
18,000
|
|
|
|
7,246
|
|
|
|
|
|
|
|
|
|
|
|
25,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,732,500
|
|
|
|
2,523,486
|
|
|
|
593,627
|
|
|
|
(5,917,097
|
)
|
|
|
932,516
|
|
Long-term debt
|
|
|
4,317,059
|
|
|
|
330,046
|
|
|
|
600,000
|
|
|
|
|
|
|
|
5,247,105
|
|
Other long-term liabilities
|
|
|
511,816
|
|
|
|
290,302
|
|
|
|
350
|
|
|
|
|
|
|
|
802,468
|
|
Total stockholders equity
|
|
|
51,267
|
|
|
|
7,023,476
|
|
|
|
80,137
|
|
|
|
(7,103,613
|
)
|
|
|
51,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,612,642
|
|
|
$
|
10,167,310
|
|
|
$
|
1,274,114
|
|
|
$
|
(13,020,710
|
)
|
|
$
|
7,033,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-14-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
|
|
for the Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
3,190,458
|
|
|
$
|
4,211
|
|
|
$
|
|
|
|
$
|
3,194,669
|
|
Cost of sales
|
|
|
|
|
|
|
2,459,887
|
|
|
|
3,062
|
|
|
|
|
|
|
|
2,462,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
730,571
|
|
|
|
1,149
|
|
|
|
|
|
|
|
731,720
|
|
Selling and distribution
|
|
|
|
|
|
|
468,213
|
|
|
|
261
|
|
|
|
|
|
|
|
468,474
|
|
General, administrative and other
|
|
|
614
|
|
|
|
120,257
|
|
|
|
1,601
|
|
|
|
|
|
|
|
122,472
|
|
Facility closing, reorganization and other costs
|
|
|
|
|
|
|
8,960
|
|
|
|
|
|
|
|
|
|
|
|
8,960
|
|
Interest expense
|
|
|
67,699
|
|
|
|
6,866
|
|
|
|
144
|
|
|
|
|
|
|
|
74,709
|
|
Other (income) expense, net
|
|
|
|
|
|
|
157
|
|
|
|
(399
|
)
|
|
|
|
|
|
|
(242
|
)
|
Income from subsidiaries
|
|
|
(125,660
|
)
|
|
|
|
|
|
|
|
|
|
|
125,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
57,347
|
|
|
|
126,118
|
|
|
|
(458
|
)
|
|
|
(125,660
|
)
|
|
|
57,347
|
|
Income taxes
|
|
|
19,544
|
|
|
|
43,575
|
|
|
|
(290
|
)
|
|
|
(43,285
|
)
|
|
|
19,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
37,803
|
|
|
|
82,543
|
|
|
|
(168
|
)
|
|
|
(82,375
|
)
|
|
|
37,803
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
37,803
|
|
|
$
|
82,492
|
|
|
$
|
(168
|
)
|
|
$
|
(82,375
|
)
|
|
$
|
37,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
|
|
for the Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
3,113,479
|
|
|
$
|
3,317
|
|
|
$
|
|
|
|
$
|
3,116,796
|
|
Cost of sales
|
|
|
|
|
|
|
2,454,757
|
|
|
|
2,716
|
|
|
|
|
|
|
|
2,457,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
658,722
|
|
|
|
601
|
|
|
|
|
|
|
|
659,323
|
|
Selling and distribution
|
|
|
|
|
|
|
430,627
|
|
|
|
189
|
|
|
|
|
|
|
|
430,816
|
|
General, administrative and other
|
|
|
1,066
|
|
|
|
103,379
|
|
|
|
940
|
|
|
|
|
|
|
|
105,385
|
|
Facility closing, reorganization and other costs
|
|
|
346
|
|
|
|
19,470
|
|
|
|
|
|
|
|
|
|
|
|
19,816
|
|
Interest expense
|
|
|
74,559
|
|
|
|
14,870
|
|
|
|
228
|
|
|
|
|
|
|
|
89,657
|
|
Other (income) expense, net
|
|
|
750
|
|
|
|
488
|
|
|
|
(626
|
)
|
|
|
|
|
|
|
612
|
|
Income from subsidiaries
|
|
|
(89,758
|
)
|
|
|
|
|
|
|
|
|
|
|
89,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
13,037
|
|
|
|
89,888
|
|
|
|
(130
|
)
|
|
|
(89,758
|
)
|
|
|
13,037
|
|
Income taxes
|
|
|
6,520
|
|
|
|
35,343
|
|
|
|
(55
|
)
|
|
|
(35,288
|
)
|
|
|
6,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
6,517
|
|
|
|
54,545
|
|
|
|
(75
|
)
|
|
|
(54,470
|
)
|
|
|
6,517
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,517
|
|
|
$
|
54,545
|
|
|
$
|
(110
|
)
|
|
$
|
(54,470
|
)
|
|
$
|
6,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-15-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
|
|
for the Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
9,360,361
|
|
|
$
|
13,827
|
|
|
$
|
|
|
|
$
|
9,374,188
|
|
Cost of sales
|
|
|
|
|
|
|
7,203,839
|
|
|
|
10,735
|
|
|
|
|
|
|
|
7,214,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
2,156,522
|
|
|
|
3,092
|
|
|
|
|
|
|
|
2,159,614
|
|
Selling and distribution
|
|
|
|
|
|
|
1,367,345
|
|
|
|
741
|
|
|
|
|
|
|
|
1,368,086
|
|
General, administrative and other
|
|
|
1,755
|
|
|
|
344,907
|
|
|
|
3,400
|
|
|
|
|
|
|
|
350,062
|
|
Facility closing, reorganization and other costs
|
|
|
|
|
|
|
16,370
|
|
|
|
|
|
|
|
|
|
|
|
16,370
|
|
Interest expense
|
|
|
203,351
|
|
|
|
31,585
|
|
|
|
90
|
|
|
|
|
|
|
|
235,026
|
|
Other (income) expense, net
|
|
|
571
|
|
|
|
(558
|
)
|
|
|
502
|
|
|
|
|
|
|
|
515
|
|
Income from subsidiaries
|
|
|
(395,232
|
)
|
|
|
|
|
|
|
|
|
|
|
395,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
189,555
|
|
|
|
396,873
|
|
|
|
(1,641
|
)
|
|
|
(395,232
|
)
|
|
|
189,555
|
|
Income taxes
|
|
|
72,095
|
|
|
|
148,008
|
|
|
|
(532
|
)
|
|
|
(147,476
|
)
|
|
|
72,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
117,460
|
|
|
|
248,865
|
|
|
|
(1,109
|
)
|
|
|
(247,756
|
)
|
|
|
117,460
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
117,460
|
|
|
$
|
248,814
|
|
|
$
|
(1,109
|
)
|
|
$
|
(247,756
|
)
|
|
$
|
117,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income
|
|
|
|
for the Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
8,584,060
|
|
|
$
|
6,130
|
|
|
$
|
|
|
|
$
|
8,590,190
|
|
Cost of sales
|
|
|
|
|
|
|
6,550,700
|
|
|
|
4,843
|
|
|
|
|
|
|
|
6,555,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
2,033,360
|
|
|
|
1,287
|
|
|
|
|
|
|
|
2,034,647
|
|
Selling and distribution
|
|
|
|
|
|
|
1,274,558
|
|
|
|
468
|
|
|
|
|
|
|
|
1,275,026
|
|
General, administrative and other
|
|
|
3,926
|
|
|
|
312,462
|
|
|
|
2,746
|
|
|
|
|
|
|
|
319,134
|
|
Facility closing, reorganization and other costs
|
|
|
464
|
|
|
|
28,927
|
|
|
|
|
|
|
|
|
|
|
|
29,391
|
|
Interest expense
|
|
|
192,341
|
|
|
|
51,612
|
|
|
|
431
|
|
|
|
|
|
|
|
244,384
|
|
Other (income) expense, net
|
|
|
5,645
|
|
|
|
774
|
|
|
|
(961
|
)
|
|
|
|
|
|
|
5,458
|
|
Income from subsidiaries
|
|
|
(363,630
|
)
|
|
|
|
|
|
|
|
|
|
|
363,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
161,254
|
|
|
|
365,027
|
|
|
|
(1,397
|
)
|
|
|
(363,630
|
)
|
|
|
161,254
|
|
Income taxes
|
|
|
63,357
|
|
|
|
139,771
|
|
|
|
(531
|
)
|
|
|
(139,240
|
)
|
|
|
63,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
97,897
|
|
|
|
225,256
|
|
|
|
(866
|
)
|
|
|
(224,390
|
)
|
|
|
97,897
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
821
|
|
|
|
|
|
|
|
821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
97,897
|
|
|
$
|
225,256
|
|
|
$
|
(45
|
)
|
|
$
|
(224,390
|
)
|
|
$
|
98,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-16-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flows
|
|
|
|
for the Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(50,657
|
)
|
|
$
|
492,633
|
|
|
$
|
16,284
|
|
|
$
|
458,260
|
|
Additions to property, plant and equipment
|
|
|
(1,086
|
)
|
|
|
(167,131
|
)
|
|
|
(2,791
|
)
|
|
|
(171,008
|
)
|
Payments for acquisitions and investments, net of cash received
|
|
|
(75,200
|
)
|
|
|
|
|
|
|
|
|
|
|
(75,200
|
)
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
7,121
|
|
|
|
|
|
|
|
7,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(76,286
|
)
|
|
|
(160,010
|
)
|
|
|
(2,791
|
)
|
|
|
(239,087
|
)
|
Net repayment of debt
|
|
|
(13,500
|
)
|
|
|
(14,241
|
)
|
|
|
|
|
|
|
(27,741
|
)
|
Net repayment of revolver and receivables-backed facility
|
|
|
(550,300
|
)
|
|
|
|
|
|
|
(75,078
|
)
|
|
|
(625,378
|
)
|
Issuance of common stock
|
|
|
418,746
|
|
|
|
|
|
|
|
|
|
|
|
418,746
|
|
Tax savings on share-based compensation
|
|
|
7,365
|
|
|
|
|
|
|
|
|
|
|
|
7,365
|
|
Net change in intercompany balances
|
|
|
264,031
|
|
|
|
(325,292
|
)
|
|
|
61,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
126,342
|
|
|
|
(339,533
|
)
|
|
|
(13,817
|
)
|
|
|
(227,008
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
(601
|
)
|
|
|
(6,910
|
)
|
|
|
(324
|
)
|
|
|
(7,835
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
601
|
|
|
|
26,557
|
|
|
|
5,397
|
|
|
|
32,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
|
|
|
$
|
19,647
|
|
|
$
|
5,073
|
|
|
$
|
24,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows
|
|
|
|
for the Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Totals
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(136,388
|
)
|
|
$
|
540,190
|
|
|
$
|
(183,113
|
)
|
|
$
|
220,689
|
|
Additions to property, plant and equipment
|
|
|
(521
|
)
|
|
|
(164,410
|
)
|
|
|
(261
|
)
|
|
|
(165,192
|
)
|
Payments for acquisitions and investments, net of cash received
|
|
|
(131,689
|
)
|
|
|
|
|
|
|
|
|
|
|
(131,689
|
)
|
Net proceeds from divestitures
|
|
|
12,169
|
|
|
|
|
|
|
|
|
|
|
|
12,169
|
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
11,831
|
|
|
|
|
|
|
|
11,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(120,041
|
)
|
|
|
(152,579
|
)
|
|
|
(261
|
)
|
|
|
(272,881
|
)
|
Proceeds from issuance of debt
|
|
|
1,912,500
|
|
|
|
|
|
|
|
|
|
|
|
1,912,500
|
|
Repayment of debt
|
|
|
(65,250
|
)
|
|
|
(262,554
|
)
|
|
|
|
|
|
|
(327,804
|
)
|
Net proceeds from revolver and receivables-backed facility
|
|
|
325,600
|
|
|
|
|
|
|
|
87,500
|
|
|
|
413,100
|
|
Payment of financing costs
|
|
|
(31,281
|
)
|
|
|
|
|
|
|
|
|
|
|
(31,281
|
)
|
Issuance of common stock
|
|
|
27,752
|
|
|
|
|
|
|
|
|
|
|
|
27,752
|
|
Payment of special cash dividend
|
|
|
(1,942,738
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,942,738
|
)
|
Tax savings on share-based compensation
|
|
|
14,529
|
|
|
|
|
|
|
|
|
|
|
|
14,529
|
|
Net change in intercompany balances
|
|
|
22,173
|
|
|
|
(117,052
|
)
|
|
|
94,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
263,285
|
|
|
|
(379,606
|
)
|
|
|
182,379
|
|
|
|
66,058
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
6,856
|
|
|
|
8,005
|
|
|
|
(995
|
)
|
|
|
13,866
|
|
Cash and cash equivalents, beginning of period
|
|
|
579
|
|
|
|
26,254
|
|
|
|
4,307
|
|
|
|
31,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
7,435
|
|
|
$
|
34,259
|
|
|
$
|
3,312
|
|
|
$
|
45,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-17-
|
|
7.
|
Common
Stock and Share-Based Compensation
|
Public Offering of Equity Securities On
March 5, 2008, we issued and sold 18.7 million shares
of our common stock, $0.01 par value per share, in a public
offering pursuant to a registration statement on
Form S-3.
We received net proceeds of approximately $400 million from
the offering. The net proceeds from the offering were used to
reduce debt outstanding under the revolving portion of our
senior credit facility.
Stock Options The following table summarizes
stock option activity during the first nine months of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Value
|
|
|
Options outstanding at December 31, 2007
|
|
|
22,016,663
|
|
|
$
|
18.40
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
2,981,838
|
|
|
|
25.02
|
|
|
|
|
|
|
|
|
|
Options canceled or forfeited(1)
|
|
|
(1,029,979
|
)
|
|
|
22.33
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(3,484,287
|
)
|
|
|
12.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2008
|
|
|
20,484,235
|
|
|
|
20.23
|
|
|
|
6.05
|
|
|
$
|
99,086,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2008
|
|
|
14,160,197
|
|
|
|
17.26
|
|
|
|
4.95
|
|
|
|
98,777,485
|
|
|
|
|
(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 September 30, 2008 and 2007,
we recognized stock option expense of $5.9 million and
$5.8 million, respectively. During the nine months ended
September 30, 2008 and 2007, we recognized stock option
expense of $17.7 million and $17.3 million,
respectively.
Restricted Stock Units The following table
summarizes restricted stock unit (stock unit)
activity during the first nine months of 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees
|
|
|
Directors
|
|
|
Total
|
|
|
Stock units outstanding at December 31, 2007
|
|
|
1,140,152
|
|
|
|
78,863
|
|
|
|
1,219,015
|
|
Stock units issued
|
|
|
924,306
|
|
|
|
22,950
|
|
|
|
947,256
|
|
Shares issued upon vesting of stock units
|
|
|
(175,931
|
)
|
|
|
(30,132
|
)
|
|
|
(206,063
|
)
|
Stock units canceled or forfeited(1)
|
|
|
(105,106
|
)
|
|
|
|
|
|
|
(105,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock units outstanding at September 30, 2008
|
|
|
1,783,421
|
|
|
|
71,681
|
|
|
|
1,855,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$
|
26.70
|
|
|
$
|
21.24
|
|
|
$
|
26.53
|
|
|
|
|
(1) |
|
Pursuant to the terms of our stock unit plans, employees have
the option of forfeiting stock units to cover their minimum
statutory tax withholding when shares are issued. Stock units
that are canceled or forfeited become available for future
grants. |
During the three months ended September 30, 2008 and 2007,
we recognized stock unit expense of $3.0 million and
$2.3 million, respectively. During the nine months ended
September 30, 2008 and 2007, we recognized stock unit
expense of $8.9 million and $9.8 million, respectively.
-18-
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
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
Basic EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
37,803
|
|
|
$
|
6,517
|
|
|
$
|
117,460
|
|
|
$
|
97,897
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares
|
|
|
153,137,212
|
|
|
|
130,671,408
|
|
|
|
147,688,222
|
|
|
|
129,866,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS from continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.05
|
|
|
$
|
0.80
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
37,803
|
|
|
$
|
6,517
|
|
|
$
|
117,460
|
|
|
$
|
97,897
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares basic
|
|
|
153,137,212
|
|
|
|
130,671,408
|
|
|
|
147,688,222
|
|
|
|
129,866,142
|
|
Stock option conversion(1)
|
|
|
4,035,168
|
|
|
|
6,817,287
|
|
|
|
4,551,102
|
|
|
|
6,769,919
|
|
Stock units(2)
|
|
|
113,784
|
|
|
|
180,559
|
|
|
|
195,304
|
|
|
|
431,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares diluted
|
|
|
157,286,164
|
|
|
|
137,669,254
|
|
|
|
152,434,628
|
|
|
|
137,068,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS from continuing operations
|
|
$
|
0.24
|
|
|
$
|
0.05
|
|
|
$
|
0.77
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Anti-dilutive stock options excluded
|
|
|
9,980,380
|
|
|
|
3,478,484
|
|
|
|
9,967,473
|
|
|
|
2,467,057
|
|
(2) Anti-dilutive stock units excluded
|
|
|
561,365
|
|
|
|
98,666
|
|
|
|
956,632
|
|
|
|
11,581
|
|
-19-
|
|
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
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Components of net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
620
|
|
|
$
|
675
|
|
|
$
|
1,861
|
|
|
$
|
2,026
|
|
Interest cost
|
|
|
4,040
|
|
|
|
4,246
|
|
|
|
12,120
|
|
|
|
12,738
|
|
Expected return on plan assets
|
|
|
(4,796
|
)
|
|
|
(4,681
|
)
|
|
|
(14,389
|
)
|
|
|
(14,043
|
)
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized transition obligation
|
|
|
28
|
|
|
|
28
|
|
|
|
84
|
|
|
|
84
|
|
Prior service cost
|
|
|
222
|
|
|
|
211
|
|
|
|
668
|
|
|
|
632
|
|
Unrecognized net loss
|
|
|
510
|
|
|
|
719
|
|
|
|
1,529
|
|
|
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
624
|
|
|
$
|
1,198
|
|
|
$
|
1,873
|
|
|
$
|
3,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits Certain of our
subsidiaries provide health care benefits to certain retirees
who are covered under specific group contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
380
|
|
|
$
|
357
|
|
|
$
|
1,140
|
|
|
$
|
1,072
|
|
Interest cost
|
|
|
426
|
|
|
|
412
|
|
|
|
1,278
|
|
|
|
1,235
|
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(17
|
)
|
|
|
(17
|
)
|
|
|
(51
|
)
|
|
|
(51
|
)
|
Unrecognized net loss
|
|
|
156
|
|
|
|
266
|
|
|
|
467
|
|
|
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
945
|
|
|
$
|
1,018
|
|
|
$
|
2,834
|
|
|
$
|
3,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Facility
Closing And Reorganization Costs
|
We recorded net facility closing and reorganization costs of
$9.0 million and $19.5 million during the three months
ended September 30, 2008 and 2007, respectively, and $16.4
and $27.7 million during the nine months ended
September 30, 2008 and 2007, respectively. Those costs
included the following types of cash and non-cash charges:
|
|
|
|
|
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;
|
|
|
|
Costs incurred after shutdown, such as lease obligations or
termination costs, utilities and property taxes;
|
|
|
|
Costs associated with the centralization of certain finance and
transaction processing activities from local to regional
facilities; and
|
-20-
|
|
|
|
|
Write-downs of property, plant and equipment and other assets,
primarily for asset impairments as a result of the decision to
close a facility. The impairments relate primarily to owned
buildings, land and equipment at the facilities, which are
written down to their estimated fair value.
|
Approved plans within our multi-year initiatives and related
charges are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Closure of facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSD Dairy(1)
|
|
$
|
8,130
|
|
|
$
|
2,718
|
|
|
$
|
12,375
|
|
|
$
|
7,324
|
|
WhiteWave-Morningstar(2)
|
|
|
549
|
|
|
|
|
|
|
|
3,493
|
|
|
|
|
|
Workforce reductions within the DSD Dairy segment resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realignment of finance and transaction processing activities(3)
|
|
|
281
|
|
|
|
2,483
|
|
|
|
502
|
|
|
|
3,845
|
|
Management realignment(4)
|
|
|
|
|
|
|
8,268
|
|
|
|
|
|
|
|
10,533
|
|
Broad based reduction of facility and distribution personnel(5)
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,960
|
|
|
$
|
19,469
|
|
|
$
|
16,370
|
|
|
$
|
27,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Charges primarily relate to the closure of facilities in
Hickory, North Carolina; Denver, Colorado; Union, New Jersey;
Detroit, Michigan; Kalispell, Montana; and Akron, Ohio. We
expect to incur additional charges related to these facility
closures of $5.9 million, related to shutdown and other
costs. As we continue the evaluation of our supply chain, it is
likely that we will close additional facilities in the future. |
|
(2) |
|
Charges primarily relate to the closure of a facility in
Belleville, Pennsylvania. We expect to incur additional charges
related to this facility closure of $1.7 million, related
to shutdown and other costs. |
|
(3) |
|
In 2006, we began the centralization of certain finance and
transaction processing activities from local to regional
facilities. We have incurred $7.4 million of workforce
reduction costs since the inception of this initiative and
expect to incur $1.1 million of additional costs through
the end of 2009. We will continue to evaluate additional
opportunities for centralization of activities, which could
result in additional charges in the future. |
|
(4) |
|
In 2007, we realigned certain management positions within our
former Dairy Group segment to facilitate supply-chain focused
platforms. This resulted in the elimination of certain regional
and corporate office positions, including the former President
of the former Dairy Group segment. These positions will not be
replaced. As part of this initiative, we incurred
$10.6 million of workforce reduction costs,
$3.4 million of which was a non-cash charge resulting from
acceleration of vesting on share-based compensation. This
initiative was completed as of the year ended December 31,
2007. |
|
(5) |
|
In 2007, we approved a plan to reduce the former Dairy
Groups manufacturing and distribution workforce by
approximately
600-700
positions. The decision to reduce employment is part of our
multi-year productivity initiative to increase efficiency and
capability of the former Dairy Group operations. As part of this
initiative, we incurred $9.4 million of workforce reduction
costs, of which $6.0 million was recognized in the third
quarter of 2007, and the remaining $3.4 million in the
fourth quarter of 2007. This initiative was completed as of the
year ended December 31, 2007. |
-21-
Activity for the first nine months of 2008 with respect to
facility closing and reorganization costs is summarized below
and includes items expensed as incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
Charges at
|
|
|
|
|
|
|
|
|
Charges at
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Charges
|
|
|
Payments
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction costs
|
|
$
|
13,062
|
|
|
$
|
3,647
|
|
|
$
|
(12,215
|
)
|
|
$
|
4,494
|
|
Shutdown costs
|
|
|
19
|
|
|
|
2,200
|
|
|
|
(2,184
|
)
|
|
|
35
|
|
Lease obligations after shutdown
|
|
|
43
|
|
|
|
167
|
|
|
|
(195
|
)
|
|
|
15
|
|
Other
|
|
|
88
|
|
|
|
958
|
|
|
|
(1,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
13,212
|
|
|
|
6,972
|
|
|
$
|
(15,640
|
)
|
|
$
|
4,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down of assets(1)
|
|
|
|
|
|
|
9,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charges
|
|
|
|
|
|
$
|
16,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The write-down of assets relates primarily to owned buildings,
land and equipment of those facilities identified for closure.
The assets are written down to their estimated fair value. 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 September 30, 2008
was $15.7 million. We are marketing these properties for
sale. |
We are currently working through a multi-year initiative to
optimize our manufacturing and distribution capabilities. This
initiative will have multiple phases as we evaluate and modify
historical activities surrounding purchasing, support, and
decision-making infrastructure, supply chain, selling
organization, brand building, and product innovation. These
initiatives will require investments in people, systems, tools,
and facilities. As a direct result of these initiatives, over
the next several years, we will incur facility closing and
reorganization costs including:
|
|
|
|
|
One-time termination benefits to employees;
|
|
|
|
Write-down of operating assets prior to the end of their
respective economic useful lives;
|
|
|
|
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.
-22-
|
|
11.
|
Fair
Value Measurement
|
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands
disclosures about fair market value measurements.
SFAS No. 157 clarifies that fair value is an exit
price, representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a
market-based measurement that should be determined based on
assumptions that market participants would use in pricing an
asset or liability. As a basis for considering assumptions,
SFAS No. 157 establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair
value as follows:
|
|
|
|
|
Level 1 Quoted prices for identical instruments
in active markets.
|
|
|
|
Level 2 Quoted prices for similar instruments
in active markets, quoted prices for identical or similar
instruments in markets that are not active and model-derived
valuations, in which all significant inputs are observable in
active market.
|
|
|
|
Level 3 Unobservable inputs in which there is
little or no market data, which require the reporting entity to
develop its own assumptions.
|
In addition, SFAS No. 157 requires disclosures about
the use of fair value to measure assets and liabilities to
enable the assessment of inputs used to develop fair value
measures, and for unobservable inputs, to determine the effects
of the measurements on earnings.
Effective January 1, 2008, we partially adopted
SFAS No. 157 and have applied its provisions to
financial assets and liabilities that are measured at fair value
and non-financial assets and liabilities that are measured at
fair value on a recurring basis (at least annually). We have not
yet adopted SFAS No. 157 for non-financial assets and
liabilities, in accordance with FSP
FAS 157-2.
FSP
FAS 157-2
delays the effective date of SFAS No. 157 to
January 1, 2009, for all non-financial assets and
non-financial liabilities that are not measured at fair value on
a recurring basis.
We use certain cash flow hedging derivative instruments to
manage interest rate exposures on a portion of our debt. These
derivative instruments are measured at fair value using direct
observable swap rates at commonly quoted intervals for the full
term of the swap.
A summary of our cash flow hedging derivative assets and
liabilities measured at fair value on a recurring basis as of
September 30, 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
as of
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Cash flow hedging derivative liability
|
|
$
|
84,159
|
|
|
$
|
|
|
|
$
|
84,159
|
|
|
$
|
|
|
|
|
12.
|
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 that 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 Legacy Dean, we purchased
Dairy Farmers of Americas (DFA) interest in
our operations. 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
-23-
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
Legacy Dean 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 $500,000
for medical claims to $2.0 million for casualty claims, but
may vary higher or lower due to insurance market conditions and
risk. We believe that we have established adequate reserves to
cover these claims.
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 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. In general, 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 other than set forth below.
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.
We were named, among several defendants, in two purported class
action antitrust complaints filed on July 5, 2007. The
complaints were filed in the United States District Court for
the Middle District of Tennessee, Columbia Division, and allege
generally that we and others in the milk industry worked
together to limit the price Southeastern dairy farmers are paid
for their raw milk and to deny these farmers access to fluid
Grade A milk processing facilities (dairy farmer
actions). A third purported class action antitrust
complaint (retailer action) was filed on
August 9, 2007 in the United States District Court for the
Eastern District of Tennessee, Greenville Division. The
complaint in the retailer action was amended on March 28,
2008. The amended complaint alleges generally that we, either
acting alone or in conjunction with others in the milk industry,
lessened competition in the Southeastern United States for the
sale of processed fluid Grade A milk to retail outlets and other
customers, and that the defendants conduct also
artificially inflated retail prices for direct milk purchasers.
Four additional purported class action complaints were filed on
August 27, 2007, October 3, 2007, November 15,
2007 and February 13, 2008 in the United States District
Court for the Eastern District of Tennessee, Greenville
Division. The allegations in these complaints are similar to
those in the dairy farmer actions.
On January 7, 2008, a United States Judicial Panel on
Multidistrict Litigation transferred all of the pending cases to
the Eastern District of Tennessee, Greenville Division. On
April 1, 2008, the Eastern District Court ordered the
consolidation of the six dairy farmer actions, and ordered the
retailer action to be administratively consolidated with the
coordinated dairy farmer actions. A motion to dismiss the dairy
farmer actions was denied on May 20, 2008, and an amended
consolidated complaint was filed by the dairy farmer
-24-
plaintiffs on June 20, 2008. A motion to dismiss the
retailer action is currently pending before the Court. These
matters are currently in discovery and we intend to vigorously
defend them.
On January 18, 2008, our subsidiary, Kohler Mix
Specialties, LLC (Kohler), was named as defendant in
a civil complaint filed in the Superior Court, Judicial District
of Hartford. The plaintiff in the case is the Commissioner of
Environmental Protection of the State of Connecticut. The
complaint alleges generally that Kohler improperly discharged
wastewater in to the waters of the State of Connecticut, and
bypassed certain wastewater treatment equipment. The plaintiff
is seeking injunctive relief and civil penalties with respect to
the claims.
At this time, it is not possible to predict the ultimate outcome
of the matters set forth above.
|
|
13.
|
Segment,
Geographic and Customers Information
|
We currently have two reportable segments: DSD Dairy and
WhiteWave-Morningstar.
Our DSD Dairy segment is our largest segment with over 80
manufacturing facilities geographically located largely based on
local and regional customer needs and other market factors. It
manufactures, markets and distributes a wide variety of branded
and private-label dairy case products, including milk, creamers,
ice cream, juices and teas, to retailers, distributors,
foodservice outlets, educational institutions, and governmental
entities across the United States. Our direct store delivery or
DSD business is delivered through what we believe to
be one of the most extensive refrigerated DSD systems in the
United States.
Our WhiteWave-Morningstar segment consists of two platforms:
WhiteWave and Morningstar. Our WhiteWave platform
(WhiteWave) 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®
milk and other dairy products, International
Delight®
coffee creamers, LAND
OLAKES®
creamer and fluid dairy products and Rachels
Organic®
dairy products. Our Morningstar platform
(Morningstar) is one of the leading
U.S. manufacturers of private label cultured and extended
shelf life dairy products such as ice cream mix, sour and
whipped cream, yogurt and cottage cheese. Our
WhiteWave-Morningstar segment also sells The Organic
Cow®
organic dairy products. Our WhiteWave-Morningstar segment sells
its products to a variety of customers, including grocery
stores, club stores, natural foods stores, mass merchandisers,
convenience stores, drug stores, and foodservice outlets. The
majority of the WhiteWave and Morningstar products are delivered
through warehouse delivery systems.
We evaluate the performance of our segments based on sales and
operating profit or loss before gains and losses on the sale of
businesses, 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. Our Chief
Executive Officer is our chief operating decision maker. The
accounting policies of our segments are the same as those
described in the summary of significant accounting policies set
forth in Note 1 to our Consolidated Financial Statements
contained in our 2007 Annual Report on
Form 10-K.
Due to changes in our reportable segments as discussed in
Note 1 to our Condensed Consolidated Financial Statements,
segment results for the three and nine months ended
September 30, 2007 have been recast to present results on a
comparable basis, including the transfer of $334.4 million
of goodwill from the DSD Dairy segment to the
WhiteWave-Morningstar segment. These changes had no impact on
consolidated net sales or operating income.
-25-
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
|
|
|
Nine Months Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSD Dairy
|
|
$
|
2,523,357
|
|
|
$
|
2,498,634
|
|
|
$
|
7,432,072
|
|
|
$
|
6,851,486
|
|
WhiteWave-Morningstar
|
|
|
671,312
|
|
|
|
618,162
|
|
|
|
1,942,116
|
|
|
|
1,738,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,194,669
|
|
|
$
|
3,116,796
|
|
|
$
|
9,374,188
|
|
|
$
|
8,590,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSD Dairy
|
|
$
|
13,210
|
|
|
$
|
18,864
|
|
|
$
|
38,197
|
|
|
$
|
41,155
|
|
WhiteWave-Morningstar
|
|
|
72,561
|
|
|
|
61,871
|
|
|
|
204,971
|
|
|
|
172,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,771
|
|
|
$
|
80,735
|
|
|
$
|
243,168
|
|
|
$
|
213,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DSD Dairy
|
|
$
|
140,444
|
|
|
$
|
116,543
|
|
|
$
|
425,606
|
|
|
$
|
411,347
|
|
WhiteWave-Morningstar
|
|
|
41,321
|
|
|
|
43,062
|
|
|
|
136,012
|
|
|
|
144,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable segment operating income
|
|
|
181,765
|
|
|
|
159,605
|
|
|
|
561,618
|
|
|
|
555,411
|
|
Corporate
|
|
|
(40,991
|
)
|
|
|
(36,483
|
)
|
|
|
(120,152
|
)
|
|
|
(114,924
|
)
|
Facility closing, reorganization and other costs
|
|
|
(8,960
|
)
|
|
|
(19,816
|
)
|
|
|
(16,370
|
)
|
|
|
(29,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,814
|
|
|
$
|
103,306
|
|
|
$
|
425,096
|
|
|
$
|
411,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
DSD Dairy
|
|
$
|
4,776,181
|
|
|
$
|
4,750,747
|
|
WhiteWave-Morningstar
|
|
|
2,064,175
|
|
|
|
2,010,487
|
|
Corporate
|
|
|
235,511
|
|
|
|
272,122
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,075,867
|
|
|
$
|
7,033,356
|
|
|
|
|
|
|
|
|
|
|
Geographic Information Less than 1% of our
net sales and long-lived assets relate to operations outside of
the United States.
Significant Customers Our DSD Dairy and
WhiteWave-Morningstar segments each had a single customer that
represented greater than 10% of their net sales in the three and
nine months ended September 30, 2008 and 2007.
Approximately 18.6% and 16.9% of our consolidated net sales in
the three months ended September 30, 2008 and 2007,
respectively, were to that same customer. Approximately 18.4%
and 17.8% of our consolidated net sales in the nine months ended
September 30, 2008 and 2007, respectively, were to that
same customer.
-26-
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Cautionary
Statement Regarding Forward-Looking Statements
This Quarterly Report on
Form 10-Q
(the
Form 10-Q)
contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which are
subject to risks, uncertainties and assumptions that are
difficult to predict. Forward-looking statements are predictions
based on our current expectations and our projections about
future events, and are not statements of historical fact.
Forward-looking statements include statements concerning our
business strategy, among other things, including anticipated
trends and developments in and management plans for our business
and the markets in which we operate. In some cases, you can
identify these statements by forward-looking words, such as
estimate, expect,
anticipate, project, plan,
intend, believe, forecast,
foresee, likely, may,
should, goal, target,
might, will, could,
predict, and continue, the negative or
plural of these words and other comparable terminology. All
forward-looking statements included in this
Form 10-Q
are based upon information available to us as of the filing date
of this
Form 10-Q,
and we undertake no obligation to update any of these
forward-looking statements for any reason. You should not place
undue reliance on these forward-looking statements. These
forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, levels of activity, performance, or achievements to
differ materially from those expressed or implied by these
statements. These factors include the matters discussed in the
section entitled Part II
Item 1A Risk Factors in this
Form 10-Q,
Part I Item 1A Risk
Factors in our 2007 Annual Report on
Form 10-K,
and elsewhere in this
Form 10-Q.
You should carefully consider the risks and uncertainties
described under these sections.
Business
Overview
We are one of the leading food and beverage companies in the
United States. Our DSD Dairy segment is the largest processor
and distributor of milk and other dairy products in the country,
with products sold under more than 50 familiar local and
regional brands and a wide array of private labels. Our
WhiteWave-Morningstar segment markets and sells a variety of
nationally branded dairy and dairy-related products, such as
Silk®
soymilk and cultured soy products, Horizon
Organic®
milk and other dairy products, International
Delight®
coffee creamers, LAND
OLAKES®
creamers and other fluid dairy products. Our
WhiteWave-Morningstar segments Rachels
Organic®
dairy products brand is the second largest organic yogurt brand
in the United Kingdom. Additionally, our WhiteWave-Morningstar
segment markets and sells private label cultured and extended
shelf life dairy products through our Morningstar platform.
During 2007, we began aligning our leadership teams and strategy
around distinct supply chain and delivery channels. Effective
January 1, 2008, consistent with this direction, we
disaggregated the former Dairy Group segment into a DSD Dairy
fluid and ice cream platform and a Morningstar platform. The
Morningstar platform is now a part of our WhiteWave-Morningstar
segment.
DSD Dairy Our DSD Dairy segment is our
largest segment, with approximately 79% of our consolidated net
sales in the three and nine months ended September 30,
2008. The DSD Dairy segment manufactures, markets and
distributes a wide variety of branded and private label dairy
case products, including milk, creamers, ice cream, juices and
teas, to retailers, distributors, foodservice outlets,
educational institutions, and governmental entities across the
United States. Due to the perishable nature of its products, our
DSD Dairy segment delivers the majority of its products directly
to its customers locations in refrigerated trucks or
trailers that we own or lease. This form of delivery is called a
direct store delivery or DSD system. We
believe that our DSD Dairy segment has one of the most extensive
refrigerated DSD systems in the United States. The DSD Dairy
segment 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 DSD Dairy
segments corporate sales department. Our DSD Dairy segment
does not have contracts with many of its customers, including
its largest customers, and most of its existing contracts are
generally terminable at will by the customer.
WhiteWave-Morningstar Our
WhiteWave-Morningstar segment net sales are approximately 21% of
our consolidated net sales in the three and nine months ended
September 30, 2008. The WhiteWave-Morningstar 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 and other products,
-27-
International Delight coffee creamers, LAND
OLAKES creamers and fluid dairy products and
Rachels Organic dairy products. Our
WhiteWave-Morningstar segment also sells The Organic
Cow®
organic dairy products. We license the LAND OLAKES
name from a third party. With the addition of Morningstar, our
WhiteWave-Morningstar segment now includes private label
cultured and extended shelf life dairy products such as ice
cream mix, sour and whipped cream, yogurt and cottage cheese.
The WhiteWave-Morningstar segment sells its products to a
variety of customers, including grocery stores, club stores,
natural foods stores, mass merchandisers, convenience stores,
drug stores, and foodservice outlets. The WhiteWave-Morningstar
segment sells its products through its internal sales force and
through independent brokers. Our WhiteWave-Morningstar segment
does not have contracts with many of its customers, including
its largest customers, and most of its existing contracts are
generally terminable at will by the customer.
Recent
Developments
Developments
Since January 1, 2008
Hero/WhiteWave Joint Venture We have formed a
strategic joint venture with Hero Group (Hero),
producer of international fruit and infant nutrition brands,
that will introduce a new innovative product line to
North America. The joint venture, called Hero/WhiteWave,
combines Heros expertise in fruit, innovation and process
engineering, with WhiteWaves deep understanding of the
American consumer and manufacturing network, as well as the
go-to-market system of Dean Foods.
The joint venture, which is based in Broomfield, Colorado, will
serve as a strategic growth platform for both companies to
further extend their global reach by leveraging each
others established innovation, technology, manufacturing
and distribution capabilities over time. The initial product of
the joint venture will be launched in the middle of 2009 under
the
Fruit2Daytm
brand. The initial products will expand the WhiteWave product
footprint beyond the dairy case to capitalize on the chilled
fruit-based beverage opportunity. We have invested in this
initiative in 2008. Our investment will step-up in 2009 with
start-up and introductory marketing costs, which is expected to
negatively impact our 2009 earnings.
Credit Markets Recent disruptions in global
financial markets and banking systems have made credit and
capital markets more difficult for companies to access. We have
assessed the implications of these factors on our current
business and determined that these financial market disruptions
have not had a significant impact on our financial position,
results of operations or liquidity as of September 30,
2008. However, continuing volatility in the credit and capital
markets could potentially impair our and our customers
ability to access these markets and increase associated costs,
and there can be no assurance that we will not be materially
affected by these financial market disruptions as economic
events and circumstances continue to evolve.
Current Dairy Environment Rapidly increasing
and record high dairy commodity costs created a challenging
operating environment throughout 2007. While conventional raw
milk prices decreased in the first nine months of 2008 from the
levels experienced in the fourth quarter of 2007, they remained
significantly higher than prices in the first six months of the
prior year. In the third quarter of 2008, conventional raw milk
prices were lower than the third quarter of 2007, a trend we
expect to continue into the fourth quarter. In addition to a
challenging commodity environment, we face an intensely
competitive environment with higher pricing sensitivity by our
customers as well as continued consolidation in the retail
grocery industry resulting in increased competition for a
smaller customer base. Despite these challenges, we continue to
focus on cost control and supply chain efficiency through
initiatives such as the reduction in workforce executed late
last fall, improved effectiveness in the pass through of costs
to our customers, and our continued focus to drive productivity
and efficiency within our operations.
Throughout most of 2007, the industry, including us, experienced
an oversupply in organic raw milk. This oversupply led to
aggressive discounting within this product category,
particularly in the second half of 2007. In 2008, the supply and
demand balance has improved, which has lessened the level of
discounting. However, significant pricing pressures remain,
particularly from private label products. Net price increases to
our customers have not kept pace with the rising input cost of
organic milk as upward pressure on pay prices to our farmers
continues to reflect the sharp rise in feed and fuel costs
experienced by our network of over 400 organic family farms.
-28-
Public Offering of Equity Securities On
March 5, 2008, we issued and sold 18.7 million shares
of our common stock, $0.01 par value per share, in a public
offering pursuant to a registration statement on
Form S-3.
We received net proceeds of approximately $400 million from
the offering. The net proceeds from the offering were used to
reduce debt outstanding under the revolving portion of our
senior credit facility.
Acquisitions During the first nine months of
2008, our DSD Dairy segment completed four acquisitions. The
aggregate purchase price of these acquisitions was approximately
$75 million, including transaction costs. We have noted an
increase in potential transaction activity. We attribute this
increase in activity in part to higher commodity prices,
tightening of financial markets, and shifting consumer behavior.
Results
of Operations
The following table presents certain information concerning our
financial results, including information presented as a
percentage of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
|
|
Nine Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
3,194.7
|
|
|
|
100.0
|
%
|
|
$
|
3,116.8
|
|
|
|
100.0
|
%
|
|
$
|
9,374.2
|
|
|
|
100.0
|
%
|
|
$
|
8,590.2
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
2,463.0
|
|
|
|
77.1
|
|
|
|
2,457.5
|
|
|
|
78.8
|
|
|
|
7,214.6
|
|
|
|
77.0
|
|
|
|
6,555.6
|
|
|
|
76.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit(1)
|
|
|
731.7
|
|
|
|
22.9
|
|
|
|
659.3
|
|
|
|
21.2
|
|
|
|
2,159.6
|
|
|
|
23.0
|
|
|
|
2,034.6
|
|
|
|
23.7
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution
|
|
|
468.5
|
|
|
|
14.6
|
|
|
|
430.8
|
|
|
|
13.9
|
|
|
|
1,368.1
|
|
|
|
14.6
|
|
|
|
1,275.0
|
|
|
|
14.9
|
|
General and administrative
|
|
|
120.7
|
|
|
|
3.8
|
|
|
|
103.1
|
|
|
|
3.3
|
|
|
|
345.0
|
|
|
|
3.7
|
|
|
|
312.9
|
|
|
|
3.6
|
|
Amortization of intangibles
|
|
|
1.7
|
|
|
|
0.1
|
|
|
|
2.3
|
|
|
|
0.1
|
|
|
|
5.0
|
|
|
|
0.1
|
|
|
|
6.2
|
|
|
|
0.1
|
|
Facility closing, reorganization and other costs
|
|
|
9.0
|
|
|
|
0.3
|
|
|
|
19.8
|
|
|
|
0.6
|
|
|
|
16.4
|
|
|
|
0.1
|
|
|
|
29.4
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
599.9
|
|
|
|
18.8
|
|
|
|
556.0
|
|
|
|
17.9
|
|
|
|
1,734.5
|
|
|
|
18.5
|
|
|
|
1,623.5
|
|
|
|
18.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
131.8
|
|
|
|
4.1
|
%
|
|
$
|
103.3
|
|
|
|
3.3
|
%
|
|
$
|
425.1
|
|
|
|
4.5
|
%
|
|
$
|
411.1
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As disclosed in Note 1 to our Consolidated Financial
Statements in our 2007 Annual Report on
Form 10-K,
we include certain shipping and handling costs within selling
and distribution expense. As a result, our gross profit may not
be comparable to other entities that present all shipping and
handling costs as a component of cost of sales. |
Quarter
Ended September 30, 2008 Compared to Quarter Ended
September 30, 2007 Consolidated
Results
Net Sales Net sales by segment are shown in
the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30
|
|
|
|
|
|
|
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
DSD Dairy
|
|
$
|
2,523.4
|
|
|
$
|
2,498.6
|
|
|
$
|
24.8
|
|
|
|
1.0
|
%
|
WhiteWave-Morningstar
|
|
|
671.3
|
|
|
|
618.2
|
|
|
|
53.1
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,194.7
|
|
|
$
|
3,116.8
|
|
|
$
|
77.9
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-29-
The increase in net sales was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2008
|
|
|
|
vs Quarter Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Pricing
|
|
|
|
|
|
|
|
|
|
|
|
|
And Product
|
|
|
Total Increase/
|
|
|
|
Acquisitions
|
|
|
Volume
|
|
|
Mix Changes
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
DSD Dairy
|
|
$
|
39.2
|
|
|
$
|
23.4
|
|
|
$
|
(37.8
|
)
|
|
$
|
24.8
|
|
WhiteWave-Morningstar
|
|
|
|
|
|
|
41.9
|
|
|
|
11.2
|
|
|
|
53.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39.2
|
|
|
$
|
65.3
|
|
|
$
|
(26.6
|
)
|
|
$
|
77.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased during the third quarter of 2008 as compared
to the third quarter of 2007 primarily due to acquisitions, as
well as volume growth in both the DSD Dairy and
WhiteWave-Morningstar segments.
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. Although cost of sales was
relatively flat as a percentage of net sales in the third
quarter of 2008 as compared to the third quarter of 2007, there
were significant offsetting drivers, which included a decrease
in net raw milk and other related costs of $58.5 million as
DSD Dairys raw material costs decreased more than
WhiteWave-Morningstars increase, partially offset by
higher packaging costs, particularly resin; an increase in
personnel-related costs of $15.0 million; and an increase
in other manufacturing overhead costs of $16.2 million due
to higher utilities and maintenance costs.
Operating Costs and Expenses Our operating
expenses increased $43.9 million, or 7.9%, in the third
quarter of 2008 as compared to the same period in the prior
year. Significant changes to operating costs and expenses
include the following:
|
|
|
|
|
Selling and distribution costs increased $37.7 million
primarily due to higher fuel, third-party freight and fleet
costs of $26.2 million, increased personnel-related costs
of $8.2 million and higher advertising expenses of
$3.9 million;
|
|
|
|
General and administrative costs increased $17.6 million
primarily due to personnel-related costs of $9.7 million
including incentive based compensation, as well as professional
fees and other outside services of $3.9 million primarily
related to strategic corporate driven initiatives; and
|
|
|
|
Net facility closing, reorganization and other costs decreased
$10.8 million from the third quarter of 2007. See
Note 10 to our Condensed Consolidated Financial Statements
for further information on our facility closing and
reorganization activities.
|
Other (Income) Expense Interest expense
decreased to $74.7 million in the third quarter of 2008
from $89.7 million in the third quarter of 2007, primarily
driven by the reduction in debt related to our $400 million
paydown of the revolving portion of our senior credit facility
with proceeds from our equity offering on March 5, 2008, as
well as the paydown of debt with cash flow from operations.
Income Taxes Income tax expense was recorded
at an effective rate of 34.1% in the third quarter of 2008
compared to 50.0% in the third quarter of 2007. During the third
quarter of 2008, our effective tax rate was reduced due to the
settlement of taxing authority examinations, adjustments to tax
credit carryforwards, and the effects of state tax law changes.
During the third quarter of 2007, the reduction in income before
taxes increased the unfavorable effect that non-deductible,
permanent items had on our estimated annual effective tax rate.
-30-
Quarter
Ended September 30, 2008 Compared to Quarter Ended
September 30, 2007 Results by
Segment
DSD
Dairy
The key performance indicators of our DSD Dairy segment are
sales volumes, gross profit and operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
2,523.4
|
|
|
|
100.0
|
%
|
|
$
|
2,498.6
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
1,958.4
|
|
|
|
77.6
|
|
|
|
1,993.3
|
|
|
|
79.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
565.0
|
|
|
|
22.4
|
|
|
|
505.3
|
|
|
|
20.2
|
|
Operating costs and expenses
|
|
|
424.5
|
|
|
|
16.8
|
|
|
|
388.8
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
140.5
|
|
|
|
5.6
|
%
|
|
$
|
116.5
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales The increase in our DSD Dairy
segments net sales of 1.0% was due to acquisitions and
volume growth that were partially offset by the effects of
slightly lower selling prices resulting from the pass-through of
lower raw material prices. DSD Dairys fluid milk volumes,
which represented approximately 73% of DSD Dairys sales
volume during the quarter, increased 3.2% during the third
quarter of 2008 compared to the same period a year ago,
including a positive impact from our acquisitions this year.
Our DSD Dairy segment generally increases or decreases the
prices of its fluid dairy products on a monthly basis in
correlation to fluctuations in the costs of raw materials,
packaging supplies and delivery costs. However, in some cases,
we are competitively or contractually constrained with respect
to the means
and/or
timing of price increases. This can have a negative impact on
our DSD Dairy segments profitability. The following table
sets forth the average monthly Class I mover
and its components, as well as the average monthly Class II
minimum prices for raw skim milk and butterfat for the third
quarter of 2008 compared to the third quarter of 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30*
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
Class I mover(1)
|
|
$
|
18.97
|
|
|
$
|
21.53
|
|
|
|
(12
|
)%
|
Class I raw skim milk mover(1)(2)
|
|
|
13.58
|
|
|
|
16.37
|
|
|
|
(17
|
)
|
Class I butterfat mover(3)(4)
|
|
|
1.68
|
|
|
|
1.64
|
|
|
|
2
|
|
Class II raw skim milk minimum(1)(2)
|
|
|
11.55
|
|
|
|
17.07
|
|
|
|
(32
|
)
|
Class II butterfat minimum(3)(4)
|
|
|
1.75
|
|
|
|
1.58
|
|
|
|
11
|
|
|
|
|
* |
|
The prices noted in this table are not the prices that we
actually pay. The federal order minimum prices applicable at any
given location for Class I raw skim milk or Class I
butterfat are based on the Class I mover prices plus 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 supplier.
Please see Part I Item 1.
Business Government Regulation Milk
Industry Regulation in our 2007 Annual Report on
Form 10-K
and Known Trends and Uncertainties
Prices of Raw Milk and Other Inputs below for a more
complete description of raw milk pricing. |
|
(1) |
|
Prices are per hundredweight. |
|
(2) |
|
We process Class I raw skim milk and butterfat into fluid
milk products. |
|
(3) |
|
Prices are per pound. |
|
(4) |
|
We process Class II raw skim milk and butterfat into
products such as cottage cheese, creams and creamers, ice cream
and sour cream. |
-31-
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. DSD Dairys cost of
sales decreased by $34.9 million, or 1.8% in the third
quarter of 2008, due to lower raw milk and other related costs
of $84.3 million, such as shrink costs and the higher net
contribution from excess cream, partially offset by higher
packaging costs, particularly resin, and other raw material
costs of $31.5 million; increased manufacturing overhead
costs due to higher utilities and maintenance costs of
$8.6 million; and increased personnel-related costs of
$7.4 million.
Operating Costs and Expenses DSD Dairys
operating costs and expenses increased by $35.7 million, or
9.2%, during the third quarter of 2008 from the third quarter of
2007. The increase was primarily due to higher distribution
costs of $17.7 million driven primarily by higher fuel,
third-party freight and fleet costs; as well as higher
personnel-related costs of $15.9 million, including
increased incentive compensation costs, and salaries and wages.
While operating income margin increased 1.0%, DSD Dairys
operating income was approximately 21% above year ago levels in
the quarter. In addition to the factors described above, DSD
Dairy results benefited from tight cost controls across the
business including continued benefits from the reduction in our
manufacturing and distribution workforce completed in the fourth
quarter of 2007, as well as disciplined pricing execution to
offset continued commodity volatility and inflationary pressure
across the cost spectrum.
WhiteWave-Morningstar
The key performance indicators of our WhiteWave-Morningstar
segment are sales volumes, net sales dollars, gross profit and
operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
671.3
|
|
|
|
100.0
|
%
|
|
$
|
618.2
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
504.2
|
|
|
|
75.1
|
|
|
|
463.8
|
|
|
|
75.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
167.1
|
|
|
|
24.9
|
|
|
|
154.4
|
|
|
|
25.0
|
|
Operating costs and expenses
|
|
|
125.8
|
|
|
|
18.7
|
|
|
|
111.3
|
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
41.3
|
|
|
|
6.2
|
%
|
|
$
|
43.1
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales The increase in our
WhiteWave-Morningstar segments net sales of 8.6% was
driven by a mix of both increased volumes and higher pricing
across our branded products, primarily in response to higher raw
material and commodity costs. For the third quarter of 2008,
total net sales for the WhiteWave brands increased 12.8% to
$378.7 million, with continued strong sales growth across
all of our key brands. Silk net sales increased more than
13% driven by higher pricing, as well as continued distribution
expansion and integrated marketing that featured both print and
television advertising highlighting the heart health benefits of
our soymilk products. Net sales of the Horizon Organic
brand increased almost 15% in the quarter driven by continued
distribution expansion and differentiated innovation like our
DHA-enhanced and single serve products, as well as higher
realized pricing. International Delight grew net sales in
the high single digits through improved price realization.
LAND OLAKES creamer products also grew net sales in
the high single digits over the same period last year as a
result of both higher volumes and commodity related price
increases. Our Morningstar business also posted sales growth in
the quarter, increasing net sales almost 4% to
$292.6 million primarily behind higher yogurt, ice cream
mix and creamer sales volume and increased pricing due to higher
average Class II butter prices.
The primary raw material used in our organic milk-based products
is raw organic milk. We generally enter into supply agreements
with organic dairy farmers with typical terms of one to two
years, which obligate us to purchase certain minimum quantities.
In the past, the industry-wide demand for organic raw milk
generally exceeded supply, resulting in our inability to fully
meet customer demand. However, in 2006 economic incentives for
conventional farmers to begin the transition to organic farming
combined with a
-32-
change in the organic farm transition regulations dramatically
increased the growth of supply in 2007. This oversupply led to
significant discounting and aggressive distribution expansion by
processors in an effort to stimulate incremental demand and sell
their supply in the organic milk market. Faced with the
potential of losing market share in the organic milk market, we
made the strategic decision to defend the long-term value of the
Horizon Organic brand by increasing our price
competitiveness and marketing investment behind the brand in
2007. In 2008, the supply and demand balance has improved, which
has lessened the level of discounting. However, the impact of
price increases has been offset by higher raw organic milk costs
that are significantly higher on a year over year basis, in
addition to increases in other commodity costs. Furthermore,
significant pricing pressures remain, particularly from private
label products, as these prices have increased less than branded
products. As a result, retail price gaps have expanded. We
expect industry supply growth to decline significantly over the
next six months. Consequently, we expect increasing retail
pricing to balance demand with slowing supply growth. We
continue to monitor our position in the organic milk category
and remain focused on maintaining our leading branded position
as we balance market share considerations against profitability.
Cost of Sales WhiteWave-Morningstars
cost of sales increased by $40.4 million, or 8.7%, in the
third quarter of 2008 from the third quarter of 2007 primarily
driven by higher volumes, but also by higher raw material and
commodity costs of $21.5 million, particularly raw organic
milk, due to sharp inflation in organic feed costs and
Class II butter prices; personnel-related costs of
$7.6 million; and higher utilities of $6.5 million.
Operating Costs and Expenses
WhiteWave-Morningstars operating costs and expenses
increased by $14.5 million, or 13.0%, during the third
quarter of 2008 from the third quarter of 2007 primarily due to
higher selling and marketing expenses of $9.3 million
primarily due to increased advertising on our brands, as well as
higher distribution costs of $4.5 million driven by higher
volumes and increased third-party freight costs.
Although WhiteWave-Morningstar net sales were higher, with
strong sales growth across all of our key brands and in the
Morningstar business, our operating profits were 4.2% below year
ago levels in the quarter. While the majority of the portfolio
did increase profitability in the quarter, segment operating
income in the quarter continued to be adversely affected by
challenges in the Horizon Organic brand where price
increases were offset by higher raw organic milk and other
commodity costs, as well as decreased profitability at
Morningstar primarily due to higher commodity costs,
particularly higher Class II butter prices, of which the
pass-through lagged the cost inflation.
Nine
Months Ended September 30, 2008 Compared to Nine Months
Ended September 30, 2007 Consolidated
Results
Net Sales Net sales by segment are shown in
the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
|
|
|
|
|
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
DSD Dairy
|
|
$
|
7,432.1
|
|
|
$
|
6,851.5
|
|
|
$
|
580.6
|
|
|
|
8.5
|
%
|
WhiteWave-Morningstar
|
|
|
1,942.1
|
|
|
|
1,738.7
|
|
|
|
203.4
|
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,374.2
|
|
|
$
|
8,590.2
|
|
|
$
|
784.0
|
|
|
|
9.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-33-
The increase in net sales was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
vs Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Pricing
|
|
|
|
|
|
|
|
|
|
|
|
|
And Product
|
|
|
Total Increase/
|
|
|
|
Acquisitions
|
|
|
Volume
|
|
|
Mix Changes
|
|
|
(Decrease)
|
|
|
|
(Dollars in millions)
|
|
|
DSD Dairy
|
|
$
|
107.0
|
|
|
$
|
(24.0
|
)
|
|
$
|
497.6
|
|
|
$
|
580.6
|
|
WhiteWave-Morningstar
|
|
|
19.6
|
|
|
|
124.3
|
|
|
|
59.5
|
|
|
|
203.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
126.6
|
|
|
$
|
100.3
|
|
|
$
|
557.1
|
|
|
$
|
784.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased during the first nine months of 2008 as
compared to the first nine months of 2007 primarily due to the
pass-through of higher dairy commodity costs in DSD Dairy and
continued strong sales growth at WhiteWave-Morningstar,
particularly in our national brands, as well as acquisitions
completed in 2008.
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. Cost of sales increased by
$659.0 million, or 10.0%, in the first nine months of 2008
from the first nine months of 2007 primarily due to higher
volume and higher conventional raw milk costs, in the first six
months of 2008, and organic raw milk costs. The higher commodity
prices, as well as relative pricing movement between raw skim
milk and butterfat, impacted our cost of sales.
Operating Costs and Expenses Our operating
expenses increased $111.0 million, or 6.8%, in the first
nine months of 2008 as compared to the same period in the prior
year. Significant changes to operating costs and expenses
include the following:
|
|
|
|
|
Selling and distribution costs increased $93.1 million
primarily due to higher fuel, third-party freight and fleet
costs of $59.6 million, increased personnel-related costs
of $14.1 million and higher advertising expenses of
$6.4 million;
|
|
|
|
General and administrative costs increased $32.1 million
primarily due to personnel-related costs of $22.7 million
including incentive-based compensation, as well as higher
professional fees and other outside services of
$4.3 million primarily related to strategic corporate
driven initiatives; and
|
|
|
|
Net facility closing, reorganization and other costs decreased
$13.0 million from the first nine months of 2007. See
Note 10 to our Condensed Consolidated Financial Statements
for further information on our facility closing and
reorganization activities.
|
Other (Income) Expense Interest expense
decreased to $235.0 million in the first nine months of
2008 from $244.4 million in the first nine months of 2007,
primarily due to a higher average debt balance throughout 2007
related to the timing of our special cash dividend on
April 2, 2007 compared to lower average debt balances
during 2008 driven by the reduction in debt related to our
$400 million paydown of the revolving portion of our senior
credit facility with proceeds from our equity offering on
March 5, 2008, as well as the paydown of debt with cash
flow from operations. In addition, we wrote off
$13.5 million in financing costs in the first nine months
of 2007 due to the completion of our new senior credit facility
and incurred $4.9 million of professional fees and other
costs related to the payment of a special cash dividend.
Income Taxes Income tax expense was recorded
at an effective rate of 38.0% in the first nine months of 2008
compared to 39.3% in the first nine months of 2007. Our
effective tax rate varies based on the relative earnings of our
business units. During the first nine months of 2008, our
effective tax rate was reduced due to settlement of taxing
authority examinations, adjustments to tax credit carryforwards,
and the effects of state tax law changes.
-34-
Nine
Months Ended September 30, 2008 Compared to Nine Months
Ended September 30, 2007 Results by
Segment
DSD
Dairy
The key performance indicators of our DSD Dairy segment are
sales volumes, gross profit and operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
7,432.1
|
|
|
|
100.0
|
%
|
|
$
|
6,851.5
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
5,776.6
|
|
|
|
77.7
|
|
|
|
5,282.2
|
|
|
|
77.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,655.5
|
|
|
|
22.3
|
|
|
|
1,569.3
|
|
|
|
22.9
|
|
Operating costs and expenses
|
|
|
1,229.8
|
|
|
|
16.6
|
|
|
|
1,157.9
|
|
|
|
16.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
425.7
|
|
|
|
5.7
|
%
|
|
$
|
411.4
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales The increase in our DSD Dairy
segments net sales of 8.5% was due primarily to the pass
through of higher overall dairy commodity costs to customers, as
well as acquisitions completed in 2008.
Our DSD Dairy segment generally increases or decreases the
prices of its fluid dairy products on a monthly basis in
correlation to fluctuations in the costs of raw materials,
packaging supplies and delivery costs. However, in some cases,
we are competitively or contractually constrained with respect
to the means
and/or
timing of price increases. This can have a negative impact on
our DSD Dairy segments profitability. The following table
sets forth the average monthly Class I mover
and its components, as well as the average monthly Class II
minimum prices for raw skim milk and butterfat for the first
nine months of 2008 compared to the first nine months of 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30*
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
Class I mover(1)
|
|
$
|
18.63
|
|
|
$
|
17.17
|
|
|
|
8
|
%
|
Class I raw skim milk mover(1)(2)
|
|
|
13.86
|
|
|
|
12.46
|
|
|
|
11
|
|
Class I butterfat mover(3)(4)
|
|
|
1.50
|
|
|
|
1.47
|
|
|
|
2
|
|
Class II raw skim milk minimum(1)(2)
|
|
|
11.96
|
|
|
|
12.49
|
|
|
|
(4
|
)
|
Class II butterfat minimum(3)(4)
|
|
|
1.55
|
|
|
|
1.49
|
|
|
|
4
|
|
|
|
|
* |
|
The prices noted in this table are not the prices that we
actually pay. The federal order minimum prices applicable at any
given location for Class I raw skim milk or Class I
butterfat are based on the Class I mover prices plus 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 supplier.
Please see Part I Item 1.
Business Government Regulation Milk
Industry Regulation in our 2007 Annual Report on
Form 10-K
and Known Trends and Uncertainties
Prices of Raw Milk and Other Inputs below for a more
complete description of raw milk pricing. |
|
(1) |
|
Prices are per hundredweight. |
|
(2) |
|
We process Class I raw skim milk and butterfat into fluid
milk products. |
|
(3) |
|
Prices are per pound. |
|
(4) |
|
We process Class II raw skim milk and butterfat into
products such as cottage cheese, creams and creamers, ice cream
and sour cream. |
-35-
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. DSD Dairys cost of
sales increased by $494.4 million, or 9.4%, in the first
nine months of 2008 from the first nine months of 2007, driven
by higher conventional raw milk costs in the first six months of
2008 of $307.7 million, as well as higher other raw
material and packaging costs, particularly resin, of
$150.1 million.
Operating Costs and Expenses DSD Dairys
operating costs and expenses increased by $71.9 million, or
6.2%, during the first nine months of 2008 from the first nine
months of 2007. The increase was primarily due to higher
distribution costs of $52.8 million driven primarily by
higher fuel, third-party freight and fleet costs; higher
personnel-related costs of $30.0 million due primarily to
increased salaries and wages and incentive-based compensation;
partially offset by lower advertising and promotion expense of
$6.5 million.
Despite a 0.3% decrease in operating income margin, DSD Dairy
operating income was 3.5% above year ago levels in the first
nine months of the year. In addition to the factors described
above, DSD Dairy results benefited from tight cost controls
across the business including continued benefits from the
reduction in our manufacturing and distribution workforce
completed in the fourth quarter of 2007, as well as disciplined
pricing execution to offset continued commodity volatility and
inflationary pressure across the cost spectrum.
WhiteWave-Morningstar
The key performance indicators of our WhiteWave-Morningstar
segment are sales volumes, net sales dollars, gross profit and
operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars in millions)
|
|
|
Net sales
|
|
$
|
1,942.1
|
|
|
|
100.0
|
%
|
|
$
|
1,738.7
|
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
1,436.9
|
|
|
|
74.0
|
|
|
|
1,272.3
|
|
|
|
73.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
505.2
|
|
|
|
26.0
|
|
|
|
466.4
|
|
|
|
26.8
|
|
Operating costs and expenses
|
|
|
369.2
|
|
|
|
19.0
|
|
|
|
322.3
|
|
|
|
18.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
136.0
|
|
|
|
7.0
|
%
|
|
$
|
144.1
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales The increase in our
WhiteWave-Morningstar segments net sales of 11.7% was
driven by a mix of both increased volumes and higher pricing,
primarily in response to higher raw material and commodity
costs. For the first nine months of the year, total net sales
for the WhiteWave brands increased 12.8% to $1.11 billion,
with continued strong sales growth across all of our key brands.
Silk net sales increased more than 11% driven by higher
pricing, as well as continued distribution expansion and
integrated marketing that featured both print and television
advertising highlighting the heart health benefits of our
soymilk products. Net sales of the Horizon Organic brand
increased 20% in the first nine months driven by continued
expansion distribution and differentiated innovation like our
DHA-enhanced and single serve products, as well as higher
realized pricing. International Delight grew net sales in
the high single digits through improved price realization.
LAND OLAKES creamer products also grew net sales in
the high single digits over the same period last year as a
result of both higher volumes and commodity-related price
increases. Our Morningstar business also posted sales growth in
the first nine months, increasing net sales 10% to
$831.7 million, primarily driven by higher cultured
products sales volume, as well as the benefit of an acquisition
completed in March 2007.
The primary raw material used in our organic milk-based products
is raw organic milk. We generally enter into supply agreements
with organic dairy farmers with typical terms of one to two
years, which obligate us to purchase certain minimum quantities.
In the past, the industry-wide demand for organic raw milk
generally exceeded supply, resulting in our inability to fully
meet customer demand. However, in 2006 economic incentives for
conventional farmers to begin the transition to organic farming
combined with a change in the organic farm transition
regulations dramatically increased the growth of supply in 2007.
This oversupply led to significant discounting and aggressive
distribution expansion by processors in an effort to
-36-
stimulate incremental demand and sell their supply in the
organic milk market. Faced with the potential of losing market
share in the organic milk market, we made the strategic decision
to defend the long-term value of the Horizon Organic
brand by increasing our price competitiveness and marketing
investment behind the brand in 2007. In 2008, the supply and
demand balance has improved, which has lessened the level of
discounting. However, the impact of price increases has been
offset by higher raw organic milk costs that are significantly
higher on a year over year basis, in addition to increases in
other commodity costs. Furthermore, significant pricing
pressures remain, particularly from private label products, as
these prices have increased less than branded products. As a
result, retail price gaps have expanded. We expect industry
supply growth to decline significantly over the next six months.
Consequently, we expect increasing retail pricing to balance
demand with slowing supply growth. We continue to monitor our
position in the organic milk category and remain focused on
maintaining our leading branded position as we balance market
share considerations against profitability.
Cost of Sales WhiteWave-Morningstars
cost of sales increased by $164.6 million, or 12.9%, in the
first nine months of 2008 from the first nine months of 2007
primarily driven by higher volumes, but also by higher raw
material and commodity costs, particularly raw organic milk, due
to the sharp inflation in organic feed costs, which more than
offset savings from plant efficiencies.
Operating Costs and Expenses
WhiteWave-Morningstars operating costs and expenses
increased $46.9 million, or 14.6%, during the first nine
months of 2008 from the first nine months of 2007 primarily due
to increased selling and marketing expense of $14.9 million
driven by higher advertising spending on our brands, increased
distribution costs of $15.3 million driven by higher
volumes and increased fuel costs, and higher personnel-related
costs of $6.7 million, including incentive-based
compensation.
Although WhiteWave-Morningstars net sales were higher,
with strong sales growth across all of our key brands and in the
Morningstar business, our operating profits were 5.6% below year
ago levels in the first nine months of the year. While the
majority of the portfolio did increase profitability in the
first nine months of the year, segment operating income in the
quarter continued to be adversely affected by challenges in the
Horizon Organic brand where price increases were offset
by higher raw organic milk and other commodity costs, as well as
decreased profitability at Morningstar primarily due to higher
commodity costs, particularly higher Class II butter
prices, of which the pass-through lagged the cost inflation.
WhiteWave-Morningstar operating income was also impacted by
higher administrative costs and increased marketing spending in
the first nine months of 2008.
Liquidity
and Capital Resources
We believe that our cash from operations, as well as our
existing $1.5 billion
5-year
senior secured revolving credit facility and our
$600 million receivables-backed facility, will provide
sufficient liquidity to meet our working capital needs, planned
capital expenditures and future contractual obligations. Recent
disruptions in global financial markets and banking systems have
made credit and capital markets more difficult for companies to
access. We have assessed the implications of these factors on
our current business and determined that these financial market
disruptions have not had a significant impact on our financial
position, results of operations or liquidity as of
September 30, 2008. However, continuing volatility in the
credit and capital markets could potentially impair our and our
customers ability to access these markets and increase
associated costs, and there can be no assurance that we will not
be materially affected by these financial market disruptions as
economic events and circumstances continue to evolve.
Historical
Cash Flow
During the first nine months of 2008, we met our working capital
needs with cash flow from operations. Net cash provided by
operating activities increased $237.6 million to
$458.3 million in the first nine months of 2008 compared to
$220.7 million for the same period in 2007. The impact of
higher operating income in the first nine months was
significantly supplemented by the decrease in working capital
requirements due in part to the reduction in accounts receivable
and income taxes receivable.
-37-
Net cash used in investing activities was $239.1 million in
the first nine months of 2008 compared to $272.9 million in
the first nine months of 2007. In the first nine months of 2008,
we made approximately $171.0 million in capital
expenditures and we completed four acquisitions requiring the
use of approximately $75 million in cash. In the first nine
months of 2007, we made approximately $165.2 million in
capital expenditures and our Morningstar platform acquired
Friendship Dairies, requiring the use of approximately
$131.7 million in cash, and received net proceeds of
$12.2 million for divestitures.
In the first nine months of 2008 we reduced our debt by
approximately $653.1 million with cash generated from
operations and an equity offering completed in March 2008. We
issued and sold 18.7 million shares of our common stock
resulting in net proceeds of approximately $400 million
from the offering.
Financial
Covenants
Under the senior secured credit facility, we are required to
maintain certain financial covenants, including, but not limited
to, maximum leverage and minimum interest coverage ratios. As of
September 30, 2008, we were in compliance with all
covenants contained in this agreement. We currently have a
maximum permitted leverage ratio of 6.25 times consolidated
funded indebtedness to consolidated EBITDA for the prior four
consecutive quarters, each as defined under and calculated in
accordance with the terms of our senior secured credit facility
and our receivables facility. As of September 30, 2008, our
leverage ratio was 5.35 times. The maximum permitted leverage
ratio under both the senior secured credit facility and the
receivables facility will decline to 5.75 times as of
December 31, 2008. We anticipate further reductions of
borrowings over the balance of 2008, and expect our leverage
ratio to be below 5.25 times as of December 31, 2008. On
December 31, 2009 the maximum permitted leverage ratio will
decline to 5.00.
Contractual
Obligations
Except for the reduction of our debt due to funds from our
equity offering and cash flow from operations, there have been
no material changes outside the ordinary course of business to
the information provided with respect to our contractual
obligations, including indebtedness and purchase and lease
obligations, as disclosed in our 2007 Annual Report on
Form 10-K.
See Note 6 to our Condensed Consolidated Financial
Statements provided herein for a description of our debt
obligations.
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 and postretirement costs also may be significantly
affected by changes in key actuarial assumptions, including
anticipated rates of return on plan assets and the discount
rates used in determining the projected benefit obligation and
pension costs.
We expect to contribute approximately $22.5 million to the
pension plans and approximately $2.3 million to the
postretirement health plans in 2008.
Certain of our defined benefit retirement plans, as well as many
of the multi-employer plans in which we participate, are
currently underfunded. Recent changes in federal laws require
plan sponsors to eliminate, over defined time periods, the
underfunded status of plans that are subject to ERISA rules and
regulations. We expect recent adverse stock market performance
to negatively impact the cost of providing such benefits to our
current and former employees, as well as further increase our
funding requirements.
-38-
Other
Commitments and Contingencies
We are not party to, nor are our properties the subject of, any
material pending legal proceedings other than set forth in
Note 12 to our Condensed Consolidated Financial Statements,
and in Item 1. Legal Proceedings contained in Part II
of this
Form 10-Q.
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.
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 contingent obligations related to milk supply
arrangements;
|
|
|
|
Selected levels of property and casualty risks, primarily
related to employee health care, workers compensation
claims and other casualty losses; and
|
|
|
|
Certain lease obligations, which require us to guarantee the
minimum value of the leased asset at the end of the lease.
|
Future
Capital Requirements
During 2008, we intend to invest a total of approximately
$260 million in capital expenditures primarily for our
existing manufacturing facilities and distribution capabilities.
We expect cash interest to be approximately $300 million
based on anticipated debt levels and interest rate expectations.
Cash interest excludes amortization of deferred financing fees
and bond discounts of approximately $10 million. The
portion of our long-term debt due within the next 12 months
totals $336.3 million through September 2009. From time to
time, we may repurchase our outstanding debt obligations in the
open market or in privately negotiated transactions. We expect
that for the foreseeable future our cash flow from operations
and borrowings under our senior credit facility will be
sufficient to meet our mandatory debt repayments and future
capital requirements. At October 31, 2008, approximately
$1.33 billion was available under the revolving credit
facility, subject to the limitations of our credit agreement.
Known
Trends and Uncertainties
Prices
of Raw Milk and Other Inputs
DSD Dairy The primary raw material used in
our DSD Dairy segment is raw conventional milk (which contains
both raw 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
(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).
In general, our DSD Dairy segment 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.
-39-
However, there can be a lag between the timing 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 respect to the implementation of price changes.
This can have a negative impact on the DSD Dairys
profitability and can cause volatility in our earnings. Our
sales and operating profit margin fluctuate with the price of
our raw materials and other inputs.
In the first nine months of 2008, we experienced significant
fluctuations in conventional raw milk prices. There continues to
be significant volatility in the pricing of conventional raw
milk and we anticipate that volatility to continue throughout
2008. Raw milk, butterfat and cream prices are difficult to
predict, and we change our forecasts frequently based on current
market activity. The DSD Dairy segment generally has been
effective at passing through the changes in the prices of
underlying commodities. However, the pass through is not perfect
when prices move up steadily over a period of several months.
Our DSD Dairy segment purchases approximately four million
gallons of diesel fuel per month to operate its extensive DSD
system. Another significant raw material used by our DSD Dairy
segment is resin, which is a petroleum-based product used to
make plastic bottles. We purchase approximately 27 million
pounds of resin and bottles per month. The price of diesel and
resin are subject to fluctuations based on changes in crude oil
and natural gas prices. We have experienced increased fuel and
resin costs during 2008, and we expect prices of both resin and
diesel fuel to fluctuate throughout the remainder of 2008.
WhiteWave-Morningstar The primary raw
material used in our soy-based products is organic soybeans.
Organic soybeans are generally available from several suppliers
and we are not dependent on any single supplier for these
products. Consistent with the general inflationary pressure and
volatility currently existing in the commodities markets, the
cost of organic soybeans continues to rise. We expect to
adequately source our soybean requirements; however, the higher
costs of organic soybeans could put pressure on our soy-based
product operating margins in 2009.
The primary raw material used in our organic milk-based products
is organic raw milk. We currently purchase organic raw milk from
a network of over 400 dairy farmers across the United States. We
also produce approximately 20% of our own organic raw milk needs
in the U.S. at two organic farms that we own and operate
and an additional farm that we lease and have contracted with a
third party to manage. We generally enter into supply agreements
with organic dairy farmers with typical terms of one to two
years, which obligate us to purchase certain minimum quantities.
In the past, the industry-wide demand for organic raw milk
generally exceeded supply, resulting in our inability to fully
meet customer demand. However, due to the recent industry
efforts to increase the supply of organic raw milk, in 2007 we
experienced a significant oversupply of organic raw milk that
increased competitive pressure from both branded and private
label participants. In 2008, the supply and demand balance has
improved, which has lessened the level of discounting. However,
the impact of price increases has been offset by higher raw
organic milk costs that are more than 10% higher on a year over
year basis, in addition to increases in other commodity costs.
Furthermore, significant pricing pressures remain, particularly
from private label products, as these prices have increased less
than branded products. As a result, retail price gaps have
expanded. We expect industry supply growth to decline
significantly over the next six months. Consequently, we expect
increasing retail pricing to balance demand with slowing supply
growth. We continue to monitor our position in the organic milk
category and remain focused on maintaining our leading branded
position as we balance market share considerations against
profitability.
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.
-40-
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 DSD Dairy segment, which
reduced our profitability on sales to several customers. In
bidding situations, we are subject to the risk of losing certain
customers altogether. In addition, higher levels of price
competition and higher resistance to pricing are becoming more
widespread in our business. We expect these trends to continue
and intensify. 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 customers, including our
largest customers, and most of our existing contracts are
generally terminable at will by the customer.
Tax
Rate
Income tax expense was recorded at an effective rate of 38.0% in
the first nine months of 2008. Our tax rate during the first
nine months of 2007 was 39.3%. We estimate that our effective
tax rate will be approximately 38.5% for the full year 2008.
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 below and Part I
Item 1A Risk Factors in our 2007 Annual
Report on
Form 10-K
for a description of various other risks and uncertainties
concerning our business.
-41-
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
There have been no material changes in our quantitative and
qualitative disclosures about market risk as provided in our
2007 Annual Report on
Form 10-K.
|
|
Item 4.
|
Controls
and Procedures
|
Controls
Evaluation and Related Certifications
We conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act, referred to herein as 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). 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
to ensure that the information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the rules and terms of the SEC.
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.
Changes
in Internal Control over Financial Reporting
During the quarter covered by this report, there have been no
changes in our internal control over financial reporting (as
defined in
rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
-42-
Part II
Other Information
|
|
Item 1.
|
Legal
Proceedings
|
We are not party to, nor are our properties the subject of, any
material pending legal proceedings, other than as set forth
below. 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.
We were named, among several defendants, in two purported class
action antitrust complaints filed on July 5, 2007. The
complaints were filed in the United States District Court for
the Middle District of Tennessee, Columbia Division, and allege
generally that we and others in the milk industry worked
together to limit the price Southeastern dairy farmers are paid
for their raw milk and to deny these farmers access to fluid
Grade A milk processing facilities (dairy farmer
actions). A third purported class action antitrust
complaint (retailer action) was filed on
August 9, 2007 in the United States District Court for the
Eastern District of Tennessee, Greenville Division. The
complaint in the retailer action was amended on March 28,
2008. The amended complaint alleges generally that we, either
acting alone or in conjunction with others in the milk industry,
lessened competition in the Southeastern United States for the
sale of processed fluid Grade A milk to retail outlets and other
customers, and that the defendants conduct also
artificially inflated retail prices for direct milk purchasers.
Four additional purported class action complaints were filed on
August 27, 2007, October 3, 2007, November 15,
2007 and February 13, 2008 in the United States District
Court for the Eastern District of Tennessee, Greenville
Division. The allegations in these complaints are similar to
those in the dairy farmer actions.
On January 7, 2008 a United States Judicial Panel on
Multidistrict Litigation transferred all of the pending cases to
the Eastern District of Tennessee, Greenville Division. On
April 1, 2008, the Eastern District Court ordered the
consolidation of the six dairy farmer actions, and ordered the
retailer action to be administratively consolidated with the
coordinated dairy farmer actions. A motion to dismiss the dairy
farmer actions was denied on May 20, 2008, and an amended
consolidated complaint was filed by the dairy farmer plaintiffs
on June 20, 2008. A motion to dismiss the retailer action
is currently pending before the Court. These matters are
currently in discovery and we intend to vigorously defend them.
On January 18, 2008, our subsidiary, Kohler Mix
Specialties, LLC (Kohler), was named as defendant in
a civil complaint filed in the Superior Court, Judicial District
of Hartford. The plaintiff in the case is the Commissioner of
Environmental Protection of the State of Connecticut. The
complaint alleges generally that Kohler improperly discharged
wastewater into the waters of the State of Connecticut, and
bypassed certain wastewater treatment equipment. The plaintiff
is seeking injunctive relief and civil penalties with respect to
the claims.
At this time, it is not possible for us to predict the ultimate
outcome of the matters set forth above.
The following risk factors are provided to supplement and update
the Risk Factors previously disclosed in our
Form 10-K
for the fiscal year ended December 31, 2007. The risk
factors set forth below and in our
Form 10-K
should be read in conjunction with the considerations set forth
above in Managements Discussion and Analysis of
Financial Condition and Results of Operation.
The
Recent Disruptions in the Overall Economy and the Financial
Markets may Adversely Impact Our Business and Results of
Operations
The industry in which we operate is sensitive to changes in
general economic conditions, both nationally and locally. Recent
disruptions in global financial markets and banking systems have
made credit and capital markets more difficult for companies to
access. Continuing volatility in the credit and capital markets
could potentially impair our and our customers ability to
access these markets and increase associated costs, and there
can be no assurance that we will not be materially affected by
these financial market disruptions as economic events and
circumstances continue to evolve.
-43-
In addition, the recent turmoil in the financial markets may
have an adverse effect on consumer spending patterns. A
recessionary economic cycle, higher interest rates, higher fuel
and other energy costs, inflation, increases in commodity
prices, higher levels of unemployment, higher consumer debt
levels, higher tax rates and other changes in tax laws or other
economic factors could adversely affect consumer demand for
products we sell or distribute, which could adversely affect our
results of operations. There can be no assurances that
government responses to the disruptions in the financial markets
will restore consumer confidence.
Recent
Adverse Market Events Have Caused Costs of Providing Employee
Benefits to Escalate, which May Adversely Affect Our Operating
Margin, Profitability and Liquidity
We sponsor various defined benefit and defined contribution
retirement plans, as well as contribute to various
multi-employer plans on behalf of our employees. Certain of our
defined benefit retirement plans, as well as many of the
multi-employer plans in which we participate, are currently
underfunded. Recent changes in federal laws require plan
sponsors to eliminate, over defined time periods, the
underfunded status of plans that are subject to ERISA rules and
regulations. We expect recent adverse stock market performance
to negatively impact the cost of providing such benefits to our
current and former employees, as well as further increase our
funding requirements.
We May
be Exposed to Counterparty Risks in Certain of Our Financial
Instruments
We have access to capital through our senior credit facility and
our receivables facility, each of which is provided by a
syndicate of financial institutions. Each financial institution
in the syndicate is responsible on a several, but not joint,
basis for providing a portion of the loans under each respective
facility. If any of the participants in the syndicate fails to
satisfy its obligations to extend credit under the facility, the
other participants refuse or are unable to assume its
obligations, and we are unable to find an alternative source of
funding at comparable rates, our liquidity may be adversely
affected or our interest expense may increase substantially.
From time to time we enter into arrangements with other parties
to hedge our exposure to fluctuations in currency and interest
rates, including swap agreements. Recently, a number of
financial institutions similar to those that serve as
counterparties to our hedging arrangements have been adversely
affected by the global credit crisis and in some cases have been
unable to fulfill their debts and other obligations. If any of
the counterparties to our hedging arrangements become unable to
fulfill their obligations to us, we may lose the financial
benefits of these arrangements.
American International Group (AIG), which currently has an
A.M. Best rating of A, provides a portion of our overall
insurance coverage. Recently, AIG has experienced significant
financial issues associated with the troubled credit markets,
and has received financial support from the
U.S. Government. It is unclear whether the restructuring of
AIG will cause AIG to alter its coverage position or
reimbursement policies. The inability of AIG to provide coverage
under any of our insurance policies could materially and
adversely affect our results of operations and financial
condition.
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 DSD Dairy segment. Organic raw milk, organic soybeans and
sugar are significant inputs utilized by our
WhiteWave-Morningstar segment. The prices of these materials
increase and decrease based on supply and demand, and in some
cases, governmental regulation. Weather, including the
heightened impact of weather events related to climate change,
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. In 2007, we experienced rapidly rising
and all time-high prices in conventional raw milk prices, and in
the first nine months of 2008, we experienced significant
fluctuations in conventional raw milk prices. There continues to
be significant volatility in the pricing of conventional raw
milk and we anticipate that volatility to continue.
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Throughout most of 2007, the industry, including us, experienced
an oversupply in organic raw milk. This oversupply led to
significant discounting and aggressive distribution expansion by
processors in an effort to stimulate incremental demand and sell
their supply in the organic milk market. In 2008, the supply and
demand balance has improved, which has lessened the level of
discounting. However, the impact of price increases has been
offset by higher raw organic milk costs that are more than 10%
higher on a year over year basis, in addition to increases in
other commodity costs. Furthermore, significant pricing
pressures remain, particularly from private label products, as
these have increased less than branded products. As a result,
retail price gaps have expanded. We expect industry supply
growth to decline significantly over the next six months.
Consequently, we expect increasing retail pricing to balance
demand with slowing supply growth.
Because our DSD Dairy segment 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-Morningstar segment is impacted by the
costs of petroleum-based products through the use of common
carriers in delivering their products. We utilize 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. We have experienced increased fuel
and resin costs during 2008, and further 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.
Consistent with the general inflationary pressure and volatility
currently existing in the commodities markets, the cost of
organic soybeans continues to rise. We expect to adequately
source our soybean requirements; however, the higher costs of
organic soybeans could put pressure on our soy-based product
operating margins in 2009.
The
Consolidation of Retail Customers May Put Pressures on Our
Operating Margins and Profitability
Our customers such as supermarkets, warehouse clubs and food
distributors, have consolidated in recent years and
consolidation is expected to continue. These consolidations have
produced large, sophisticated customers with increased buying
power. Some of these customers are vertically integrated and may
use shelf space currently used for our products for their
private label products. In addition, our large retail customers
may seek to use their position to improve their profitability
through improved efficiency, lower pricing and increased
promotional programs. Higher levels of price competition and
higher resistance to pricing are becoming more widespread in our
business. If we are unable to use our scale, marketing
expertise, product innovation and category leadership positions
to respond to these trends, our volume growth could slow or we
may need to lower prices or increase promotional spending for
our products, any of which would adversely affect our
profitability.
We
Must Identify Changing Consumer Preferences and Develop and
Offer Products to Meet Their Preferences
Consumer preferences evolve over time and the success of our
products depends on our ability to identify the tastes, dietary
and purchasing habits of consumers and to offer products that
appeal to their preferences. Introduction of new products and
product extensions requires significant development and
marketing investment. Currently, we believe consumers are
trending toward health and wellness beverages. Although we have
increased our innovation efforts and spend in order to
capitalize on this trend, there are currently several global
competitors with greater resources with whom we compete in these
areas. In addition, as consumers become increasingly aware of
climate change and the sources of greenhouse gas emissions, to
which agriculture, including dairy farming, is a contributor,
their preferences and purchasing decisions may change. If our
products fail to meet consumer preferences, the return on our
investment in those areas will be less than anticipated and our
product strategy may not succeed.
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Item 5.
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Other
Information
|
On August 27, 2008, we adopted amended and restated bylaws
which, among other things, changed the date by which notice of
intent to present certain stockholder proposals for
consideration at our annual meeting must be submitted to our
corporate secretary. For our 2009 annual meeting of
stockholders, stockholders must submit proposals to our
corporate secretary no earlier than January 21, 2009 and no
later than February 20, 2009. The deadline for stockholder
proposals to be considered for inclusion in our proxy statement
remains unchanged.
-45-
|
|
|
|
|
|
3
|
.1
|
|
Amended and Restated Bylaws of Dean Foods Company, as adopted on
August 27, 2008 (filed as Exhibit 3.1 to the Current
Report on
Form 8-K
filed with the SEC on September 2, 2008, and incorporated
herein by reference).
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*10
|
.1
|
|
Dean Foods Company Amended and Restated Executive Severance Pay
Plan (filed herewith).
|
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*10
|
.2
|
|
Form of Amended and Restated Change in Control Agreement for our
executive officers (filed herewith).
|
|
*10
|
.3
|
|
Forms of Amended and Restated Change in Control Agreements for
certain other officers (filed herewith).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
99
|
|
|
Supplemental Financial Information for Dean Holding Company
(filed herewith).
|
|
|
|
* |
|
This exhibit is a management or compensatory agreement. |
-46-
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
November 5, 2008
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