-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FQJ8lKdByXut4kUDrS2RotFD/CgRsphxjCgBzGflWFTOLEo3OwtqV3eX07OZFJCN a/0bsAwzdfTM/W4sTB8NQQ== 0000950134-03-008151.txt : 20030515 0000950134-03-008151.hdr.sgml : 20030515 20030515151314 ACCESSION NUMBER: 0000950134-03-008151 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEAN FOODS CO/ CENTRAL INDEX KEY: 0000931336 STANDARD INDUSTRIAL CLASSIFICATION: ICE CREAM & FROZEN DESSERTS [2024] IRS NUMBER: 752559681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12755 FILM NUMBER: 03704384 BUSINESS ADDRESS: STREET 1: 2515 MCKINNEY AVENUE LB 30 STREET 2: SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 2143033400 MAIL ADDRESS: STREET 1: 2515 MCKINNEY AVENUE LB 30 STREET 2: SUITE 1200 CITY: DALLAS STATE: TX ZIP: 75201 FORMER COMPANY: FORMER CONFORMED NAME: SUIZA FOODS CORP DATE OF NAME CHANGE: 19941013 10-Q 1 d05819e10vq.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 001-12755
DEAN FOODS COMPANY (Exact name of the registrant as specified in its charter) (DEAN FOODS COMPANY LOGO) ------------------ DELAWARE 75-2559681 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.)
2515 MCKINNEY AVENUE, SUITE 1200 DALLAS, TEXAS 75201 (214) 303-3400 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of May 12, 2003 the number of shares outstanding of each class of common stock was: Common Stock, par value $.01 89,966,531 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I -- FINANCIAL INFORMATION Item 1 -- Financial Statements.................... 3 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations..... 23 Item 3 -- Quantitative and Qualitative Disclosures About Market Risk................................. 34 Item 4 -- Controls and Procedures................. 35 PART II -- OTHER INFORMATION Item 6 -- Exhibits and Reports on Form 8-K........ 36
2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEAN FOODS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 31, December 31, 2003 2002 ----------- ------------ (unaudited) Assets Current assets: Cash and cash equivalents................................. $ 26,780 $ 45,896 Accounts receivable, net.................................. 629,425 656,938 Inventories............................................... 418,403 400,347 Deferred income taxes..................................... 151,347 158,337 Prepaid expenses and other current assets................. 54,652 49,628 ---------- ---------- Total current assets.............................. 1,280,607 1,311,146 Property, plant and equipment, net.......................... 1,645,269 1,628,424 Goodwill.................................................... 3,038,804 3,035,417 Identifiable intangible and other assets.................... 606,333 607,279 ---------- ---------- Total............................................. $6,571,013 $6,582,266 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses..................... $ 952,644 $1,056,213 Income taxes payable...................................... 42,718 38,488 Current portion of long-term debt......................... 185,228 173,442 ---------- ---------- Total current liabilities......................... 1,180,590 1,268,143 Long-term debt.............................................. 2,618,113 2,554,482 Other long-term liabilities................................. 234,289 236,915 Deferred income taxes....................................... 313,205 294,256 Mandatorily redeemable convertible trust issued preferred securities................................................ 585,034 585,177 Commitments and contingencies (See Note 10) Stockholders' equity: Common stock, 87,313,792 and 88,640,960 shares issued and outstanding............................................ 873 886 Additional paid-in capital................................ 907,824 979,557 Retained earnings......................................... 781,764 718,555 Accumulated other comprehensive income.................... (50,679) (55,705) ---------- ---------- Total stockholders' equity........................ 1,639,782 1,643,293 ---------- ---------- Total............................................. $6,571,013 $6,582,266 ========== ==========
See notes to Condensed Consolidated Financial Statements. 3 DEAN FOODS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data)
Three Months Ended March 31 --------------------------- 2003 2002 ------------ ------------ (unaudited) Net sales................................................... $ 2,144,878 $ 2,226,220 Cost of sales............................................... 1,573,645 1,681,388 ------------ ------------ Gross profit................................................ 571,233 544,832 Operating costs and expenses: Selling and distribution.................................. 329,673 316,284 General and administrative................................ 84,632 79,291 Amortization of intangibles............................... 1,636 2,212 Plant closing costs....................................... (1,690) 1,234 ------------ ------------ Total operating costs and expenses................ 414,251 399,021 ------------ ------------ Operating income............................................ 156,982 145,811 Other (income) expense: Interest expense, net..................................... 46,871 50,520 Financing charges on trust issued preferred securities.... 8,395 8,395 Equity in earnings of unconsolidated affiliates........... (196) (403) Other income, net......................................... (467) (280) ------------ ------------ Total other (income) expense...................... 54,603 58,232 ------------ ------------ Income from continuing operations before income taxes and minority interest......................................... 102,379 87,579 Income taxes................................................ 39,170 32,907 Minority interest in earnings............................... 9 ------------ ------------ Income from continuing operations........................... 63,209 54,663 Income from discontinued operations, net of tax............. 696 ------------ ------------ Income before cumulative effect of accounting change........ 63,209 55,359 Cumulative effect of accounting change...................... (84,983) ------------ ------------ Net income (loss)........................................... $ 63,209 $ (29,624) ============ ============ Average common shares: Basic................................ 86,858,785 88,876,210 Average common shares: Diluted.............................. 106,200,628 107,902,958 Basic earnings per common share: Income from continuing operations......................... $ 0.73 $ 0.62 Income from discontinued operations....................... 0.01 Cumulative effect of accounting change.................... (0.96) ------------ ------------ Net income (loss)......................................... $ 0.73 $ (0.33) ============ ============ Diluted earnings per common share: Income from continuing operations......................... $ 0.65 $ 0.55 Income from discontinued operations....................... 0.01 Cumulative effect of accounting change.................... (0.79) ------------ ------------ Net income (loss)......................................... $ 0.65 $ (0.23) ============ ============
See notes to Condensed Consolidated Financial Statements. 4 DEAN FOODS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended March 31 --------------------- 2003 2002 --------- --------- (unaudited) Cash flows from operating activities: Net income (loss)......................................... $ 63,209 $ (29,624) Income from discontinued operations....................... (696) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 46,666 45,922 Loss on disposition of assets.......................... 407 989 Equity in earnings of unconsolidated affiliates........ (196) (403) Cumulative effect of accounting change................. 84,983 Deferred income taxes.................................. 35,439 (2,947) Other, net............................................. (597) 1,551 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable.................................. 29,046 (1,283) Inventories.......................................... (18,821) 7,300 Prepaid expenses and other assets.................... (4,266) (13,421) Accounts payable, accrued expenses and other liabilities......................................... (90,684) (18,080) Income taxes......................................... 4,252 8,658 --------- --------- Net cash provided by continuing operations........ 64,455 82,949 Net cash provided by discontinued operations...... 111 --------- --------- Net cash provided by operating activities......... 64,455 83,060 Cash flows from investing activities: Net additions to property, plant and equipment............ (53,713) (30,293) Cash outflows for acquisitions............................ (476) (15,901) Net proceeds from divestitures............................ 2,561 Proceeds from sale of fixed assets........................ 4,496 1,013 --------- --------- Net cash used in continuing operations............ (49,693) (42,620) Net cash used in discontinued operations.......... (728) --------- --------- Net cash used in investing activities............. (49,693) (43,348) Cash flows from financing activities: Proceeds from issuance of debt............................ 350,094 33,755 Repayment of debt......................................... (286,581) (169,619) Issuance of common stock, net of expenses................. 45,174 40,809 Redemption of common stock................................ (142,565) --------- --------- Net cash used in financing activities............. (33,878) (95,055) --------- --------- Decrease in cash and cash equivalents....................... (19,116) (55,343) Cash and cash equivalents, beginning of period.............. 45,896 74,731 --------- --------- Cash and cash equivalents, end of period.................... $ 26,780 $ 19,388 ========= =========
See notes to Condensed Consolidated Financial Statements. 5 DEAN FOODS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2003 (UNAUDITED) 1. GENERAL Basis of Presentation -- The unaudited Condensed Consolidated Financial Statements contained in this report have been prepared on the same basis as the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2002. 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 reclassifications have been made to conform the prior year's Consolidated Financial Statements to the current year classifications. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. Our results of operations for the period ended March 31, 2003 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this report should be read in conjunction with our 2002 Consolidated Financial Statements contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 27, 2003. On April 23, 2002, we effected a two-for-one split of our common stock. Pursuant to the split, all shareholders of record as of April 8, 2002 received one additional share of common stock for each share held on that date. All share numbers contained in our Condensed Consolidated Financial Statements, and in these notes, have been adjusted for all periods to reflect the stock split. This Quarterly Report, including these notes, have been written in accordance with the Securities and Exchange Commission's "Plain English" guidelines. 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 -- In June 2001, Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which the associated legal obligation for the liability is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and amortized over the useful life of the asset. SFAS No. 143 became effective for us in 2003. The adoption of this pronouncement did not have a material impact on our Consolidated Financial Statements. SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," was issued in April 2002 and is applicable to fiscal years beginning after May 15, 2002. One of the provisions of this technical statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," whereby any gain or loss on the early extinguishment of debt that was classified as an extraordinary item in prior periods in accordance with SFAS No. 4, which does not meet the criteria of an extraordinary item as defined by APB Opinion 30, must be reclassified. Adoption of this standard requires us to reclassify extraordinary losses previously reported from the early extinguishment of debt as a component of "other expense." In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and is effective for exit or disposal activities that are 6 initiated after December 31, 2002. Our adoption of this standard will change the timing of the recognition of certain charges associated with exit and disposal activities. In November 2002, FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the requirements of SFAS No. 5 "Accounting for Contingencies," relating to the guarantor's accounting for and disclosures of certain guarantees issued. FIN No. 45 requires disclosure of guarantees. It also requires liability recognition for the fair value of guarantees made after December 31, 2002. We adopted the liability recognition requirements of FIN No. 45 effective January 1, 2003. The adoption of this pronouncement did not have a material effect on our Consolidated Financial Statements. In January 2003, FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or in which equity investors do not bear the residual economic risks. The interpretation applies to variable interest entities ("VIEs") created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. It applies in the fiscal or interim period beginning after June 15, 2003, to VIEs in which an enterprise holds a variable interest that was acquired before February 1, 2003. We currently utilize special purpose limited liability entities to facilitate our receivable-backed loan and our trust-issued preferred securities. Since their formations, these entities have been consolidated in our financial statements for financial reporting purposes. Therefore, FIN No. 46 will have no impact on our Consolidated Financial Statements. Employee Stock-Based Compensation -- We measure compensation expense for our stock-based employee compensation plans using the intrinsic value method and provide the required pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense. We have elected to follow Accounting Principles Board Opinion No. 25 and related interpretations in accounting for our stock options. All options granted to date have been to employees, officers or directors. Accordingly, no compensation expense has been recognized since stock options granted were at exercise prices which approximated or exceeded market value at the grant date. Had compensation expense been determined for stock option grants using fair value methods provided for in SFAS No. 123, Accounting for Stock-Based Compensation, our pro forma net income and net income per common share would have been the amounts indicated below:
Three Months Ended March 31 -------------------------- 2003 2002 ---------- ---------- (In thousands, except share data) Net income, as reported..................................... $ 63,209 $ (29,624) Less: Stock based employee compensation, net of income tax expense................................................... 8,459 7,900 ---------- ---------- Pro forma net income........................................ $ 54,750 $ (37,524) ========== ========== Net income per share: Basic -- as reported...................................... $ 0.73 $ (0.33) Basic -- pro forma........................................ 0.63 (0.42) Diluted -- as reported.................................... 0.65 (0.23) Diluted -- pro forma...................................... 0.57 (0.30) Stock option share data: Stock options granted during period....................... 2,225,327 4,826,170 Weighted average option fair value........................ 17.23(1) 14.79(2)
- --------------- (1) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 38%, expected dividend yield of 0%, expected option term of seven 7 years and risk-free rates of return as of the date of grant of ranging from 3.56% to 3.64% based on the yield of seven-year U.S. Treasury securities. (2) Calculated in accordance with the Black-Scholes option pricing model, using the following assumptions: expected volatility of 38%, expected dividend yield of 0%, expected option term of seven years and risk-free rates of return as of the date of grant of 4.64% based on the yield of seven-year U.S. Treasury securities. 2. DISCONTINUED OPERATIONS On December 30, 2002, we sold our operations in Puerto Rico for a net price of approximately $119.4 million. In accordance with generally accepted accounting principles, our financial statements have been restated to reflect our former Puerto Rico business as a discontinued operation. Revenues and income before taxes generated by our Puerto Rico operations were as follows:
Three Months Ended March 31, 2002 ------------------ (In thousands) Net sales................................................... $55,766 Income before tax(1)........................................ 1,129
- --------------- (1) Corporate interest expense of $1.4 million for the three months ended March 31, 2002 was allocated to our Puerto Rico operations based on the ratio of our investment in them to total debt and equity. All intercompany revenues and expenses have been appropriately eliminated in the table above. In the first quarter of 2002 we recognized an impairment charge of $37.7 million related to the goodwill of our Puerto Rico operations in accordance with our implementation of SFAS No. 142 "Goodwill and Other Intangible Assets." This loss is reflected as a cumulative change in accounting principle in our Consolidated Financial Statements. 3. INVENTORIES
At At March 31, December 31, 2003 2002 ------------ --------------- (In thousands) Raw materials and supplies........................... $160,752 $151,179 Finished goods....................................... 257,651 249,168 -------- -------- Total.............................................. $418,403 $400,347 ======== ========
Approximately $72.2 million and $97.3 million of our inventory was accounted for under the last-in, first-out (LIFO) method of accounting at March 31, 2003 and December 31, 2002, respectively. There was no material excess of current cost over the stated value of LIFO inventories at either date. 8 4. INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the three months ended March 31, 2003 are as follows:
Morningstar/ Specialty Dairy Group White Wave Foods Other Total ----------- ------------ --------- ------- ---------- (In thousands) Balance at December 31, 2002....................... $2,149,389 $510,652 $304,290 $71,086 $3,035,417 Acquisitions................. 523 523 Purchase accounting adjustments................ (54) 100 46 Currency changes and other... 2,818 2,818 ---------- -------- -------- ------- ---------- Balance at March 31, 2003.... $2,149,858 $510,752 $304,290 $73,904 $3,038,804 ========== ======== ======== ======= ==========
The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of March 31, 2003 and December 31, 2002 are as follows:
March 31, 2003 December 31, 2002 ---------------------------------- ---------------------------------- Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount -------- ------------ -------- -------- ------------ -------- (In thousands) Intangible assets with indefinite lives: Trademarks......... $479,129 $(14,274) $464,855 $478,691 $(14,274) $464,417 Intangible assets with finite lives: Customer-related... 54,160 (12,138) 42,022 56,864 (13,270) 43,594 -------- -------- -------- -------- -------- -------- Total other intangibles........ $533,289 $(26,412) $506,877 $535,555 $(27,544) $508,011 ======== ======== ======== ======== ======== ========
In accordance with SFAS No. 142, we completed an impairment assessment of our intangibles with an indefinite useful life, other than goodwill, at January 1, 2002 during the first quarter of 2002. We determined that an impairment of $47.3 million, net of income tax benefit of $29 million existed at January 1, 2002. The impairment related to certain trademarks in our Dairy Group and Morningstar/ White Wave segments, and was recorded in the first quarter as the cumulative effect of accounting change. The fair value of these trademarks was determined using a present value technique. Amortization expense on intangible assets for the three months ended March 31, 2003 and 2002 was $1.6 million and $1.9 million, respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows: 2004................................................... $4.0 million 2005................................................... 3.9 million 2006................................................... 3.7 million 2007................................................... 3.5 million 2008................................................... 3.5 million
9 5. LONG-TERM DEBT
At March 31, 2003 At December 31, 2002 ------------------------ ------------------------ Amount Interest Amount Interest Outstanding Rate Outstanding Rate ----------- ---------- ----------- ---------- (Dollars in thousands) Senior credit facility.................... $1,800,950 3.54% $1,827,500 3.65% Subsidiary debt obligations: Senior notes............................ 657,850 6.625-8.15 656,951 6.625-8.15 Receivables-backed loan................. 245,000 1.92 145,000 2.28 Foreign subsidiary term loan............ 34,072 4.44 35,739 4.69 Other lines of credit................... 6,471 3.26 11,919 3.71-4.69 Industrial development revenue bonds.... 21,000 1.27-1.40 21,000 1.65-2.00 Capital lease obligations and other..... 37,998 29,815 ---------- ---------- 2,803,341 2,727,924 Less current portion...................... (185,228) (173,442) ---------- ---------- Total........................... $2,618,113 $2,554,482 ========== ==========
Senior Credit Facility -- On December 21, 2001, in connection with our acquisition of Dean Foods Company ("Old Dean"), we entered into a $2.7 billion senior credit agreement with a syndicate of lenders. The senior credit facility provides an $800 million revolving line of credit, a Tranche A $900 million term loan and a Tranche B $1 billion term loan. At March 31, 2003 there were outstanding term loan borrowings of $1.79 billion under this facility, plus $9.7 million that was outstanding under the revolving line of credit. $75 million of letters of credit were issued but undrawn. At March 31, 2003, approximately $715.3 million was available for future borrowings under the revolving credit facility, subject to satisfaction of certain conditions contained in the loan agreement. We are currently in compliance with all covenants contained in our credit agreement. Credit Facility Terms -- Amounts outstanding under the revolver and the Tranche A term loan bear interest at a rate per annum equal to one of the following rates, at our option: - a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin that varies from 25 to 150 basis points, depending on our leverage ratio (which is computed as the ratio of indebtedness to EBITDA, as such terms are defined in the credit agreement), or - the London Interbank Offering Rate ("LIBOR") divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 150 to 275 basis points, depending on our leverage ratio. Borrowings under the Tranche B term loan bear interest at a rate per annum equal to one of the following rates, at our option: - a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin that varies from 75 to 150 basis points, depending on our leverage ratio, or - LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 200 to 275 basis points, depending on our leverage ratio. The blended interest rate in effect on borrowings under the senior credit facility, including the applicable interest rate margin, was 3.54% at March 31, 2003. However, we had interest rate swap agreements in place that hedged $1.48 billion of our borrowings under this facility at an average rate of 4.34%, plus the applicable interest rate margin. Interest is payable quarterly or at the end of the applicable interest period. 10 The agreement requires principal payments on the Tranche A term loan as follows: - $16.87 million quarterly from March 31, 2002 through December 31, 2002; - $33.75 million quarterly from March 31, 2003 through December 31, 2004; - $39.38 million quarterly from March 31, 2005 through December 31, 2005; - $45.0 million quarterly from March 31, 2006 through December 31, 2006; - $56.25 million quarterly from March 31, 2007 through June 30, 2007; and - A final payment of $112.5 million on July 15, 2007. The agreement requires principal payments on the Tranche B term loan as follows: - $1.25 million quarterly from March 31, 2002 through December 31, 2002; - $2.5 million quarterly from March 31, 2003 through December 31, 2007; - A payment of $472.5 million on March 31, 2008; and - A final payment of $472.5 million on July 15, 2008. No principal payments are due on the $800 million line of credit until maturity on July 15, 2007. The credit agreement also requires mandatory principal prepayments in certain circumstances including without limitation: (1) upon the occurrence of certain asset dispositions not in the ordinary course of business, and (2) upon the occurrence of certain debt and equity issuances when our leverage ratio is greater than 3.75 to 1.0. The credit agreement requires that we prepay 50% of defined excess cash flow for any fiscal year (beginning in 2003) in which our leverage ratio at year end is greater than 3.75 to 1.0. As of March 31, 2003, our leverage ratio was 3.4 to 1.0. In consideration for the revolving commitments, we pay a commitment fee on unused amounts of the $800 million revolving credit facility that ranges from 37.5 to 50 basis points, based on our leverage ratio. The senior credit facility contains various financial and other restrictive covenants and requires that we maintain certain financial ratios, including a leverage ratio (computed as the ratio of the aggregate outstanding principal amount of defined indebtedness to defined EBITDA) and an interest coverage ratio (computed as the ratio of defined EBITDA to interest expense). In addition, this facility requires that we maintain a minimum level of net worth (as defined by the agreement). Our leverage ratio must be less than or equal to:
Period Ratio - ------ ------------ 01-01-03 through 12-31-03................................... 4.00 to 1.00 01-01-04 through 12-31-04................................... 3.75 to 1.00 01-01-05 and thereafter..................................... 3.25 to 1.00
Our interest coverage ratio must be greater than or equal to 3.00 to 1.00. Our consolidated net worth must be greater than or equal to $1.2 billion, as increased each quarter (beginning with the quarter ended March 31, 2002) by an amount equal to 50% of our consolidated net income for the quarter, plus 75% of the amount by which stockholders' equity is increased by certain equity issuances. As of March 31, 2003, the minimum net worth requirement was $1.3 billion. Our credit agreement permits us to complete acquisitions that meet the following conditions without obtaining prior approval: (1) the acquired company is involved in the manufacture, processing and distribution of food or packaging products or any other line of business in which we are currently engaged, (2) the net cash consideration is not greater than $300 million, (3) we acquire at least 51% of the acquired entity, and (4) the transaction is approved by the Board of Directors or shareholders, as appropriate, of the target. All other acquisitions must be approved in advance by the required lenders. 11 Our credit agreement also permits us to repurchase stock under our share repurchase program, provided that, if our leverage ratio is greater than 3.75 to 1.0, total Restricted Payments (as defined in the agreement, which definition includes stock repurchases) cannot exceed $50 million per year, plus the amount of payments required to be made on our outstanding convertible preferred securities during that year. The facility also contains limitations on liens, investments and the incurrence of additional indebtedness, and prohibits certain dispositions of property and restricts certain payments, including dividends. The credit facility is secured by liens on substantially all of our domestic assets (including the assets of our subsidiaries, but excluding the capital stock of Old Dean's subsidiaries, and the real property owned by Old Dean and its subsidiaries). The agreement contains standard default triggers, including without limitation: failure to maintain compliance with the financial and other covenants contained in the agreement, default on certain of our other debt, a change in control and certain other material adverse changes in our business. The agreement does not contain any default triggers based on our debt rating. Senior Notes -- Old Dean had certain senior notes outstanding at the time of the acquisition which remain outstanding. The notes carry the following interest rates and maturities: - $97.1 million ($100 million face value), at 6.75% interest, maturing in 2005; - $250.5 million ($250 million face value), at 8.15% interest, maturing in 2007; - $184.7 million ($200 million face value), at 6.625% interest, maturing in 2009; and - $125.6 million ($150 million face value), at 6.9% interest, maturing in 2017. The related indentures do not contain financial covenants but they do contain certain restrictions including a prohibition against Old Dean and its subsidiaries granting liens on their respective real estate interests and a prohibition against Old Dean granting liens on the stock of its subsidiaries. The indentures also place certain restrictions on Old Dean's ability to divest assets not in the ordinary course of business. Receivables-Backed Loan -- We have entered into a $400 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 balance sheet, and the securitization is treated as a borrowing for accounting purposes. During the first quarter of 2003, we had net borrowings of $100 million under this facility leaving an outstanding balance of $245 million at March 31, 2003. The receivables-backed loan bears interest at a variable rate based on the commercial paper yield as defined in the agreement. The average interest rate on the receivables-backed loan was 1.92% at March 31, 2003. Our ability to re-borrow under this facility is subject to a standard "borrowing base" formula. At March 31, 2003, we could have re-borrowed an additional $85.1 million under this facility. Foreign Subsidiary Term Loan -- In connection with our acquisition of Leche Celta in February 2000, our Spanish subsidiary obtained a 42.1 million euro (as of March 31, 2003, approximately $45.9 million) non-recourse term loan from a syndicate of lenders, all of which was borrowed at closing and used to finance a portion of the purchase price. The loan, which is secured by the stock of Leche Celta, will expire on February 21, 2007, bears interest at a variable rate based on the ratio of Leche Celta's debt to EBITDA (as defined in the corresponding loan agreement), and requires semi-annual principal payments. At March 31, 2003, a total of $34.1 million was outstanding under this facility. The interest rate in effect on this loan at March 31, 2003 was 4.44%. Other Lines of Credit -- Leche Celta is our only subsidiary with its own lines of credit separate from the credit facilities described above. Leche Celta's primary line of credit, which is in the principal amount of 15 million euros (as of March 31, 2003 approximately $16.4 million), was obtained on July 12, 2000, 12 bears interest at a variable interest rate based on the ratio of Leche Celta's debt to EBITDA (as defined in the corresponding loan agreement), is secured by our stock in Leche Celta and will expire in June 2007. Leche Celta also utilizes other local commercial lines of credit. At March 31, 2003, $6.5 million was outstanding under these lines of credit at an average interest rate of 3.26%. Industrial Development Revenue Bonds -- Certain of our subsidiaries have revenue bonds outstanding, some of which require nominal annual sinking fund redemptions. Typically, these bonds are secured by irrevocable letters of credit issued by financial institutions, along with first mortgages on the related real property and equipment. Interest on these bonds is due semiannually at interest rates that vary based on market conditions which, at March 31, 2003 ranged from 1.27% to 1.40%. Other Subsidiary Debt -- Other subsidiary debt includes various promissory notes for the purchase of property, plant, and equipment and capital lease obligations. The various promissory notes payable provide for interest at varying rates and are payable in monthly installments of principal and interest until maturity, when the remaining principal balances are due. Capital lease obligations represent machinery and equipment financing obligations which are payable in monthly installments of principal and interest and are collateralized by the related assets financed. Letters of Credit -- At March 31, 2003 there were $75 million of issued but undrawn letters of credit secured by our senior credit facility. In addition to the letters of credit secured by our credit facility, an additional $48.2 million of letters of credit were outstanding at March 31, 2003. The majority of these letters of credit were required by various utilities and government entities for performance and insurance guarantees. 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 our interest rate risk and stabilizing cash flows. These swap agreements provide hedges for loans under our senior credit facility by limiting or fixing the LIBOR interest rates specified in the senior credit facility at the interest rates noted below until the indicated expiration dates of these interest rate swap agreements. The following table summarizes our various interest rate agreements in effect as of March 31, 2003:
Fixed Interest Rates Expiration Date Notional Amounts - -------------------- --------------- ---------------- (In millions) 6.23%............... June 2003 $ 50 1.47% to 4.69%...... December 2003 675 4.01% to 6.69%...... December 2004 275 5.20% to 6.74%...... December 2005 400 6.78%............... December 2006 75
The following table summarizes our various interest rate agreements as of December 31, 2002:
Fixed Interest Rates Expiration Date Notional Amounts - -------------------- --------------- ---------------- (In millions) 6.23%............... June 2003 $ 50 4.29% to 4.69%...... December 2003 275 4.01% to 6.69%...... December 2004 275 5.20% to 6.74%...... December 2005 400 6.78%............... December 2006 75
13 We have also entered into interest rate swap agreements that provide hedges for loans under Leche Celta's term loan. The following table summarizes these agreements:
Fixed Interest Rates Expiration Date Notional Amounts - -------------------- --------------- ---------------- 5.54% November 2003 9 million euros (approximately $9.8 million as of March 31, 2003 and $9.4 million as of December 31, 2002) 5.6% November 2004 12 million euros (approximately $13.1 million as of March 31, 2003 and $12.6 million as of December 31, 2002)
These swaps are required to be recorded as an asset or liability on our 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. As of March 31, 2003, our derivative liability totaled $75.8 million on our consolidated balance sheet including approximately $42.6 million recorded as a component of accounts payable and accrued expenses and $33.2 million recorded as a component of other long-term liabilities. There was no hedge ineffectiveness, as determined in accordance with SFAS No. 133, for the quarter ended March 31, 2003. Approximately $7.1 million of losses (net of taxes) were reclassified to interest expense from other comprehensive income during the quarter ended March 31, 2003. We estimate that approximately $27.1 million of net derivative losses (net of taxes) included in other comprehensive income will be reclassified into earnings within the next twelve months. These losses will partially offset the lower interest payments recorded on our variable rate debt. We are exposed to market risk under these arrangements due to the possibility of interest rates on the credit facilities falling below the rates on our interest rate swap agreements. Credit risk under these arrangements is remote since the counterparties to our interest rate swap agreements are major financial institutions. 6. STOCKHOLDERS' EQUITY Stock Award Plans -- The following table summarizes stock option activity during the first quarter of 2003 under our stock-based compensation programs:
Weighted Average Exercise Options Price ---------- ---------------- Options outstanding at December 31, 2002.............. 13,039,020 $24.83 Options granted during quarter(1)................... 2,225,327 37.20 Options canceled or forfeited during quarter(2)..... (170,498) 28.46 Options exercised during quarter.................... (1,759,380) 22.74 ---------- Options outstanding at March 31, 2003................. 13,334,469 27.06 ==========
- --------------- (1) Options vest as follows: one-third on the first anniversary of the grant date, one-third on the second anniversary of the grant date, and one-third on the third anniversary of the grant date. (2) Pursuant to the terms of our stock award plans, options that are canceled or forfeited become available for future grants. We issued 8,957 shares of restricted stock during the quarter to independent directors as compensation for services rendered during the fourth quarter of 2002 and first quarter of 2003. Shares of 14 restricted stock vest one-third on grant, one-third on the first anniversary of grant and one-third on the second anniversary of grant. We also issued 512,500 deferred stock units ("DSU's") to certain key employees during the first quarter of 2003. Each DSU represents the right to receive one share of common stock in the future. DSU's have no exercise price. Each employee's DSU grant vests ratably over 5 years, subject to certain accelerated vesting provisions based primarily on our stock price. Earnings Per Share -- 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 during each period. The following table reconciles the numerators and denominators used in the computations of both basic and diluted earnings per share ("EPS"):
Three Months Ended March 31 --------------------------------- 2003 2002 --------------- --------------- (In thousands, except share data) Basic EPS computation: Numerator: Income from continuing operations.................... $ 63,209 $ 54,663 Denominator: Average common shares................................ 86,858,785 88,876,210 Basic EPS from continuing operations.................... $ 0.73 $ 0.62 Diluted EPS computation: Numerator: Income from continuing operations.................... $ 63,209 $ 54,663 Net effect on earnings from conversion of mandatorily redeemable convertible preferred securities........ 5,331 5,331 ------------ ------------ Income applicable to common stock.................... $ 68,540 $ 59,994 ============ ============ Denominator: Average common shares -- basic....................... 86,858,785 88,876,210 Stock option conversion(1)........................... 3,536,452 3,693,320 Deferred stock units conversion...................... 472,639 Dilutive effect of conversion of mandatorily redeemable convertible preferred securities........ 15,332,752 15,333,428 ------------ ------------ Average common shares -- diluted........................ 106,200,628 107,902,958 ============ ============ Diluted EPS from continuing operations.................. $ 0.65 $ 0.55
- --------------- (1) Stock option conversion excludes 90,240 anti-dilutive shares at March 31, 2002. Common Stock Repurchases -- On each of January 8, 2003 and February 12, 2003, our Board of Directors authorized additional increases to our stock repurchase program of $150 million each. During the first quarter of 2003, we spent approximately $129 million to repurchase approximately 3.24 million shares of our common stock for an average price of $39.72 per share. At March 31, 2003, approximately $171.6 remained available under our current stock repurchase authorization. TIPES Conversions -- On March 17, 2003, we announced that we would redeem $100 million of our trust issued preferred securities ("TIPES") effective April 17, 2003. Holders of approximately 99% of TIPES that were called for redemption elected to convert their TIPES into shares of our common stock, at a conversion rate of 1.278 shares of common stock for each TIPES security, instead of being redeemed for cash. Accordingly, we issued approximately 2.5 million shares of common stock to holders of TIPES 15 that were called for redemption, 7.4 thousand of which were issued during the first quarter of 2003, and the balance of which were issued between April 1 and April 16, 2003. See Note 12. 7. COMPREHENSIVE INCOME Comprehensive income consists of net income plus all other changes in equity from non-owner sources. Consolidated comprehensive income was $68.2 million for the three-month period ending March 31, 2003. The amounts of income tax (expense) benefit allocated to each component of other comprehensive income during the three months ended March 31, 2003 are included below.
Pre-Tax Income Tax Benefit Net (Loss) (Expense) Amount -------------- ----------- ---------- (In thousands) Accumulated other comprehensive income, December 31, 2002...................... $(91,684) $35,979 $(55,705) Cumulative translation adjustment arising during period............... 2,972 (1,169) 1,803 Net change in fair value of derivative instruments......................... (6,102) 2,201 (3,901) Amounts reclassified to income statement related to derivatives.... 11,168 (4,044) 7,124 -------- ------- -------- Accumulated other comprehensive income, March 31, 2003......................... $(83,646) $32,967 $(50,679) ======== ======= ========
8. PLANT CLOSING COSTS Plant Closing Costs -- As part of an overall integration and cost reduction program, we previously recorded plant closing costs related to the closing of our Port Huron, Michigan plant with consolidation of production into other plants. As part of this charge, we wrote down the value of the Port Huron plant. In the first quarter of 2003, we sold this facility for more than expected, resulting in a gain of $1.7 million. This gain was recorded as a reduction of restructuring expense. The principal components of our overall integration and cost reduction program include the following: - Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions. The program includes an overall reduction of 446 employees who were primarily plant employees associated with the plant closings and rationalization. The costs were charged to our earnings in the period that the plan was established in detail and employee severance and benefits had been appropriately communicated. All except 35 employees had been terminated as of March 31, 2003; - Shutdown costs, including those costs that are necessary to prepare the plant facilities for closure; - Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes; and - Write-downs of property, plant and equipment and other assets, primarily for asset impairments as a result of facilities that are no longer used in operations. The impairments relate primarily to owned buildings, land and equipment at the facilities which are being sold and were 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 March 31, 2003 was approximately $2.6 million. We are marketing these properties for sale. Divestitures of the closed facilities has not resulted in significant modification to the estimate of fair value. 16 Activity with respect to plant closing costs during the first quarter of 2003 is summarized below:
Balance at Balance at December 31, Charges/ March 31, 2002 (Gain) Payments 2003 ------------ -------- -------- ---------- (In thousands) Cash charges: Workforce reduction costs......... $3,882 $ $(1,151) $2,731 Shutdown costs.................... 1,657 (90) 1,567 Lease obligations after shutdown....................... 668 (172) 496 Other............................. 786 (160) 626 ------ ------- ------- ------ Subtotal....................... $6,993 $(1,573) $5,420 ====== ======= ====== Gain on sale of facility............ (1,690) ------- Total charges (gain)........... $(1,690) =======
There have not been significant adjustments to the plans and the majority of future cash requirements to reduce the liability at March 31, 2003 are expected to be funded within a year. Acquired Facility Closing Costs -- As part of our purchase price allocations, we accrue costs from time to time pursuant to plans to exit certain activities and operations of acquired businesses in order to rationalize production and reduce costs and inefficiencies. Several plants were closed in connection with our acquisition of Old Dean and one plant was closed in connection with our acquisition of Marie's. The principal components of the plans include the following: - Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions and offices, resulting in an overall reduction of 844 plant and administrative personnel. The costs incurred are charged against our acquisition liabilities for these costs. As of March 31, 2003, 43 employees had not yet been terminated; - Shutdown costs, including those costs that are necessary to clean and prepare the plant facilities for closure; and - Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes after shutdown of the plant or administrative office. Activity with respect to these acquisition liabilities during the first quarter of 2003 is summarized below:
Balance at Balance at December 31, March 31, 2002 Accruals Payments 2003 ------------ -------- -------- ---------- (In thousands) Workforce reduction costs........... $ 9,002 $100 $(3,383) $ 5,719 Shutdown costs...................... 11,637 (630) 11,007 ------- ---- ------- ------- Total............................... $20,639 $100 $(4,013) $16,726 ======= ==== ======= =======
9. SHIPPING AND HANDLING FEES Our shipping and handling costs are included in both cost of sales and selling and distribution expense, depending on the nature of such costs. Shipping and handling costs included in cost of sales reflect the cost of shipping products to customers through third party carriers, inventory warehouse costs and product loading and handling costs. Shipping and handling costs included in selling and distribution expense consist primarily of route delivery costs for both company-owned delivery routes and independent distributor routes, to the extent that such independent distributors are paid a delivery fee. Shipping and 17 handling costs that were recorded as a component of selling and distribution expense were approximately $241.5 million during the first quarter of 2003 and $231.7 million during the first quarter of 2002. 10. COMMITMENTS AND CONTINGENCIES Leases -- 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 1 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. Contingent Obligations Related to Milk Supply Arrangements -- On December 21, 2001, in connection with our acquisition of Old Dean, we purchased Dairy Farmers of America's ("DFA") 33.8% stake in our Dairy Group. In connection with that transaction, we issued a contingent, subordinated promissory note to DFA in the original principal amount of $40 million. DFA is our primary supplier of raw milk, and the promissory note is designed to ensure that DFA has the opportunity to continue to supply raw milk to certain of our plants until 2021, or be paid for the loss of that business. The promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we ever materially breach or terminate one of our milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire at the end of 20 years, without any obligation to pay any portion of the principal or interest. Payments made under the note, if any, would be expensed as incurred. Also as part of the same transaction, we amended a milk supply agreement with DFA to provide that: - If we have not offered DFA the right to supply all of our raw milk requirements for certain of Old Dean's plants by either (i) June 2003, or (ii) with respect to certain other plants, the end of the sixth full calendar month following the expiration of milk supply agreements in existence at those plants on December 21, 2001, or - If DFA is prohibited from supplying those plants because of an injunction, restraining order or otherwise as a result of or arising from a milk supply contract to which we are party, we must pay DFA liquidated damages determined and paid on a plant-by-plant basis, based generally on the amount of raw milk used by that plant, up to an aggregate maximum of $47 million. Liquidated damages would be payable in arrears in equal, quarterly installments over a 5-year period, without interest. If we are required to pay any such liquidated damages, the principal amount of the $40 million subordinated promissory note described above will be reduced by an amount equal to 25% of the liquidated damages paid. We cannot currently estimate the amount of damages that we may have to pay, if any. Contingent Obligations Related to White Wave Acquisition -- On May 9, 2002, we completed the acquisition of White Wave, Inc. In connection with the acquisition, we established a Performance Bonus Plan pursuant to which we have agreed to pay performance bonuses to certain employees of White Wave if certain performance targets are achieved. Specifically, we agreed that if the cumulative net sales (as defined in the plan) of White Wave equal or exceed $382.5 million during the period beginning April 1, 2002 and ending March 31, 2004 (the "Incentive Period") and White Wave does not exceed the budgetary restrictions set forth in the plan by more than $1 million during the Incentive Period, we will pay employee bonuses as follows: - If cumulative net sales during the Incentive Period are between $382.5 million and $450 million, the bonus paid will scale ratably (meaning $129,630 for each $1 million of net sales) between $26.025 million and $35.0 million; and 18 - If cumulative net sales exceed $450 million during the Incentive Period, additional amounts will be paid as follows: - First $50 million above $450 million net sales: 10% of amount in excess of $450 million, plus - Second $50 million above $450 million net sales: 15% of amount in excess of $500 million, plus - In excess of $550 million net sales: 20% of amount in excess of $550 million. We currently expect the aggregate amount of bonuses payable under White Wave's Performance Bonus Plan to be in the range of $35 million to $40 million, and we have recorded quarterly accruals based on the aggregate amount that we expect to pay. Key employees of White Wave are also entitled to receive certain payments if they are terminated without cause (or as a result of death or incapacity) during the Incentive Period. Contingent Obligations Related to Divested Operations -- We have sold several businesses in recent years. In each case, we have retained certain known contingent liabilities related to those businesses and/or assumed an obligation to indemnify the purchasers of the businesses for certain unknown contingent liabilities. In the case of the sale of our Puerto Rico operations, we were required to post collateral, including one surety bond and one letter of credit, to secure our obligation to satisfy the retained liabilities and to fulfill our indemnification obligation. We believe we have established adequate reserves for any potential liability 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 be material. Enron -- In 1999, we entered into an Energy Program Agreement with Enron Energy Services pursuant to which we contracted to purchase electricity for certain of our plants at a discounted rate for a ten-year period. Under the agreement, Enron (i) supplied (or arranged for the supply of) utilities to our facilities and paid the costs of such utilities directly to the utility suppliers, and (ii) made certain capital improvements at certain of our facilities in an effort to reduce our utility consumption, all in exchange for one monthly payment from us. In November 2001, Enron stopped performing under the agreement and in December 2001, Enron filed for bankruptcy protection. Shortly thereafter, Enron rejected our contract. In order to compensate us for our lost savings, the Energy Program Agreement provided for formula-based liquidated damages. We have filed a claim in Enron's bankruptcy for our damages. We have received correspondence from Enron demanding payment of certain amounts that Enron alleges we owe under the agreement. We have disputed the validity of Enron's claim and are in the process of attempting to negotiate an agreement with Enron for the settlement of our claims against each other. We cannot estimate the outcome of any settlement with Enron. However, we do not expect the settlement to have a material adverse impact on our financial position, results of operations or cash flows. Litigation, Investigations and Audits -- We and our subsidiaries are parties, in the ordinary course of business, to certain other claims, litigation, audits and investigations. We believe we have adequate reserves for any liability we may incur in connection with any such currently pending or threatened matter. 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. 11. BUSINESS AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS Segment Data -- We currently have three reportable segments: Dairy Group, Morningstar/White Wave and Specialty Foods. Our Dairy Group segment manufactures and distributes milk, ice cream and ice cream novelties, half-and-half and whipping cream, cultured dairy products, fruit juices, other flavored drinks, bottled water, coffee creamers, dips and condensed milk. Morningstar/White Wave manufactures and sells dairy and non-dairy liquid coffee creamers, extended shelf-life milks, cultured dairy products, dips and dressings, aerosol whipped topping, dairy and nondairy frozen whipped topping and frozen creamers, egg substitute, soy milk and other soy products. Specialty Foods processes and sells pickles, relishes and peppers; powdered products such as non-dairy coffee creamers; aseptic sauces and puddings and nutritional beverages. Our Spanish operations do not meet the definition of a segment and are reported in 19 "Corporate/Other." The 2002 period has been restated to remove the results of our former Puerto Rico operations, which have been reclassified as a discontinued operation. The accounting policies of the segments are the same as those described in the summary of significant accounting policies set forth in Note 1 to our 2002 Consolidated Financial Statements contained in our 2002 Annual Report on Form 10-K. We evaluate performance based on operating profit not including non- recurring gains and losses and foreign exchange gains and losses. The amounts in the following tables are obtained from reports used by our executive management team and do not include any allocated income taxes or management fees. There are no significant non-cash items reported in segment profit or loss other than depreciation and amortization.
Three Months Ended March 31 ----------------------- 2003 2002 ---------- ---------- (In thousands) Net sales to external customers: Dairy Group............................................... $1,683,669 $1,777,503 Morningstar/White Wave.................................... 239,248 238,580 Specialty Foods........................................... 162,938 161,215 Corporate/Other........................................... 59,023 48,922 ---------- ---------- Total..................................................... $2,144,878 $2,226,220 ========== ========== Intersegment sales: Dairy Group............................................... $ 6,445 $ 6,077 Morningstar/White Wave.................................... 21,855 29,150 Specialty Foods........................................... 4,294 3,876 ---------- ---------- Total..................................................... $ 32,594 $ 39,103 ========== ========== Operating income: Dairy Group(1)............................................ $ 138,366 $ 126,209 Morningstar/White Wave.................................... 12,049 23,105 Specialty Foods........................................... 23,827 20,787 Corporate/Other........................................... (17,260) (24,290) ---------- ---------- Total..................................................... $ 156,982 $ 145,811 ========== ==========
At March 31 ----------------------- 2003 2002 ---------- ---------- Assets: Dairy Group............................................... $4,407,211 $4,391,583 Morningstar/White Wave.................................... 1,094,766 894,997 Specialty Foods........................................... 597,396 608,006 Corporate/Other........................................... 471,640 625,424 ---------- ---------- Total..................................................... $6,571,013 $6,520,010 ========== ==========
- --------------- (1) Operating income includes a gain of $1.7 million on the disposition of a plant in the first three months of 2003 and plant closing costs of $1.2 million in the first three months of 2002. 20 Geographic Information
Revenues for the Three Months Ended Long-Lived Assets at March 31 March 31 ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (In thousands) United States................................ $2,085,855 $2,173,117 $5,152,972 $4,863,509 Puerto Rico(1)............................... 131,458 Europe....................................... 59,023 53,103 132,164 119,830 ---------- ---------- ---------- ---------- Total...................................... $2,144,878 $2,226,220 $5,285,136 $5,114,797 ========== ========== ========== ==========
- --------------- (1) Revenues have been restated to remove revenues related to our Puerto Rico operations, which have been reclassified as discontinued operations. Significant Customers -- Our Dairy Group had one customer that represented greater than 10% of its sales in the first quarter of 2003. Approximately 11% of our consolidated sales in the first quarter of 2003 were to that same customer. 12. SUBSEQUENT EVENTS TIPES Redemption -- On March 17, 2003, we announced that on April 17, 2003, we would redeem TIPES with an aggregate liquidation value of $100 million at a redemption price of $51.035 per security. Holders of approximately 99% of the TIPES called for redemption elected to convert their TIPES into shares of our common stock rather than receive the cash redemption price. Each TIPES security is convertible into 1.278 shares of our common stock. Accordingly, we issued a total of approximately 2.5 million shares of common stock to holders of TIPES that were called for redemption, approximately 7.4 thousand of which were issued during the first quarter of 2003 and the balance of which were issued between April 1 and April 16, 2003. On April 22, 2003, we announced that we will redeem a second tranche of TIPES. On May 22, 2003, we will redeem another $200 million (aggregate liquidation value) of TIPES at a redemption price of $51.035 per security. Holders of TIPES selected for redemption will have until 4:00 p.m. (EDT) on May 21, 2003, to elect to convert their TIPES into shares of our common stock rather than receive the cash redemption price. Approximately $300 million (aggregate liquidation value) of TIPES will remain outstanding following completion of the second partial redemption. Stock Split -- On May 7, 2003, our Board of Directors declared a three-for-two split of our common stock. The split will be payable on June 9, 2003 to shareholders of record on May 23, 2003. 21 On a pro forma basis as if the stock split had already occurred at each of March 31, 2003 and 2002, common shares outstanding would have been 131 million and 133 million shares, respectively, and earnings per share would have been:
Three Months Ended March 31 --------------------------- 2003 2002 ------------ ------------ Basic earnings per share: Income from continuing operations...................... $ 0.49 $ 0.41 Income from discontinued operations.................... 0.01 Cumulative effect of accounting change................. (0.64) ------------ ------------ Net income............................................. $ 0.49 $ (0.22) ============ ============ Diluted earnings per share: Income from continuing operations...................... $ 0.43 $ 0.37 Income from discontinued operations.................... 0.01 Cumulative effect of accounting change................. (0.53) ------------ ------------ Net income............................................. $ 0.43 $ (0.15) ============ ============ Shares used in per share calculations: Average common shares -- Basic......................... 130,288,178 133,314,315 Average common shares -- Diluted....................... 159,300,942 161,854,437
Organizational Changes -- On May 8, 2003, we announced certain organizational changes designed to sharpen our focus on our strategic brand portfolio and enable us to realize additional manufacturing efficiencies. These changes will include (i) shifting responsibility for manufacturing, selling and distributing Morningstar Foods' private label dairy products out of Morningstar Foods and into our Dairy Group, and (ii) shifting responsibility for the manufacture and distribution of all of Morningstar Foods' remaining products (which are its nationally branded products) into the Dairy Group, with Morningstar Foods remaining responsible for the development, marketing and sales of those products. Approximately half of Morningstar Foods' 2002 sales consisted of sales of private label dairy products. As a result of these changes, which will be implemented over the remainder of 2003, Morningstar Foods will be re-named the Dean Branded Products Group. When the realignment of our operations is complete, which we expect to be by January 2004, a new segment reporting structure will begin pursuant to which (i) Morningstar Foods' existing private label business will be reported in the Dairy Group segment, (ii) the results of the Dean Branded Products Group and White Wave will be aggregated and reported as a segment, and (iii) Specialty Foods will remain unchanged. Until that time, segment results will be reported consistently with prior years. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are the leading processor and distributor of milk and other dairy products in the United States and a leading manufacturer of specialty foods. We have five operating divisions including Dairy Group, Morningstar Foods, White Wave, Specialty Foods and International. In accordance with applicable accounting rules, we currently have three reportable business segments: Dairy Group, Morningstar/White Wave and Specialty Foods. Our Dairy Group manufactures and sells milk, ice cream and novelties, cream (including half-and-half and whipping cream), cultured products, juice, flavored drinks, water, coffee creamers, dips and condensed milk. Our Morningstar/White Wave segment manufactures and sells dairy and non-dairy liquid coffee creamers, extended shelf-life milks, cultured dairy products, dips and dressings, aerosol whipped topping, dairy and non-dairy frozen whipped topping and frozen creamers, egg substitute, as well as soymilk and other soy products. Our Specialty Foods segment manufactures and sells pickles, relishes and peppers; powdered coffee creamers and other powdered products; aseptic sauces and puddings and nutritional beverages. RESULTS OF OPERATIONS The following table presents certain information concerning our results of operations, including information presented as a percentage of net sales.
Three Months Ended March 31 ------------------------------------------- 2003 2002 -------------------- -------------------- Dollars Percent Dollars Percent ---------- ------- ---------- ------- (Dollars in thousands) Net sales................................. $2,144,878 100.0% $2,226,220 100.0% Cost of sales............................. 1,573,645 73.4 1,681,388 75.5 ---------- ----- ---------- ----- Gross profit.............................. 571,233 26.6 544,832 24.5 Operating costs and expenses: Selling and distribution.................. 329,673 15.4 316,284 14.2 General and administrative................ 84,632 3.9 79,291 3.6 Amortization of intangibles............... 1,636 0.1 2,212 0.1 Plant closing costs....................... (1,690) (0.1) 1,234 0.1 ---------- ----- ---------- ----- Total operating expenses........ 414,251 19.3 399,021 18.0 ---------- ----- ---------- ----- Total operating income.................... $ 156,982 7.3% $ 145,811 6.5% ========== ===== ========== =====
QUARTER ENDED MARCH 31, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2002 Net Sales -- Net sales decreased 4% to $2.14 billion during the first quarter of 2003 from $2.23 billion in 2002. Net sales for the Dairy Group decreased 5%, or $93.8 million, in the first quarter of 2003 compared to the first quarter of 2002. This decrease is primarily due to the effects of decreased raw milk costs compared to the prior year. In general, we change the prices that we charge our customers for our products on a monthly basis, as the costs of our raw materials fluctuate. The following table sets forth the 23 average monthly Class I "mover" and average monthly Class II minimum prices for raw skim milk and butterfat for the first quarter of 2003 compared to the first quarter of 2002:
Quarter Ended March 31* --------------------------- % 2003 2002 Change ----- ----- ------- Class I raw skim milk mover(3).......................... $6.30(1) $7.14(1) (11.8)% Class I butterfat mover(3).............................. 1.18(2) 1.41(2) (16.3)% Class II raw skim milk minimum(4)....................... 7.00(1) 7.70(1) (9.0)% Class II butterfat minimum(4)........................... 1.16(2) 1.42(2) (18.3)%
- --------------- * The prices noted in this table are not the prices that we actually pay. The federal order minimum prices at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus a location differential. Class II prices noted in the table are federal minimum prices, applicable at all federally regulated locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and vendor. (1) Prices are per hundredweight. (2) Prices are per pound. (3) We process Class I raw skim milk and butterfat into fluid milk products. (4) We process Class II raw skim milk and butterfat into products such as cottage cheese, creams, ice cream and sour cream. Net sales for Morningstar/White Wave increased slightly by approximately 0.3%, or $0.7 million, during 2003. The acquisition of White Wave contributed approximately $49.8 million during 2003. This increase was offset primarily by the planned phase-out of the Lactaid, Nestle Nesquik and Nestle Coffeemate co-packing businesses, and to a lesser extent by the effects of lower raw milk and bulk cream costs, and the transfer of certain cultured dairy product sales volumes to the Dairy Group. In 2002, we began tracking the sales growth of our strategic brands. Morningstar/White Wave's strategic brands include Hershey's flavored milks and milkshakes, International Delight coffee creamers, Silk soy products, Sun Soy soymilk, Folger's Jakada milk and coffee beverage, Land O'Lakes extended shelf-life products, Marie's dips and dressings and Dean's dips. On a pro forma basis as if White Wave had been acquired on January 1, 2002, strategic brand sales volumes increased approximately 32% in the first quarter of 2003 from the first quarter of 2002. Net sales for our Specialty Foods segment increased slightly by approximately 1%, or $1.7 million, during the first quarter of 2003 compared to the first quarter of 2002. This increase was primarily due to an increase in non-dairy coffee creamer and nutritional beverage sales volumes. Cost of Sales -- Our cost of sales ratio was 73.4% in the first quarter of 2003 compared to 75.5% in the first quarter of 2002. The cost of sales ratio for the Dairy Group decreased to 73.4% in the first quarter of 2003 from 75.2% in the first quarter of 2002 due primarily to lower raw milk costs and also to realized merger synergies. The cost of sales ratio for Morningstar/White Wave decreased to 70% in the first quarter of 2003 from 74% in the first quarter of 2002. This decrease in 2003 was due primarily to the phase-out of the Lactaid and Nestle co-packing businesses, which had a higher cost of sales, to the acquisition of White Wave, which has a lower cost of sales, and to a lesser extent to lower raw material costs. Specialty Foods' cost of sales ratio decreased to 74.7% in the first quarter of 2003 from 75.9% in the first quarter of 2002. This decrease was due to synergies resulting from plant rationalization in 2002, offset by an increase in packaging costs and rising commodity prices. Operating Costs and Expenses -- Our operating expense ratio was 19.3% in the first quarter of 2003 compared to 18.0% during the first quarter of 2002. 24 The operating expense ratio at the Dairy Group was 18.4% in the first quarter of 2003 compared to 17.7% in the first quarter of 2002. The increase in the 2003 operating expense ratio was primarily due to the effect of lower raw material prices in 2003. Lower raw material prices generally result in lower sales dollars. Therefore, falling raw milk prices will generally increase the Dairy Group's operating expense ratio and rising raw milk prices will generally reduce the Dairy Group's operating expense ratio. The operating expense ratio at Morningstar/White Wave was 24.9% during the first quarter of 2003 compared to 16.3% in the first quarter of 2002. This increase was caused primarily by the addition of White Wave, which is accruing significant amounts for bonuses to be paid in March 2004 under the White Wave Performance Bonus Plan that was established when we acquired White Wave in May 2002. See Note 10 to our Condensed Consolidated Financial Statements. The ratio was also significantly impacted by higher marketing, selling and distribution expenses at Morningstar Foods related to the introduction of new products and the promotion of strategic brands. The operating expense ratio for Specialty Foods was 10.7% in the first quarter of 2003 versus 11.2% in the first quarter of 2002 primarily due to the sale of EBI Foods, Ltd., which had higher operating expenses. Operating Income -- Operating income during the first quarter of 2003 was $157 million, an increase of $11.2 million from the first quarter of 2002 operating income of $145.8 million. Our operating margin in the first quarter of 2003 was 7.3% compared to 6.5% in the first quarter of 2002. The Dairy Group's operating margin increased to 8.2% in the first quarter of 2003 from 7.1% in the same period of 2002. This increase is primarily due to the effects of decreased raw milk costs compared to the prior year. The operating margin for our Morningstar/White Wave segment declined to 5% in the first quarter of 2003 from 9.7% in the first quarter of 2002. This decrease was primarily due to the addition of White Wave and higher marketing, selling and distribution expenses related to the introduction of new products and promotion of strategic brands. The ratio was also affected by significant bonus accruals in the first quarter of 2003 under White Wave's Performance Bonus Plan. Specialty Foods' operating margin was 14.6% in the first quarter of 2003 versus 12.9% in the first quarter of 2002. This increase was primarily due to the increase in non-dairy creamer sales (which tend to have higher margins), realization of merger synergies and lower promotional costs for pickle products. Other (Income) Expense -- Total other expense decreased by $3.6 million in the first quarter of 2003 compared to the first quarter of 2002. Interest expense decreased to $46.9 million in the first quarter of 2003 from $50.5 million in the first quarter of 2002 as a result of lower interest rates and lower debt levels. Financing charges on preferred securities were $8.4 million in both years. Income Taxes -- Income tax expense was recorded at an effective rate of 38.3% in the first quarter of 2003 compared to 37.6% in the first quarter of 2002. Our tax rate varies as the mix of earnings contributed by our various business units changes and as tax savings initiatives are adopted. Discontinued Operations -- We recorded income from discontinued operations of $0.7 million during the first quarter of 2002. On December 30, 2002, we sold our operations in Puerto Rico; as a result, all amounts attributable to our former Puerto Rico operations have been reclassified to "income from discontinued operations." Cumulative Effect of Accounting Change -- As part of our adoption of SFAS 142 on January 1, 2002 we wrote down the value of certain trademarks and the goodwill related to our Puerto Rico operations which our analysis indicated were impaired. Our adoption of this accounting standard resulted in the recognition of $85 million, net of an income tax benefit of $29 million, as a charge to earnings. 25 RECENT DEVELOPMENTS TIPES REDEMPTIONS On March 17, 2003, we announced that on April 17, 2003, we would redeem TIPES with an aggregate liquidation value of $100 million at a redemption price of $51.035 per security. Holders of approximately 99% of the TIPES called for redemption elected to convert their TIPES into shares of our common stock rather than receive the cash redemption price. Each TIPES security is convertible into 1.278 shares of our common stock. Accordingly, we issued a total of approximately 2.5 million shares of common stock to holders of TIPES that were called for redemption, approximately 7.4 thousand of which were issued during the first quarter of 2003, with the remaining shares being issued between April 1 and April 16, 2003. On April 22, 2003, we announced that we will redeem a second tranche of TIPES. On May 22, 2003, we will redeem another $200 million (aggregate liquidation value) of TIPES at a redemption price of $51.035 per security. Holders of TIPES selected for redemption will have until 4:00 p.m. (EDT) on May 21, 2003, to elect to convert their TIPES into shares of our common stock rather than receive the cash redemption price. Approximately $300 million (aggregate liquidation value) of TIPES will remain outstanding following completion of the second partial redemption. COMMON STOCK REPURCHASES During the first quarter of 2003, our Board of Directors approved two increases of our common stock repurchase program of $150 million each. During the first quarter of 2003, we repurchased approximately 3.24 million shares of our common stock at an average price of $39.72 per share, for an aggregate purchase price of approximately $129 million. Approximately $171.6 million remains available under our current stock repurchase authorization. STOCK SPLIT On May 7, 2003, our Board of Directors declared a three-for-two split of our common stock. The split will be payable on June 9, 2003 to shareholders of record on May 23, 2003. ORGANIZATIONAL CHANGES On May 8, 2003, we announced certain organizational changes designed to sharpen our focus on our strategic brand portfolio, and enable us to realize additional manufacturing efficiencies. These changes will include (i) shifting responsibility for manufacturing, selling and distributing Morningstar Foods' private label dairy products out of Morningstar Foods and into our Dairy Group, and (ii) shifting responsibility for the manufacture and distribution of all of Morningstar Foods' remaining products (which are its nationally branded products) into the Dairy Group, with Morningstar Foods remaining responsible for the development, marketing and sales of those products. Approximately half of Morningstar Foods' 2002 sales consisted of sales of private label dairy products. As a result of these changes, which will be implemented over the remainder of 2003, Morningstar Foods will be re-named the Dean Branded Products Group. When the realignment of our operations is complete, which we expect to be by January 2004, a new segment reporting structure will begin, pursuant to which (i) Morningstar Foods' existing private label business will be reported in the Dairy Group segment, (ii) the results of the Dean Branded Products Group and White Wave will be aggregated and reported as a segment, and (iii) Specialty Foods will remain unchanged. Until then, segment results will be reported consistently with prior years. 26 BRANDED PRODUCT INITIATIVES We spent approximately $45 million during the first quarter of 2003 marketing our strategic brands. Highlights of our branded product initiatives during the first quarter of 2003 include: International Delight(R) Coffee Creamers -- In the first quarter of 2003, we began the national rollout of International Delight in its newly-designed plastic pint bottle, beginning in the western and central United States and moving eastward. We intend to begin introducing International Delight in a quart-sized plastic bottle in the second half of the year. We are supporting the product launch with both television and print advertising and marketing efforts. Silk(R) Soymilk -- In the first quarter of 2003, we announced that White Wave entered into a three-year agreement with Starbucks pursuant to which, beginning this summer, Silk will be the exclusive soymilk used in handcrafted beverages in all Starbucks locations throughout the United States. Single-serve bottles of Silk will also be sold separately in certain Starbucks locations, and both companies will participate in consumer advertising and in-store promotions. Folgers(R) Jakada(R) Milk and Coffee Beverage -- During the first quarter of 2003, we began producing Folgers Jakada 4-packs in aseptic packaging on our Stork filler line in Mt. Crawford, Virginia. Products processed on this equipment can be stored and shipped without refrigeration. Marie's(R) Dressings -- At the end of the first quarter of 2003, we launched Marie's dressings in a newly-redesigned oval jar. LIQUIDITY AND CAPITAL RESOURCES HISTORICAL CASH FLOW During the first quarter of 2003, we met our working capital needs with cash flow from operations. Net cash provided by operating activities from continuing operations was $64.5 million for 2003 as contrasted to $82.9 million for 2002, a decrease of $18.4 million. Net cash provided by operating activities was primarily impacted by changes in working capital which increased $63.6 million more in 2003 than in the same period of the prior year. Net cash used in investing activities for continuing operations was $49.7 million in 2003 compared to $42.6 million in 2002, an increase of $7.1 million. We used approximately $53.7 million for capital expenditures. We used approximately $142.6 million to repurchase our stock and received approximately $45.2 million primarily as a result of stock option exercises and employee stock purchases through our employee stock purchase plan. We had net proceeds from the issuance of debt of $63.5 million. CURRENT DEBT OBLIGATIONS Our senior credit facility provides us with a revolving line of credit of up to $800 million and two term loans in the amounts of $900 million and $1 billion, respectively. Both term loans have been fully funded since completion of our acquisition of Dean Foods Company ("Old Dean") in December 2001. The senior credit facility contains various financial and other restrictive covenants and requires that we maintain certain financial ratios, including a leverage ratio (computed as the ratio of the aggregate outstanding principal amount of defined indebtedness to EBITDA) and an interest coverage ratio (computed as the ratio of EBITDA to interest expense). In addition, this facility requires that we maintain a minimum level of net worth (as defined by the agreement). The agreement contains standard default triggers, including without limitation: failure to maintain compliance with the financial and other covenants contained in the agreement, default on certain of our other debt, a change in control and certain other material adverse changes in our business. The agreement does not contain any default triggers based on our debt rating. See Note 5 to our Condensed Consolidated Financial Statements for further information regarding the terms of our credit agreement, including interest rates, principal payment schedules and mandatory prepayment provisions. 27 At March 31, 2003 we had outstanding borrowings of $1.80 billion under our senior credit facility (compared to $1.83 billion at December 31, 2002), including approximately $9.7 million that was drawn under the revolving credit facility, in addition to $75 million of letters of credit that were issued but undrawn. As of March 31, 2003 approximately $715.3 million was available for future borrowings under our credit facility, subject to satisfaction of certain conditions contained in the loan agreement. We are currently in compliance with all covenants contained in our credit agreement. In addition to our senior credit facility, we also have a $400 million receivables-backed credit facility, which had $245 million outstanding at March 31, 2003. See Note 5 to our Condensed Consolidated Financial Statements for more information about our receivables-backed facility. Other indebtedness outstanding at March 31, 2003 included $700 million face value of outstanding indebtedness under Old Dean's senior notes, $34.1 million of term indebtedness and a $6.5 million line of credit at our Spanish subsidiary, $21 million of industrial development revenue bonds and approximately $38.0 million of capital lease and other obligations. See Note 5 to our Condensed Consolidated Financial Statements. The table below summarizes our obligations for indebtedness and lease obligations at March 31, 2003 (dollars in thousands).
Payments Due by Period ----------------------------------------------------------------- 04/01/03 04/01/04 04/01/05 04/01/06 04/01/07 Indebtedness & Lease to to to to to Obligations Total 03/31/04 03/31/05 03/31/06 03/31/07 03/31/08 Thereafter - -------------------- ---------- -------- -------- -------- -------- -------- ---------- Senior credit facility....... $1,800,950 $145,000 $150,625 $173,125 $201,250 $658,450 $472,500 Senior notes(1).............. 700,000 100,000 250,000 350,000 Receivables-backed loan...... 245,000 245,000 Foreign subsidiary term loan....................... 34,072 8,846 8,846 8,190 8,190 Other lines of credit........ 6,471 6,471 Industrial development revenue bonds.............. 21,000 300 300 300 300 300 19,500 Capital lease obligations and other...................... 37,998 24,612 4,257 1,859 1,238 2,288 3,744 Operating leases............. 292,024 64,358 53,934 44,366 34,358 28,698 66,310 ---------- -------- -------- -------- -------- -------- -------- Total........................ $3,137,515 $249,587 $217,962 $572,840 $245,336 $939,736 $912,054 ========== ======== ======== ======== ======== ======== ========
- --------------- (1) Represents face value of senior notes. In addition to the letters of credit secured by our senior credit facility, we had at March 31, 2003 approximately $48.2 million of letters of credit with three other banks that were issued but undrawn. The majority of these were required by various utilities and government entities for performance and insurance guarantees. OTHER LONG-TERM LIABILITIES We offer pension benefits to certain employees 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 noncontributory 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 also impact current and future pension costs. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased pension costs in future periods. Pension costs may also be significantly affected by changes in 28 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. In accordance with SFAS No. 87, "Employers' Accounting for Pensions," changes in pension obligations associated with these factors may not be immediately recognized as pension costs on the income statement, but generally are recognized in future years over the remaining average service period of plan participants. As such, significant portions of pension costs recorded in any period may not reflect the actual level of cash benefits provided to plan participants. OTHER COMMITMENTS AND CONTINGENCIES On December 21, 2001, in connection with our acquisition of Old Dean, we issued a subordinated promissory note to Dairy Farmers of America ("DFA") in the original principal amount of $40 million. DFA is our primary supplier of raw milk and the promissory note is designed to ensure that DFA has the opportunity to continue to supply raw milk to certain of our plants until 2021, or be paid for the loss of that business. The promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash, but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we ever materially breach or terminate one of our milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire at the end of 20 years, without any obligation to pay any portion of the principal or interest. Payments under this note, if any, would be expensed as incurred. Also in connection with our purchase of DFA's minority interest in our Dairy Group, we agreed to pay to DFA liquidated damages in an amount of up to $47 million if we fail to offer them the right, within a specified period of time after completion of the Old Dean acquisition, to supply raw milk to certain of Old Dean's plants. The amount of damages to be paid, if any, would be determined on a plant-by-plant basis for each plant's milk supply that is not offered to DFA, based generally on the amount of raw milk used by the plants. We could be required to pay the liquidated damages even if we were prohibited from offering the business to DFA by an injunction, restraining order or contractual obligation. See Note 10 to our Condensed Consolidated Financial Statements for further information regarding this agreement. At this time, we cannot estimate the amount of damages that we may have to pay, if any. We also have the following contingent obligations, in addition to contingent liabilities related to ordinary course litigation and audits: - the obligation to pay performance bonuses to White Wave's management team in the event that established performance hurdles are met by March 2004 (which bonuses we expect to be in the range of $35 million to $40 million); and - certain indemnification obligations related to businesses that we have divested. See Note 10 to our Condensed Consolidated Financial Statements for more information about our contingent obligations. PREFERRED SECURITIES On March 24, 1998, we issued $600 million of company-obligated 5.5% mandatorily redeemable convertible preferred securities of a Delaware business trust ("TIPES") in a private placement to "qualified institutional buyers" under Rule 144A under the Securities Act of 1933. The TIPES, which are recorded net of related fees and expenses, mature 30 years from the date of issue. Holders of these securities are entitled to receive preferential cumulative cash distributions at an annual rate of 5.5% of their liquidation preference of $50 each. These distributions are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year. TIPES are convertible at the option of the holders into shares of our common stock, subject to adjustment in certain circumstances, at a conversion price of $39.13. These preferred securities are also redeemable, at our option, at any time at specified premiums and are 29 mandatorily redeemable at their liquidation preference amount of $50 per share at maturity or upon occurrence of certain specified events. On March 17, 2003, we announced that on April 17, 2003, we would redeem TIPES with an aggregate liquidation value of $100 million at a redemption price of $51.0315 per security. Holders of approximately 99% of the TIPES called for redemption elected to convert their TIPES into shares of our common stock rather than receive the cash redemption price. We issued a total of approximately 2.5 million shares of common stock to holders of TIPES called for redemption, 7.4 thousand of which were issued during the first quarter of 2003, and the balance of which were issued between April 1 and April 16, 2003. On April 22, 2003, we announced that on May 22, 2003, we will redeem another $200 million (aggregate liquidation value) of TIPES at a redemption price of $51.0315 per security. FUTURE CAPITAL REQUIREMENTS During 2003, we intend to invest a total of approximately $310 million in capital expenditures primarily for our existing manufacturing facilities and distribution capabilities. We intend to fund these expenditures using cash flow from operations. We intend to spend it as follows:
Operating Division Amount - ------------------ --------------------- (Dollars in millions) Dairy Group................................................. $195 Morningstar/White Wave...................................... 85 Specialty Foods............................................. 15 Other....................................................... 15 ---- $310 ====
We expect that cash flow from operations will be sufficient to meet our requirements for our existing businesses for the foreseeable future. In the future, we may pursue additional acquisitions that are compatible with our core business strategy. We may also repurchase our securities pursuant to our securities repurchase program. Approximately $171.6 million was available for spending under our securities repurchase program as of March 31, 2003. We base our decisions regarding when to repurchase securities on a variety of factors, including primarily an analysis of the optimal use of available capital, taking into account our stock price, the relative expected return on alternative investments and the limitations imposed by our credit facility. See Note 5 to our Condensed Consolidated Financial Statements. Any acquisitions or equity repurchases will be funded through cash flows from operations or borrowings under our senior credit facility. If necessary, we believe that we have the ability to secure additional financing for our future capital requirements. CRITICAL ACCOUNTING POLICIES There have been no changes to our critical accounting policies since we filed our 2002 annual report on Form 10-K. KNOWN TRENDS AND UNCERTAINTIES ECONOMIC ENVIRONMENT As a result of the recent economic environment in this country, many of our retail customers have experienced economic difficulty over the past year. A number of our customers have been forced to close stores and certain others have sought bankruptcy protection. This trend, if it continues, could have a material adverse affect on us if a material number of our customers, or any one large customer, were to be forced to close a significant number of stores or file for bankruptcy protection. 30 PRICES OF RAW MILK AND CREAM In our Dairy Group and Morningstar/White Wave segments, our raw milk cost changes are based on the federal and certain state governments' minimum prices, regional and national milk supply conditions and arrangements with our suppliers. 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 material cost, 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 the commodity environment can be linked to the change in federal minimum prices. Bulk cream is also a significant raw material cost to the Dairy Group and Morningstar Foods. Bulk cream is typically purchased based on a multiple of the AA butter price on the Chicago Mercantile Exchange. Bulk cream is used in our Class II products such as ice cream, ice cream mix, creams and creamers, sour cream and cottage cheese. In 2002 and in the first quarter of 2003, prices for raw milk and butter were unusually low. Although we cannot predict future raw material prices with precision, we do expect prices to increase throughout the remainder of 2003. In general, we change the prices that we charge our customers for our products on a monthly basis, as the costs of our raw materials fluctuate. However, there can be a lag between the time of a raw material cost increase or decrease and the effectiveness of a corresponding price change to our customers, and in some cases we are contractually restrained with respect to the means and timing of implementing price changes. Also, at some point price increases do erode our volumes. These factors can cause volatility in our earnings. Our sales and operating profit margin tend to fluctuate with the price of our raw materials. RISK FACTORS This report contains statements about our future that are not statements of historical fact. In some cases, you can identify these statements by terminology such as "may," "will," "should," "could," "expects," "seek to," "anticipates," "plans," "believes," "estimates," "intends," "predicts," "potential" or "continue" or the negative of such terms and other comparable terminology. These statements are only predictions, and in evaluating those statements, you should carefully consider the risks outlined below. Actual performance or results may differ materially and adversely. OUR FAILURE TO SUCCESSFULLY COMPETE COULD ADVERSELY AFFECT OUR PROSPECTS AND FINANCIAL RESULTS Our businesses are subject to significant competition based on a number of factors. Our failure to successfully compete against our competitors could have a material adverse effect on our business. Many of our competitors, especially those with nationally branded products that compete with our nationally branded products, have significantly greater resources than we do. Also, in many cases, those nationally branded products have significantly more name-recognition and longer histories of success. The consolidation trend is continuing in the retail grocery and foodservice industries. As our customer base continues to consolidate, we expect competition to intensify as we compete for the business of fewer customers. As the consolidation continues, there can be no assurance that we will be able to keep our existing customers, or to gain new customers. Winning new customers is especially important to the growth of our Dairy Group, as demand tends to be relatively flat in the dairy industry. Many of our Dairy Group retail customers have become increasingly price sensitive in the current economic environment and we have recently been subject to a number of intensely competitive bidding situations in our Dairy Group. The current competitive environment could result in margin erosion in our Dairy Group, or the loss of certain customers altogether. In 2002, we lost several key local and regional grocery customers as a result of pricing battles with our competitors. Loss of any of our largest customers 31 could have a material adverse impact on our financial results. We do not have contracts with many of our largest customers. There are several large regional grocery chains that have captive dairy operations. As the consolidation of the grocery industry continues, we could be adversely affected if any one or more of our existing customers were to decide to establish captive dairy operations, or be sold to a chain with captive dairy operations. We could also be adversely affected by any expansion of capacity by our existing competitors or by new entrants in our markets. OUR BRANDING EFFORTS MAY NOT SUCCEED We have invested, and intend to continue to invest, significant resources toward the growth of our branded, value-added portfolio of products, particularly at our Morningstar/White Wave segment. We believe that sales of these products could be a significant source of growth for our business. However, the success of our efforts will depend on customer and consumer acceptance of our branded products, of which there can be no assurance. If our efforts do not succeed, we may not be able to continue to significantly increase sales or profit margins. CHANGES IN RAW MATERIAL AND OTHER INPUT COSTS CAN ADVERSELY AFFECT US The most important raw materials that we use in our operations are raw milk and bulk cream, and high density polyethylene resin. The prices of these materials increase and decrease based on supply and demand, and, in some cases, governmental regulation. Weather affects the available supply of raw milk and cream. Our Specialty Foods segment purchases cucumbers under seasonal grower contracts with a variety of growers located near our plants. Bad weather in one of the growing areas can damage or destroy the crop in that area. If we are not able to buy cucumbers from one of our local growers due to bad weather, we are forced to purchase cucumbers from non-local sources at substantially higher prices, which can have an adverse affect on Specialty Foods' results of operations. Our White Wave operating unit is sensitive to adverse weather due to its reliance on soybeans. 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. Extremely high raw material costs can also put downward pressure on our margins and our volumes. Although we cannot predict future changes in raw material costs, we do expect raw material prices to increase in 2003. Because our Dairy Group delivers the majority of its products directly to customers through our "direct store delivery" system, we are a large consumer of fuel. Increases in fuel prices can adversely affect our results of operations. We are also a significant consumer of electricity, so any significant increase in energy prices could adversely affect our financial performance. WE HAVE SUBSTANTIAL DEBT AND OTHER FINANCIAL OBLIGATIONS AND WE MAY INCUR EVEN MORE DEBT We have substantial debt and other financial obligations and significant unused borrowing capacity. See "-- Liquidity and Capital Resources." We have pledged substantially all of our assets (including the assets of our subsidiaries) to secure our indebtedness. Our high debt level and related debt service obligations: - require us to dedicate significant cash flow to the payment of principal and interest on our debt which reduces the funds we have available for other purposes, - may limit our flexibility in planning for or reacting to changes in our business and market conditions, - impose on us additional financial and operational restrictions, and - expose us to interest rate risk since a portion of our debt obligations are at variable rates. 32 Our ability to make scheduled payments on our debt and other financial obligations depends on our financial and operating performance. Our financial and operating performance is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. A significant increase in interest rates could adversely impact our financial results. If we do not comply with the financial and other restrictive covenants under our credit facilities (see Note 5 to our Condensed Consolidated Financial Statements), we may default under them. Upon default, our lenders could accelerate the indebtedness under the facilities, foreclose against their collateral or seek other remedies. LOSS OF RIGHTS TO ANY OF OUR LICENSED BRANDS COULD ADVERSELY AFFECT US We sell certain of our products under licensed brand names such as Hershey's(R), Borden(R), Pet(R), Folgers(R), Land-O-Lakes(R) and others. In some cases, we have invested, and intend to continue to invest, significant capital in product development and marketing and advertising related to these licensed brands. Should our rights to manufacture and sell products under any of these names be terminated for any reason, our financial performance and results of operations could be materially and adversely affected. NEGATIVE HEALTH CLAIMS COULD ADVERSELY AFFECT US As a manufacturer of food products, positive or negative publicity or medical research regarding the health effects of the types of foods that we produce affects us. For example, incidences of bovine spongiform encephalopathy ("BSE" or "mad cow disease") in other countries have raised public concern about the safety of eating beef and using or ingesting certain other animal-derived products. The World Health Organization, the U.S. Food and Drug Administration and the United States Department of Agriculture have all affirmed that BSE is not transmitted to milk. However, we are still subject to risk as a result of public perception that milk products may be affected by mad cow disease. To date, we have not seen any measurable impact on our milk sales resulting from concerns about mad cow disease. However, should public concerns about the safety of milk or milk products escalate as a result of further occurrences of mad cow disease, we could suffer a loss of sales, which could have a material and adverse affect on our financial results. WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS We sell food products for human consumption, which involves risks such as: - product contamination or spoilage, - product tampering, and - other adulteration of food products. Consumption of an adulterated, contaminated or spoiled product may result in personal illness or injury. We could be subject to claims or lawsuits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or that exceed our insurance coverages. Although we maintain quality control programs designed to address food quality and safety issues, an actual or alleged problem with the quality, safety or integrity of our products at any of our facilities could result in: - product withdrawals, - product recalls, - negative publicity, - temporary plant closings, and - substantial costs of compliance or remediation. 33 Any of these events could have a material and adverse effect on our financial condition, results of operations or cash flows. LOSS OF OR INABILITY TO ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS Our success depends to a large extent on the skills, experience and performance of our key personnel. The loss of one or more of these persons could hurt our business. We do not maintain key man life insurance on any of our executive officers, directors or other employees. If we are unable to attract and retain key personnel, our business will be adversely affected. CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER ATTEMPTS Some provisions in our certificate of incorporation and bylaws could delay, prevent or make more difficult a merger, tender offer, proxy contest or change of control. Our stockholders might view any such transaction as being in their best interests since the transaction could result in a higher stock price than the current market price for our common stock. Among other things, our certificate of incorporation and bylaws: - authorize our board of directors to issue preferred stock in series with the terms of each series to be fixed by our board of directors, - divide our board of directors into three classes so that only approximately one-third of the total number of directors is elected each year, - permit directors to be removed only for cause, and - specify advance notice requirements for stockholder proposals and director nominations. In addition, with certain exceptions, the Delaware General Corporation Law restricts mergers and other business combinations between us and any stockholder that acquires 15% or more of our voting stock. We also have a stockholder rights plan. Under this plan, after the occurrence of specified events, our stockholders will be able to buy stock from us or our successor at reduced prices. These rights do not extend, however, to persons participating in takeover attempts without the consent of our board of directors. Accordingly, this plan could delay, defer, make more difficult or prevent a change of control. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE FLUCTUATIONS In order to reduce the volatility of earnings that arises from changes in interest rates, we manage interest rate risk through the use of interest rate swap agreements. These swap agreements provide hedges for loans under our senior credit facility by limiting or fixing the LIBOR interest rates specified in the senior credit facility at the interest rates noted below until the indicated expiration dates. These swaps have been designated as cash flow hedges against variable interest rate exposure. The following table summarizes our various interest rate swap agreements in effect as of March 31, 2003:
Fixed Interest Rates Expiration Date Notional Amounts - -------------------- --------------- ---------------- (In millions) 6.23% June 2003 $ 50 1.47% to 4.69% December 2003 675 4.01% to 6.69% December 2004 275 5.20% to 6.74% December 2005 400 6.78% December 2006 75
34 The following table summarizes our various interest rate agreements as of December 31, 2002:
Fixed Interest Rates Expiration Date Notional Amounts - -------------------- --------------- ---------------- (In millions) 6.23% June 2003 $ 50 4.29% to 4.69% December 2003 275 4.01% to 6.69% December 2004 275 5.20% to 6.74% December 2005 400 6.78% December 2006 75
We have also entered into interest rate swap agreements that provide hedges for loans under Leche Celta's term loan. See Note 5 to our Condensed Consolidated Financial Statements. The following table summarizes these agreements as of March 31, 2003 and 2002:
Fixed Interest Rates Expiration Date Notional Amounts - -------------------- --------------- ---------------- 5.54% November 2003 9 million euros (approximately $9.8 million as of March 31, 2003 and $9.4 million as of December 31, 2002) 5.6% November 2004 12 million euros (approximately $13.1 million as of March 31, 2003 and $12.6 million as of December 31, 2002)
We are exposed to market risk under these arrangements due to the possibility of interest rates on our credit facilities falling below the rates on our interest rate derivative agreements. We incurred $7.1 million of additional interest expense, net of taxes, during 2003 as a result of interest rates on our variable rate debt falling below the agreed-upon interest rate on our existing swap agreements. Credit risk under these arrangements is remote since the counterparties to our interest rate derivative agreements are major financial institutions. A majority of our debt obligations are currently at variable rates. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates. As of March 31, 2003, the analysis indicated that such interest rate movement would not have a material effect on our financial position, results of operations or cash flows. However, actual gains and losses in the future may differ materially from that analysis based on changes in the timing and amount of interest rate movement and our actual exposure and hedges. FOREIGN CURRENCY We are exposed to foreign currency risk due to operating cash flows and various financial instruments that are denominated in foreign currencies. Our most significant foreign currency exposures relate to the euro. At this time, we believe that potential losses due to foreign currency fluctuations would not have a material impact on our consolidated financial position, results of operations or operating cash flow. ITEM 4. CONTROLS AND PROCEDURES Based on their evaluations as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13-a and 15d-14 under the Securities Exchange Act of 1934) are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 35 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Form 8-K's - Form 8-K dated May 8, 2003 36 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 /s/ Barry A. Fromberg -------------------------------------- Barry A. Fromberg Executive Vice President, Chief Financial Officer (Principal Accounting Officer) Date: May 15, 2003 37 CERTIFICATION I, Gregg Engles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Dean Foods Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Dean Foods Company as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. Designed such disclosure controls and procedures to ensure that material information relating the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in the Company's internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Gregg Engles -------------------------------------- Gregg Engles Chief Executive Officer Date: May 15, 2003 38 CERTIFICATION I, Barry A. Fromberg, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Dean Foods Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of Dean Foods Company as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. Designed such disclosure controls and procedures to ensure that material information relating the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in the Company's internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Barry A. Fromberg -------------------------------------- Barry A. Fromberg Chief Financial Officer Date: May 15, 2003 39 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ------------ 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
EX-99.1 3 d05819exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Form 10-Q of Dean Foods Company (the "Company") for the quarter ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregg Engles, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gregg Engles --------------------------- Gregg Engles Chairman of the Board and Chief Executive Officer Date: May 15, 2003 Note: This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent required by the Sarbanes-Oxley Act of 2002, by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99.2 4 d05819exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Form 10-Q of Dean Foods Company (the "Company") for the quarter ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barry A. Fromberg, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Barry A. Fromberg ---------------------------- Barry A. Fromberg Executive Vice President and Chief Financial Officer Date: May 15, 2003 Note: This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed, except to the extent required by the Sarbanes-Oxley Act of 2002, by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----