10-K 1 d223771d10k.htm FORM 10-K FORM 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

(Mark One)

þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2011

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 Registrant as specified in its charter)

 

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Delaware   75-2559681

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2711 North Haskell Avenue Suite 3400

Dallas, Texas 75204

(214) 303-3400

(Address, including zip code, and telephone number, including

area code, of Registrant’s principal executive offices)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $.01par value   New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned-issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    þ          Smaller reporting company    ¨
   Accelerated filer    ¨    Non-accelerated filer    ¨   
   (Do not check if a smaller reporting company)

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

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant at June 30, 2011, based on the $12.27 per share closing price for the registrant’s common stock on the New York Stock Exchange on June 30, 2011, was approximately $2.20 billion.

The number of shares of the registrant’s common stock outstanding as of February 17, 2012 was 184,235,408.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on or about May 16, 2012, which will be filed within 120 days of the registrant’s fiscal year end, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item      

            Page    

PART I

  
1    Business    3
  

Our Reportable Segments

   3
  

Current Business Strategy

   8
  

Developments Since January 1, 2011

   9
  

Employees

   12
  

Government Regulation

   12
  

Minority Holdings and Other Interests

   13
  

Where You Can Get More Information

   13
1A    Risk Factors    14
1B    Unresolved Staff Comments    20
2    Properties    21
3    Legal Proceedings    22
4    Mine Safety Disclosure    24

PART II

  
5    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    25
6    Selected Financial Data    26
7    Management’s Discussion and Analysis of Financial Condition and Results of Operations    27
  

Business Overview

   27
  

Our Reportable Segments

   27
  

Recent Developments

   28
  

Results of Operations

   29
  

Liquidity and Capital Resources

   38
  

Known Trends and Uncertainties

   46
  

Critical Accounting Estimates

   48
  

Recent Accounting Pronouncements

   50
7A    Quantitative and Qualitative Disclosures About Market Risk    51
8    Consolidated Financial Statements    52
9    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure    54
9A    Controls and Procedures    54
9B    Other Information    55

PART III

  
10    Directors, Executive Officers and Corporate Governance    55
11    Executive Compensation    55
12    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    55
13    Certain Relationships and Related Transactions, and Director Independence    55
14    Principal Accountant Fees and Services    55

PART IV

15    Exhibits and Financial Statement Schedule    56

Signatures

   S-1

 

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Forward-Looking Statements

This Annual Report on Form 10-K (the “Form 10-K”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are predictions based on expectations and projections about future events, and are not statements of historical fact. Forward-looking statements include statements concerning business strategy, among other things, including anticipated trends and developments in and management plans for our business and the markets in which we operate. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue,” the negative or plural of these words and other comparable terminology. All forward-looking statements included in this Form 10-K are based upon information available to us as of the filing date of this Form 10-K, and we undertake no obligation to update any of these forward-looking statements for any reason. You should not place undue reliance on forward-looking statements. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in the section entitled “Part I — Item 1A — Risk Factors” in this Form 10-K, and elsewhere in this Form 10-K. You should carefully consider the risks and uncertainties described in this Form 10-K.

PART I

 

Item 1. Business

We are a leading food and beverage company in the United States, as well as a global leader in branded plant-based beverages, such as soy, almond and coconut milks, and other plant-based food products. As we continue to evaluate and seek to maximize the value of our leading brands and product offerings, we have aligned our leadership teams, operating strategies and supply chain initiatives around our three business segments: Fresh Dairy Direct, WhiteWave-Alpro and Morningstar. Fresh Dairy Direct is the largest processor and distributor of milk and other dairy products in the United States, with products sold under more than 50 familiar local and regional brands and a wide array of private labels. WhiteWave-Alpro markets and sells a variety of nationally branded dairy and dairy-related products, such as Horizon Organic® milk and other dairy products, International Delight® coffee creamers and LAND O LAKES® creamers and fluid dairy products, and Silk® plant-based beverages, such as soy, almond and coconut milks, and cultured soy products. WhiteWave-Alpro also offers branded plant-based beverages, such as soy, almond and hazelnut drinks, and food products in Europe and markets its products under the Alpro® and Provamel® brands. Morningstar is a leading producer of extended shelf life (“ESL”) creams and creamers, beverages and cultured dairy products under a wide array of private labels and the Friendship™ brand.

Our principal executive offices are located at 2711 North Haskell Avenue, Suite 3400, Dallas, Texas 75204. Our telephone number is (214) 303-3400. We maintain a worldwide web site at www.deanfoods.com. We were incorporated in Delaware in 1994.

Our Reportable Segments

We have three reportable segments, Fresh Dairy Direct, WhiteWave-Alpro and Morningstar.

In the fourth quarter of 2011, our Chief Executive Officer, who is our chief operating decision maker, changed the way he determines strategy and investment plans for our operations. As a result, beginning in the fourth quarter of 2011, our Fresh Dairy Direct and Morningstar operations were separated so that our three reporting segments consisted of Fresh Dairy Direct, WhiteWave-Alpro and Morningstar. This change reflects the divergence between the go-to market strategies, customer bases and objectives of our businesses and reflects a change in how we expect to deploy our capital in the future. We believe these revised segments have increased internal focus and offered management and investors improved visibility into the performance of the segments against their specific objectives. All segment results set forth herein have been recast to present results on a comparable basis. These changes had no impact on consolidated net sales or operating income.

During the second quarter of 2010, we committed to a plan to sell the business operations of our Rachel’s Dairy companies (“Rachel’s”), which provided organic branded dairy-based chilled yogurt, milk and related dairy products primarily in the United Kingdom. The sale of these operations was completed on August 4, 2010. All of our Rachel’s operations, previously reported within the WhiteWave-Alpro segment, have been reclassified as discontinued operations. See Note 2 to our Consolidated Financial Statements. Unless stated otherwise, any reference to income statement items in this Annual Report on Form 10-K refers to results from continuing operations.

 

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Fresh Dairy Direct

Fresh Dairy Direct manufactures, markets and distributes a wide variety of branded and private label dairy case products, including milk, ice cream, cultured dairy products, creamers, juices and teas to retailers, foodservice outlets, distributors, educational institutions and governmental entities across the United States.

Fresh Dairy Direct’s net sales totaled $9.6 billion in 2011, or approximately 74% of our consolidated net sales. The following charts graphically depict Fresh Dairy Direct’s 2011 net sales by product, customer and volume mix of company branded versus private label products.

 

 

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(1)

Includes half-and-half and whipping cream.

(2)

Includes creamers and other ESL fluids.

(3)

Includes fruit juice, fruit-flavored drinks, iced tea and water.

(4)

Includes ice cream, ice cream mix and ice cream novelties.

(5)

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

(6)

Includes restaurants, hotels and other foodservice outlets.

Fresh Dairy Direct sells its products under local and regional proprietary or licensed brands. Products not sold under these brands are sold as private label. Fresh Dairy Direct sells its products primarily on a local or regional basis through its local and regional sales forces, although some national customer relationships are coordinated by a centralized corporate sales department. Fresh Dairy Direct’s largest customer is Wal-Mart, including its subsidiaries such as Sam’s Club, which accounted for approximately 22% of Fresh Dairy Direct’s net sales in 2011.

As of December 31, 2011, Fresh Dairy Direct’s local and regional proprietary and licensed brands included the following:

 

Alta Dena®

   Dairy Fresh®    Mayfield®    Robinson™

Arctic Splash®

   Dean’s®    McArthur®    Saunders™

Atlanta Dairies®

   Dipzz®    Meadow Brook®    Schenkel’s All*Star™

Barbers®

   Fieldcrest®    Meadow Gold®    Schepps®

Barbe’s®

   Foremost® (licensed brand)    Mile High Ice Cream™    Shenandoah’s Pride®

Berkeley Farms®

   Gandy’s™    Model Dairy®    Stroh’s®

Borden® (licensed brand)

   Garelick Farms®    Morning Glory®    Swiss Dairy™

Broughton™

   Hershey’s® (licensed brand)    Nature’s Pride®    Swiss Premium™

Brown Cow®

   Hygeia®    Nurture®    Trumoo®

Brown’s Dairy®

   Jilbert™    Nutty Buddy®    T.G. Lee®

Bud’s Ice Cream™

   Knudsen® (licensed brand)    Oak Farms®    Tuscan®

Chug®

   LAND O  LAKES® (licensed brand)    Over the  Moon®    Turtle Tracks®

Country Churn®

   Land-O-Sun & design®    Pet® (licensed  brand)    Verifine®

Country Delite™

   Lehigh Valley Dairy Farms®    Pog® (licensed  brand)    Viva®

Country Fresh®

   Liberty™    Price’s™   

Country Love®

   Louis Trauth Dairy Inc.®    Purity™   

Creamland™

   Maplehurst®    Reiter™   

 

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Fresh Dairy Direct currently operates 77 manufacturing facilities in 33 states located largely based on customer needs and other market factors. For more information about facilities in Fresh Dairy Direct, see “Item 2. Properties.” Due to the perishable nature of its products, Fresh Dairy Direct delivers the majority of its products directly to its customers’ locations in refrigerated trucks or trailers that we own or lease. This form of delivery is called a “direct store delivery” or “DSD” system. We believe that Fresh Dairy Direct has one of the most extensive refrigerated DSD systems in the United States.

The primary raw material used in Fresh Dairy Direct products is conventional raw milk (which contains both raw milk and butterfat) that we purchase primarily from farmers’ cooperatives, as well as from independent farmers. The federal government and certain state governments set minimum prices for raw milk and butterfat on a monthly basis. Another significant raw material used by Fresh Dairy Direct is resin, which is a fossil fuel-based product used to make plastic bottles. The price of resin fluctuates based on changes in crude oil and natural gas prices. Other raw materials and commodities used extensively by Fresh Dairy Direct include diesel fuel, used to operate our extensive DSD system, and juice concentrates and sweeteners used in our products. Fresh Dairy Direct generally increases or decreases the prices of its fluid dairy products on a monthly basis in correlation with fluctuations in the costs of raw materials, packaging supplies and delivery costs. However, in some cases, we are subject to the terms of sales agreements with respect to the means and/or timing of price increases, particularly for non-dairy input costs such as diesel and resin.

Fresh Dairy Direct has several competitors in each of its major product and geographic markets. Competition between dairy processors for shelf-space with retailers is based primarily on price, service, quality and the expected or historical sales performance of the product compared to its competitors. In some cases Fresh Dairy Direct pays fees to customers for shelf-space. Competition for consumer sales is based on a variety of factors such as brand recognition, price, taste preference and quality. Dairy products also compete with many other beverages and nutritional products for consumer sales.

The dairy industry is a mature and fragmented industry that has traditionally been characterized by slow to flat growth and low profit margins. According to the United States Department of Agriculture (“USDA”), per capita consumption of fluid milk continues to decline. As a result of the current economic climate and historically high retail prices, the fluid milk category has posted declining volumes over the last several years. In addition, the industry has experienced retail and wholesale margin erosion, as conventional milk prices have increased steadily from 2009 through 2011. During the fourth quarter of 2011, milk prices decreased slightly, and retailers did not fully reflect such declines in shelf pricing, which partially restored the historical price relationship between branded and private label milk and allowed our regional brands to compete more effectively during the quarter. Our fluid milk volumes, in general, outpaced the industry due to the addition of new customers during the second half of 2011. Despite ongoing challenges to our sales volume performance, we expect our fluid milk volumes to remain flat in the near term.

To further improve profitability and stabilize margin erosion, we will continue to place an emphasis on cost reduction in 2012. Organizational changes are in process to reduce our total cost to serve and our selling and general and administrative costs. We remain focused on sustaining positive cash flow and net debt reduction.

For more information on factors that could impact Fresh Dairy Direct, see “— Government Regulation — Milk Industry Regulation”, “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Known Trends and Uncertainties — Prices of Raw Milk and Other Inputs,” as well as Note 19 to our Consolidated Financial Statements.

WhiteWave-Alpro

WhiteWave-Alpro develops, manufactures, markets and sells a variety of nationally branded dairy and dairy-related products, such as Horizon Organic milk and other dairy products, International Delight coffee creamers and LAND O LAKES creamers and fluid dairy products, and Silk plant-based beverages, such as soy, almond and coconut milks, and cultured soy products. WhiteWave-Alpro also offers branded plant-based beverages, such as soy, almond and hazelnut drinks, and food products in Europe and markets its products under the Alpro and Provamel brands.

WhiteWave-Alpro’s net sales totaled $2.1 billion in 2011, or approximately 16% of our consolidated net sales. WhiteWave-Alpro sells its products to a variety of customers, including grocery stores, club stores, natural foods stores, mass merchandisers, convenience stores, drug stores and foodservice outlets. WhiteWave-Alpro sells its products primarily through its internal sales forces and independent brokers. WhiteWave-Alpro’s largest customer is Wal-Mart, including its subsidiaries such as Sam’s Club, which accounted for approximately 16% of WhiteWave-Alpro’s net sales in 2011. Approximately 83% of WhiteWave-Alpro’s net sales are domestic.

 

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The following charts graphically depict WhiteWave-Alpro’s 2011 net sales by brand mix and customers:

 

 

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(1)

Includes private label organic milk and plant-based products.

(2)

Includes both Alpro and Provamel brands in Europe.

WhiteWave-Alpro currently operates five domestic and four international manufacturing facilities. For more information about our WhiteWave-Alpro facilities, see “Item 2. Properties.” The remaining products are manufactured by third-party manufacturers under processing agreements. The majority of WhiteWave-Alpro’s products are delivered through warehouse delivery systems.

The primary raw material used in our organic milk-based products is organic raw milk. We currently work with more than 600 dairy farmers across the United States and purchase 93% of our organic raw milk from this network. The balance of our organic raw milk is sourced from two farms that we own. We generally enter into supply agreements with organic dairy farmers with typical terms of two to five years, which obligate us to purchase certain minimum quantities of organic raw milk. The organic dairy industry continues to experience significant swings in supply and demand. Industry regulation and the costs of organic farming compared to the cost for conventional farming can impact the supply of organic raw milk in the market.

The primary raw materials used in our creamer products are conventional raw milk, palm oil, flavorings and sweeteners. Certain of these raw materials are purchased under long-term contracts to better manage the supply and costs of our inputs.

The primary raw materials used in our plant-based products include non-genetically modified (“non-GMO”) soybeans, organic soybeans and almonds. Soybeans and almonds are generally available from several suppliers and we are not dependent on any single supplier for these raw materials.

WhiteWave-Alpro has several competitors in each of its product markets. Competition to obtain shelf-space with retailers for a particular product is based primarily on brand recognition and the expected or historical sales performance of the product compared to its competitors. In some cases, WhiteWave-Alpro pays fees to retailers to obtain shelf-space for its products. Competition for consumer sales is based on many factors, including brand recognition, price, taste preferences and quality. Consumer demand for plant-based and organic beverages and foods has grown in recent years due to growing consumer confidence in the health benefits attributable to these products, and we believe WhiteWave-Alpro has a leading position in these categories.

For more information on factors that could impact the results of WhiteWave-Alpro, see “— Government Regulation — Organic Regulations,” “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Known Trends and Uncertainties — Prices of Raw Milk and Other Inputs,” as well as Note 19 to our Consolidated Financial Statements.

 

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Morningstar

Morningstar Foods is a leading U.S. manufacturer of extended shelf life (“ESL”) creams and creamers, beverages and cultured dairy products with an emphasis on foodservice and private label retail customers. These products include half and half, whipping cream, ice cream mix, value-added milks, sour cream and cottage cheese and are sold under a wide array of private labels and the Friendship brand. In addition to being sold through retailers for at-home consumption, these products are important ingredients for restaurant menu items such as desserts, soups, and coffee-specialty drinks.

Morningstar’s net sales totaled $1.3 billion in 2011, or approximately 10% of our consolidated net sales. Morningstar sells its products to a variety of customers, including foodservice distributors, national restaurant chains, grocery stores and mass merchandisers. Morningstar sells its products through its internal sales force and independent brokers. Morningstar’s largest customer accounted for approximately 15% of Morningstar’s net sales in 2011.

The following charts graphically depict Morningstar’s 2011 net sales by customer and product.

 

 

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Morningstar currently operates 12 manufacturing facilities domestically and has one of the most extensive manufacturing networks for these products in the United States. For more information about our Morningstar facilities, see “Item 2. Properties.” Morningstar’s products are delivered through warehouse delivery systems.

The primary raw materials used in Morningstar products are conventional raw milk and bulk cream. Cream is priced based on a multiple of the grade AA butter price and Class II butterfat price. The federal government and certain state governments set minimum prices for bulk cream and butterfat on a monthly basis. The pass-through mechanism for bulk cream and butterfat inputs differs from the fluid milk pricing mechanism in that Morningstar’s products are generally priced before input costs are known. Morningstar works to pass through changes in bulk cream and butterfat costs through a mix of forecast pricing, true-up pricing and the direct, but lagged, pass-through of input cost changes. As a result, changes in bulk cream and butterfat prices can have a significant impact on Morningstar’s profitability from period to period.

Morningstar has several competitors in each of its customer channels and major products. Competition within foodservice and retail customers is based primarily on quality, price and service. Competition for consumer sales is based on a variety of factors such as price, taste preference and quality. Dairy products also compete with many other products for consumer sales.

For more information on factors that could impact Morningstar, see “— Government Regulation — Milk Industry Regulation”, “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Known Trends and Uncertainties — Prices of Raw Milk and Other Inputs,” as well as Note 19 to our Consolidated Financial Statements.

 

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Current Business Strategy

The evolution of Dean Foods into a leading dairy processor began in the early nineties with an acquisition-focused strategy centered on creating scale to align with a consolidating customer base. Between 1993 and 2009, we completed more than 40 acquisitions of high quality dairies, dairy products and plant-based brands, increasing net sales from $150 million to more than $13 billion in 2011. We believe our portfolio of manufacturing and distribution assets enables us to offer regional and national branded and private label products across a variety of product categories, ranging from short shelf life (less than 20 days) to extended shelf life (“ESL”) (45 to 60 days) to shelf stable products (6 to 12 months), to customers in a cost effective manner. We believe that Fresh Dairy Direct operates one of the most extensive refrigerated DSD networks in the United States, WhiteWave-Alpro maintains significant share positions in plant-based beverages and other plant-based food products, organic dairy and creamers in the United States and Europe, and Morningstar maintains a leading position within the cultured and ESL product categories.

Each of our three reporting segments, Fresh Dairy Direct, WhiteWave-Alpro and Morningstar, operates a distinct business, and we have developed separate strategies to address their respective sets of business opportunities and challenges. As explained more fully below, our Fresh Dairy Direct strategy focuses on reducing cost and increasing profitability. In contrast, we believe WhiteWave-Alpro and Morningstar are well positioned to build on the continuing growth of their respective businesses, and we have developed strategies to further expand that growth while continuing to focus on cost reduction and capability building.

Fresh Dairy Direct

Fresh Dairy Direct’s strategy is to achieve significantly lower costs and use those lower costs to win new customers and grow profitability. To build the core business while meeting current market challenges and customer expectations, Fresh Dairy Direct focuses on the following:

 

   

Driving volume gains through the acquisition of new customers;

 

   

Actively managing commodity input costs in an inflationary environment to maximize profitable growth; and

 

   

Aligning our field and support functions under a single leadership team to best serve our customers, permanently remove costs and improve profitability.

WhiteWave-Alpro

WhiteWave-Alpro competes in categories such as organic milk, creamers and plant-based beverages (such as soy, almond, coconut and hazelnut drinks) that we believe have strong long-term growth potential due to their relative immaturity, low household penetration numbers and strong consumer interest. Within these categories, WhiteWave-Alpro brands are often category leaders. To further build growth, the WhiteWave-Alpro strategy encompasses the following:

 

   

Expanding the plant-based beverage category’s scope by further expansion with products such as almond, coconut and hazelnut drinks, and continuing to innovate behind the Silk and Alpro brands;

 

   

Investing in emerging and alternative channels and expanding the geography and platform of our portfolio;

 

   

Reducing costs to increase profitability, including creation of a new, centrally-located U.S. production facility to add needed capacity and further optimize the supply chain for growth;

 

   

Developing commercial, marketing, innovation, customer logistics, financial management and strategic sales capabilities to enhance growth within the organization; and

 

   

Continuing to support our environment, community and employees through sustainability efforts, building organizational diversity and safeguarding the unique culture and reputation of the organization.

 

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Morningstar

Morningstar’s business is centered around ESL creams and creamers, beverages and cultured dairy products for foodservice and private label retailers. We believe this business has strong growth potential due to ongoing growth in restaurant dessert and indulgent beverage programs, such as specialty coffees, milkshakes and smoothies, and the increasing penetration of private label products. The Morningstar strategy focuses on the following:

 

   

Continuing to gain new points of distribution in our core categories within our core customer segments;

 

   

Working with our customers to increase sales velocity of our products by growing private label shares of our categories and increasing the presence and attractiveness of our products on our customers’ menus;

 

   

Reducing operational costs through productivity, simplification of our business and optimization of our manufacturing network; and

 

   

Continuing product development, commercialization and strategic sales efforts to enhance growth.

Corporate Responsibility

Within these strategies, a sense of corporate responsibility remains an integral part of our efforts, despite the economic challenges we have faced. As we work to strengthen our business, we are committed to do it in a way that is right for our employees, shareholders, consumers, customers and the environment. We intend to realize savings by reducing waste and duplication while we continue to support programs that improve our local communities.

Seasonality

Our business is affected by seasonal changes in the demand for dairy products. The demand for dairy is fairly stable through the first three quarters of the year with a marked increase in the fourth quarter. Fluid milk volumes tend to decrease in the second and third quarters of the year primarily due to the reduction in dairy consumption associated with our school business. However, this drop in volumes is typically offset by the increase in ice cream and ice cream mix consumption during the summer months. Sales volumes are typically higher in the fourth quarter associated with increased dairy consumption, especially fresh cream and creamers, during seasonal holidays. Because certain of our operating expenses are fixed, fluctuations in volumes and revenue from quarter to quarter may have a material effect on operating income for the respective quarters.

Intellectual Property

We are continually developing new technology and enhancing existing proprietary technology related to our dairy operations. As of December 31, 2011, 16 United States and 6 international patents have been issued to us and 21 United States and 45 international patent applications are pending. We primarily rely on a combination of trademarks, copyrights, trade secrets, confidentiality procedures and contractual provisions to protect our technology and other intellectual property rights. Despite these protections, it may be possible for unauthorized parties to copy, obtain or use certain portions of our proprietary technology or trademarks.

Research and Development

With our state-of-the-art research and development (“R&D”) facility, we utilize our team of top consumer packaged goods talent to generate and test new product concepts, new flavors and packaging. Our total R&D expense was $19.7 million, $ 25.8 million and $25.5 million for 2011, 2010 and 2009, respectively.

Developments since January 1, 2011

Competitive Pressures and Consumer Environment — As a result of the current economic climate and historically high retail prices, the fluid milk category has posted declining volumes over the last several years. In addition, the industry has experienced retail and wholesale margin erosion, as conventional milk prices have increased steadily from 2009 through 2011. During the fourth quarter of 2011, milk prices decreased slightly, and retailers did not fully reflect such declines in shelf pricing, which partially restored the historical price relationship between branded and private label milk and allowed our regional brands to compete more effectively during the quarter. Our fluid milk volumes, in general, outpaced the industry due to the addition of new customers during the second half of 2011. Despite ongoing challenges to our sales volume performance, we expect our fluid milk volumes to remain flat in the near term.

 

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To improve profitability and to stabilize margin erosion, we will continue to emphasize cost reduction in 2012. Organizational changes are in process to reduce our total cost to serve and our selling and general and administrative costs. We remain focused on sustaining positive cash flow and net debt reduction.

Conventional Milk Environment — Conventional milk prices increased sharply in March of 2011 and continued to increase through the third quarter of 2011, before gradually declining in the fourth quarter. Class I and Class II butterfat prices were the highest the industry has experienced in recent history, and all Class I and Class II pricing remains significantly higher than 2010. This significant increase in conventional milk prices during 2011 was a result of limited inventories of butterfat and nonfat solids coupled with strong demand for butter, nonfat dry milk and cheese both domestically and internationally. After declining modestly throughout the first quarter, we expect Class I and Class II pricing to remain relatively flat throughout 2012.

Goodwill Impairment — During the third quarter of 2011, we performed a step one interim goodwill analysis of our Fresh Dairy Direct reporting unit. A prolonged economic decline has resulted in significantly lower consumer spending, declining volumes in the fluid milk industry and increased competitive pricing pressures that are unlikely to improve materially. These conditions have continued to affect both consumption and pricing in our Fresh Dairy Direct product categories, which culminated in a change to our outlook for that business.

Based on the results of the step one analysis, we determined that the carrying value of our Fresh Dairy Direct reporting unit exceeded its fair value; therefore, we were required to perform step two of the impairment analysis to determine the amount of goodwill impairment to be recorded. The amount of the impairment was calculated by comparing the implied fair value of the goodwill to its carrying amount, which required us to allocate the fair value determined in the step one analysis to the individual assets and liabilities of the reporting unit. Any remaining fair value represented the implied fair value of goodwill on the testing date.

Based on the step two valuation, we concluded the implied fair value of our Fresh Dairy Direct goodwill was $87 million. Accordingly, we recorded a $2.1 billion non-cash charge ($1.6 billion net of tax) in 2011. This impairment charge did not impact our operations, compliance with our debt covenants or our cash flows. We assessed each of our reporting units for impairment during the fourth quarter of 2011 in connection with our annual impairment test, which is conducted annually as of December 1, and concluded there was no goodwill impairment for our WhiteWave, Morningstar or Alpro reporting units and no additional goodwill impairment for our Fresh Dairy Direct reporting unit. Additionally, in connection with our annual impairment testing, we concluded that none of our indefinite-lived trademarks were impaired. See Note 6 to our Consolidated Financial Statements for further information with respect to our interim and annual goodwill impairment testing.

Facility Closing and Reorganization Activities — In an effort to continue to optimize our distribution network, we closed two production facilities and a number of distribution facilities within Fresh Dairy Direct during 2011. Additionally, we incurred charges related to workforce reductions under our organization optimization and department realignment initiatives. We recorded facility closing and reorganization costs of $45.7 million in 2011.

During the first quarter of 2012, our management team reassessed our company-wide strategy, resulting in a shift in focus to deploying our capital and strategically investing in the value-added segments of our business. With this new strategy, our goal is to invest our strategic capital primarily in those initiatives that yield higher returns over shorter time frames. In connection with this change, our management team approved a cost reduction plan that is focused on aligning key functions within the Fresh Dairy Direct organization under a single leadership team and permanently removing costs from the Fresh Dairy Direct organization as well as certain functions that support this segment of our business. We expect to incur charges of approximately $25 million under this initiative, primarily related to workforce reduction costs, the write-down of certain information technology assets and costs associated with exiting other commitments deemed not necessary to execute our new strategy.

We continue to look for areas of opportunity and will likely incur additional costs related to these efforts and other initiatives in the near term as we continue to transform our business. See Note 16 to our Consolidated Financial Statements for more information regarding our facility closing and reorganization activities.

Management Changes — In connection with our decision to combine the supply chain and sales and distribution functions of Fresh Dairy Direct under a single leadership team, effective February 4, 2012, we eliminated Christopher Sliva’s position as Chief Commercial Officer. Gregg Tanner assumed the role of President of Fresh Dairy Direct, in addition to continuing to serve in his current role as our Chief Supply Chain Officer. Additionally, effective February 4, 2012, we eliminated Greg McKelvey’s position as Chief Strategy and Transformation Officer.

Mr. Sliva and Mr. McKelvey each received benefits in accordance with our Executive Severance Pay Plan, filed with the SEC as Exhibit 10.1 to our Current Report on Form 8-K on November 19, 2010.

DOJ Litigation Settlement — In March 2011 we reached a settlement with the United States Department of Justice (“DOJ”) and the States of Wisconsin, Illinois and Michigan related to our acquisition of the Consumer Products Division of Foremost Farms USA in April 2009. Pursuant to the settlement, we sold the fluid milk operations at our Fresh Dairy Direct manufacturing facility in Waukesha, Wisconsin (“Waukesha”) on September 8, 2011. See Notes 2 and 18 to our Consolidated Financial Statements. This operation did not meet the requirements to be accounted for as a discontinued operation.

 

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Tennessee Dairy Farmer Action Settlement — On July 12, 2011, we entered into a settlement agreement with the class plaintiffs in the dairy farmer actions. Under the proposed settlement agreement, we agreed to pay a total of up to $140 million over a period of four to five years into a fund for distribution to dairy farmer class members in a number of Southeastern states.

On July 28, 2011, the Court issued an order partially decertifying the dairy farmer plaintiff class with which we had previously entered into the settlement agreement. In order to pursue a final and certain resolution consistent with the terms of the settlement agreement, we filed a motion with the Court on August 5, 2011 to vacate preliminary approval of the settlement agreement, defer associated deadlines related to the settlement, and to clarify the role of class counsel in light of the Court’s decertification order. The motion was granted by the Court and a Memorandum Opinion was issued on August 31, 2011. On December 27, 2011, interim counsel for the putative Dairy Farmers of America (“DFA”) member subclass filed a motion to certify the DFA subclass for settlement purposes and to reinstate preliminary approval of the July 12, 2011 settlement agreement. On February 14, 2012, the Court granted preliminary approval of the settlement agreement, and set May 15, 2012 as the date to consider final approval of the agreement. Per the terms of the settlement agreement, on February 21, 2012 we made a payment of $60 million into an escrow account to be distributed following the Court’s final approval and issued a standby letter of credit in the amount of $80 million to support subsequent payments due under the agreement. The settlement agreement requires us to make a payment of up to $20 million on each of the following four anniversaries of the settlement agreement’s final approval date. There can be no assurance that the settlement agreement will receive final approval in its current form, in another form that is acceptable to the Court and the parties, or at all.

In the second quarter of 2011, we recorded a $131.3 million charge and a corresponding liability for the present value of our obligations under the original settlement agreement, based on imputed interest computed at a rate of 4.77%, which approximates our like-term incremental fixed rate borrowing cost. We have continued to accrete interest related to this recorded liability as we believe a settlement of this matter is likely to occur under substantially similar financing terms. See Note 18 to our Consolidated Financial Statements for further information.

Divestiture of Yogurt Operations — In the fourth quarter of 2010, we entered into two separate agreements to sell our Mountain High and private label yogurt operations, which were part of our Fresh Dairy Direct and Morningstar segments. On February 1, 2011, we completed the sale of our Mountain High yogurt operations, and on April 1, 2011, we completed the sale of our private label yogurt operations, recording a gain on both transactions. These operations did not meet the requirements to be accounted for as discontinued operations. See Note 2 to our Consolidated Financial Statements.

Hero/Whitewave Joint Venture — In the second quarter of 2011, we began evaluating strategic alternatives related to our 50% owned joint venture between WhiteWave and Hero Group (“Hero”), which is a part of our WhiteWave-Alpro segment. During the third quarter of 2011, due to continued poor performance by the venture and a desire on our part to invest in core operations, a recommendation was made to, and approved by, the joint venture partners to wind down the joint venture operations during the fourth quarter of 2011. In conjunction with this action plan, we wrote down the joint venture’s long-lived assets to fair value less costs to sell as of September 30, 2011. Additionally, based on our continuing level of involvement with the joint venture, we have continued to consolidate the venture in our Consolidated Financial Statements. We completed the majority of the wind-down of the joint venture during the fourth quarter of 2011. Upon completion of the wind-down in the first half of 2012, we may incur additional charges related to the final settlement with our joint venture partner, Hero Group. See Note 2 to our Consolidated Financial Statements.

 

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Employees

As of December 31, 2011, we had the following employees:

 

00000000000 00000000000
     No. of
Employees
     % of
Total
 

Fresh Dairy Direct

     19,056         79%     

WhiteWave-Alpro

     2,337         10         

Morningstar

     1,992         8         

Corporate

     681         3         
  

 

 

    

 

 

 

Total

     24,066             100%     
  

 

 

    

 

 

 

Approximately 39% of Fresh Dairy Direct’s, 26% of WhiteWave-Alpro’s and 46% of Morningstar’s employees participate in collective bargaining agreements. We believe our relationship with our employees and these organizations is satisfactory.

Government Regulation

Food-Related Regulations

As a manufacturer and distributor of food products, we are subject to a number of food-related regulations, including the Federal Food, Drug and Cosmetic Act and regulations promulgated thereunder by the U.S. Food and Drug Administration (“FDA”). This comprehensive regulatory framework governs the manufacture (including composition and ingredients), labeling, packaging and safety of food in the United States. The FDA:

 

   

Regulates manufacturing practices for foods through its current good manufacturing practices regulations;

 

   

Specifies the standards of identity for certain foods, including many of the products we sell; and

 

   

Prescribes the format and content of certain information required to appear on food product labels.

In addition, the FDA enforces the Public Health Service Act and regulations issued thereunder, which authorizes regulatory activity necessary to prevent the introduction, transmission or spread of communicable diseases. These regulations require, for example, pasteurization of milk and milk products. We are subject to numerous other federal, state and local regulations involving such matters as the licensing and registration of manufacturing facilities, enforcement by government health agencies of standards for our products, inspection of our facilities and regulation of our trade practices in connection with the sale of food products.

We use quality control laboratories in our manufacturing facilities to test raw ingredients. Product quality and freshness are essential to the successful distribution of our products. To monitor product quality at our facilities, we maintain quality control programs to test products during various processing stages. We believe our facilities and manufacturing practices are in material compliance with all government regulations applicable to our business.

Employee Safety Regulations

We are subject to certain safety regulations, including regulations issued pursuant to the U.S. Occupational Safety and Health Act. These regulations require us to comply with certain manufacturing safety standards to protect our employees from accidents. We believe that we are in material compliance with all employee safety regulations applicable to our business.

Environmental Regulations

We are subject to various environmental regulations. Our plants use a number of chemicals that are considered to be “extremely” hazardous substances pursuant to applicable environmental laws due to their toxicity, including ammonia, which is used extensively in our operations as a refrigerant. Such chemicals must be handled in accordance with such environmental laws. Also, on occasion, certain of our facilities discharge biodegradable wastewater into municipal waste treatment facilities in excess of levels allowed under local regulations. As a result, certain of our facilities are required to pay wastewater surcharges or to construct wastewater pretreatment facilities. To date, such wastewater surcharges have not had a material effect on our financial condition or results of operations.

We maintain above-ground and under-ground petroleum storage tanks at many of our facilities. We periodically inspect these tanks to determine whether they are in compliance with applicable regulations and, as a result of such inspections, we are required to make expenditures from time to time to ensure that these tanks remain in compliance. In addition, upon removal of the tanks, we are sometimes required to make expenditures to restore the site in accordance with applicable environmental laws. To date, such expenditures have not had a material effect on our financial condition or results of operations.

 

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We believe that we are in material compliance with the environmental regulations applicable to our business. We do not expect the cost of our continued compliance to have a material impact on our capital expenditures, earnings, cash flows or competitive position in the foreseeable future. In addition, any asset retirement obligations are not material.

Milk Industry Regulation

The federal government establishes minimum prices that we must pay to producers in federally regulated areas for raw milk. Raw milk primarily contains raw skim milk, in addition to a small percentage of butterfat. Raw milk delivered to our facilities is tested to determine the percentage of butterfat and other milk components, and we pay our suppliers for the raw milk based on the results of these tests.

The federal government’s minimum prices vary depending on the processor’s geographic location or sales area and the type of product manufactured. Federal minimum prices change monthly. Class I butterfat and raw skim milk prices (which are the minimum prices we are required to pay for raw milk that is processed into Class I products such as fluid milk) and Class II raw milk prices (which are the prices we are required to pay for raw milk that is processed into Class II products such as cottage cheese, creams, creamers, ice cream and sour cream) for each month are announced by the federal government the immediately preceding month.

Some states have established their own rules for determining minimum prices for raw milk. In addition to the federal or state minimum prices, we also may pay producer premiums, procurement costs and other related charges that vary by location and supplier.

Organic Regulations

Our organic products are required to meet the standards set forth in the Organic Foods Production Act and the regulations adopted thereunder by the National Organic Standards Board. These regulations require strict methods of production for organic food products and limit the ability of food processors to use non-organic or synthetic materials in the production of organic foods or in the raising of organic livestock. We believe that we are in material compliance with the organic regulations applicable to our business.

Minority Holdings and Other Interests

Consolidated Container Company

We own an approximately 25% non-controlling interest, on a fully diluted basis, in Consolidated Container Company (“CCC”), one of the nation’s largest manufacturers of rigid plastic containers and our largest supplier of plastic bottles and bottle components. We have owned a minority interest in CCC since July 1999 when we sold our U.S. plastic packaging operations to CCC. Vestar Capital Partners, an unaffiliated entity, controls CCC through a majority ownership interest. Pursuant to our agreements with Vestar, we control two of the eight seats on CCC’s Management Committee. We also have entered into various supply agreements with CCC through December 31, 2014, pursuant to which we have agreed to purchase certain of our requirements for plastic bottles and bottle components from CCC. We spent $360.3 million, $314.9 million and $268.2 million on products purchased from CCC during the years ended December 31, 2011, 2010 and 2009, respectively. See Note 3 to our Consolidated Financial Statements for more information regarding our relationship with CCC.

Hero/WhiteWave Joint Venture

In January 2008, WhiteWave entered into and formed a 50/50 strategic joint venture with Hero Group (“Hero”), a producer of international fruit and infant nutrition brands. During 2011, the joint venture partners decided to wind down Hero’s operations. See Note 2 to our Consolidated Financial Statements for more information regarding the wind-down of the joint venture.

During 2011 and 2010, our joint venture partner made cash contributions of $6.8 million and $8.0 million, respectively. Our joint venture partner did not make any non-cash contributions in 2011 or 2010. During 2011 and 2010, we made cash contributions of $6.9 million and $8.8 million, respectively, and continued non-cash contributions in the form of the capital lease for the manufacturing facility constructed at one of our existing WhiteWave plants. The joint venture has assets of $4.0 million, primarily equipment held for sale, and liabilities of $2.4 million, which are included within the WhiteWave-Alpro segment as of December 31, 2011.

Where You Can Get More Information

Our fiscal year ends on December 31. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission.

 

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You may read and copy any reports, statements or other information that we file with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.

We file our reports with the Securities and Exchange Commission electronically through the Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval (“EDGAR”) system. The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding companies that file electronically with the Securities and Exchange Commission through EDGAR. The address of this Internet site is http://www.sec.gov.

We also make available free of charge through our website at www.deanfoods.com our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

Our Code of Ethics is applicable to all of our employees and directors, with the exception of our Alpro employees, who are subject to a comparable code of ethics. Our Code of Ethics is available on our corporate website at www.deanfoods.com, together with the Corporate Governance Principles of our Board of Directors and the charters of all of the Committees of our Board of Directors. Any waivers that we may grant to our executive officers or directors under the Code of Ethics, and any amendments to our Code of Ethics, will be posted on our corporate website. If you would like hard copies of any of these documents, or of any of our filings with the Securities and Exchange Commission, write or call us at:

Dean Foods Company

2711 North Haskell Avenue, Suite 3400

Dallas, Texas 75204

(214) 303-3400

Attention: Investor Relations

 

Item 1A. Risk Factors

Competitive Risks

Volume Softness in the Dairy Category Has Had a Negative Impact on Our Sales and Profits.

Industry-wide volume softness across dairy product categories continued in 2011. In particular, the fluid milk category has experienced declining volumes over the past several years. Decreasing dairy category volume has increased the impact of declining margins on our business. Periods of declining volumes limit the amount of price increases that we can seek to recapture. We expect these trends to continue for the foreseeable future, which could further negatively affect our business. In addition, during 2010 and 2011, we experienced a decline in historical volumes from some of our largest customers, which has negatively impacted our sales and profitability and which will continue to have a negative impact in the future if we are not able to attract and retain a profitable customer mix.

We are Subject to Competitive Bidding Situations, the Outcome of Which Could Negatively Impact Our Sales and Profits.

Many of our retail customers have become increasingly price sensitive in the current economic climate, which has intensified the competitive environment in which we operate. As a result of the intensely competitive dairy environment, we have been subject to a number of competitive bidding situations, both formal and informal, particularly within Fresh Dairy Direct and Morningstar, which has reduced our profitability on sales to several customers. We expect this trend of competitive bidding to continue. In some cases, we have replaced lost volume with lower margin business, which also negatively impacts our profitability. If we are unable to structure our business to appropriately respond to the pricing demands of our customers, we may lose these customers to other processors that are willing to sell product at a lower cost, which could negatively impact our sales and profits.

 

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Continued Price Concessions on Fluid Milk to Large Format Retailers, and the Continued Shift to Private Label, Has Decreased Our Operating Margins and Profitability.

Many of our customers, such as supermarkets, warehouse clubs and food distributors, have experienced industry consolidation in recent years and this consolidation is expected to continue. These consolidations have produced large, sophisticated customers with increased buying power, and have increased the significance of large-format retailers and discounters. As a result, we are increasingly dependent on key retailers, which have significant bargaining power. In addition, some of these customers are vertically integrated and have re-dedicated key shelf-space currently occupied by our regionally branded products for their private label products. Higher levels of price competition and higher resistance to price increases have had a significant impact on our business. During 2011, retailers continued to push suppliers for lower prices, which decreased our margins. In addition, the fluid milk category continued to experience low pricing on private label milk during 2011. As a result, we are experiencing a continued shift from branded to private label products, as economically stressed consumers choose private label products over more expensive regional brands. If we are not able to lower our cost structure adequately, our profitability could continue to be adversely affected by the decrease in margin.

Increased Competition With Our Nationally and Internationally Branded Products and Continued Economic Weakness Could Impede Our Growth Rate and Profit Margin.

In recent years, growth in our business has primarily resulted from the strength of our nationally and internationally branded products. Our brands such as Silk, Horizon Organic, LAND O LAKES, International Delight, Alpro and Provamel have benefited in many cases from being the first to introduce products in their categories. As plant-based, organic and coffee-enhancing products have gained in popularity with consumers, our products in these categories have attracted competitors, including private label competitors who sell their products at a lower price. In addition, our branded products typically have higher marketing costs than our regionally branded or private label products, which could negatively impact the profitability of this segment of our business. In periods of economic weakness, consumers tend to purchase lower-priced products, including conventional milk, coffee creamers and other private label products, which could reduce sales of our branded products. The willingness of consumers to purchase our products will depend upon our ability to offer products providing the right consumer benefits at the right price. Further trade down to lower priced products could adversely affect our sales and profit margin for our branded products.

Many large food and beverage companies have substantially more resources than we do, and they may be able to market their products more successfully than we can, which could cause our growth rate in certain categories to be slower than our forecast and could cause us to lose sales. Some of our branded products compete intensely for consumer spend. If our branded products fail to compete successfully with other branded offerings in the marketplace, our sales and profitability could be negatively impacted.

The Loss of Any of Our Largest Customers Could Negatively Impact Our Sales and Profits.

Our largest customer, Wal-Mart Stores, Inc. and its subsidiaries, including Sam’s Club, accounted for approximately 19% of consolidated net sales during 2011. During 2011, our top five customers, collectively, accounted for approximately 28% of our consolidated net sales. We do not generally enter into written agreements with our customers, and where such agreements exist, they are generally terminable at will by the customer. The loss of any large customer for an extended length of time could negatively impact our sales and profits.

Commodity Risks

Availability of and Changes in Raw Materials and Other Input Costs Can Adversely Affect Us.

Our business is heavily dependent on raw materials such as conventional and organic raw milk, butterfat, diesel fuel, resin, soybeans and other commodities. In addition to our dependence on conventional and organic raw milk, our Fresh Dairy Direct segment is a large consumer of diesel fuel, and Morningstar and WhiteWave-Alpro are affected by the costs of petroleum-based products through the use of common carriers and packaging. The prices of these materials increase and decrease based on market conditions, and in some cases, governmental regulation. Weather, including the heightened impact of weather events related to climate change, also affects the availability and pricing of these inputs. Sometimes supplies of raw materials, such as resin, have been insufficient to meet demand. Volatility in the cost of our raw materials, particularly diesel fuel and other non-dairy inputs, has adversely affected our profitability as upward price changes often lag changes in costs we charge our customers. In some cases the price increases of these non-dairy inputs may exceed the price increases we are able to pass along to our customers due to contractual and other limitations. In periods of rapid movements in dairy commodities, our ability to pass-through costs is impaired due to the timing of passing through the price increases. These lags and limitations have periodically decreased our profit margins in inflationary markets. In addition, raw material cost fluctuations from year to year can cause our revenues to increase or decrease significantly compared to prior periods.

Raw milk and bulk cream are the primary ingredients in many of Morningstar’s products. The pass-through mechanism for butterfat and bulk cream inputs differs from the fluid milk pricing mechanism in that Morningstar’s products are generally priced before input costs are known. Morningstar works to pass through changes in butterfat and bulk cream costs through a mix of forecast pricing, true-up pricing and the direct, but lagged, pass-through of cost changes. As a result, rapid increases in butterfat and bulk cream prices can have a substantial impact on Morningstar’s profitability from period to period. In addition, Morningstar sets pricing for non-dairy inputs with the majority of its customers annually and generally lacks the ability to pass through increases in these inputs to those customers. This pricing method may further negatively impact Morningstar’s profitability in periods of inflationary costs.

 

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The organic dairy industry is continuing to develop in terms of consumer acceptance and market penetration, and, as a result, continues to experience significant swings in supply and demand. Industry regulation, and the costs of organic farming compared to prices paid for conventional farming can impact the supply of organic raw milk in the market. An oversupply of organic raw milk can cause significant discounting in the sale of organic packaged milk, which increases competitive pressure on our branded products and could cause our profitability to suffer. An undersupply or higher input costs can increase the cost and availability of organic raw milk, which can cause product shortages or retail price gaps between private label and branded products to expand, potentially decreasing our volumes and adversely affecting our results. We experienced a tightening of organic milk supply during the fourth quarter of 2011, which increased costs, impacted availability of organic milk and negatively impacted our sales volume of organic milk. In 2012, we expect the organic milk supply challenges to continue, which may continue to pressure our costs and impact our volume sales of organic milk. In addition, the impact of retail price gaps may be compounded by the current economic environment as consumers become increasingly focused on product pricing. Moreover, consumers may choose to purchase conventional milk instead of organic milk due to differences in cost, which could further decrease our volumes and results.

Capital Markets and General Economic Risks

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. At December 31, 2011, we had outstanding borrowings of approximately $2.5 billion under our senior secured credit facility, of which $2.4 billion were in term loan borrowings with an additional $100 million in outstanding borrowings under our $1.5 billion senior secured revolving line of credit. In addition, we had $1.0 billion aggregate principal amount of senior unsecured notes outstanding and $260 million outstanding under our receivables-backed facility at December 31, 2011.

We have pledged substantially all of our assets (including the assets of our subsidiaries) to secure our indebtedness. Our debt level and related debt service obligations:

 

   

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 or funding our strategic growth plan;

 

   

Impose on us additional financial and operational restrictions;

 

   

Expose us to interest rate risk since a portion of our debt obligations is at variable rates; and

 

   

Restrict our ability to fund acquisitions.

In addition, investors may be apprehensive about investing in companies such as ours that carry a substantial amount of leverage on their balance sheets, and this apprehension may adversely affect the price of our common stock.

Under our senior secured credit facility, we are required to maintain certain financial covenants, including, but not limited to, maximum senior secured leverage, maximum leverage and minimum interest coverage ratios, each as defined under and calculated in accordance with the terms of our senior credit facility and receivables-backed facility. As of December 31, 2011, our maximum permitted leverage ratio was 5.75 times consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters. As of December 31, 2011, our leverage ratio was 4.64 times. The maximum permitted leverage ratio under both the senior secured credit facility and the receivables-backed facility will decline to 5.50 times as of March 31, 2012. Failure to comply with the financial covenants, or any other non-financial or restrictive covenant, could create a default under our senior secured credit facility and under our receivables-backed facility. Upon a default, our lenders could accelerate the indebtedness under the facilities, foreclose against their collateral or seek other remedies, which would jeopardize our ability to continue our current operations. We may be required to amend our credit facility, refinance all or part of our existing debt, sell assets, incur additional indebtedness or raise equity. Further, based upon our actual performance levels, our senior secured leverage ratio, leverage ratio and minimum interest coverage ratio requirements or other financial covenants could limit our ability to incur additional debt, which could hinder our ability to execute our current business strategy.

Throughout 2011, Fresh Dairy Direct experienced significant pricing pressures from our retail customers, as well as volume declines, and despite improved operating profit performance from our other segments and continued cost reductions, our overall operating profitability decreased. Our ability to make scheduled payments on our debt and other financial obligations and comply with financial covenants depends on our financial and operating performance. Our financial and operating performance will continue to be subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control.

 

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Our ability to maintain an adequate level of liquidity in the future is dependent on our ability to renew our receivables-backed facility annually. See “Part II — Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Current Debt Obligations” below for more information.

The Costs of Providing Employee Benefits Have Escalated, and Liabilities Under Certain Plans May be Triggered Due to Our Actions or the Actions of Others, Which May Adversely Affect Our Profitability and Liquidity.

We sponsor various defined benefit and defined contribution retirement plans, as well as contribute to various multiemployer plans on behalf of our employees. Changes in interest rates or in the market value of plan assets could affect the funded status of our pension plans. This could cause volatility in our benefits costs and increase future funding requirements of our plans. Pension and post-retirement costs also may be significantly affected by changes in key actuarial assumptions including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and annual periodic pension costs. Recent changes in federal laws require plan sponsors to eliminate, over defined time periods, the underfunded status of plans that are subject to ERISA rules and regulations. In addition, turmoil in the financial markets in recent years brought significant declines in the fair market value of the equity and debt instruments that we hold within our defined benefit master trust to settle future defined benefit plan obligations. Our funded status as of December 31, 2011 decreased by $23.0 million from the prior year end and is still $78.6 million lower than our funded status at December 31, 2007, which was prior to the 2008 global financial crisis. A significant increase in future funding requirements could have a negative impact on our results of operations, financial condition and cash flows.

Certain of our defined benefit retirement plans, as well as many of the multiemployer plans in which we participate, are less than fully funded. Facility closings may trigger cash payments or previously unrecognized obligations under our defined benefit retirement plans or multiemployer plans. In addition, certain actions or the financial condition of other companies which participate in multiemployer plans may create financial obligations for us, which circumstances are entirely out of our control. Future funding requirements, and related charges, associated with multiemployer plans in which we participate could have a negative impact on our results of operations, financial condition and cash flows.

The Continued Economic Decline May Adversely Impact Our Business and Results of Operations.

The dairy industry is sensitive to changes in international, national and local general economic conditions. The continued economic decline has had an adverse effect on consumer spending patterns. High levels of unemployment, high consumer debt levels and other unfavorable economic factors could further adversely affect consumer demand for products we sell or distribute, which in turn adversely affects our results of operations. There can be no assurance that consumers will return to historical spending patterns.

Changes in Our Credit Ratings May Have a Negative Impact on Our Future Financing Costs or the Availability of Capital.

Some of our debt is rated by Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings, and there are a number of factors beyond our control with respect to these ratings. Our credit ratings are currently considered to be below “investment grade.” Although the interest rate on our existing credit facilities is not affected by changes in our credit ratings, such ratings or any further rating downgrades may impair our ability to raise additional capital in the future on terms that are acceptable to us, may cause the value of our securities to decline and may have other negative implications with respect to our business. Ratings reflect only the views of the ratings agency issuing the rating, are not recommendations to buy, sell or hold our securities and may be subject to revision or withdrawal at any time by the ratings agency issuing the rating. Each rating should be evaluated independently of any other rating.

Impairment in the Carrying Value of Goodwill Has Negatively Impacted, and Future Goodwill Impairments Could Negatively Impact, Our Consolidated Results of Operations and Net Worth.

In the third quarter of 2011, as a result of an interim test of the goodwill of our Fresh Dairy Direct reporting unit, we concluded the implied fair value of our Fresh Dairy Direct goodwill was less than its carrying value. Accordingly, we recorded a $2.1 billion non-cash charge ($1.6 billion net of tax) in 2011 to reflect the impairment. As of December 31, 2011, on a consolidated basis, we had $1.2 billion of goodwill representing approximately 20% of our total assets, of which $87 million was associated with our Fresh Dairy Direct reporting unit, $600 million was associated with our WhiteWave reporting unit, $162 million was associated with our Alpro reporting unit and $306 million was associated with our Morningstar reporting unit. We record goodwill initially at fair value and review its fair value for impairment at least annually, as of December 1, or on an interim basis if impairment indicators, such as disruptions to the business, unexpected significant declines in operating performance or sustained market capitalization declines, are present.

We assessed each of our reporting units for impairment during the fourth quarter of 2011 in connection with our annual impairment test and concluded there was no goodwill impairment for our WhiteWave, Morningstar or Alpro reporting units and no additional goodwill impairment for our Fresh Dairy Direct reporting unit. We can provide no assurance that we will not have an impairment charge in future periods as a result of changes in our operating results.

 

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In assessing the fair value of our reporting units, we make estimates and assumptions about sales, growth rates, our cost of capital and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors and different assumptions could result in goodwill impairment charges in the future, which could be substantial. Any such impairment would result in our recognizing a non-cash charge, which may adversely affect our results of operations.

Strategic Risks

We May Not Realize Anticipated Benefits from Our Cost Reduction Efforts as Expected.

We have implemented a number of cost reduction initiatives that we believe are necessary to position our business for future success and growth. Our future success and earnings growth depend upon our ability to achieve a lower cost structure and operate efficiently in the highly competitive food and beverage industry, particularly in an environment of increased competitive activity and reduced profitability. In order to capitalize on our cost reduction efforts, it will be necessary to carefully evaluate future investments in our business, and concentrate on those areas with the most potential return on investment. If we are unable to realize the anticipated benefits from our cost cutting efforts, we could become cost disadvantaged in the marketplace, and our competitiveness and our profitability could decrease.

Product, Supply Chain and Systems Risks

We Must Identify Changing Consumer Preferences and Develop and Offer Products to Meet Their Preferences.

Consumer preferences evolve over time and the success of our products depends on our ability to identify the tastes, dietary preferences and purchasing habits of consumers and to offer products that appeal to their preferences. Introduction of new products and product extensions requires significant development and marketing investment, and we may fail to realize anticipated returns on such investments due to lack of consumer acceptance of such products. Currently, we believe consumers are trending toward health and wellness beverages. Although we continue to invest in research and development in order to capitalize on this trend, there are currently several global companies with greater resources that compete with us in the health and wellness space. In addition, as consumers become increasingly aware of the environmental and social impacts of the products they purchase, their preferences and purchasing decisions may change. If our products fail to meet changing consumer preferences, the return on our investment in those areas will be less than anticipated and our product strategy may not succeed.

We May Experience Liabilities or Harm to Our Reputation as a Result of Product Issues, Such as Product Recalls.

We sell products for human consumption, which involves a number of risks. Product contamination, spoilage or other adulteration, product misbranding or product tampering could require us to recall products. We also may be subject to liability if our products or operations violate applicable laws or regulations or in the event our products cause injury, illness or death. In addition, we advertise our products and could be the target of claims relating to false or deceptive advertising under U.S. federal and state laws, including consumer protection statutes of some states. A significant product liability or other legal judgment against us or a widespread product recall may negatively impact our profitability. Even if a product liability or consumer fraud claim is unsuccessful or is not merited, the negative publicity surrounding such assertions regarding our products or processes could materially and adversely affect our reputation and brand image, particularly in categories such as fluid milk that have strong health and wellness credentials.

 

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Disruption of Our Supply Chain or Transportation Systems Could Adversely Affect Our Business.

Damage or disruption to our manufacturing or distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes, the financial and/or operational instability of key suppliers, distributors, warehousing and transportation providers, or other reasons could impair our ability to manufacture or distribute our products. To the extent that we are unable, or it is not financially feasible, to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, there could be an adverse effect on our business and results of operations, and additional resources could be required to restore our supply chain. In addition, we are subject to federal motor carrier regulations, such as the Federal Motor Carrier Safety Act, with which our extensive DSD system must comply. Failure to comply with such regulations could result in our inability to deliver product to our customers in a timely manner, which could adversely affect our reputation and our results.

Our Business Operations Could be Disrupted if Our Information Technology Systems Fail to Perform Adequately or Experience a Security Breach.

We maintain a large database of confidential information in our information technology systems, including confidential employee and customer information. The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our business data, communications, supply chain, logistics, accounting and other business processes. If we do not allocate and effectively manage the resources necessary to build and sustain an appropriate technology infrastructure, our business or financial results could be negatively impacted. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including systems failures, viruses, security breaches or cyber incidents such as intentional cyber attacks aimed at theft of sensitive data or inadvertent cyber-security compromises. A security breach of such information could result in damage to our reputation, and could negatively impact our relations with our customers or employees. Any such damage or interruption could have a material adverse effect on our business.

Legal and Regulatory Risks

Pending Antitrust Lawsuits May have a Material Adverse Impact on Our Business.

We are the subject of several antitrust lawsuits, the outcome of which we are unable to predict. Increased scrutiny of the dairy industry has resulted, and may continue to result, in litigation against us. Such lawsuits are expensive to defend, divert management’s attention, and may result in significant judgments. In some cases, these awards would be trebled by statute and successful plaintiffs might be entitled to an award of attorney’s fees. Depending on its size, such a judgment could materially and adversely affect our results of operations, cash flows and financial condition and impair our ability to continue operations. We may not be able to pay such judgment or to post a bond for an appeal, given our financial condition and our available cash resources. In addition, depending on its size, failure to pay such a judgment or failure to post an appeal bond could cause us to breach certain provisions of our credit facilities. In either of these circumstances, we may seek a waiver of or amendment to the terms of our credit facilities, but there can be no assurance that such a waiver or amendment could be obtained. Failure to obtain such a waiver or amendment would materially and adversely affect our results of operations, cash flows and financial condition and could impair our ability to continue operations.

Moreover, these actions could expose us to negative publicity, which might adversely affect our brands, reputation and/or customer preference for our products. In addition, merger and acquisition activities are subject to these antitrust and competition laws, which have impacted, and may continue to impact, our ability to pursue strategic transactions.

The Dairy Industry in Which We Operate Has Been Subject to Increased Government Scrutiny Which Could Have an Adverse Impact on Our Business.

We are subject to antitrust and other competition laws in the United States and in the other countries in which we operate. We cannot predict how these laws or their interpretation, administration and enforcement will impact us. Throughout 2010 and 2011, the dairy industry was the subject of increased government scrutiny. In 2010, the Obama administration initiated a review of existing dairy policies in order to consider potential changes to those policies. In 2012, we expect re-authorization of the nation’s farm bill, which is the primary tool regulating federal dairy policy. This federal and congressional review process, and legislative activity in connection with the farm bill, may result in changes to the dairy industry that we cannot anticipate or control and that may have a material adverse impact on our business.

 

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Litigation or Legal Proceedings Could Expose Us to Significant Liabilities and Have a Negative Impact on Our Reputation.

We are party to various litigation claims and legal proceedings. We evaluate these litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and/or disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of management judgment. Actual outcomes or losses may differ materially from our current assessments and estimates.

Labor Disputes Could Adversely Affect Us.

As of December 31, 2011, approximately 39% of Fresh Dairy Direct’s, 26% of WhiteWave-Alpro’s and 46% of Morningstar’s employees participated in collective bargaining agreements. At any given time, we may face a number of union organizing drives. When we face union organizing drives, we and the union may disagree on important issues which, in turn, could possibly lead to a strike, work slowdown or other job actions at one or more of our locations. A strike, work slowdown or other labor unrest could in some cases impair our ability to supply our products to customers, which could result in reduced revenue and customer claims.

Our Business is Subject to Various Environmental Laws, Which May Increase Our Compliance Costs.

Our business operations are subject to numerous environmental and other air pollution control laws, including the federal Clean Air Act, the federal Clean Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, as well as state and local statutes. These laws and regulations cover the discharge of pollutants, wastewater, and hazardous materials into the environment. In addition, various laws and regulations addressing climate change are being considered or implemented at the federal and state levels. New legislation, as well as current federal and other state regulatory initiatives relating to these environmental matters, could require us to replace equipment, install additional pollution controls, purchase various emission allowances or curtail operations. These costs could adversely affect our results of operations and financial condition.

Changes in Laws, Regulations and Accounting Standards, Including Those of Non-US Jurisdictions, Could Have an Adverse Effect on Our Financial Results.

We are subject to federal, state, local and foreign governmental laws and regulations, including those promulgated by the United States Food and Drug Administration, the United States Department of Agriculture, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and numerous related regulations promulgated by the Securities and Exchange Commission and the Financial Accounting Standards Board. Changes in federal, state or local laws, or the interpretations of such laws and regulations, may negatively impact our financial results or our ability to market our products. In addition, we have operations outside of the United States, which may present unique challenges and increase our exposure to the risks associated with foreign operations, including foreign currency risks and compliance with foreign rules and regulations. Any or all of these risks could adversely impact our financial results.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

Our corporate headquarters are located in leased premises at 2711 North Haskell Avenue, Suite 3400, Dallas, TX 75204. In addition, we operate more than 95 manufacturing facilities. Management believes that Dean Foods’ facilities are well maintained and are generally suitable and of sufficient capacity to support our current business operations and that the loss of any single facility would not have a material adverse effect on our operations or financial results. The following tables set forth, by business segment, our principal manufacturing facilities.

Fresh Dairy Direct

Fresh Dairy Direct currently conducts its manufacturing operations within the following 77 facilities, most of which are owned:

 

    Homewood, Alabama(2)

   New Orleans, Louisiana    Toledo, Ohio

    Buena Park, California

   Shreveport, Louisiana    Erie, Pennsylvania

    City of Industry, California(2)

   Bangor, Maine    Lansdale, Pennsylvania

    Hayward, California

   Franklin, Massachusetts    Lebanon, Pennsylvania

    Riverside, California

   Lynn, Massachusetts    Schuylkill Haven, Pennsylvania

    Delta, Colorado

   Mendon, Massachusetts    Sharpsville, Pennsylvania

    Denver, Colorado

   Evart, Michigan    Spartanburg, South Carolina

    Englewood, Colorado

   Grand Rapids, Michigan    Sioux Falls, South Dakota

    Greeley, Colorado

   Livonia, Michigan    Athens, Tennessee

    Deland, Florida

   Marquette, Michigan    Nashville, Tennessee(2)

    Miami, Florida

   Thief River Falls, Minnesota    Dallas, Texas(2)

    Orlando, Florida

   Woodbury, Minnesota    El Paso, Texas

    Braselton, Georgia

   Billings, Montana    Houston, Texas

    Hilo, Hawaii

   Great Falls, Montana    Lubbock, Texas

    Honolulu, Hawaii

   North Las Vegas, Nevada    McKinney, Texas

    Boise, Idaho

   Reno, Nevada    San Antonio, Texas

    Belvidere, Illinois

   Florence, New Jersey    Waco, Texas

    Harvard, Illinois

   Albuquerque, New Mexico    Orem, Utah

    Huntley, Illinois

   Rensselaer, New York    Salt Lake City, Utah

    O’Fallon, Illinois

   High Point, North Carolina    Richmond, Virginia

    Decatur, Indiana

   Winston-Salem, North Carolina    Springfield, Virginia

    Huntington, Indiana

   Bismarck, North Dakota    Ashwaubenon, Wisconsin

    Rochester, Indiana

   Tulsa, Oklahoma    Sheboygan, Wisconsin

    LeMars, Iowa

   Marietta, Ohio   

    Louisville, Kentucky

   Springfield, Ohio   

The majority of Fresh Dairy Direct’s manufacturing facilities also serve as distribution facilities. In addition, Fresh Dairy Direct has numerous distribution branches located across the country, some of which are owned but most of which are leased. Fresh Dairy Direct’s headquarters are located within our corporate headquarters.

WhiteWave-Alpro

WhiteWave-Alpro currently conducts its manufacturing operations from the following 9 facilities, most of which are owned:

 

    City of Industry, California    

   Dallas, Texas    Issenheim, France

    Jacksonville, Florida

   Mt. Crawford, Virginia                Landgraaf, Netherlands

    Bridgeton, New Jersey

   Wevelgem, Belgium    Kettering, United Kingdom        

WhiteWave also owns two organic dairy farms located in Paul, Idaho and Kennedyville, Maryland. WhiteWave’s headquarters and our research and development facility are located in leased premises in Broomfield, Colorado. Alpro’s headquarters are located in leased premises in Gent, Belgium.

 

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Morningstar

Morningstar currently conducts its manufacturing operations within the following 12 facilities, most of which are owned:

 

    Decatur, Alabama

   Rockford, Illinois    Delhi, New York

    Gustine, California

   Murray, Kentucky    Friendship, New York

    Tulare, California

   Frederick, Maryland    Sulphur Springs, Texas(2)

    Newington, Connecticut

   White Bear Lake, Minnesota   

Morningstar’s headquarters are located within our corporate headquarters.

 

Item 3. Legal Proceedings

We are not party to, nor are our properties the subject of, any material pending legal proceedings, other than as set forth below:

Tennessee Dairy Farmer Actions and Related Mississippi Action

We were named, along with several other defendants, in two putative class action antitrust complaints filed on July 5, 2007. The complaints were filed in the United States District Court for the Middle District of Tennessee, Columbia Division, and allege generally that we and others in the milk industry worked together to limit the price Southeastern dairy farmers are paid for their raw milk and to deny these farmers access to fluid Grade A milk processing facilities. Four additional putative class action complaints were filed in 2007 and 2008 in the United States District Court for the Eastern District of Tennessee, Greeneville Division. The allegations in these complaints are similar to those in the dairy farmer actions. All six of the class actions (collectively, the “dairy farmer actions”) were consolidated and were transferred to the Eastern District of Tennessee, Greeneville Division. Class certification in the dairy farmer actions was granted in September 2010.

On July 12, 2011, we entered into a settlement agreement with the class plaintiffs in the dairy farmer actions. On July 14, 2011, the United States District Court for the Eastern District of Tennessee granted preliminary approval of the class-wide settlement agreement and stayed the dairy farmer action with respect to the Company. Under the proposed settlement agreement, we agreed to pay a total of up to $140 million over a period of four to five years into a fund for distribution to dairy farmer class members in a number of Southeastern states.

On July 28, 2011, the Court issued an order partially decertifying the dairy farmer plaintiff class with which we had previously entered into the settlement agreement. The dairy farmer plaintiffs that were decertified from the class are, or were, members of the Dairy Farmers of America (“DFA”) co-operative. On August 1, 2011, the plaintiffs filed a motion asking the Court to re-consider its decertification order. The Court denied that motion on August 19, 2011. In order to pursue a final and certain resolution consistent with the terms of the settlement agreement, we filed a motion with the Court on August 5, 2011 to vacate preliminary approval of the settlement agreement, defer associated deadlines related to the settlement, and to clarify the role of class counsel in light of the Court’s decertification order. The motion was granted by the Court and a Memorandum Opinion was issued on August 31, 2011. In the Memorandum Opinion, the Court stated that it would take the motion for preliminary approval of the settlement under advisement pending appointment of separate counsel and class representatives for the decertified DFA subclass.

In a separate order entered on October 5, 2011, the Court appointed separate interim counsel for the DFA subclass, and set preliminary deadlines for newly designated interim counsel to submit any motion for certification of a DFA subclass for settlement purposes and any motion to preliminarily approve the July 12, 2011 settlement agreement. On December 27, 2011, interim counsel for the putative DFA member subclass filed a motion to certify the DFA subclass for settlement purposes and to reinstate preliminary approval of the July 12, 2011 settlement agreement. Dean responded to the motion on January 17, 2012, and did not oppose the motion. On February 14, 2012, the Court granted preliminary approval of the settlement agreement, and set May 15, 2012 as the date to consider final approval of the agreement. Per the terms of the settlement agreement, on February 21, 2012 we made a payment of $60 million into an escrow account to be distributed following the Court’s final approval, and issued a standby letter of credit in the amount of $80 million to support subsequent payments due under the agreement. The settlement agreement requires us to make a payment of up to $20 million on each of the following four anniversaries of the settlement agreement’s final approval date. There can be no assurance that the settlement agreement will receive final approval in its current form, in another form that is acceptable to the Court and the parties, or at all.

 

 

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In the second quarter of 2011, we recorded a $131.3 million charge and a corresponding liability for the present value of our obligations under the original settlement agreement, based on imputed interest computed at a rate of 4.77%, which approximates our like-term incremental fixed rate borrowing cost. We have continued to accrete interest related to this recorded liability as we believe a settlement of this matter is likely to occur under substantially similar financing terms.

On April 26, 2011, we, along with our Chief Executive Officer, Gregg Engles, and other defendants, were named in a putative class action lawsuit filed in the United States District Court for the Southern District of Mississippi, Hattiesburg Division. An amended complaint was filed in August 2011, which dropped the class action allegations. The allegations in the amended complaint are similar to those in the Tennessee dairy farmer actions. In addition, plaintiffs have alleged generally that defendants committed civil violations of the federal Racketeering Influenced and Corrupt Organizations Act (“RICO”), as well as common law fraud and tortious interference with contract. Plaintiffs are seeking treble damages for the alleged antitrust and RICO violations, and compensatory and consequential damages for the common law fraud and tortious interference claims. With respect to the antitrust allegations in the complaint, the plaintiffs’ proposed geographic market in the Mississippi action is ambiguous as to whether it is identical to the geographic market alleged in the Tennessee dairy farmer actions. In any event, Plaintiffs in the Mississippi action would likely also be included in any class or classes certified in the Tennessee dairy farmer actions. Members of any Tennessee class or classes who fail to exclude themselves from that class, or who excluded themselves but are permitted to opt back into any class for purposes of any settlement with us, will be bound by any settlement in the Tennessee dairy farmer actions when it is approved, which should release and extinguish any claims asserted by them in the Mississippi action. As of February 20, 2012, three Plaintiffs in the Mississippi action have not excluded themselves from the Tennessee dairy farmer actions.

On August 11, 2011, a motion to dismiss all of the claims was filed on behalf of Mr. Engles, and motions to dismiss all but the antitrust claims were filed on behalf of the company and the other defendants. Plaintiffs responded to those motions on October 4, 2011. On November 9, 2011, the Court granted the motion to dismiss filed on behalf of Mr. Engles, and granted in part and denied in part the motion to dismiss filed on behalf of the company. The company filed its answer on November 23, 2011. On February 17, 2012, the Company entered into a settlement agreement with all of the plaintiffs who have excluded themselves from the Tennessee dairy farmer actions pursuant to which all of the claims against the Company will be dismissed, and the Company’s involvement as a party in the case will end.

Tennessee Retailer and Indirect Purchaser Actions

A putative class action antitrust complaint (the “retailer action”) was filed on August 9, 2007 in the United States District Court for the Eastern District of Tennessee. Plaintiffs allege generally that we, either acting alone or in conjunction with others in the milk industry who are also defendants in the retailer action, lessened competition in the Southeastern United States for the sale of processed fluid Grade A milk to retail outlets and other customers, and that the defendants’ conduct also artificially inflated wholesale prices for direct milk purchasers. Plaintiffs’ motion for class certification in the retailer action is still pending. Defendants’ motion for summary judgment in the retailer action was granted in part and denied in part in August 2010. Defendants filed a motion for reconsideration on September 10, 2010, and filed a supplemental motion for summary judgment as to the remaining claims on September 27, 2010. Those motions are currently pending before the Court, and the case has been stayed pending resolution of those motions. The Court has not set a trial date yet for the retailer action.

On June 29, 2009, another putative class action lawsuit was filed in the Eastern District of Tennessee, Greeneville Division, on behalf of indirect purchasers of processed fluid Grade A milk (the “indirect purchaser action”). The allegations in this complaint are similar to those in the retailer action, but primarily involve state law claims. Because the allegations in the indirect purchaser action substantially overlap with the allegations in the retailer action, the Court granted the parties’ joint motion to stay all proceedings in the indirect purchaser action pending the outcome of the summary judgment motions in the retailer action. At this time, we are unable to predict the ultimate outcome of these matters.

Kohler Mix Action

On January 18, 2008, our subsidiary, Kohler Mix Specialties, LLC (“Kohler”), was named as a defendant in a civil complaint filed in the Superior Court, Judicial District of Hartford. The plaintiff in the case was the Commissioner of Environmental Protection of the State of Connecticut. The complaint alleged generally that Kohler improperly discharged wastewater into the waters of the State of Connecticut, and bypassed certain wastewater treatment equipment in violation of certain Connecticut environmental regulations and Kohler’s wastewater discharge permit. The plaintiff was seeking injunctive relief and civil penalties with respect to the claims. On August 24, 2011 the parties reached an agreement to settle the litigation. On January 11, 2012, a Stipulated Judgment was entered by the Court, thereby resolving the matter.

Other than the material pending legal proceedings set forth above, we are party from time to time to certain claims, litigations, audits and investigations. Potential liabilities associated with the other matters referred to in this paragraph are not expected to have a material adverse impact on our financial position, results of operations or cash flows.

 

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At this time, it is not possible for us to predict the ultimate outcome of the matters set forth within this section.

Other

We are in varying stages of discussion with numerous states to determine whether we have complied with state unclaimed property laws. Most, but not all, of these states have appointed an agent to conduct an examination of our books and records. In addition to seeking remittance of unclaimed property, some states may also seek interest and penalties. We settled the State of Delaware’s claims during 2011. The settlement amount was not material to our Consolidated Financial Statements. At this time, it is not possible for us to predict the ultimate outcome of the remaining examinations.

Item 4. Mine Safety Disclosure

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock trades on the New York Stock Exchange under the symbol “DF.” The following table sets forth the high and low closing sales prices of our common stock as quoted on the New York Stock Exchange for the last two fiscal years. At February 17, 2012, there were 4,091 record holders of our common stock.

 

           High                 Low        

2010:

    

First Quarter

   $ 18.53      $ 14.46   

Second Quarter

     16.89        9.57   

Third Quarter

     12.00        9.49   

Fourth Quarter

     10.80        7.26   

2011:

    

First Quarter

     10.56        8.87   

Second Quarter

     13.88        9.68   

Third Quarter

     12.43        7.97   

Fourth Quarter

     11.21        8.30   

We have not historically declared or paid a regular cash dividend on our common stock. We have no current plans to pay a cash dividend in the future.

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Current Debt Obligations” and Note 9 to our Consolidated Financial Statements for further information regarding the terms of our senior secured credit facility, including terms restricting the payment of dividends.

Stock Repurchases — Since 1998, our Board of Directors has from time to time authorized the repurchase of our common stock up to an aggregate of $2.3 billion, excluding fees and expenses. We made no share repurchases in 2011 or 2010 and do not intend to make any repurchases for the foreseeable future. As of December 31, 2011, $218.7 million was available for repurchases under this program (excluding fees and commissions). Shares, when repurchased, are retired.

For information relating to securities authorized for issuance under our equity compensation plans, see “Part III – Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10-K.

 

 

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Item 6.   Selected Financial Data

The following selected financial data as of and for each of the five years in the period ended December 31, 2011 has been derived from our audited Consolidated Financial Statements. The selected financial data do not purport to indicate results of operations as of any future date or for any future period. The selected financial data should be read in conjunction with our Consolidated Financial Statements and related Notes.

 

     Year Ended December 31  
     2011      2010      2009      2008      2007  
     (Dollars in thousands, except share data)  

Operating data:

              

Net sales

   $ 13,055,493           $ 12,122,887           $ 11,113,782           $ 12,361,311           $ 11,731,870       

Cost of sales

     10,037,907             9,116,965             8,008,561             9,438,593             9,015,216       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit(1)

     3,017,586             3,005,922             3,105,221             2,922,718             2,716,654       

Operating costs and expenses:

              

Selling and distribution

     1,963,748             1,904,526             1,818,833             1,802,214             1,708,594       

General and administrative

     608,868             629,656             623,835             482,392             415,694       

Amortization of intangibles

     10,539             11,295             9,637             9,836             6,744       

Facility closing and reorganization costs

     45,688             30,761             30,162             22,758             34,421       

Litigation settlement(2)

     131,300             30,000             —               —               —         

Goodwill impairment(3)

     2,075,836             —               —               —               —         

Other operating (income) loss(4)

     (16,831)           —               —               —               1,688       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

     4,819,148             2,606,238             2,482,467             2,317,200             2,167,141       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     (1,801,562)           399,684             622,754             605,518             549,513       

Other (income) expense:

              

Interest expense(5)(6)

     252,951             248,301             246,510             308,178             333,328       

Other (income) expense, net(7)

     (1,915)           161             (4,221)           1,123             5,956       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other expense

     251,036             248,462             242,289             309,301             339,284       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

     (2,052,598)           151,222             380,465             296,217             210,229       

Income tax expense (benefit)

     (456,811)           73,482             151,845             114,330             82,862       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations

     (1,595,787)           77,740             228,620             181,887             127,367       

Gain (loss) on sale of discontinued operations, net of tax

     3,616             7,521             89             (1,275)           608       

Income (loss) from discontinued operations, net of tax

     —               (2,505)           (862)           3,158             3,378       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     (1,592,171)           82,756             227,847             183,770             131,353       

Net loss attributable to non-controlling interest

     16,550             8,735             12,461             —               —         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Dean Foods Company

   $ (1,575,621)         $ 91,491           $ 240,308           $ 183,770           $ 131,353       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividend paid per share

   $ —             $ —             $ —             $ —             $ 15.00       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings (loss) per common share:

              

Net income attributable to Dean Foods Company

   $ (8.59)         $ 0.50           $ 1.41           $ 1.23           $ 1.01       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings (loss) per common share:

              

Net income attributable to Dean Foods Company

   $ (8.59)         $ 0.50           $ 1.38           $ 1.20           $ 0.96       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average common shares:

              

Basic

     183,388,220             181,799,306             170,986,886             149,266,519             130,310,811       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     183,388,220             182,861,802             173,858,303             153,395,746             137,291,998       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other data:

              

Ratio of earnings to fixed charges(8)

     —               1.50x           2.26x           1.81x           1.55x     

Deficiency in the coverage of earnings to fixed charges

   $ (1,751,268)         $ —             $ —             $ —             $ —         

Balance sheet data (at end of period):

              

Total assets(3)

   $ 5,754,363           $ 7,956,667           $ 7,843,941           $ 7,040,192           $ 7,033,356       

Long-term debt(6)(9)

     3,765,928             4,067,525             4,228,979             4,489,251             5,272,351       

Other long-term liabilities

     428,544             351,645             393,575             411,991             320,181       

Non-controlling interest

     4,747             14,543             15,286             —               —         

Dean Foods Company stockholders’ equity (deficit)(6)(10)

     (103,398)           1,499,525             1,351,946             558,234             51,267       

 

(1)

As disclosed in Note 1 to our Consolidated Financial Statements, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales.

(2)

Results for 2011 and 2010 include charges of $131.3 million and $30.0 million, respectively, related to class action antitrust complaint settlements. See Note 18 to our Consolidated Financial Statements for more information regarding these charges.

(3)

Results for 2011 include a pre-tax, non-cash goodwill impairment of $2.1 billion related to our Fresh Dairy Direct reporting unit. See Note 6 to our Consolidated Financial Statements for further information.

(4)

Results for 2011 include a net pre-tax gain of $16.8 million related to the divestitures discussed in Note 2 to our Consolidated Financial Statements and results for 2007 include a loss of $1.7 million related to the sale of our tofu business.

(5)

Results for 2010 include charges totaling $12.3 million in financing costs associated with the amendments of our senior secured credit facility on June 30, 2010 and December 9, 2010. Additionally, results for 2007 include a charge of $13.5 million to write-off financing costs related to the refinancing of our senior secured credit facility.

(6)

In May 2009, we issued and sold 25.4 million shares of our common stock in a public offering. We received net proceeds of $444.7 million from the offering. The net proceeds from the offering were used to repay the $122.8 million aggregate principal amount of our subsidiary’s 6.625% senior notes due May 15, 2009, and indebtedness under our receivables-backed facility.

On March 5, 2008, we issued and sold 18.7 million shares of our common stock in a public offering. We received net proceeds of approximately $400 million from the offering, which were used to reduce debt outstanding under the revolving portion of our senior secured credit facility.

On April 2, 2007, we recapitalized our balance sheet with the completion of a new $4.8 billion senior secured credit facility and the return of $1.94 billion to shareholders of record as of March 27, 2007, through a $15 per share special cash dividend.

 

(7)

Results for 2009 include a gain of $4.2 million related to a Euro-based forward currency contract related to the Alpro acquisition. Results for 2007 include charges of $4.5 million for professional fees and other costs related to the second quarter special cash dividend.

 

(8)

The 2011 computation resulted in a deficiency in the coverage of earnings to fixed charges of $1.8 billion, due in large part to the goodwill impairment charge related to our Fresh Dairy Direct reporting unit. For purposes of calculating the ratio of earnings to fixed charges, “earnings” represents income (loss) before income taxes plus fixed charges. “Fixed charges” consist of interest on all debt, amortization of deferred financing costs and the portion of rental expense that we believe is representative of the interest component of rent expense.

 

(9)

Includes the current portion of long-term debt.

 

(10)

Effective January 1, 2007, we adopted Financial Accounting Standards related to “Accounting for Uncertainty in Income Taxes”. As a result, we recognized a $25.9 million increase in our liability for uncertain tax positions, a $20.1 million increase in deferred income tax assets, a $0.3 million decrease to additional paid-in capital, a $0.2 million decrease to goodwill and a $5.7 million decrease to retained earnings.

 

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

We are a leading food and beverage company in the United States. Fresh Dairy Direct is the largest processor and distributor of milk and other dairy products in the country, with products sold under more than 50 familiar local and regional brands and a wide array of private labels. WhiteWave-Alpro markets and sells a variety of nationally branded dairy and dairy-related products, such as Horizon Organic milk and other dairy products, International Delight coffee creamers and LAND O LAKES creamers and fluid dairy products, and Silk plant-based beverages, such as soy, almond and coconut milks, and cultured soy products. WhiteWave-Alpro also offers branded plant-based beverages, such as soy, almond and hazelnut drinks, and food products in Europe and markets its products under the Alpro and Provamel brands. Morningstar is a leading producer of extended shelf life (or “ESL”) creams and creamers, beverages and cultured dairy products under a wide array of private labels and the Friendship brand.

Our Reportable Segments

We have three reportable segments, Fresh Dairy Direct, WhiteWave-Alpro and Morningstar.

In the fourth quarter of 2011, our Chief Executive Officer, who is our chief operating decision maker, changed the way he determines strategy and investment plans for our operations. As a result, beginning in the fourth quarter of 2011, our Fresh Dairy Direct and Morningstar operations were separated so that our three reporting segments consisted of Fresh Dairy Direct, WhiteWave-Alpro and Morningstar. This change reflects the divergence between the go-to market strategies, customer bases and objectives of our businesses and reflects a change in how we expect to deploy our capital in the future. We believe these revised segments have increased internal focus and offered management and investors improved visibility into the performance of the segments against their specific objectives. All segment results set forth herein have been recast to present results on a comparable basis. These changes had no impact on consolidated net sales or operating income.

During the second quarter of 2010, we committed to a plan to sell the business operations of Rachel’s, which provided organic branded dairy-based chilled yogurt, milk and related dairy products primarily in the United Kingdom. The sale of these operations was completed on August 4, 2010. All Rachel’s operations, previously reported within the WhiteWave-Alpro segment, have been reclassified as discontinued operations. See Note 2 to our Consolidated Financial Statements. Unless stated otherwise, any reference to income statement items in these financial statements refers to results from continuing operations.

Fresh Dairy Direct — Fresh Dairy Direct is our largest segment, with approximately 74% of our consolidated net sales in 2011. Fresh Dairy Direct manufactures, markets and distributes a wide variety of branded and private label dairy case products, including milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products, to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Due to the perishable nature of its products, Fresh Dairy Direct delivers the majority of its products directly to its customers’ locations in refrigerated trucks or trailers that we own or lease. We believe that Fresh Dairy Direct has one of the most extensive refrigerated DSD systems in the United States. Fresh Dairy Direct sells its products primarily on a local or regional basis through its local and regional sales forces, although some national customer relationships are coordinated by a centralized corporate sales department.

 

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The dairy industry is a mature and fragmented industry that has traditionally been characterized by slow to flat growth and low profit margins. According to the USDA, per capita consumption of fluid milk continues to decline. As a result of the current economic climate and historically high retail prices, the fluid milk category has posted declining volumes over the last several years. In addition, the industry has experienced retail and wholesale margin erosion, as conventional milk prices have increased steadily from 2009 through 2011. During the fourth quarter of 2011, milk prices decreased slightly, and retailers did not fully reflect such declines in shelf pricing, which partially restored the historical price relationship between branded and private label milk and allowed our regional brands to compete more effectively during the quarter. Our fluid milk volumes, in general, outpaced the industry due to the addition of new customers during the second half of 2011. Despite ongoing challenges to our sales volume performance, we expect our fluid milk volumes to remain flat in the near term.

To further improve profitability and to stabilize margin erosion, we will continue to place an emphasis on cost reduction in 2012. Organizational changes are in process to reduce our total cost to serve and our selling and general and administrative costs. We remain focused on sustaining positive cash flow and net debt reduction.

Fresh Dairy Direct has several competitors in each of its major product and geographic markets. Competition between dairy processors for shelf-space with retailers is based primarily on price, service, quality and the expected or historical sales performance of the product compared to its competitors. In some cases Fresh Dairy Direct pays fees to customers for shelf-space. Competition for consumer sales is based on a variety of factors such as brand recognition, price, taste preference and quality. Dairy products also compete with many other beverages and nutritional products for consumer sales.

WhiteWave-Alpro — WhiteWave-Alpro’s net sales were approximately 16% of our consolidated net sales in 2011. WhiteWave-Alpro manufactures, develops, markets and sells a variety of nationally branded dairy and dairy-related products, such as Horizon Organic milk and other dairy products, International Delight coffee creamers and LAND O LAKES creamers and fluid dairy products, and Silk plant-based beverages, such as soy, almond and coconut milks, and cultured soy products. WhiteWave-Alpro also offers branded plant-based beverages, such as soy, almond and hazelnut drinks, and food products in Europe and markets its products under the Alpro and Provamel brands. WhiteWave-Alpro sells its products to a variety of customers, including grocery stores, club stores, natural food stores, mass merchandisers, convenience stores, drug stores and foodservice outlets. WhiteWave-Alpro sells its products primarily through its internal sales force and independent brokers. The majority of the WhiteWave-Alpro products are delivered through warehouse delivery systems.

WhiteWave-Alpro has several competitors in each of its product markets. Competition to obtain shelf-space with retailers for a particular product is based primarily on brand recognition and the expected or historical sales performance of the product compared to its competitors. In some cases, WhiteWave-Alpro pays fees to retailers to obtain shelf-space for its products. Competition for consumer sales is based on many factors, including brand recognition, price, taste preferences and quality. Consumer demand for soy, other plant-based and organic beverages and foods has grown in recent years due to growing consumer confidence in the health benefits attributable to these products, and we believe WhiteWave-Alpro has a leading position in these categories.

Morningstar – Morningstar’s net sales were approximately 10% of our consolidated net sales in 2011. Morningstar Foods is a leading U.S. manufacturer of extended shelf life (“ESL”) creams and creamers, beverages and cultured dairy products with an emphasis on foodservice and private label retail customers. These products include half and half, whipping cream, ice cream mix, value-added milks, sour cream and cottage cheese and are sold under a wide array of private labels and the Friendship brand. In addition to being sold through retailers for at-home consumption, these products are important ingredients for restaurant menu items such as desserts, soups, and coffee-specialty drinks. Morningstar sells its products to a variety of customers, including foodservice distributors, national restaurant chains, grocery stores and mass merchandisers. Morningstar sells its products through its internal sales force and independent brokers.

Morningstar has several competitors in each of its customer channels and major products. Competition within foodservice and retail customers is based primarily on quality, price and service. Competition for consumer sales is based on a variety of factors such as price, taste preference and quality. Dairy products also compete with many other products for consumer sales.

Recent Developments

See “Part I — Item 1. Business — Developments Since January 1, 2011” for further information regarding recent developments that have impacted our financial condition and results of operations.

 

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Matters Affecting Comparability

Our discussion of the results of operations for the years ended 2011, 2010 and 2009 will be affected by the matters as summarized in the following table. See Note 2 to our Consolidated Financial Statements.

 

Year

Affected

    

Matter                                     

  

Segment

2011

     Divestiture of our Mountain High yogurt operations    Fresh Dairy Direct

2011

     Divestiture of our private label yogurt operations    Fresh Dairy Direct and Morningstar

2009

     Acquisition of Alpro    WhiteWave-Alpro

Results of Operations

The following table presents certain information concerning our financial results, including information presented as a percentage of net sales.

 

000000000 000000000 000000000 000000000 000000000 000000000
     Year Ended December 31  
     2011      2010      2009  
     Dollars      Percent      Dollars      Percent      Dollars      Percent  
     (Dollars in millions)  

Net sales

   $     13,055.5             100.0%        $     12,122.9             100.0%        $     11,113.8             100.0%    

Cost of sales

     10,037.9             76.9             9,117.0             75.2             8,008.6             72.1       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit(1)

     3,017.6             23.1             3,005.9             24.8             3,105.2             27.9       

Operating costs and expenses:

                 

Selling and distribution

     1,963.7             15.0             1,904.5             15.7             1,818.8             16.4       

General and administrative

     608.9             4.7             629.6             5.2             623.8             5.6       

Amortization of intangibles

     10.5             0.1             11.3             0.1             9.6             0.1       

Facility closing and reorganization costs

     45.7             0.3             30.8             0.3             30.2             0.3       

Litigation settlement

     131.3             1.0             30.0             0.2             —               —         

Goodwill impairment

     2,075.8             15.9             —               —               —               —         

Other operating income

     (16.8)           (0.1)           —               —               —               —         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

     4,819.1             36.9             2,606.2             21.5             2,482.4             22.4       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

   $ (1,801.5)           (13.8)%        $ 399.7             3.3%        $ 622.8             5.5%    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1)

As disclosed in Note 1 to our Consolidated Financial Statements, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 — Consolidated Results

Net Sales — Net sales by segment are shown in the table below.

 

     Net Sales  
     2011      2010      $
Increase/
(Decrease)
     %
Increase/
(Decrease)
 
     (Dollars in millions)  

Fresh Dairy Direct

   $     9,596.9           $     8,968.5           $     628.4             7.0%    

WhiteWave-Alpro

     2,109.9             1,938.0             171.9             8.9       

Morningstar

     1,348.7             1,216.4             132.3             10.9       
  

 

 

    

 

 

    

 

 

    

Total

   $ 13,055.5           $ 12,122.9           $ 932.6             7.7%    
  

 

 

    

 

 

    

 

 

    

 

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The change in net sales was due to the following:

 

     Change in Net Sales 2011 vs. 2010  
         Volume          Pricing
and Product
        Mix Changes         
     Total
Increase/
    (Decrease)    
 
     (Dollars in millions)  

Fresh Dairy Direct

   $     (318.2)         $ 946.6           $     628.4       

WhiteWave-Alpro

     84.8             87.1             171.9       

Morningstar

     (56.8)           189.1             132.3       
  

 

 

    

 

 

    

 

 

 

Total

   $     (290.2)         $     1,222.8           $ 932.6       
  

 

 

    

 

 

    

 

 

 

Net sales — Consolidated net sales increased $932.6 million, or 7.7% during 2011 compared to 2010 primarily due to the pass through of higher commodity costs. These increases were partially offset by overall volume declines across most of our dairy categories in the Fresh Dairy Direct segment, as well as the sale of our yogurt operations during the first half of 2011.

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, including raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Cost of sales increased $920.9 million, or 10.1%, as a result of higher commodity costs, partially offset by overall volume declines at Fresh Dairy Direct and the divestiture of our yogurt operations. Conventional milk prices increased sharply in March of 2011 and continued to increase through the third quarter of 2011, before gradually declining in the fourth quarter. Class I and Class II butterfat prices were the highest the industry has experienced in recent history, and all Class I and Class II pricing remains significantly higher than 2010. This significant increase in conventional milk prices during 2011 was a result of limited inventories of butterfat and nonfat solids coupled with strong demand for butter, nonfat dry milk and cheese both domestically and internationally. After declining modestly throughout the first quarter, we expect Class I and Class II pricing to remain relatively flat throughout 2012.

Operating Costs and Expenses — Excluding the $2.1 billion non-cash, pre-tax goodwill impairment charge recorded during 2011 (see Note 6 to our Consolidated Financial Statements), our operating expenses increased $137.1 million, or 5.3%, during the year compared to prior year. Significant changes to operating costs and expenses include the following:

 

   

Selling and distribution costs increased $59.2 million, driven by higher freight and fuel costs due to continued increases in fuel prices and increased personnel-related costs, largely due to incentive-based compensation. These costs were partially offset by a decrease in marketing costs. We expect freight and fuel costs to remain elevated throughout 2012.

 

   

General and administrative costs decreased $20.7 million, driven by a reduction in headcount and a decrease in professional and consulting fees, partially offset by higher incentive-based compensation, a $16.0 million correction of errors in our other postretirement benefit obligations and net periodic benefit costs, and a write-down of certain corporate assets. See Note 15 to our Consolidated Financial Statements for further information regarding the postretirement benefit errors.

 

   

Net facility closing and reorganization costs increased $14.9 million. See Note 16 to our Consolidated Financial Statements for further information regarding our facility closing and reorganization activities.

 

   

We recorded a charge of $131.3 million in the second quarter of 2011 related to a proposed settlement of the Tennessee dairy farmer actions. See Note 18 to our Consolidated Financial Statements for further information regarding the settlement.

 

   

We recorded other operating income as a result of a net pre-tax gain on the sale of our Mountain High and private label yogurt operations, partially offset by a pre-tax loss on the sale of our Waukesha fluid milk operations and the write-down of the assets of our Hero/WhiteWave joint venture, during 2011. See Note 2 to our Consolidated Financial Statements for further information on our divestitures.

Other (Income) Expense — Excluding $12.3 million of financing charges in 2010 associated with our June and December 2010 amendments of our senior secured credit facility, interest expense increased $17.0 million from the prior year, primarily due to higher average interest rates resulting from the June 30, 2010 credit facility amendment and the December 16, 2010 senior notes issuance. This increase was partially offset by the expiration of $450 million notional amount of our fixed interest rate hedges at the end of 2010, the expiration of another $250 million notional amount of fixed interest rate hedges at the end of March 2011, and lower average debt balances versus the prior year resulting from free cash flow generation, proceeds from the divestiture of our yogurt operations and the receipt of a federal income tax refund in the second quarter of 2011.

 

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Table of Contents

Income Taxes — Income tax benefit was recorded at an effective rate of 22.3% for 2011 compared to a 48.6% effective tax expense rate in 2010. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In 2011, our tax benefit rate was decreased by nondeductible goodwill related to the impairment charge. Excluding the impact of the goodwill impairment, our 2011 effective tax rate was 47.9%, which was increased by changes in certain state tax laws and the exclusion of the tax benefit attributable to our non-controlling interest in the Hero/WhiteWave joint venture and was decreased by the relative profitability of our foreign operations. Excluding the impact of a deferred tax correction, our 2010 effective tax rate was 41.4%, which was increased by the exclusion of the tax benefit attributable to our non-controlling interest in the Hero/WhiteWave joint venture.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 — Results by Segment

Fresh Dairy Direct

The key performance indicators of Fresh Dairy Direct are brand mix and achieving low cost, which are realized within gross profit and operating income, respectively.

 

$000 $000 $000 $000
     Year Ended December 31  
     2011      2010  
     Dollars      Percent      Dollars      Percent  
     (Dollars in millions)  

Net sales

   $     9,596.9             100.0%        $     8,968.5             100.0%    

Cost of sales

     7,539.0         78.6             6,868.7         76.6       
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     2,057.9         21.4             2,099.8         23.4       

Operating costs and expenses

     1,708.4         17.8             1,686.3         18.8       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income

   $ 349.5         3.6%        $ 413.5         4.6%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Sales — Fresh Dairy Direct’s net sales increased $628.4 million, or 7.0%, during 2011 compared to the prior year, primarily due to the pass-through of higher commodity costs, partially offset by a 1% volume decline in our fresh fluid milk category, which accounts for approximately 79% of our total volume at Fresh Dairy Direct. Additionally, volume declines in our ice cream, cultured and other non-dairy products, as well as the impact of our divestiture of our Mountain High yogurt operations, contributed to the offset. The industry and our Fresh Dairy Direct segment continue to experience declining volume trends. The continued economic decline throughout 2011 continued to have a negative impact on consumer spending, which has had a pronounced impact on the fluid milk category. We expect these trends to continue in the near term.

Fresh Dairy Direct generally increases or decreases the prices of its fluid dairy products on a monthly basis in correlation to fluctuations in the costs of raw materials, packaging supplies and delivery costs. However, in some cases, we are subject to the terms of sales agreements with respect to the means and/or timing of price increases. This can have a negative impact on Fresh Dairy Direct’s profitability. The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for 2011 compared to 2010:

 

0000000 0000000 0000000
     Year Ended December 31*  
     2011      2010      % Change  

Class I mover(1)

   $ 19.13       $ 15.35         24.6%    

Class I raw skim milk mover(1)(2)

     12.02         9.26         29.8       

Class I butterfat mover(2)(3)

     2.15         1.83         17.5       

Class II raw skim milk minimum(1)(4)

     12.49         9.85         26.8       

Class II butterfat minimum(3)(4)

     2.16         1.86         16.1       

 

 

*

The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and supplier. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” and “— Known Trends and Uncertainties — Prices of Raw Milk and Other Inputs” below for a more complete description of raw milk pricing.

 

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(1)

Prices are per hundredweight.

(2)

We process Class I raw skim milk and butterfat into fluid milk products.

(3)

Prices are per pound.

(4)

We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, including raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Fresh Dairy Direct’s cost of sales increased $670.3 million, or 9.8%, in 2011 compared to 2010 primarily due to higher commodity costs. Conventional milk prices increased sharply in March of 2011 and continued to increase through the third quarter of 2011, before gradually declining in the fourth quarter. Class I and Class II butterfat prices were the highest the industry has experienced in recent history, and all Class I and Class II pricing remains significantly higher than 2010. This significant increase in conventional milk prices during 2011 was a result of limited inventories of butterfat and nonfat solids coupled with strong demand for butter, nonfat dry milk and cheese both domestically and internationally. After declining modestly throughout the first quarter, we expect Class I and Class II pricing to remain relatively flat throughout 2012.

Gross Profit — Fresh Dairy Direct’s gross profit percentage decreased to 21.4% in 2011 from 23.4% in 2010. Gross profit trended downward due to weak volumes resulting from declining demand and the continued economic decline, as well as reduced margins on new business. The industry has experienced retail and wholesale margin erosion, which has impacted the performance of our regional brands. During the fourth quarter of 2011, milk prices decreased slightly, and retailers did not fully reflect such declines in shelf pricing, which partially restored the historical price relationship between branded and private label milk and allowed our regional brands to compete more effectively during the fourth quarter of 2011. In addition, rising non-dairy input costs, such as packaging materials, have impacted our gross profit, as our pass-through of the full impact of these commodities’ volatility to our customers has been limited. We continue to focus on cost control and supply chain efficiency through cost-cutting initiatives, improved effectiveness in the pass-through of costs to our customers, as well as our continued focus on driving productivity and efficiency within our operations.

Operating Costs and Expenses — Fresh Dairy Direct’s operating costs and expenses increased $22.1 million, or 1.3%, during the year compared to the prior year. Significant changes to operating costs and expenses include the following:

 

   

Selling and distribution costs increased $39.6 million, driven by increased fuel and freight costs, as the average diesel price has increased approximately 28% from 2010. We expect fuel and freight costs to remain elevated throughout 2012.

 

   

General and administrative costs decreased $16.7 million due to reductions in employee-related costs and professional and consulting fees, as a result of our cost-cutting initiatives.

WhiteWave-Alpro

The key performance indicators of WhiteWave-Alpro are sales volume, net sales dollars, gross profit and operating income.

 

$000 $000 $000 $000
     Year Ended December 31  
     2011      2010  
     Dollars      Percent      Dollars      Percent  
     (Dollars in millions)  

Net sales

   $     2,109.9             100.0%       $     1,938.0               100.0%   

Cost of sales

     1,360.0         64.5             1,242.7           64.1       
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     749.9         35.5             695.3           35.9       

Operating costs and expenses

     550.2         26.0             529.1           27.3       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income

   $ 199.7         9.5%       $ 166.2           8.6%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Sales — Net sales of the WhiteWave-Alpro segment increased $171.9 million, or 8.9%, driven by mid single-digit volume growth, coupled with pricing actions in response to higher commodity costs. Sales for the Horizon Organic and the creamers business, including International Delight and LAND O LAKES brands, increased in the low double-digits. Silk sales increase in the mid single-digits due to growth from Silk Pure Almond milk. Alpro sales increased low single-digits on a constant currency basis. We expect to continue to drive growth in the creamers and plant-based beverage categories through product innovation, including the launch of International Delight Iced Coffees and Silk Fruit and Protein in the first quarter of 2012.

 

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Cost of Sales — WhiteWave-Alpro’s cost of sales increased $117.3 million, or 9.4%, in 2011 compared to the prior year. This increase was primarily driven by sales volume growth and higher commodity costs, partially offset by cost-savings initiatives. We expect cost of sales to increase in the near term due to start-up costs incurred at our new Dallas manufacturing facility.

Gross Profit — WhiteWave-Alpro’s gross profit decreased to 35.5% in 2011 from 35.9% in 2010, driven by increased commodity input costs. We expect industry-wide shortages of organic milk to cause supply constraints, which could compress margins related to organic milk in 2012. We continue to take proactive steps to manage our organic milk supply in the short-term, and we remain focused on maintaining our leading brand position in the organic milk category.

Operating Costs and Expenses — WhiteWave-Alpro’s operating costs and expenses increased $21.1 million, or 4%, during 2011 compared to 2010, driven by an increase in selling and distribution costs as a result of higher volume and increased fuel costs. We expect operating costs to continue to increase, particularly in the first half of 2012, as we continue to invest in our International Delight and Silk expansion.

Morningstar

The key performance indicator of Morningstar is volume growth in categories, which is realized within gross profit.

 

$000 $000 $000 $000
     Year Ended December 31  
     2011      2010  
     Dollars      Percent      Dollars      Percent  
     (Dollars in millions)  

Net sales

   $     1,348.7             100.0%        $     1,216.4             100.0%    

Cost of sales

     1,139.1         84.5             1,004.6         82.6       
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     209.6         15.5             211.8         17.4       

Operating costs and expenses

     114.2         8.5             120.8         9.9       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income

   $ 95.4         7.0%        $ 91.0         7.5%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Sales — Morningstar’s net sales increased $132.3 million, or 10.9%, during 2011 compared to the prior year, primarily due to the pass-through of higher commodity costs as well as volume increases across most product categories. Total volume increase was offset by the divestiture of our private label yogurt operations during the second quarter of 2011.

Morningstar generally increases or decreases the prices of its dairy products on a monthly basis in correlation to fluctuations in its dairy commodity costs. However, Grade AA butter and Class II butterfat costs are not known in advance of setting customer pricing. In addition, in some cases, we are subject to the terms of sales agreements with respect to the means and/or timing of price increases. This can have a negative impact on Morningstar’s profitability. The following table sets forth the average monthly Grade AA butter, Class II minimum butterfat and Class II minimum raw skim milk prices for 2011 compared to 2010:

 

     Year Ended December 31*  
     2011      2010      % Change  

Grade AA butter(1)

   $     1.96       $     1.73             13.3%    

Class II butterfat minimum(1)(2)

     2.16         1.86         16.1       

Class II raw skim milk minimum(2)(3)

     12.49         9.85         26.8       

 

 

*

The prices noted in this table are not the prices that we actually pay. Bulk cream is purchased based on a multiple of the grade AA butter price. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and supplier. Please see “Part I —Item 1. Business — Government Regulation — Milk Industry Regulation” and “— Known Trends and Uncertainties — Prices of Raw Milk and Other Inputs” below for a more complete description of raw milk pricing.

(1)

Prices are per pound.

(2)

We process Class II butterfat and Class II raw skim milk into products such as cottage cheese, creams and creamers, ice cream and sour cream.

(3)

Prices are per hundredweight.

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, including raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Morningstar’s cost of sales increased $134.5 million, or 13.4%, in 2011 compared to 2010 primarily due to increased commodity costs, as well as packaging and labor cost.

 

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Gross Profit —Morningstar’s gross margin decreased to 15.5% in 2011 from 17.4% in 2010 due to the impact of higher commodity costs. The higher commodity costs were passed through in higher prices; however, there is typically a lag between the timing of raw materials cost increases and a corresponding price change to our customers. As a result, not all of the commodity cost increase was reflected in higher customer prices, which drove the decrease in gross profit.

Operating Costs and Expenses — Morningstar’s operating costs and expenses decreased $6.6 million, or 5.5%, during the year compared to prior year. Significant changes to operating costs and expenses include the following:

 

   

Selling and distribution costs decreased $0.5 million, driven by reduced marketing activity in our Friendship brand.

 

   

General and administrative costs decreased $6.0 million due to lower labor related expenses resulting from reduced headcount through cost savings initiatives.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 — Consolidated Results

Net Sales — Net sales by segment are shown in the table below.

 

     Net Sales  
     2010      2009      $
Increase/
(Decrease)
     %
Increase/
(Decrease)
 
     (Dollars in millions)  

Fresh Dairy Direct

   $     8,968.5       $     8,456.2       $       512.3                 6.1%    

WhiteWave-Alpro

     1,938.0         1,633.0         305.0         18.7       

Morningstar

     1,216.4         1,024.6         191.8         18.7       
  

 

 

    

 

 

    

 

 

    

Total

   $ 12,122.9       $ 11,113.8       $ 1,009.1         9.1       
  

 

 

    

 

 

    

 

 

    

The change in net sales was due to the following:

 

     Change in Net Sales 2010 vs. 2009  
     Acquisitions      Volume      Pricing
and Product
Mix Changes
     Total
Increase/
(Decrease)
 
     (Dollars in millions)  

Fresh Dairy Direct

   $     157.7           $     (315.9)           $     670.5           $     512.3       

WhiteWave-Alpro

     172.7             106.9              25.4             305.0       

Morningstar

     —             (49.8)             241.6             191.8       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 330.4           $ (258.8)           $ 937.5           $ 1,009.1       
  

 

 

    

 

 

    

 

 

    

 

 

 

Net sales — Consolidated net sales increased $1.0 billion during 2010 compared to 2009 primarily due to the pass-through of higher commodity costs, acquisitions and an increase in sales volumes of our branded products, particularly International Delight, Horizon Organic and Silk. These increases were partially offset by higher promotional retail pricing and wholesale pricing pressures, as well as lower sales volumes across all categories in our Fresh Dairy Direct segment.

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, including raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Cost of sales increased $1.1 billion, or 13.8%, in 2010 as compared to the prior year, primarily due to higher commodity prices, particularly raw milk and Class II butterfat costs, offset by lower overall volumes in Fresh Dairy Direct and Morningstar. Conventional milk prices were at historically low levels for most of 2009, with a fairly sharp increase in the fourth quarter of 2009 that continued throughout 2010. This significant increase in conventional milk prices was a result of limited supply due to production challenges coupled with strong global demand for both Class I and Class II inputs.

Operating Costs and Expenses — Our operating expenses increased $123.8 million, or 5.0%, during the year compared to prior year. Significant changes to operating costs and expenses include the following:

 

   

Selling and distribution costs increased $85.7 million driven by the impact of acquisitions, including $36.0 million related to Alpro, higher freight and fuel costs. In addition, WhiteWave experienced increased outside storage facility costs and related distribution costs due to capacity constraints. These increases were partly offset by a decrease in our self-insurance reserve due to changes in loss development factors as a result of a continuous decline in claims and better claims management.

 

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General and administrative costs increased $5.8 million primarily driven by the impact of acquisitions, including $24.5 million for Alpro, and higher consulting fees, offset by lower employee-related costs, largely due to decreased short term incentive compensation.

 

   

Net facility closing and reorganization costs increased $0.6 million. See Note 16 to our Consolidated Financial Statements for further information on our facility closing and reorganization activities.

 

   

We recorded a charge of $30.0 million related to a class action antitrust settlement. See Note 18 to our Consolidated Financial Statements for further information regarding the settlement.

Other (Income) Expense — Excluding $12.3 million in financing costs associated with the amendments of our senior secured credit facility on June 30, 2010 and December 9, 2010, interest expense decreased $10.5 million from the prior year, primarily due to lower average debt balances, lower interest rates during the first six months of 2010 and the expiration of $800 million notional amounts of fixed interest rate swap agreements in the first quarter of 2010. In 2009 we recorded a $4.2 million gain related to a Euro-based forward currency contract related to the Alpro acquisition.

Income Taxes — Income tax expense was recorded at an effective rate of 48.6% for 2010 compared to 39.9% in 2009. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. Additionally, in 2010, we identified deferred tax asset balances associated with errors primarily related to periods prior to 2007. Since the effects of the errors are not material to the financial results for the year ending December 31, 2010 and were not material to any individual year prior to 2010, we adjusted our deferred tax assets and recorded a non-cash income tax charge of $10.8 million in the fourth quarter of 2010. Excluding the impact of this correction, the effective tax rate for 2010 was 41.4%, which was higher than 2009 primarily as a result of lower net earnings. Our 2010 and 2009 effective tax rates were both negatively impacted by the exclusion of the tax benefit attributable to our non-controlling interest in the Hero/WhiteWave joint venture.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 — Results by Segment

Fresh Dairy Direct

The key performance indicators of Fresh Dairy Direct are brand mix and achieving low cost, which are realized within gross profit and operating income.

 

     Year Ended December 31  
     2010      2009  
     Dollars      Percent      Dollars      Percent  
     (Dollars in millions)  

Net sales

   $     8,968.5                 100.0%        $     8,456.2                 100.0%    

Cost of sales

     6,868.7             76.6             6,160.5             72.9       
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     2,099.8             23.4             2,295.7             27.1       

Operating costs and expenses

     1,686.3             18.8             1,653.3             19.6       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income

   $ 413.5             4.6%        $ 642.4             7.5%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Sales — Fresh Dairy Direct’s net sales increased $512.3 million, or 6.1%, during 2010 compared to the prior year, primarily due to the pass-through of higher commodity costs and the impact of acquisitions. These increases were partially offset by the impact of higher promotional retail pricing and wholesale pricing pressures, as well as overall volume declines across all product categories. Changing consumer behavior with increased pricing sensitivity and focus on value in the challenging domestic economy drove a material shift across the retail grocery industry. Retailers began lowering their margins on milk to hit key price points and demonstrate strong value to customers in an effort to keep or win market share in the challenging environment. Beginning in 2009 and throughout 2010, we experienced an increasing demand to absorb pricing concessions, which were originally absorbed by retailers.

 

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Fresh Dairy Direct generally increases or decreases the prices of its fluid dairy products on a monthly basis in correlation to fluctuations in the costs of raw materials, packaging supplies and delivery costs. However, in some cases, we are subject to the terms of sales agreements with respect to the means and/or timing of price increases. This can have a negative impact on Fresh Dairy Direct profitability. The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for 2010 compared to 2009:

 

     Year Ended December 31*  
     2010      2009      % Change  

Class I mover(1)

   $     15.35       $     11.48             33.7%    

Class I raw skim milk mover(1)(2)

     9.26         7.40         25.1       

Class I butterfat mover(2)(3)

     1.83         1.24         47.6       

Class II raw skim milk minimum(1)(4)

     9.85         7.09         38.9       

Class II butterfat minimum(3)(4)

     1.86         1.26         47.6       

 

 

*

The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and supplier. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” and “— Known Trends and Uncertainties — Prices of Raw Milk and Other Inputs” below for a more complete description of raw milk pricing.

(1)

Prices are per hundredweight.

(2)

We process Class I raw skim milk and butterfat into fluid milk products.

(3)

Prices are per pound.

(4)

We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, including raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Fresh Dairy Direct’s cost of sales increased $708.2 million, or 11.5%, in 2010 compared to 2009 primarily due to higher commodity prices experienced throughout the year, particularly raw milk and Class II butterfat costs, slightly offset by lower personnel costs. Conventional milk prices continued to increase throughout 2010 compared to historic lows in 2009. This significant increase in conventional milk prices was a result of limited supply due to production challenges coupled with strong global demand for both Class I and Class II inputs.

Gross Profit — Fresh Dairy Direct’s gross margin decreased to 23.4% in 2010 from 27.1% in 2009. Gross margins trended downward due to the increasingly intense competitive environment we have experienced. In addition to the increasing demands to absorb pricing concessions, we experienced a continued shift from branded to private label products, exacerbated by weak volumes across dairy and non-dairy product offerings, further impacting profitability.

Operating Costs and Expenses — Fresh Dairy Direct’s operating costs and expenses increased $33.0 million, or 2.0%, during the year compared to prior year. Significant changes to operating costs and expenses include the following:

 

   

Selling and distribution costs increased $23.0 million, primarily driven by increased fuel and freight costs. These costs were offset by a decrease in our self-insurance reserve due to changes in loss development factors as a result of a continuous decline in claims and better claims management, as well as benefits from efficiencies gained in our distribution network with route reductions and lower fuel usage.

 

   

General and administrative costs increased $8.8 million due to an increase in supply chain management and higher consulting fees, offset by lower personnel-related costs, largely due to decreased short term incentive compensation.

WhiteWave-Alpro

The key performance indicators of WhiteWave-Alpro are sales volumes, net sales dollars, gross profit and operating income.

 

$000 $000 $000 $000
     Year Ended December 31  
     2010      2009  
     Dollars      Percent      Dollars      Percent  
     (Dollars in millions)  

Net sales

   $     1,938.0             100.0%        $     1,633.0             100.0%    

Cost of sales

     1,242.7         64.1             1,058.2         64.8       
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     695.3         35.9             574.8         35.2       

Operating costs and expenses

     529.1         27.3             444.5         27.2       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income

   $ 166.2         8.6%        $ 130.3         8.0%    

 

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Net Sales — Net sales of the WhiteWave-Alpro segment increased $305.0 million, or 18.7%, driven by the impact of our Alpro acquisition and strong volume growth in our branded products. Excluding the impact of our Alpro acquisition, net sales increased $132.3 million, or 8.1%. Sales for the creamers business, which includes both International Delight and LAND O LAKES, grew low double digits compared to 2009. Horizon Organic brand sales also grew low double digits while Silk brand sales grew high single digits compared to the prior year.

Cost of Sales — WhiteWave-Alpro’s cost of sales increased $184.5 million, or 17.4%, in 2010 compared to the prior year. This increase was primarily driven by a $92.9 million increase due to our Alpro acquisition higher sales volumes and higher input costs.

Gross Profit — WhiteWave-Alpro’s gross profit increased to 35.9% in 2010 from 35.2% in 2009, driven by the impact of our Alpro acquisition, strong volume growth, a favorable brand mix, as well as benefits from productivity initiatives.

Operating Costs and Expenses — WhiteWave-Alpro’s operating costs and expenses increased $84.6 million, or 19.0%, during 2010 compared to 2009. Significant changes to operating costs and expenses are summarized below:

 

   

Selling and distribution costs increased $50.1 million, driven by a $36.0 million increase due to the Alpro acquisition, volume growth and higher fuel costs. In addition, WhiteWave experienced increased outside storage facility costs due to capacity constraints.

 

   

General and administrative costs increased $33.8 million, primarily driven by a $24.5 million increase due to our Alpro acquisition.

Morningstar

The key performance indicator of Morningstar is volume growth in categories, which is realized within gross profit.

 

     Year Ended December 31  
     2010      2009  
     Dollars      Percent      Dollars      Percent  
     (Dollars in millions)  

Net sales

   $     1,216.4             100.0%        $     1,024.6             100.0%    

Cost of sales

     1,004.6         82.6             800.9         78.2       
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     211.8         17.4             223.7         21.8       

Operating costs and expenses

     120.8         9.9             109.4         10.7       
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income

   $ 91.0         7.5%        $ 114.3         11.1%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Sales — Morningstar’s net sales increased $191.8 million, or 18.7%, during 2010 compared to the prior year, primarily due to the pass-through of higher commodity costs, as well as volume increases across most product categories. These increases were partially offset by volume declines in our yogurt business.

Morningstar generally increases or decreases the prices of its fluid dairy products on a monthly basis in correlation to fluctuations in the costs of its dairy commodity costs. However, Grade AA butter and Class II butterfat costs are not known in advance of setting customer pricing. In addition, in some cases, we are subject to the terms of sales agreements with respect to the means and/or timing of price increases. This can have a negative impact on Morningstar’s profitability. The following table sets forth the average monthly Grade AA butter, Class II minimum butterfat and Class II minimum raw skim milk prices for 2010 compared to 2009:

 

     Year Ended December 31*  
     2010      2009      % Change  

Grade AA butter(1)

   $     1.73       $     1.24             39.5%    

Class II butterfat minimum(1)(2)

     1.86         1.26         47.6       

Class II raw skim milk minimum(2)(3)

     9.85         7.09         38.9       

 

 

*

The prices noted in this table are not the prices that we actually pay. Bulk cream is purchased based on a multiple of the grade AA butter price. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and supplier. Please see “Part I —Item 1. Business — Government Regulation — Milk Industry Regulation” and “— Known Trends and Uncertainties — Prices of Raw Milk and Other Inputs” below for a more complete description of raw milk pricing.

 

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Table of Contents
(1)

Prices are per pound.

(2)

We process Class II butterfat and Class II raw skim milk into products such as cottage cheese, creams and creamers, ice cream and sour cream.

(3)

Prices are per hundredweight.

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, including raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Morningstar’s cost of sales increased $203.7 million, or 25.4%, in 2010 compared to 2009. Morningstar’s cost of sales increased as a result of higher commodity prices experienced throughout the year. In addition, effective January 1, 2010, we implemented a standardized intercompany transfer pricing structure on all products manufactured by Morningstar on behalf of Fresh Dairy Direct, which caused an increase to Morningstar’s cost of sales as compared to 2009.

Gross Profit — Morningstar’s gross margin decreased to 17.4% in 2010 from 21.8% in 2009 due to the implementation of a standardized intercompany pricing structure and the impact of higher commodity costs. The higher commodity costs were passed through in higher prices; however, there is typically a lag between the timing of raw material cost increases and a corresponding price change to our customers. As a result, not all of the commodity cost increase was reflected in higher customer prices, which drove the decrease in gross profit.

Operating Costs and Expenses — Morningstar’s operating costs and expenses increased $11.4 million, or 10.4%, during the year compared to prior year. Significant changes to operating costs and expenses include the following:

 

   

Selling and distribution costs increased $5.1 million, primarily driven by increased fuel and freight costs. These costs were partially offset by a decrease in marketing costs related to our Friendship brand.

 

   

General and administrative costs increased $6.4 million due to increased research and development costs, investment in category management capabilities and increased facility costs.

Liquidity and Capital Resources

General

We believe that our cash on hand, coupled with future cash flows from operations and other available sources of liquidity, including our amended and restated $1.5 billion 5-year senior secured revolving credit facility and our $600 million receivables-backed facility, will provide sufficient liquidity to allow us to meet our future cash requirements. Our anticipated uses of cash include capital expenditures, working capital needs, pension contributions and financial obligations. On an ongoing basis, we will evaluate and consider strategic acquisitions, divestitures, joint ventures, repurchasing shares of our common stock, as well as other transactions to create shareholder value and enhance financial performance. Such transactions may require cash expenditures or generate proceeds.

As of December 31, 2011, $104.5 million of our total cash on hand of $114.9 million was attributable to our foreign operations. We anticipate that approximately $70 million of this cash will be mobilized and returned to the U.S. during the first half of 2012, and although not a required repayment under the agreement governing our senior secured credit facility, we intend to utilize these funds for additional debt repayments to lower our outstanding debt balances as well as future interest expense. We currently anticipate leaving the remaining $34.5 million of cash attributable to our foreign operations in these foreign jurisdictions.

At December 31, 2011, we had $3.8 billion of outstanding debt obligations, cash on hand of $114.9 million and an additional $1.6 billion of combined available future borrowing capacity under our existing senior secured revolving credit facility and receivables-backed facility, subject to compliance with the covenants in our credit agreements. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may, from time to time, raise additional funds through borrowings or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.

 

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Table of Contents

Historical Cash Flow

The following table summarizes our cash flows from operating, investing and financing activities:

 

$000,000,00 $000,000,00 $000,000,00
     Year Ended December 31  
     2011      2010      Change  
     (In thousands)  

Net cash flows from:

        

Operating activities

   $     448,516           $     525,700           $ (77,184)       

Investing activities

     (131,876)             (293,575)             161,699       

Financing activities

     (293,598)             (217,692)             (75,906)       

Discontinued operations (operating and investing)

     4,390             32,886             (28,496)       

Effect of exchange rate changes on cash and cash equivalents

     (4,588)             (502)             (4,086)       
  

 

 

    

 

 

    

 

 

 

Net increase in cash and cash equivalents

   $ 22,844           $ 46,817           $ (23,973)       
  

 

 

    

 

 

    

 

 

 

Operating Activities

Operating cash flows were lower than the prior year due to the impact of lower net income, higher inventory and receivables levels, driven primarily by the increase in commodity costs in 2011, and a $30 million litigation settlement payment in May 2011. These decreases in cash flows were partially offset by the receipt of a $62.4 million federal income tax refund in April 2011.

Investing Activities

Net cash used in investing activities decreased in 2011 due to combined cash proceeds of approximately $185 million from the sale of our Mountain High and private label yogurt operations and the sale of a trademark, partially offset by an increase in capital spending of approximately $24 million in comparison to the prior year. See Note 2 to our Consolidated Financial Statements for more information regarding the sale of our yogurt operations.

Financing Activities

Net cash used in financing activities increased during 2011 primarily due to a net repayment of debt of approximately $303 million in 2011 compared to net debt repayments of approximately $177 million in 2010 and the payment of $53 million of deferred financing costs related to the June 2010 and December 2010 amendments of our senior secured credit facility and the December 2010 senior notes issuance. Cash proceeds from the sale of our yogurt operations and the cash received from a federal income tax refund in April 2011 were utilized for portions of the debt repayments made in 2011.

Current Debt Obligations

Senior Secured Credit Facility — Our senior secured credit facility consists of an original combination of a $1.5 billion 5-year senior secured revolving credit facility, a $1.5 billion 5-year senior secured term loan A and a $1.8 billion 7-year senior secured term loan B. We amended and restated the credit agreement governing our senior secured credit facility on June 30, 2010 and entered into a further amendment in December 2010, which included extension of the maturity dates for certain principal amounts as summarized in the key terms table below, amendment of the maximum permitted leverage ratio and minimum interest coverage ratio, and the addition of a senior secured leverage ratio (each as defined in our credit agreement); and the amendment of certain other terms.

 

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Table of Contents

The following table summarizes the key terms of the senior secured credit facility as of December 31, 2011:

 

         Principal(2)         Maturity
    Date    
    Applicable Base
     Rate Margin(3)    
  Applicable
LIBOR Rate
    Margin(3)    
  Quarterly
Commitment Fee
on Undrawn
    Amounts    

Revolving Credit Facility

  $ 225 million        April 2, 2012      0.00% – 0.75%   0.625% –1.75%   0.125% –0.375%  
  $ 1.28 billion        April 2, 2014      1.00% – 2.25%   2.00% – 3.25%   0.375% –0.500%  

Term Loan A

  $ 660 million        April 2, 2014      1.00% – 2.25%   2.00% – 3.25%  

Term Loan B

  $ 680 million        April 2, 2014      0.375% –0.75%   1.375% –1.75%  
  $ 485 million        April 2, 2016      2.00% – 2.25%   3.00% – 3.25%  
  $ 553 million        April 2, 2017 (1)    2.25% – 2.50%   3.25% – 3.50%  

 

(1)

Subject to the condition that we meet certain leverage, debt, cash or credit rating tests following December 31, 2015. However, if at least one of these tests is not met, the maturity date for this portion of term loan B will be April 2, 2016.

(2)

Amounts for term loan A and term loan B represent outstanding principal balances as of December 31, 2011. The revolving credit facility principal amount represents the total original borrowings available to us under the facility.

(3)

The senior secured credit facility bears interest, at our election, at the Alternate Base Rate (as defined in our credit agreement) plus a margin depending on our leverage ratio or LIBOR plus a margin depending on our leverage ratio. Interest is payable quarterly or after the end of the applicable interest period.

Our credit agreement permits us to complete acquisitions that meet all of 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 were engaged as of April 2007, (2) the net cash purchase price for any single acquisition is not greater than $500 million and not greater than $100 million if our leverage ratio is greater than 4.50 times on a pro-forma basis, (3) we acquire at least 51% of the acquired entity, (4) the transaction is approved by the board of directors or shareholders, as appropriate, of the target and (5) after giving effect to such acquisition on a pro-forma basis, we would have been in compliance with all financial covenants. All other acquisitions must be approved in advance by the required lenders.

The senior secured credit facility contains limitations on liens, investments and the incurrence of additional indebtedness, prohibits certain dispositions of property and restricts certain payments, including dividends. There are no restrictions on these certain payments, including dividends, when our leverage ratio is below 4.50 times on a pro-forma basis. The senior secured credit facility is secured by liens on substantially all of our domestic assets including the assets of our domestic subsidiaries, but excluding the capital stock of subsidiaries of the former Dean Foods Company (“Legacy Dean”), the real property owned by Legacy Dean and its subsidiaries, and accounts receivable associated with the receivables-backed facility.

Under the senior secured credit facility, we are required to comply with certain financial covenants, including, but not limited to, maximum senior secured leverage, maximum leverage and minimum interest coverage ratios, each as defined under and calculated in accordance with the terms of the agreements governing our senior secured credit facility and our receivables-backed facility. Our leverage ratio at December 31, 2011 was 4.64 times consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters. The maximum permitted leverage ratio of consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters was 5.75 times as of December 31, 2011 and decreases to 5.50 times as of March 31, 2012, with periodic decreases thereafter. As described in more detail in our amended and restated credit agreement, the leverage ratio is calculated as the ratio of consolidated funded indebtedness, less our cash and restricted subsidiary cash up to $100 million, to consolidated EBITDA for the period of four consecutive fiscal quarters ended on the measurement date. Consolidated funded indebtedness is comprised of our outstanding indebtedness and the outstanding indebtedness of certain of our subsidiaries. Consolidated EBITDA is comprised of our net income plus interest expense, taxes, depreciation, amortization expense and other non-cash expenses, and add-backs resulting from acquisition related non-recurring charges incurred by us or certain of our subsidiaries, and is calculated on a pro-forma basis to give effect to any acquisitions, divestitures or relevant changes in our composition or the composition of certain of our subsidiaries. In addition, the calculation of consolidated EBITDA may include adjustments related to other charges reasonably acceptable to the administrative agent under the senior secured credit facility. Charges resulting from the settlement amounts related to the Vermont and Tennessee dairy farmer actions described in Note 18 to our Consolidated Financial Statements were treated as an adjustment to consolidated EBITDA by the administrative agent.

 

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Our senior secured leverage ratio at December 31, 2011 was 3.34 times consolidated funded senior secured indebtedness to consolidated EBITDA for the prior four consecutive quarters. The maximum permitted senior secured leverage ratio of consolidated funded senior secured indebtedness to consolidated EBITDA for the prior four consecutive quarters allowed was 4.25 times as of December 31, 2011 and decreases to 3.75 times as of March 31, 2012, with an additional decrease thereafter. This ratio is calculated as the ratio of consolidated funded senior secured indebtedness, less our cash and restricted subsidiary cash up to $100 million, to consolidated EBITDA for the period of four consecutive fiscal quarters ended on the measurement date. Consolidated funded senior secured indebtedness is comprised of our outstanding senior secured indebtedness and the outstanding senior secured indebtedness of certain of our subsidiaries. Consolidated EBITDA is calculated as described above in the discussion of our leverage ratio.

Our interest coverage ratio at December 31, 2011 was 3.36 times consolidated EBITDA to consolidated interest expense for the prior four consecutive quarters. The minimum permitted interest coverage ratio of consolidated EBITDA to consolidated interest expense for the prior four consecutive quarters was 2.50 times as of December 31, 2011 and increases to 2.75 times as of March 31, 2012, with an additional increase thereafter. This ratio is calculated as the ratio of consolidated EBITDA to consolidated interest expense for the period of four consecutive fiscal quarters ended on the measurement date. Consolidated EBITDA is calculated as described above in the discussion of our leverage ratio. Consolidated interest expense is comprised of consolidated interest expense paid or payable in cash, as calculated in accordance with generally accepted accounting principles, but excluding non-cash losses from foreign exchange translations or swap agreements and third party fees and expenses related to acquisitions, investments, dispositions and the incurrence or early extinguishment of indebtedness.

We are currently in compliance with all covenants in our credit agreements, and based on our internal projections we expect to maintain such compliance for the foreseeable future.

The credit agreement contains standard default triggers, including without limitation: failure to maintain compliance with the financial and other covenants contained in the credit agreement, default on certain of our other debt, a change in control and certain other material adverse changes in our business. The credit agreement does not contain any requirements to maintain specific credit rating levels, except as described above with respect to determining the maturity date of the 2017 tranche of term loan B.

At December 31, 2011, there were outstanding borrowings of $2.5 billion under our senior secured credit facility (compared to $3.0 billion at December 31, 2010), which consisted of $2.4 billion in term loan borrowings and $100 million under the revolver. The decrease of $556 million in our senior secured credit facility outstanding borrowings was primarily due to lower outstanding borrowings under the revolver at December 31, 2011 in comparison to December 31, 2010; the full repayment of the remaining outstanding 2012 tranche A term loan borrowings as a result of the yogurt divestitures discussed in Note 2 to our Consolidated Financial Statements; and our quarterly scheduled term loan payments. At December 31, 2011, letters of credit in the aggregate amount of $2.2 million were issued under the revolving credit facility but undrawn. Our average daily balance under this facility during 2011 was $117.9 million. As of February 17, 2012, $124.2 million was borrowed under our senior secured revolving credit facility, excluding letters of credit in the aggregate amount of $2.2 million that were issued but undrawn.

Receivables-backed Facility — In addition to our senior secured credit facility, we also have a $600 million receivables-backed facility under which current availability is subject to a monthly borrowing base formula. On September 28, 2011, we amended the agreement governing the receivables-backed facility. The terms of the agreement were modified to extend the liquidity termination date to September 25, 2013, to include the ability to issue letters of credit of up to $300 million under the facility, and to amend certain other terms.

Based on the monthly borrowing base formula, we had the ability to borrow up to the full $600 million commitment under the receivables-backed facility as of December 31, 2011. Of this amount, $260.0 million was drawn, and letters of credit in the aggregate amount of $165.4 million were issued under the facility but undrawn, resulting in remaining available borrowing capacity of $174.6 million at December 31, 2011. The increase in outstanding borrowings at December 31, 2011 in comparison to December 31, 2010 is primarily attributable to a reallocation of revolver borrowings to the receivables-backed facility due to more favorable terms resulting from the September 2011 amendment of the receivables-backed facility described above. Our average daily balance under this facility during 2011 was $313.0 million. At February 17, 2012, $295.0 million was outstanding under this facility, excluding letters of credit in the aggregate amount of $165.4 million that were issued but undrawn.

As discussed in Note 18 to our Consolidated Financial Statements, on February 14, 2012, the United States District Court for the Eastern District of Tennessee granted preliminary approval of our settlement agreement with the plaintiffs in the Tennessee dairy farmer actions. As part of the proposed settlement agreement, on February 21, 2012 we made a payment of $60 million into an escrow account to be distributed following the court’s final approval, issued a standby letter of credit in the amount of $80 million, representing the subsequent payments due under the terms of the settlement agreement.

Senior Notes & Capital Leases — Other indebtedness outstanding at December 31, 2011 also included $500 million face value of outstanding indebtedness under Dean Foods Company’s senior notes due 2016, $400 million face value of outstanding indebtedness under Dean Foods Company’s senior notes due 2018, $142 million face value of outstanding indebtedness under Legacy Dean’s senior notes due 2017 and $0.7 million of capital lease and other obligations.

 

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Alpro Revolving Credit Facility — On July 8, 2011, Alpro Comm VA renewed its multicurrency revolving credit facility for borrowings in an amount not to exceed €1 million (or its currency equivalent). The facility is unsecured and is guaranteed by Dean Foods Company and various Alpro Comm VA subsidiaries. Proceeds under the facility may be used for working capital and other general corporate purposes of Alpro Comm VA. The subsidiary revolving credit facility is available for the issuance of up to €1 million (or its currency equivalent) of letters of credit. No principal payments are due under the subsidiary revolving credit facility until maturity on July 2, 2012. At December 31, 2011, there were no outstanding borrowings under this facility. As discussed above, we plan to return approximately $70 million of cash attributable to our Alpro operations to the U.S during the first half of 2012. Accordingly, we are currently evaluating our options with respect to the Alpro revolving credit facility to ensure the terms of the facility are sufficient to meet Alpro’s working capital and other general corporate needs once the cash is returned to the U.S.

 

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Contractual Obligations and Other Long-Term Liabilities

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future. The table below summarizes our obligations for indebtedness, purchase, lease and other contractual obligations at December 31, 2011.

 

     Payments Due by Period  
   Total      2012      2013      2014      2015      2016      Thereafter  
     (In millions)  

Senior secured credit facility

   $ 2,477.2       $ 202.0       $ 231.7       $ 1,037.4       $ 10.5       $ 470.9       $ 524.7   

Dean Foods Company senior notes(1)

     900.0         0.0         0.0         0.0         0.0         500.0         400.0   

Subsidiary senior notes(1)

     142.0         0.0         0.0         0.0         0.0         0.0         142.0   

Receivables-backed facility

     260.0         0.0         260.0         0.0         0.0         0.0         0.0   

Capital lease obligations and other

     0.7         0.5         0.2         0.0         0.0         0.0         0.0   

Purchase obligations(2)

     1,068.5         740.3         165.8         55.6         37.3         25.6         43.9   

Operating leases (3)

     430.9         108.9         85.7         67.2         50.2         29.3         89.6   

Interest payments(4)

     852.4         203.4         184.4         143.9         131.4         95.9         93.4   

Benefit payments(5)

     365.2         23.1         22.2         22.7         22.2         22.8         252.2   

Litigation settlement(6)

     140.0         60.0         20.0         20.0         20.0         20.0         0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total(7)

   $     6,636.9       $     1,338.2       $     970.0       $     1,346.8       $     271.6       $     1,164.5       $     1,545.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1)

Represents face value.

(2)

Primarily represents commitments to purchase minimum quantities of raw materials used in our production processes, including diesel fuel, soybeans and organic raw milk. We enter into these contracts from time to time to ensure a sufficient supply of raw ingredients. In addition, we have contractual obligations to purchase various services that are part of our production process.

(3)

Represents future minimum lease payments under non-cancelable operating leases related to our distribution fleet, corporate offices and certain of our manufacturing and distribution facilities. See Note 18 to our Consolidated Financial Statements for more detail about our lease obligations.

(4)

Includes fixed rate interest obligations, expected cash payments on our interest rate swaps based on the notional amounts of the swaps and the LIBOR forward curve at December 31, 2011 and interest on our variable rate debt based on the rates in effect at December 31, 2011. Interest that may be due in the future on the variable rate portion of our senior secured credit facility and receivables-backed facility will vary based on the interest rate in effect at the time and the borrowings outstanding at the time. Future interest payments on our interest rate swaps will vary based on the interest rates in effect at each respective settlement date. Excluded from the table above are expected cash receipts related to the interest rate swaps.

(5)

Represents expected future benefit obligations of $332.7 million and $32.5 million related to our company-sponsored pension plans and postretirement healthcare plans, respectively. In addition to our company-sponsored plans, we participate in certain multiemployer defined benefit plans. The cost of these plans is equal to the annual required contributions determined in accordance with the provisions of negotiated collective bargaining arrangements. These costs were approximately $30 million, $29 million and $30 million during the years ended December 31, 2011, 2010 and 2009, respectively; however, the future cost of the multiemployer plans is dependent upon a number of factors, including the funded status of the plans, the ability of other participating companies to meet ongoing funding obligations, and the level of our ongoing participation in these plans. Because the amount of future contributions we would be contractually obligated to make pursuant to these plans cannot be reasonably estimated, such amounts have been excluded from the table above. See Note 14 to our Consolidated Financial Statements.

(6)

Represents future payments pursuant to a pending agreement to settle all claims in the Tennessee dairy farmer actions described in Note 18 to our Consolidated Financial Statements. The settlement agreement had not been granted final court approval as of the filing date of this Annual Report on Form 10-K; however, based on our current understanding of the facts and circumstances surrounding this matter, we believe a settlement of this matter is likely to occur under substantially similar financing terms.

(7)

The table above excludes our liability for uncertain tax positions of $41.7 million because the timing of any related cash payments cannot be reasonably estimated.

 

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Pension and Other Postretirement Benefit Obligations

We offer pension benefits through various defined benefit pension plans and also offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees. Reported costs of providing non-contributory defined pension benefits and other postretirement benefits are dependent upon numerous factors, assumptions and estimates. For example, these costs are impacted by actual employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plan and earnings on plan assets. Pension and postretirement costs also may be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and annual periodic pension costs. In 2011 and 2010, we made contributions of $18.1 million and $10.3 million, respectively, to our defined benefit pension plans.

During the third quarter of 2011, we identified groups of employees who were eligible to receive other postretirement benefits that had historically been excluded from our benefit plan valuations, which resulted in an understatement of our benefit obligations and net periodic benefit cost. We recorded a non-cash charge, and the related benefit obligation, of $16.0 million during the third quarter of 2011, of which $0.8 million relates to the year ended December 31, 2011 and $15.2 million relates to prior periods. This adjustment will increase our future expected benefit payments under the other postretirement benefit plans.

Our pension plan assets are primarily comprised of equity and fixed income investments. Changes made to the provisions of the plan may impact current and future pension costs. Fluctuations in actual equity market returns, as well as changes in general interest rates may result in increased or decreased pension costs in future periods. In accordance with Accounting Standards related to “Employers’ Accounting for Pensions,” changes in obligations associated with these factors may not be immediately recognized as pension costs on the income statement, but generally are recognized in future years over the remaining average service period of plan participants. As such, significant portions of pension costs recorded in any period may not reflect the actual level of cash benefits provided to plan participants. In 2011, we recorded non-cash pension expense of $13.8 million, of which $12.9 million was attributable to periodic expense and $0.9 million was attributable to settlements compared to a total of $13.0 million in 2010, of which $11.3 million was attributable to periodic expense and $1.7 million was attributable to settlements.

Almost 90% of our defined benefit plan obligations are frozen as to future participation or increases in projected benefit obligation. Many of these obligations were acquired in prior strategic transactions. As an alternative to defined benefit plans, we offer defined contribution plans for eligible employees.

The weighted average discount rate reflects the rate at which our defined benefit plan obligations could be effectively settled. The rate, which is updated annually with the assistance of an independent actuary, uses a model that reflects a bond yield curve. The weighted average discount rate for our pension plan obligations was decreased from 5.28% at December 31, 2010 to 4.5% at December 31, 2011, which will increase the net periodic benefit cost for our pension plans by approximately $1.2 million in 2012.

Substantially all of our qualified pension plans are consolidated into one master trust. The investments held in the master trust are managed by an established Investment Committee with assistance from independent investment advisors. In July 2009, the Investment Committee adopted a new long-term investment policy for the master trust that targets investments in equity securities at 59% of the portfolio, fixed income at 37%, cash equivalents at 3% and other investments of 1%. At December 31, 2011, our master trust was invested as follows: investments in equity securities were at 59%; investments in fixed income were at 38%; cash equivalents were at 2% and other investments were at 1%. We believe the allocation of our master trust investments as of December 31, 2011 is generally consistent with the targets set forth by the Investment Committee.

See Notes 14 and 15 to our Consolidated Financial Statements for additional information regarding retirement plans and other postretirement benefits.

 

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Other Commitments and Contingencies

On December 21, 2001, in connection with our acquisition of Legacy Dean, we purchased Dairy Farmers of America’s (“DFA”) 33.8% interest in our operations. In connection with that transaction, we issued a contingent, subordinated promissory note to DFA in the original principal amount of $40 million. DFA is a primary supplier of raw milk, and the promissory note is designed to ensure that DFA has the opportunity to continue to supply raw milk to certain of our facilities until 2021, or be paid for the loss of that business. The promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash, but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we materially breach or terminate one of our related milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire at the end of 20 years, without any obligation to pay any portion of the principal or interest. Payments we make under this note, if any, will be expensed as incurred. We have not terminated, and we have not materially breached, any of our related milk supply agreements with DFA related to the promissory note. We have previously terminated unrelated supply agreements with respect to several plants that were supplied by DFA. In connection with our goals of accelerated cost control and increased supply chain efficiency, we continue to evaluate our sources of raw milk supply.

We also have the following commitments and contingent liabilities, in addition to contingent liabilities related to ordinary course litigation, investigations and audits:

 

   

Certain indemnification obligations related to businesses that we have divested;

 

   

Certain lease obligations, which require us to guarantee the minimum value of the leased asset at the end of the lease; and

 

   

Selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims and other casualty losses.

See Note 18 to our Consolidated Financial Statements for more information about our commitments and contingent obligations.

Future Capital Requirements

During 2012, we intend to invest a total of approximately $250 million to $275 million in capital expenditures primarily for our existing manufacturing facilities and distribution capabilities. This represents a substantial decline in spending in comparison to recent years and reflects a recent change in our company-wide strategy and how we expect to deploy our strategic capital and other investments to the value-added segments of our business and to those initiatives that yield higher returns over shorter time frames. We expect cash interest to be approximately $215 million to $220 million based upon current debt levels and projected forward interest rates under our senior secured credit facility. Cash interest excludes amortization of deferred financing fees and bond discounts of approximately $14 million and imputed interest of approximately $3 million related to the Tennessee dairy farmer litigation settlement discussed in Note 18 to our Consolidated Financial Statements. The portion of our long-term debt due within the next 12 months totals $202.5 million. From time to time, we may repurchase our outstanding debt obligations in the open market or in privately negotiated transactions, subject to meeting certain terms and conditions as outlined in our credit agreements. We expect that cash flow from operations and borrowings under our senior secured credit facility and receivables-backed facility will be sufficient to meet our future capital requirements for the foreseeable future.

We currently have a maximum permitted senior secured leverage ratio of 4.25 times and maximum leverage ratio of 5.75 times consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters, each as defined under and calculated in accordance with the terms of our senior secured credit facility and our receivables-backed facility. As of December 31, 2011, the senior secured leverage ratio was 3.34 times and the leverage ratio was 4.64 times. The maximum permitted senior secured leverage ratio and leverage ratio under both the senior secured credit facility and the receivables-backed facility will decline to 3.75 times and 5.50 times, respectively, as of March 31, 2012. These reduced leverage ratio requirements could limit our ability to incur additional debt.

At December 31, 2011, $174.6 million was available under the receivables-backed facility, with $1.4 billion also available under the senior secured revolving credit facility, subject to compliance with the covenants in our credit agreements. Availability under the receivables-backed facility is calculated using the current receivables balance for the seller entities, less adjustments for vendor concentration limits, reserve requirements and other adjustments as described in our amended and restated receivables purchase agreement, not to exceed the total commitment amount less current borrowings and outstanding letters of credit. Availability under the senior secured revolving credit facility is calculated using the total commitment amount less current borrowings and outstanding letters of credit. At February 17, 2012, approximately $1.5 billion, subject to compliance with the covenants in our credit agreements, was available to finance working capital and other general corporate purposes under the receivables-backed and revolving credit facilities.

 

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Known Trends and Uncertainties

Prices of Raw Milk and Other Inputs

Conventional Raw Milk and Butterfat — The primary raw materials used in Fresh Dairy Direct’s and Morningstar’s products are conventional milk (which contains both raw milk and butterfat) and bulk cream. The federal government and certain state governments set minimum prices for raw milk and those prices are set on a monthly basis. The regulated minimum prices differ based on how the raw milk is utilized. Raw milk processed into fluid milk is priced at the Class I price and raw milk processed into products such as cottage cheese, creams and creamers, ice cream and sour cream is priced at the Class II price. Generally, we pay the federal minimum prices for raw milk, plus certain producer premiums (or “over-order” premiums) and location differentials. We also incur other raw milk procurement costs in some locations (such as hauling, field personnel, etc.). A change in the federal minimum price does not necessarily mean an identical change in our total raw milk costs as over-order premiums may increase or decrease. This relationship is different in every region of the country and sometimes within a region based on supplier arrangements. However, in general, the overall change in our raw milk costs can be linked to the change in federal minimum prices. Because our Class II products typically have a higher fat content than that contained in raw milk, we also purchase bulk cream for use in some of our Class II products. Bulk cream is typically purchased based on a multiple of the AA butter price on the Chicago Mercantile Exchange (“CME”).

In general, Fresh Dairy Direct changes the prices charged for Class I dairy products on a monthly basis, as the costs of raw milk, packaging, fuel and other materials fluctuate. Prices for some Fresh Dairy Direct and Morningstar Class II products are also changed monthly, while others are changed from time to time as circumstances warrant. However, there can be a lag between the timing of a raw material cost increase or decrease and a corresponding price change to our customers, especially in the case of Class II butterfat because Class II butterfat prices for each month are not announced by the government until after the end of that month. Also, in some cases, primarily with respect to diesel fuel and other non-dairy inputs, we are subject to the terms of sales agreements with respect to the implementation of price changes. This can have a negative impact on our profitability and can cause volatility in our earnings. Our sales and operating profit margin fluctuate with the price of our raw materials and other inputs.

Conventional milk prices increased sharply in March of 2011 and continued to increase through the third quarter of the year, before gradually declining in the fourth quarter. Class I and Class II butterfat prices were the highest the industry has experienced in recent history, and all Class I and Class II pricing remains significantly higher than in 2010. This significant increase in conventional milk prices during 2011 was a result of limited inventories of butterfat and nonfat solids coupled with strong demand for butter, nonfat dry milk and cheese both domestically and internationally. After declining modestly throughout the first quarter, we expect Class I and Class II pricing to remain relatively flat throughout 2012.

Organic Raw Milk — The primary raw material used in our organic milk-based products is organic raw milk. We currently work with more than 600 dairy farmers across the United States and purchase 93% of our organic raw milk from this network. The balance of our organic raw milk is sourced from two farms that we own. We generally enter into supply agreements with organic dairy farmers with typical terms of two to five years, which obligate us to purchase certain minimum quantities of organic raw milk. The organic dairy industry regularly experiences significant swings in supply and demand based on consumer economic factors. Retail price increases on private label products generally lag that of branded products, causing retail price gaps to expand. Such gaps can create challenges where increasing costs of food and energy drive up the cost of organic milk faster than retail prices can be increased. During 2011, we experienced increased demand for our organic products particularly our Horizon Organic brand, and we have taken actions to address the rising demand. However, we have also experienced a tightening of the supply of organic milk during the fourth quarter of 2011, which increased costs, impacted availability of organic milk and negatively impacted our sales volume of organic milk. We expect this trend to continue in 2012, which may continue to pressure our costs and impact our volume sales of organic milk. We continue to monitor our position in the organic milk category, including taking proactive steps to manage our supply, and we remain focused on maintaining our leading branded position as we balance market share considerations against profitability.

Soybeans — Historically, the primary raw material used in our soy-based products has been organic soybeans. However, in 2009 we began augmenting our current product line by offering customers and consumers soy-based products manufactured with non–Genetically Modified Organism (“non-GMO”) soybeans. In 2011, we committed to using only non-GMO soybeans in our Silk branded soy products. The launch of these new products has shifted our raw material requirements from organic to non-GMO soybeans. Both organic soybeans and non-GMO soybeans are generally available from several suppliers and we are not dependent on any single supplier for these raw materials.

Fuel and Resin Costs — Fresh Dairy Direct purchases diesel fuel to operate its extensive DSD system and incurs fuel surcharge expense related to the products it delivers through third-party carriers. Morningstar and WhiteWave-Alpro primarily rely on third-party carriers for product distribution, and the transportation agreements typically adjust for movement in diesel prices. Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuations, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies.

Another significant raw material we use is resin, which is a fossil fuel based product used to make plastic bottles. Fresh Dairy Direct purchases approximately 28 million pounds of resin and bottles per month. In 2011, we experienced continued increases in the price of resin. The prices of diesel and resin are subject to fluctuations based on changes in crude oil and natural gas prices. We expect that fuel and resin costs will remain elevated throughout 2012.

 

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Competitive Environment

As a result of the current economic climate and historically high retail prices, the fluid milk category has posted declining volumes over the last several years. In addition, the industry has experienced retail and wholesale margin erosion, as conventional milk prices have increased steadily from 2009 through 2011. During the fourth quarter of 2011, milk prices decreased slightly, and retailers did not fully reflect such declines on the shelf pricing, which partially restored the historical price relationship between branded and private label milk and allowed our regional brands to compete more effectively during the quarter. Our fluid milk volumes, in general, outpaced the industry due to the addition of new customers during the second half of 2011. Despite ongoing challenges to our sales volume performance, we expect our fluid milk volumes to remain flat in the near term.

To improve profitability and to stabilize margin erosion, we will continue to emphasize cost reduction in 2012. Organizational changes are in process to reduce our total cost to serve and our selling and general and administrative costs. We remain focused on sustaining positive cash flow and net debt reduction.

 

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Critical Accounting Estimates

In certain circumstances, the preparation of our Consolidated Financial Statements in conformity with generally accepted accounting principles requires us to use our judgment to make certain estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of net sales and expenses during the reporting period. Our senior management has discussed the development and selection of these critical accounting estimates, as well as our critical accounting policies (see Note 1 to our Consolidated Financial Statements), with the Audit Committee of our Board of Directors. The following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments.

 

Estimate Description        Judgment and/or Uncertainty        Potential Impact if Results Differ
       

Goodwill and Intangible Assets

 

Our goodwill and intangible assets result primarily from acquisitions and primarily include trademarks with finite lives and indefinite lives and customer-related intangible assets.

 

Perpetual trademarks and goodwill are evaluated for impairment annually and on an interim basis when circumstances arise that indicate a possible impairment to ensure that the carrying value is recoverable.

 

A perpetual trademark is impaired if its book value exceeds its estimated fair value. Goodwill is evaluated for impairment if the book value of its reporting unit exceeds its estimated fair value.

 

Amortizable intangible assets are only evaluated for impairment upon a significant change in the operating environment. If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is generally based on discounted future cash flows.

 

During 2011, we performed a step one interim goodwill analysis of our Fresh Dairy Direct reporting unit. Based on the results of the step one analysis, we determined that the carrying value of our Fresh Dairy Direct reporting unit exceeded its fair value; therefore, we were required to perform step two of the impairment analysis to determine the amount of goodwill impairment to be recorded.

 

Based on the valuation performed, we concluded the implied fair value of our Fresh Dairy Direct goodwill was $87 million. Accordingly, we recorded a $2.1 billion non-cash charge ($1.6 billion net of tax) in 2011.

     

Considerable management judgment is necessary to initially value intangible assets upon acquisition and to evaluate those assets and goodwill for impairment going forward. We determine fair value using widely acceptable valuation techniques including discounted cash flows, market multiples analyses and relief from royalty analyses.

 

Assumptions used in our valuations, such as forecasted growth rates and our cost of capital, are consistent with our internal projections and operating plans.

 

We believe that a trademark has an indefinite life if it has a history of strong sales and cash flow performance that we expect to continue for the foreseeable future. If these perpetual trademark criteria are not met, the trademarks are amortized over their expected useful lives. Determining the expected life of a trademark requires considerable management judgment and is based on an evaluation of a number of factors including the competitive environment, trademark history and anticipated future trademark support.

     

We believe that the assumptions used in valuing our intangible assets and in our impairment analysis are reasonable, but variations in any of the assumptions may result in different calculations of fair values that could result in a material impairment charge.

 

The fair value of each of our reporting units exceeds its related carrying value by approximately $512 million or 28.6%, $510 million or 94.5%, $1.2 billion or 106.7% and $193 million or 46.4% for Fresh Dairy Direct, Morningstar, WhiteWave and Alpro, respectively.

 

We can provide no assurance that we will not have additional impairment charges in future periods as a result of changes in our operating results or our assumptions.

 

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Estimate Description        Judgment and/or Uncertainty        Potential Impact if Results Differ
       

In the fourth quarter of 2011, we completed the annual goodwill impairment testing of all our reporting units using the methods described above and did not record any additional impairment charge. Additionally, based on the analysis of our indefinite-lived trademarks performed in the fourth quarter of 2011, each of our trademarks had fair values in excess of their book values.

 

Our goodwill and intangible assets totaled $1.8 billion as of December 31, 2011.

               
         

Property, Plant and Equipment

 

We perform impairment tests when circumstances indicate that the carrying value may not be recoverable. Indicators of impairment could include significant changes in business environment or planned closure of a facility.

 

Our property, plant and equipment totaled $2.1 billion as of December 31, 2011.

     

Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate asset useful lives and future cash flows.

     

If actual results are not consistent with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses that could be material.

         

Self Insurance Accruals

 

We retain selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims and other casualty losses. Many of these potential losses are covered under conventional insurance programs with third-party carriers with high deductible limits. In other areas, we are self-insured with stop-loss coverages.

 

At December 31, 2011 we recorded accrued liabilities related to these retained risks of $193.7 million, including both current and long-term liabilities. We have reduced our property and casualty insurance reserves over the past two years due to a continuous decline in claims resulting from ongoing safety improvements, as well as better claims management.

     

Accrued liabilities related to these retained risks are calculated based upon loss development factors, which contemplate a number of variables including claims history and expected trends. These loss development factors are developed by us in consultation with external insurance brokers and actuaries.

     

If actual results differ from our assumptions, we could be exposed to material gains or losses.

 

A 10% change in our self-insured liabilities could affect net earnings by approximately $15.1 million.

 

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Table of Contents

 

Estimate Description        Judgment and/or Uncertainty        Potential Impact if Results Differ
       

Employee Benefit Plans

 

We provide a range of benefits including pension and postretirement benefits to our eligible employees and retirees.

     

We record annual amounts relating to these plans, which include various actuarial assumptions, such as discount rates, assumed investment rates of return, compensation increases, employee turnover rates and health care cost trend rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when it is deemed appropriate. The effect of the modifications is generally recorded and amortized over future periods.

     

Different assumptions could result in the recognition of different amounts of expense over different periods of time.

 

A 0.25% reduction in the assumed rate of return on plan assets or a 0.25% reduction in the discount rate would each result in an increase in our annual pension expense of $0.6 million.

 

A 1% increase in assumed healthcare costs trends would increase the aggregate post retirement medical obligation by approximately $3.0 million.

         

Income Taxes

 

A liability for uncertain tax positions is recorded to the extent a tax position taken or expected to be taken in a tax return does not meet certain recognition or measurement criteria. A valuation allowance is recorded against a deferred tax asset if it is not more likely than not that the asset will be realized.

 

At December 31, 2011 our liability for uncertain tax positions, including accrued interest, was $41.7 million, and our valuation allowance was $9.2 million.

     

Considerable management judgment is necessary to assess the inherent uncertainties related to the interpretations of complex tax laws, regulations and taxing authority rulings, as well as to the expiration of statutes of limitations in the jurisdictions in which we operate.

 

Additionally, several factors are considered in evaluating the realizability of our deferred tax assets, including the remaining years available for carry forward, the tax laws for the applicable jurisdictions, the future profitability of the specific business units, and tax planning strategies.

     

Our judgments and estimates concerning uncertain tax positions may change as a result of evaluation of new information, such as the outcome of tax audits or changes to or further interpretations of tax laws and regulations. Our judgments and estimates concerning realizability of deferred tax assets could change if any of the evaluation factors change.

 

If such changes take place, there is a risk that our effective tax rate could increase or decrease in any period, impacting our net earnings.

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements — In May 2011, in an effort to assist in the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update related to “Fair Value Measurements: Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.” The standard expands existing disclosure requirements for fair value measurements and makes certain other amendments, including a requirement to categorize, by level in the fair value hierarchy, items that are required to be disclosed, but not measured, at fair value. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied prospectively. We do not expect the adoption of this standard to have a material effect on our Consolidated Financial Statements.

In June 2011, the FASB issued an Accounting Standards Update related to “Presentation of Comprehensive Income.” This standard revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the previously accepted presentation options and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income, or two separate but consecutive statements. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and requires retrospective application for all periods presented in the financial statements. In December 2011, the FASB indefinitely deferred the portion of this standard that requires entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The portions of this standard that have not been deferred by the FASB will change the presentation of comprehensive income in our Consolidated Financial Statements beginning with our Quarterly Report on Form 10-Q for the period ended March 31, 2012.

In September 2011, the FASB issued an Accounting Standards Update related to “Testing Goodwill for Impairment.” The new guidance permits entities to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Unless an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. The standard is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, and early adoption is permitted. We are currently evaluating the impact this standard will have on our annual goodwill impairment testing process.

 

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Table of Contents

In September 2011, the FASB issued an Accounting Standards Update related to “Compensation – Retirement Benefits - Multiemployer Plans.” This standard requires new quantitative and qualitative disclosures for multiemployer pension and other postretirement benefit plans. The objective of the amended disclosures is to provide users with more detailed information about the plans in which we participate. We have adopted this standard as of December 31, 2011. See Note 14 to our Consolidated Financial Statements.

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk due to commodity price, interest rate and foreign currency fluctuations. From time to time we enter into arrangements with other parties to hedge our exposure to these fluctuations.

Commodity Price Fluctuations

We are exposed to commodity price fluctuations, including milk, organic and non-GMO soybeans, butterfat, sweeteners and other commodity costs used in the manufacturing, packaging and distribution of our products, including utilities, natural gas, resin and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month’s to one year’s anticipated requirements, depending on the ingredient or commodity. These contracts are considered normal purchases. In addition to entering into forward purchase contracts, from time to time we may purchase over-the-counter contracts with our qualified banking partners or exchange-traded commodity futures contracts for raw materials that are ingredients of our products or components of such ingredients.

Our open commodity derivative contracts that qualify for hedge accounting had a notional value of $34 million as of December 31, 2011. These contracts resulted in net unrealized losses of $2.6 million as of December 31, 2011. At the end of 2011, the potential change in fair value of commodity derivative instruments, assuming a 10% adverse movement in the underlying commodity price, would have resulted in an additional unrealized net loss of $2.8 million.

Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. See Note 10 of our Consolidated Financial Statements for a description of our commodity related hedges.

Interest Rate Fluctuations

To reduce the volatility of earnings and cash flows that arise from changes in interest rates, we manage interest rate risk through the use of interest rate swap agreements. These swap agreements, including our forward starting swap agreements that have an effective date of March 31, 2012, provide hedges for loans under our senior secured credit facility by limiting or fixing the LIBOR interest rates specified in the senior secured credit facility until the indicated expiration dates.

We are exposed to market risk under these arrangements due to the possibility of interest rates on our senior secured credit facility falling below the rates on our interest rate derivative agreements. We believe the credit risk under these arrangements is remote since the counterparties to our interest rate derivative agreements are major financial institutions. However, if any of the counterparties to our hedging arrangements become unable to fulfill their obligation to us, we may lose the financial benefits of these arrangements.

A majority of our debt obligations are hedged at fixed rates and the remaining debt obligations are currently at variable rates. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates. As of December 31, 2011, 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 Fluctuations

Our international operations represented approximately 11% and 3% of our long-lived assets and net sales, respectively, as of and for the year ended December 31, 2011. Sales in foreign countries, as well as certain expenses related to those sales, are transacted in currencies other than our reporting currency, the U.S. dollar. Our foreign currency exchange rate risk is primarily limited to the euro and the British pound. We may, from time to time, employ derivative financial instruments to manage our exposure to fluctuations in foreign currency rates or enter into forward currency exchange contracts to hedge our net investment and intercompany payable or receivable balances in foreign operations.

 

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Item 8. Consolidated Financial Statements

Our Consolidated Financial Statements for 2011 are included in this report on the following pages.

 

     Page

Consolidated Balance Sheets as of December 31, 2011 and 2010

   F-1

Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009

   F-2

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December  31, 2011, 2010 and 2009

   F-3

Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009

   F-5

Notes to Consolidated Financial Statements

  

1.     Summary of Significant Accounting Policies

   F-6

2.     Divestitures, Discontinued Operations and Acquisitions

   F-9

3.     Investment in Affiliates

   F-11

4.     Inventories

   F-12

5.     Property, Plant and Equipment

   F-12

6.     Goodwill and Intangible Assets

   F-13

7.     Accounts Payable and Accrued Expenses

   F-16

8.     Income Taxes

   F-16

9.     Debt

   F-19

10.   Derivative Financial Instruments and Fair Value Measurements

   F-32

11.   Common Stock and Share-Based Compensation

   F-35

12.   Earnings (Loss) per Share

   F-39

13.   Other Comprehensive Income (Loss)

   F-40

14.   Employee Retirement and Profit Sharing Plans

   F-40

15.   Postretirement Benefits Other Than Pensions

   F-48

16.   Facility Closing and Reorganization Costs

   F-50

17.   Supplemental Cash Flow Information

   F-52

18.   Commitments and Contingencies

   F-52

19.   Segment, Geographic and Customer Information

   F-55

20.   Quarterly Results of Operations (unaudited)

   F-58

Report of Independent Registered Public Accounting Firm

   F-60

 

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Table of Contents

DEAN FOODS COMPANY

CONSOLIDATED BALANCE SHEETS

 

000000000000000000 000000000000000000
     December 31  
     2011      2010  
    

(Dollars in thousands,

except share data)

 

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 114,851           $ 92,007       

Receivables, net of allowance of $10,891 and $15,347

     946,109             891,019       

Income tax receivable

     24,960             71,337       

Inventories

     452,150             425,576       

Deferred income taxes

     109,475             141,653       

Prepaid expenses and other current assets

     65,595             77,510       

Assets held for sale

     3,182             117,114       
  

 

 

    

 

 

 

Total current assets

     1,716,322             1,816,216       

Property, plant and equipment, net

     2,114,380             2,113,391       

Goodwill

     1,155,271             3,179,192       

Identifiable intangible and other assets, net

     768,390             847,868       
  

 

 

    

 

 

 

Total

   $ 5,754,363           $ 7,956,667       
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

     

Current liabilities:

     

Accounts payable and accrued expenses

   $ 1,232,165           $ 1,232,876       

Current portion of debt

     202,539             174,250       

Liabilities of disposal groups held for sale

     -             3,839       

Current portion of litigation settlements

     60,838             30,000       
  

 

 

    

 

 

 

Total current liabilities

     1,495,542             1,440,965       

Long-term debt

     3,563,389             3,893,275       

Deferred income taxes

     292,539             756,714       

Other long-term liabilities

     428,544             351,645       

Long-term litigation settlements

     73,000             -       

Commitments and contingencies (Note 18)

     

Stockholders’ equity (deficit):

     

Dean Foods Company stockholders’ equity (deficit):

     

Preferred stock, none issued

     -             -       

Common stock 183,745,789 and 182,255,334 shares issued and outstanding, with a par value of $0.01 per share

     1,837             1,823       

Additional paid-in capital

     1,086,804             1,061,253       

Retained earnings (Accumulated deficit)

     (992,519)            583,102       

Accumulated other comprehensive loss

     (199,520)            (146,653)      
  

 

 

    

 

 

 

Total Dean Foods Company stockholders’ equity (deficit)

     (103,398)            1,499,525       

Non-controlling interest

     4,747             14,543       
  

 

 

    

 

 

 

Total stockholders’ equity (deficit)

     (98,651)            1,514,068       
  

 

 

    

 

 

 

Total

   $ 5,754,363           $ 7,956,667       
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

F-1


Table of Contents

DEAN FOODS COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

 

000,000.000,000.00 000,000.000,000.00 000,000.000,000.00
     Year Ended December 31  
     2011      2010      2009  
     (Dollars in thousands, except share data)  

Net sales

   $ 13,055,493           $ 12,122,887           $ 11,113,782       

Cost of sales

     10,037,907             9,116,965             8,008,561       
  

 

 

    

 

 

    

 

 

 

Gross profit

     3,017,586             3,005,922             3,105,221       

Operating costs and expenses:

        

Selling and distribution

     1,963,748             1,904,526             1,818,833       

General and administrative

     608,868             629,656             623,835       

Amortization of intangibles

     10,539             11,295             9,637       

Facility closing and reorganization costs

     45,688             30,761             30,162       

Litigation settlements

     131,300             30,000             —       

Goodwill impairment

     2,075,836             —             —       

Other operating income

     (16,831)            —             —       
  

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

     4,819,148             2,606,238             2,482,467       
  

 

 

    

 

 

    

 

 

 

Operating income (loss)

     (1,801,562)            399,684             622,754       

Other (income) expense:

        

Interest expense

     252,951             248,301             246,510       

Other (income) expense, net

     (1,915)            161             (4,221)      
  

 

 

    

 

 

    

 

 

 

Total other expense

     251,036             248,462             242,289       
  

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

     (2,052,598)            151,222             380,465       

Income tax expense (benefit)

     (456,811)            73,482             151,845       
  

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations

     (1,595,787)            77,740             228,620       

Gain on sale of discontinued operations, net of tax

     3,616             7,521             89       

Loss from discontinued operations, net of tax

     —             (2,505)            (862)      
  

 

 

    

 

 

    

 

 

 

Net income (loss)

     (1,592,171)            82,756             227,847       

Net loss attributable to non-controlling interest

     16,550             8,735             12,461       
  

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Dean Foods Company

   $ (1,575,621)          $ 91,491           $ 240,308       
  

 

 

    

 

 

    

 

 

 

Average common shares:

        

Basic

     183,388,220             181,799,306             170,986,886       

Diluted

     183,388,220             182,861,802             173,858,303       

Basic earnings (loss) per common share:

        

Income (loss) from continuing operations attributable to Dean Foods Company

   $ (8.61)          $ 0.48           $ 1.41       

Income from discontinued operations attributable to Dean Foods Company

     0.02             0.02             —       
  

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Dean Foods Company

   $ (8.59)          $ 0.50           $ 1.41       
  

 

 

    

 

 

    

 

 

 

Diluted earnings (loss) per common share:

        

Income (loss) from continuing operations attributable to Dean Foods Company

   $ (8.61)          $ 0.47           $ 1.39       

Income (loss) from discontinued operations attributable to Dean Foods Company

     0.02             0.03             (0.01)      
  

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Dean Foods Company

   $ (8.59)          $ 0.50           $ 1.38       
  

 

 

    

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

F-2


Table of Contents

DEAN FOODS COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

    Dean Foods Company Stockholders     Non-
controlling
Interest
    Total
Stockholders’
Equity (Deficit)
    Comprehensive
Income (Loss)
 
    Common Stock     Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Accumulated
Other
Comprehensive
Income (Loss)
       
    Shares     Amount              
    (Dollars in thousands, except share data)  

Balance, January 1, 2009

    154,036,798        $ 1,540        $ 532,420        $ 251,303        $ (227,029 )       $ —        $ 558,234       

Issuance of common stock, net of tax impact of share-based compensation

    1,412,365          15          9,292          —          —          —          9,307       

Share-based compensation expense

    —          —          39,371          —          —          —          39,371       

Public offering of equity securities

    25,405,000          254          444,419          —          —          —          444,673       

Fair value of non-controlling interest acquired

    —          —          —          —          —          14,499          14,499       

Capital contribution from non-controlling interest

    —          —          —          —          —          13,248          13,248       

Net loss attributable to non-controlling interest

    —          —          —          —          —          (12,461)           (12,461)        

Other comprehensive income (loss) (Note 13)

               

Net income attributable to Dean Foods Company

    —          —          —          240,308          —          —          240,308        $ 240,308     

Change in fair value of derivative instruments, net of tax benefit of $13,387

    —          —          —          —          (22,417)           —          (22,417)           (22,417)      

Amounts reclassified to statement of operations related to hedging activities, net of tax of $42,466

    —          —          —          —          70,772          —          70,772          70,772     

Cumulative translation adjustment

    —          —          —          —          2,509          —          2,509          2,509     

Pension liability adjustment, net of tax of $3,260

    —         —          —          —          9,189          —          9,189          9,189     
               

 

 

 

Comprehensive income attributable to Dean Foods Company

                $ 300,361     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2009

    180,854,163        $ 1,809        $ 1,025,502        $ 491,611        $ (166,976)         $ 15,286        $ 1,367,232       

Issuance of common stock, net of tax impact of share-based compensation

    1,401,171          14          (1,121)           —         —         —         (1,107)        

Share-based compensation expense

    —          —          36,872          —         —         —         36,872       

Capital contribution from non-controlling interest

    —          —          —          —         —         7,992          7,992       

Net loss attributable to non-controlling interest

    —          —          —          —         —         (8,735)           (8,735)        

Other comprehensive income (loss) (Note 13)

               

Net income attributable to Dean Foods Company

    —          —          —          91,491          —          —          91,491        $ 91,491     

Change in fair value of derivative instruments, net of tax benefit of $12,491

    —          —          —          —          (17,360)           —          (17,360)           (17,360)      

Amounts reclassified to statement of operations related to hedging activities, net of tax of $37,180

    —          —          —          —          59,393          —          59,393          59,393     

 

 

F-3


Table of Contents

 

     Dean Foods Company Stockholders      Non-
controlling
Interest
     Total
Stockholders’
Equity (Deficit)
     Comprehensive
Income (Loss)
 
     Common Stock      Additional
Paid-In
Capital
     Retained
Earnings
(Accumulated
Deficit)
     Accumulated
Other
Comprehensive
Income (Loss)
          
     Shares      Amount                    
     (Dollars in thousands, except share data)  

Cumulative translation adjustment

     —           —           —           —           (20,707)            —           (20,707)            (20,707)      

Pension liability adjustment, net of tax benefit of $525

     —          —           —           —           (1,003)            —           (1,003)            (1,003)      
                       

 

 

 

Comprehensive income attributable to Dean Foods Company

                        $ 111,814     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31, 2010

     182,255,334         $ 1,823         $ 1,061,253         $ 583,102         $ (146,653)          $ 14,543         $ 1,514,068        

Issuance of common stock, net of tax impact of share-based compensation

     1,490,455           14           (5,857)            —           —           —           (5,843)         

Share-based compensation expense

     —           —           31,408           —           —           —           31,408        

Capital Contribution from non-controlling interest

     —           —           —           —           —           6,754           6,754        

Net loss attributable to non-controlling interest

     —           —           —           —           —           (16,550)            (16,550)         

Other comprehensive income (loss) (Note 13)

                       

Net loss attributable to Dean Foods Company

     —           —           —           (1,575,621)            —           —           (1,575,621)          $ (1,575,621)      

Change in fair value of derivative instruments, net of tax benefit of $38,527

     —           —           —           —           (58,797)            —           (58,797)            (58,797)      

Amounts reclassified to statement of operations related to hedging activities, net of tax of $23,156

     —           —           —           —           35,235           —           35,235           35,235     

Cumulative translation adjustment

     —           —           —           —           (12,738)            —           (12,738)            (12,738)      

Pension liability adjustment, net of tax benefit of $10,694

     —           —           —           —           (16,567)            —           (16,567)            (16,567)      
                       

 

 

 

Comprehensive loss attributable to Dean Foods Company

                        $ (1,628,488)      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, December 31, 2011

     183,745,789         $ 1,837         $ 1,086,804         $ (992,519)          $ (199,520)          $ 4,747         $ (98,651)         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

See Notes to Consolidated Financial Statements.

 

F-4


Table of Contents

DEAN FOODS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31  
     2011      2010      2009  
     (In thousands)  

Cash flows from operating activities:

     

Net income (loss)

   $ (1,592,171)           $ 82,756             $ 227,847     

Loss from discontinued operations

     —             2,505               862     

Gain on sale of discontinued operations

     (3,616)             (7,521)               (89)     

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

     

Depreciation and amortization

     285,767             276,080               253,930     

Share-based compensation expense

     36,632             36,872               39,371     

Loss on divestitures and other, net

     8,163             19,813               29,453     

Write-off of financing costs

     —             3,695               —    

Goodwill impairment

     2,075,836             —               —    

Deferred income taxes

     (471,176)             121,043               40,352     

Other

     1,435             (1,379)               (1,337)     

Changes in operating assets and liabilities, net of acquisitions:

     

Receivables, net

     (63,669)             (25,659)               57,577     

Inventories

     (32,195)             4,020               (8,389)     

Prepaid expenses and other assets

     10,922             5,764               5,393     

Accounts payable and accrued expenses

     45,848             32,931               59,148     

Income taxes receivable/payable

     42,902             (55,220)               (46,039)     

Litigation settlements

     103,838             30,000               —     
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities—continuing operations

     448,516             525,700               658,079     

Net cash provided by operating activities—discontinued operations

     774             8,765               2,475     
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     449,290