e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
(Mark One)
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|
þ
|
|
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 2006 |
or |
|
o
|
|
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For the Transition Period
from to |
Commission File Number 001-12755 |
Dean Foods Company
(Exact name of the registrant as specified in its charter)
|
|
|
Delaware |
|
75-2559681 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. employer
identification no.) |
2515 McKinney Avenue, Suite 1200
Dallas, Texas 75201
(214) 303-3400
(Address, including zip code, and telephone number, including
area code, of the registrants principal executive offices)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act (Check one):
Large accelerated
filer þ; Accelerated
filer o; Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange Act.) Yes o No
þ
As of November 3, 2006, the number of shares outstanding of
each class of common stock was: 133,757,511
Common Stock, par value $.01
Table of Contents
-2-
Part I Financial Information
|
|
Item 1. |
Financial Statements |
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(unaudited) | |
Assets |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
43,070 |
|
|
$ |
24,456 |
|
|
Receivables, net
|
|
|
757,272 |
|
|
|
818,431 |
|
|
Inventories
|
|
|
375,413 |
|
|
|
355,004 |
|
|
Deferred income taxes
|
|
|
116,657 |
|
|
|
137,776 |
|
|
Prepaid expenses and other current assets
|
|
|
72,564 |
|
|
|
65,526 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,364,976 |
|
|
|
1,401,193 |
|
Property, plant and equipment, net
|
|
|
1,792,145 |
|
|
|
1,776,801 |
|
Goodwill
|
|
|
2,934,999 |
|
|
|
2,922,940 |
|
Identifiable intangible and other assets
|
|
|
653,501 |
|
|
|
648,223 |
|
Assets of discontinued operations
|
|
|
17,587 |
|
|
|
301,727 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,763,208 |
|
|
$ |
7,050,884 |
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$ |
835,753 |
|
|
$ |
926,067 |
|
|
Income taxes payable
|
|
|
29,055 |
|
|
|
34,541 |
|
|
Current portion of long-term debt
|
|
|
484,968 |
|
|
|
65,326 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,349,776 |
|
|
|
1,025,934 |
|
Long-term debt
|
|
|
2,691,405 |
|
|
|
3,321,522 |
|
Deferred income taxes
|
|
|
490,961 |
|
|
|
449,707 |
|
Other long-term liabilities
|
|
|
228,599 |
|
|
|
225,479 |
|
Liabilities of discontinued operations
|
|
|
6,490 |
|
|
|
126,029 |
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, none issued
|
|
|
|
|
|
|
|
|
|
Common stock, 134,442,436 and 134,209,190 shares issued and
outstanding, with a par value of $0.01 per share
|
|
|
1,344 |
|
|
|
1,342 |
|
|
Additional paid-in capital
|
|
|
874,924 |
|
|
|
922,791 |
|
|
Retained earnings
|
|
|
1,156,466 |
|
|
|
1,004,013 |
|
|
Accumulated other comprehensive loss
|
|
|
(36,757 |
) |
|
|
(25,933 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,995,977 |
|
|
|
1,902,213 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,763,208 |
|
|
$ |
7,050,884 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
-3-
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30 | |
|
September 30 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
Net sales
|
|
$ |
2,517,792 |
|
|
$ |
2,569,405 |
|
|
$ |
7,504,717 |
|
|
$ |
7,559,106 |
|
Cost of sales
|
|
|
1,823,786 |
|
|
|
1,918,356 |
|
|
|
5,475,518 |
|
|
|
5,649,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
694,006 |
|
|
|
651,049 |
|
|
|
2,029,199 |
|
|
|
1,909,507 |
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution
|
|
|
416,835 |
|
|
|
399,180 |
|
|
|
1,231,341 |
|
|
|
1,173,493 |
|
|
General and administrative
|
|
|
101,414 |
|
|
|
94,458 |
|
|
|
302,434 |
|
|
|
283,398 |
|
|
Amortization of intangibles
|
|
|
1,540 |
|
|
|
1,444 |
|
|
|
4,469 |
|
|
|
4,595 |
|
|
Facility closing and reorganization costs
|
|
|
5,471 |
|
|
|
17,993 |
|
|
|
12,823 |
|
|
|
26,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
525,260 |
|
|
|
513,075 |
|
|
|
1,551,067 |
|
|
|
1,488,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
168,746 |
|
|
|
137,974 |
|
|
|
478,132 |
|
|
|
421,200 |
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
48,031 |
|
|
|
37,837 |
|
|
|
144,335 |
|
|
|
115,681 |
|
|
Other (income), net
|
|
|
(60 |
) |
|
|
(173 |
) |
|
|
(46 |
) |
|
|
(455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
47,971 |
|
|
|
37,664 |
|
|
|
144,289 |
|
|
|
115,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
120,775 |
|
|
|
100,310 |
|
|
|
333,843 |
|
|
|
305,974 |
|
Income taxes
|
|
|
46,277 |
|
|
|
38,129 |
|
|
|
129,856 |
|
|
|
119,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
74,498 |
|
|
|
62,181 |
|
|
|
203,987 |
|
|
|
186,899 |
|
Gain (loss) on sale of discontinued operations, net of tax
|
|
|
90 |
|
|
|
37,766 |
|
|
|
(136 |
) |
|
|
37,690 |
|
Income (loss) from discontinued operations, net of tax
|
|
|
(3,795 |
) |
|
|
(563 |
) |
|
|
(51,398 |
) |
|
|
17,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
70,793 |
|
|
$ |
99,384 |
|
|
$ |
152,453 |
|
|
$ |
242,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
133,739,115 |
|
|
|
148,098,362 |
|
|
|
134,643,557 |
|
|
|
149,578,334 |
|
|
Diluted
|
|
|
139,159,658 |
|
|
|
155,536,494 |
|
|
|
140,500,663 |
|
|
|
156,137,091 |
|
Basic earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.56 |
|
|
$ |
0.42 |
|
|
$ |
1.51 |
|
|
$ |
1.25 |
|
|
Income (loss) from discontinued operations
|
|
|
(0.03 |
) |
|
|
0.25 |
|
|
|
(0.38 |
) |
|
|
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.53 |
|
|
$ |
0.67 |
|
|
$ |
1.13 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.54 |
|
|
$ |
0.40 |
|
|
$ |
1.45 |
|
|
$ |
1.20 |
|
|
Income (loss) from discontinued operations
|
|
|
(0.03 |
) |
|
|
0.24 |
|
|
|
(0.36 |
) |
|
|
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.51 |
|
|
$ |
0.64 |
|
|
$ |
1.09 |
|
|
$ |
1.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
-4-
DEAN FOODS COMPANY
CONDENSED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
Comprehensive | |
|
Total | |
|
|
| |
|
Paid-In | |
|
Retained | |
|
Income | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
(Loss) | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(unaudited) | |
Balance, December 31, 2005
|
|
|
134,209,190 |
|
|
$ |
1,342 |
|
|
$ |
922,791 |
|
|
$ |
1,004,013 |
|
|
$ |
(25,933 |
) |
|
$ |
1,902,213 |
|
|
Issuance of common stock
|
|
|
3,970,446 |
|
|
|
39 |
|
|
|
59,221 |
|
|
|
|
|
|
|
|
|
|
|
59,260 |
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
28,554 |
|
|
|
|
|
|
|
|
|
|
|
28,554 |
|
|
Purchase and retirement of treasury stock
|
|
|
(3,737,200 |
) |
|
|
(37 |
) |
|
|
(135,642 |
) |
|
|
|
|
|
|
|
|
|
|
(135,679 |
) |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,453 |
|
|
|
|
|
|
|
152,453 |
|
|
Other comprehensive income (Note 8):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,160 |
|
|
|
7,160 |
|
|
|
Amounts reclassified to income statement related to hedging
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,575 |
) |
|
|
(5,575 |
) |
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,409 |
) |
|
|
(12,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006
|
|
|
134,442,436 |
|
|
$ |
1,344 |
|
|
$ |
874,924 |
|
|
$ |
1,156,466 |
|
|
$ |
(36,757 |
) |
|
$ |
1,995,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
-5-
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
September 30 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
152,453 |
|
|
$ |
242,479 |
|
|
Loss (income) from discontinued operations
|
|
|
51,398 |
|
|
|
(17,890 |
) |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
169,029 |
|
|
|
159,929 |
|
|
|
Share-based compensation expense
|
|
|
28,554 |
|
|
|
32,280 |
|
|
|
Loss on disposition of assets
|
|
|
1,904 |
|
|
|
874 |
|
|
|
Loss (gain) on sale of discontinued operations
|
|
|
136 |
|
|
|
(37,690 |
) |
|
|
Write-down of impaired assets
|
|
|
4,034 |
|
|
|
9,051 |
|
|
|
Deferred income taxes
|
|
|
61,802 |
|
|
|
43,569 |
|
|
|
Other
|
|
|
949 |
|
|
|
(2,383 |
) |
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
65,095 |
|
|
|
(733 |
) |
|
|
Inventories
|
|
|
(19,838 |
) |
|
|
(12,725 |
) |
|
|
Prepaid expenses and other assets
|
|
|
9,356 |
|
|
|
29,935 |
|
|
|
Accounts payable and accrued expenses
|
|
|
(102,232 |
) |
|
|
30,972 |
|
|
|
Income taxes payable
|
|
|
4,312 |
|
|
|
(9,444 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
426,952 |
|
|
|
468,224 |
|
|
|
|
Net cash provided by (used in) discontinued operations
|
|
|
(900 |
) |
|
|
7,552 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
426,052 |
|
|
|
475,776 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(174,913 |
) |
|
|
(206,035 |
) |
|
Cash outflows for acquisitions and investments
|
|
|
(16,819 |
) |
|
|
(361 |
) |
|
Net proceeds from divestitures
|
|
|
96,280 |
|
|
|
189,862 |
|
|
Proceeds from sale of fixed assets
|
|
|
5,619 |
|
|
|
7,021 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(89,833 |
) |
|
|
(9,513 |
) |
|
|
|
Net cash used in discontinued operations
|
|
|
(14,696 |
) |
|
|
(22,636 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(104,529 |
) |
|
|
(32,149 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
498,020 |
|
|
|
9,100 |
|
|
Repayment of debt
|
|
|
(729,381 |
) |
|
|
(196,301 |
) |
|
Payment of deferred financing costs
|
|
|
(6,889 |
) |
|
|
(3,281 |
) |
|
Issuance of common stock
|
|
|
28,049 |
|
|
|
46,051 |
|
|
Tax savings on share-based compensation
|
|
|
31,211 |
|
|
|
16,895 |
|
|
Redemption of common stock
|
|
|
(135,679 |
) |
|
|
(345,087 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(314,669 |
) |
|
|
(472,623 |
) |
|
|
|
Net cash provided by discontinued operations
|
|
|
11,760 |
|
|
|
33,321 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(302,909 |
) |
|
|
(439,302 |
) |
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
18,614 |
|
|
|
4,325 |
|
Cash and cash equivalents, beginning of period
|
|
|
24,456 |
|
|
|
25,357 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
43,070 |
|
|
$ |
29,682 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
-6-
DEAN FOODS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
Basis of Presentation The unaudited Condensed
Consolidated Financial Statements contained in this Quarterly
Report have been prepared on the same basis as the Consolidated
Financial Statements in our Annual Report on
Form 10-K for the
year ended December 31, 2005. In our opinion, we have made
all necessary adjustments (which include only normal recurring
adjustments) in order to present fairly, in all material
respects, our consolidated financial position, results of
operations and cash flows as of the dates and for the periods
presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been omitted. Our results of operations for the
period ended September 30, 2006 may not be indicative of
our operating results for the full year. The Condensed
Consolidated Financial Statements contained in this Quarterly
Report should be read in conjunction with our 2005 Consolidated
Financial Statements contained in our Annual Report on
Form 10-K (filed
with the Securities and Exchange Commission on March 10,
2006).
Certain reclassifications have been made to conform the prior
years Condensed Consolidated Financial Statements to the
current years classifications. During the nine months
ended September 30, 2006, we reclassified the presentation
of expense recognition for reusable packaging utilized in the
distribution of our products from cost of sales to distribution
expense. The reclassification reduced cost of sales and
increased distribution expense by $11.1 million and
$29.9 million for the three and nine months ended
September 30, 2005, respectively. The reclassification had
no impact on net income.
On September 14, 2006, we completed the sale of our
operations based in Spain. The sale of our remaining Iberian
operations is subject to the completion of Portuguese regulatory
proceedings. Our Condensed Consolidated Financial Statements for
the three-month and nine-month periods ended September 30,
2006 and 2005 have been reclassified to give effect to the
Iberian operations as discontinued operations.
On June 27, 2005, we completed the spin-off
(Spin-off) of our indirect majority-owned subsidiary
TreeHouse Foods, Inc. (TreeHouse). Immediately prior
to the Spin-off, we transferred to TreeHouse (1) all of the
businesses previously conducted by our Specialty Foods Group
segment, (2) the Mocha
Mix®
non-dairy coffee creamer and Second
Nature®
liquid egg substitute businesses previously conducted by
WhiteWave Foods Company, and (3) the foodservice salad
dressings businesses, previously conducted by the Dairy Group
and WhiteWave Foods Company. In August 2005, we completed the
sale of our
Maries®
dips and dressings and
Deans®
dips businesses to Ventura Foods. Our Condensed Consolidated
Financial Statements for the three-month and nine-month periods
ended September 30, 2005 have been reclassified to give
effect to the businesses transferred to TreeHouse and the
Maries dips and dressings and Deans
dips businesses as discontinued operations.
Unless otherwise indicated, references in this report to
we, us or our refer to Dean
Foods Company and its subsidiaries, taken as a whole.
Shipping and Handling Fees Our shipping and
handling costs are included in both cost of sales and selling
and distribution expense, depending on the nature of such costs.
Shipping and handling costs included in cost of sales reflect
inventory warehouse costs, product loading and handling costs.
Our Dairy Group includes costs associated with transporting
finished products from our manufacturing facilities to our own
distribution warehouses within cost of sales while WhiteWave
Foods Company includes these costs in selling and distribution
expense. Shipping and handling costs included in selling and
distribution expense consist primarily of route delivery costs
for both company-owned delivery routes and independent
distributor routes, to the extent that such independent
distributors are paid a delivery fee, and the cost of
-7-
shipping products to customers through third party carriers.
Shipping and handling costs recorded as a component of selling
and distribution expense were approximately $325.8 million
and $311.3 million in the third quarter of 2006 and 2005,
respectively, and $951.5 million and $900.7 million
during the first nine months of 2006 and 2005, respectively.
Recently Adopted Accounting Pronouncements
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment. Among its
provisions, SFAS No. 123(R) requires the Company to
recognize compensation expense for equity awards over the
vesting period based on their grant-date fair value. Prior to
the adoption of SFAS No. 123(R), we utilized the
intrinsic-value based method of accounting under APB Opinion
No. 25, Accounting for Stock Issued to
Employees and related interpretations, and adopted the
disclosure requirements of SFAS No. 123,
Accounting for Stock-Based Compensation. Under the
intrinsic-value based method of accounting, compensation expense
for stock options granted to the Companys employees and
directors was measured as the excess of the quoted market price
of common stock at the grant date over the amount the recipient
must pay for the stock. The Companys policy is to grant
stock options at fair value on the date of grant and as a result
no compensation expense was historically recognized for stock
options. As our restricted stock units do not require the
recipients to pay for the stock, we have historically recognized
compensation expense for the fair value at the date of grant
over the vesting period. The fair value for the restricted stock
unit grants is equal to the closing price of our stock on the
date immediately prior to the date of grant.
Compensation expense is recognized only for share-based payments
expected to vest. We estimate forfeitures at the date of grant
based on the Companys historical experience and future
expectations. Prior to the adoption of
SFAS No. 123(R), the effect of forfeitures on the pro
forma expense was recognized based on estimated forfeitures.
In order to enhance comparability among all periods presented,
we elected to adopt SFAS No. 123(R) using the modified
retrospective approach. Under this transition method, the
results for prior periods reflect the recognition of the
compensation expense and related income tax benefit historically
disclosed in our financial statements. As a result of adopting
SFAS No. 123(R), our income before taxes, net income,
basic earnings per share and diluted earnings per share were
lower than if we had continued to account for share-based
compensation under APB Opinion No. 25 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2005 |
|
September 30, 2005 |
|
|
|
|
|
|
|
(In thousands, except share data) |
Decrease in:
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$ |
5,797 |
|
|
$ |
18,701 |
|
|
Net income
|
|
|
4,491 |
|
|
|
14,241 |
|
|
|
Basic EPS
|
|
$ |
0.03 |
|
|
$ |
0.10 |
|
|
Diluted EPS
|
|
|
0.03 |
|
|
|
0.09 |
|
For financial reporting purposes, share-based compensation
expense is included within the same financial statement caption
where the recipients cash compensation is reported, and is
classified as a corporate item for business segment reporting.
See Note 6 for information regarding our share-based
compensation programs.
Effective January 1, 2006, we adopted
SFAS No. 151, Inventory Costs an
Amendment of ARB No. 43, Chapter 4. This
statement clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material,
requiring that those items be recognized as current-period
charges. In addition, SFAS No. 151 requires that
allocation of fixed production overheads be based on the normal
capacity of the production facilities. The adoption of this
statement did not have a material impact on our Consolidated
Financial Statements.
-8-
Effective January 1, 2006, we adopted
SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29.
SFAS No. 153 eliminates the rule in APB No. 29
which excluded from fair value measurement exchanges of similar
productive assets. Instead, SFAS No. 153 excludes from
fair value measurement exchanges of nonmonetary assets that do
not have commercial substance. The adoption of this statement
did not have a material impact on our Consolidated Financial
Statements.
Recently Issued Accounting Pronouncements The
Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes in June
2006. This interpretation clarifies the accounting for income
taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for
Income Taxes. This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. We are currently evaluating the
impact of FIN No. 48 on our Consolidated Financial
Statements. This interpretation will become effective for us in
the first quarter of 2007.
The FASB issued SFAS No. 157, Fair Value
Measurements in September 2006. SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value
measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value
measurements but does not require any new fair value
measurements. We do not believe the adoption of this standard
will have a material impact on our Consolidated Financial
Statements. This standard will become effective for us in the
first quarter of 2008.
The FASB issued SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans an Amendment of FASB Statements No. 87,
88, 106, and 132(R) in September 2006.
SFAS No. 158 requires an employer to recognize the
overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income.
SFAS No. 158 also requires an employer to measure the
funded status of a plan as of the date of its year-end statement
of financial position. We are currently evaluating the impact of
SFAS No. 158 on our Consolidated Financial Statements.
This standard will become effective for us in the fourth quarter
of 2006.
|
|
2. |
Discontinued Operations |
Our financial statements have been reclassified to give effect
to the following businesses as discontinued operations.
Iberian Operations During the second quarter
of 2006, we committed to a plan to sell our Iberian operations.
These operations manufacture, market and sell private label and
branded milk in Spain and Portugal. The decision to sell such
operations is part of our strategy to focus on our core dairy
and branded businesses. In the second quarter of 2006, we
recognized an estimated non-cash impairment charge of
$46.4 million, net of an income tax benefit of
$8.1 million, representing our best estimate as of
June 30, 2006 of the impairment required based on our
expected proceeds upon sale of the Iberian operations.
On September 14, 2006, we completed the sale of our
operations in Spain for cash proceeds of approximately
$96.3 million. In addition to customary indemnifications of
the purchaser of the business, we have retained contingent
obligations related to regulatory compliance, including an
obligation to pay the purchaser a maximum of 15 million
euros (approximately $19.1 million as of September 30,
2006) if certain regulatory approvals are not received with
respect to a specific facility. Primarily as a result of such
retained obligations and indemnifications, an incremental loss
on the sale of our operations in Spain of $2.4 million (net
of tax) was recognized during the quarter ended
September 30, 2006.
In connection with the sale of our operations in Spain, we
entered into an agreement to sell our Portuguese operations
(which comprise the remainder of our Iberian operations) for
approximately
-9-
$11.4 million subject to regulatory approvals. Other than
transaction related costs, no incremental loss is expected on
the sale of our remaining Iberian operations.
Sale of Maries Dips and Dressings and Deans
Dips On August 22, 2005, we completed the
sale of tangible and intangible assets related to the production
and distribution of Maries dips and dressings and
Deans dips to Ventura Foods. We also agreed to
license the Dean trademark to Ventura Foods for use on certain
non-dairy dips. Our net proceeds were approximately
$189.9 million. The sale of these brands is part of our
strategy to focus on our core dairy and branded businesses.
Spin-off of TreeHouse On January 25,
2005, we formed TreeHouse. At that time, TreeHouse sold shares
of common stock to certain members of a newly retained
management team, who purchased approximately 1.67% of the
outstanding common stock of TreeHouse, for an aggregate purchase
price of $10 million.
On June 27, 2005, we completed the Spin-off. Immediately
prior to the Spin-off we transferred to TreeHouse (1) all
of the businesses previously conducted by our Specialty Foods
Group segment, (2) the Mocha Mix non-dairy coffee
creamer and Second Nature liquid egg substitute
businesses previously conducted by WhiteWave Foods Company, and
(3) the foodservice salad dressings businesses previously
conducted by the Dairy Group and WhiteWave Foods Company. The
Spin-off was effected by means of a share dividend of the
TreeHouse common stock held by us to our stockholders of record
on June 20, 2005 (the Record Date). In the
distribution, our stockholders received one share of TreeHouse
common stock for every five shares of our common stock held by
them on the Record Date.
Prior to the Spin-off, we entered into certain agreements with
TreeHouse to define our ongoing relationship. These arrangements
include agreements that define our respective responsibilities
for taxes, employee matters and all other liabilities and
obligations related to the transferred businesses. Following the
Spin-off, we have no ownership interest in TreeHouse. We
transferred the obligation for pension and other postretirement
benefit plans of transferred employees and retirees to
TreeHouse. In 2005, we transferred a portion of the related plan
assets. In 2006, we transferred the remaining plan assets
related to such obligations.
Other Included in the quarter ended
September 30, 2006 is a $2.5 million gain from the
favorable resolution of contingencies related to prior
discontinued operations.
Net sales and income before taxes generated by discontinued
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30(1) | |
|
September 30(1) | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net sales
|
|
$ |
59,886 |
|
|
$ |
86,301 |
|
|
$ |
223,088 |
|
|
$ |
646,692 |
|
Income (loss) before taxes(2)
|
|
|
(2,040 |
) |
|
|
365 |
|
|
|
(51,978 |
) |
|
|
32,990 |
|
|
|
(1) |
All intercompany sales and expenses have been appropriately
eliminated in the table. |
|
(2) |
Interest expense of $1.3 million and $4.7 million in
the three and nine month periods ended September 30, 2006,
respectively, was allocated to our Iberian discontinued
operations based on the net assets of our discontinued
operations relative to our total net assets. Interest expense of
$2.3 million and $7.6 million in the three and nine
month periods ended September 30, 2005, respectively, was
allocated to our Iberian operations and Maries dips
and dressings and Deans dips discontinued
operations based on the net assets of our discontinued
operations relative to our total net assets. |
-10-
Major classes of assets and liabilities of our Iberian
operations included in Assets and Liabilities of Discontinued
Operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
(In thousands) |
Current assets
|
|
$ |
12,321 |
|
|
$ |
75,774 |
|
Non-current assets
|
|
|
5,266 |
|
|
|
225,953 |
|
Current liabilities
|
|
|
5,337 |
|
|
|
111,397 |
|
Non-current liabilities
|
|
|
1,153 |
|
|
|
14,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
(In thousands) |
Raw materials and supplies
|
|
$ |
177,922 |
|
|
$ |
151,442 |
|
Finished goods
|
|
|
197,491 |
|
|
|
203,562 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
375,413 |
|
|
$ |
355,004 |
|
|
|
|
|
|
|
|
|
|
Changes in the carrying amount of goodwill for the nine months
ended September 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WhiteWave | |
|
|
|
|
|
|
Foods | |
|
|
|
|
Dairy Group | |
|
Company | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at December 31, 2005
|
|
$ |
2,400,843 |
|
|
$ |
522,097 |
|
|
$ |
2,922,940 |
|
Acquisitions
|
|
|
11,803 |
|
|
|
|
|
|
|
11,803 |
|
Purchase accounting adjustments
|
|
|
355 |
|
|
|
(99 |
) |
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$ |
2,413,001 |
|
|
$ |
521,998 |
|
|
$ |
2,934,999 |
|
|
|
|
|
|
|
|
|
|
|
The gross carrying amount and accumulated amortization of our
intangible assets other than goodwill as of September 30,
2006 and December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Net | |
|
Gross | |
|
|
|
Net | |
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$ |
511,867 |
|
|
$ |
(5,877 |
) |
|
$ |
505,990 |
|
|
$ |
511,662 |
|
|
$ |
(5,877 |
) |
|
$ |
505,785 |
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
|
|
87,621 |
|
|
|
(26,414 |
) |
|
|
61,207 |
|
|
|
86,525 |
|
|
|
(21,358 |
) |
|
|
65,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
599,488 |
|
|
$ |
(32,291 |
) |
|
$ |
567,197 |
|
|
$ |
598,187 |
|
|
$ |
(27,235 |
) |
|
$ |
570,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on intangible assets for the three months
ended September 30, 2006 and 2005 was $1.9 million and
$1.8 million, respectively. Amortization expense on
intangible assets for the nine months ended September 30,
2006 and 2005 was $5.7 million and $5.3 million,
respectively.
-11-
Estimated aggregate intangible asset amortization expense for
the next five years is as follows:
|
|
|
|
|
2007
|
|
$ |
7.5 million |
|
2008
|
|
|
7.4 million |
|
2009
|
|
|
7.1 million |
|
2010
|
|
|
6.9 million |
|
2011
|
|
|
5.1 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
Amount | |
|
Interest | |
|
Amount | |
|
Interest | |
|
|
Outstanding | |
|
Rate | |
|
Outstanding | |
|
Rate | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Dean Foods debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility
|
|
$ |
1,612,700 |
|
|
|
5.99 |
% |
|
$ |
2,258,600 |
|
|
|
5.16 |
% |
|
Senior notes
|
|
|
498,077 |
|
|
|
7.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,110,777 |
|
|
|
|
|
|
|
2,258,600 |
|
|
|
|
|
Subsidiary debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes
|
|
|
571,114 |
|
|
|
6.625-8.15 |
|
|
|
568,493 |
|
|
|
6.625-8.15 |
|
|
Receivables-backed facility
|
|
|
481,200 |
|
|
|
5.68 |
|
|
|
548,400 |
|
|
|
4.60 |
|
|
Capital lease obligations and other
|
|
|
13,282 |
|
|
|
|
|
|
|
11,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,065,596 |
|
|
|
|
|
|
|
1,128,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,176,373 |
|
|
|
|
|
|
|
3,386,848 |
|
|
|
|
|
|
|
Less current portion
|
|
|
(484,968 |
) |
|
|
|
|
|
|
(65,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,691,405 |
|
|
|
|
|
|
$ |
3,321,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility Our senior credit
facility provides for a $1.5 billion revolving credit
facility and a $1.5 billion term loan. At
September 30, 2006, there were outstanding term loan
borrowings of $1.5 billion under the senior credit
facility, and $112.7 million outstanding under the
revolving credit facility. Letters of credit in the aggregate
amount of $136.9 million were issued but undrawn. At
September 30, 2006, approximately $1.25 billion was
available for future borrowings under the revolving credit
facility, subject to satisfaction of certain ordinary course
conditions contained in the credit agreement.
Both the revolving credit facility and term loan bear interest,
at our election, at the base rate plus a margin that varies from
zero to 25 basis points depending on our credit ratings (as
issued by Standard & Poors and Moodys), or
LIBOR plus a margin that varies from 50 to 150 basis
points, depending on our credit ratings (as issued by
Standard & Poors and Moodys). The blended
interest rate in effect on borrowings under the senior credit
facility, including the applicable interest rate margin, was
5.99% at September 30, 2006. However, we had interest rate
swap agreements in place that hedged $1.5 billion of our
borrowings under the senior credit facility at an average rate
of 4.55%, plus the applicable interest rate margin. Interest is
payable quarterly or at the end of the applicable interest
period.
Principal payments are required on the term loan as follows:
|
|
|
|
|
$56.3 million quarterly beginning on December 31, 2006
through September 30, 2008; |
|
|
|
$262.5 million quarterly beginning on December 31,
2008 through June 30, 2009; and |
|
|
|
A final payment of $262.5 million on the maturity date of
August 13, 2009. |
No principal payments are due on the $1.5 billion revolving
credit facility until maturity on August 13, 2009.
-12-
The credit agreement also requires mandatory principal
prepayments upon the occurrence of certain asset dispositions or
recovery events.
In consideration for the revolving commitment, we pay a
quarterly commitment fee on unused amounts of the revolving
credit facility that ranges from 12.5 to 30 basis points,
depending on our credit ratings (as issued by
Standard & Poors and Moodys).
The senior credit facility contains various financial and other
restrictive covenants and requires that we maintain certain
financial ratios, including a maximum leverage and minimum
interest coverage ratio. We are currently in compliance with all
covenants contained in our credit agreement.
Our credit agreement permits us to complete acquisitions that
meet the following conditions without obtaining prior approval:
(1) the acquired company is involved in the manufacture,
processing and distribution of food or packaging products or any
other line of business in which we are currently engaged,
(2) the net cash purchase price for any single acquisition
is not greater than $500 million, (3) we acquire at
least 51% of the acquired entity, (4) the transaction is
approved by the Board of Directors or shareholders, as
appropriate, of the target and (5) after giving effect to
such acquisition on a pro-forma basis, we are in compliance with
all financial covenants. All other acquisitions must be approved
in advance by the required lenders.
The senior credit facility also contains limitations on liens,
investments and the incurrence of additional indebtedness, and
prohibits certain dispositions of property and restricts certain
payments, including dividends. The senior credit facility is
secured by liens on substantially all of our domestic assets
including the assets of our subsidiaries, but excluding the
capital stock of the former Dean Foods Companys
(Legacy Deans) subsidiaries, and the real
property owned by Legacy Dean and its subsidiaries.
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 default
triggers based on our credit rating.
Dean Foods Senior Notes On May 17, 2006,
we issued $500 million aggregate principal amount of
7.0% senior unsecured notes. The senior unsecured notes
mature on June 1, 2016 and interest is payable on
June 1 and December 1 of each year, beginning
December 1, 2006. The outstanding balance at
September 30, 2006 was $498.1 million.
The indenture under which we issued the senior unsecured notes
does not contain financial covenants but does contain covenants
that, among other things, limit our ability to incur secured
indebtedness, enter into sale-leaseback transactions and engage
in mergers, consolidations and sales of all or substantially all
of our assets.
The notes are senior unsecured obligations and are effectively
subordinated to the indebtedness outstanding under our senior
credit facility and any other secured debt we may incur. The
notes are fully and unconditionally guaranteed by the
subsidiaries that are guarantors under our senior credit
facility, which are substantially all of our wholly owned
U.S. subsidiaries other than our receivables securitization
subsidiaries.
We may, at our option, redeem some or all of the notes at any
time at a redemption price equal to the greater of:
|
|
|
|
|
100% of the principal amount of the notes being
redeemed; and |
|
|
|
The sum of the present values of the remaining scheduled
payments of principal and interest on the notes being redeemed
(excluding interest accrued to the redemption date) from the
redemption date to the maturity date discounted to the date of
redemption on a semi-annual basis (assuming a
360-day year consisting
of twelve 30-day
months) at a discount rate equal to the Treasury rate plus
50 basis points, |
-13-
plus, in each case, accrued and unpaid interest on the principal
amount being redeemed to the redemption date.
If we experience a change in control, we may be required to
offer to purchase the notes at a purchase price equal to 101% of
the principal amount, plus accrued and unpaid interest.
We used all of the net proceeds from the sale of the notes to
reduce a corresponding amount of borrowings under our senior
credit facility.
Subsidiary Senior Notes Legacy Dean had
certain senior notes outstanding at the time of the acquisition,
which remain outstanding. The notes carry the following interest
rates and maturities:
|
|
|
|
|
$250.1 million ($250 million face value), at 8.15%
interest, maturing in August 2007; |
|
|
|
$192.1 million ($200 million face value), at 6.625%
interest, maturing in May 2009; and |
|
|
|
$128.9 million ($150 million face value), at 6.9%
interest, maturing in October 2017. |
The related indentures do not contain financial covenants but
they do contain certain restrictions, including a prohibition
against Legacy Dean and its subsidiaries granting liens on
certain of their real property interests and a prohibition
against Legacy Dean granting liens on the stock of its
subsidiaries.
Receivables-Backed Facility We entered into a
$600 million receivables securitization facility pursuant
to which certain of our subsidiaries sell their accounts
receivable to three wholly-owned special purpose entities
intended to be bankruptcy-remote. The special purpose entities
then transfer the receivables to third party asset-backed
commercial paper conduits sponsored by major financial
institutions. The assets and liabilities of these three special
purpose entities are fully reflected on our Condensed
Consolidated Balance Sheet, and the securitization is treated as
a borrowing for accounting purposes. During the first nine
months of 2006, we made net payments of $67.2 million on
this facility leaving an outstanding balance of
$481.2 million at September 30, 2006. The
receivables-backed facility bears interest at a variable rate
based on the commercial paper yield as defined in the agreement.
The average interest rate on this facility was 5.68% at
September 30, 2006. Our ability to re-borrow under this
facility is subject to a borrowing base formula. The
receivables-backed facility was fully funded at
September 30, 2006.
Capital Lease Obligations and Other Capital
lease obligations and other subsidiary debt includes various
promissory notes for the purchase of property, plant and
equipment and capital lease obligations. The various promissory
notes payable provide for interest at varying rates and are
payable in monthly installments of principal and interest until
maturity, when the remaining principal balances are due. Capital
lease obligations represent machinery and equipment financing
obligations, which are payable in monthly installments of
principal and interest and are collateralized by the related
assets financed.
Interest Rate Agreements We have interest
rate swap agreements in place that have been designated as cash
flow hedges against variable interest rate exposure on a portion
of our debt, with the objective of minimizing our interest rate
risk and stabilizing cash flows. These swap agreements provide
hedges for loans under our senior credit facility by limiting or
fixing the LIBOR interest rates specified in the senior credit
facility at the interest rates noted below until the indicated
expiration dates of these interest rate swap agreements.
The following table summarizes our various interest rate
agreements in effect at September 30, 2006:
|
|
|
|
|
|
|
|
|
Fixed Interest Rates |
|
Expiration Date |
|
Notional Amounts |
|
|
|
|
|
|
|
|
|
(In millions) |
3.65% to 6.78%
|
|
|
December 2006 |
|
|
$ |
550 |
|
4.81% to 4.84%
|
|
|
December 2007 |
|
|
|
500 |
|
4.07% to 4.27%
|
|
|
December 2010 |
|
|
|
450 |
|
-14-
The following table summarizes our various interest rate
agreements in effect at December 31, 2005:
|
|
|
|
|
|
|
|
|
Fixed Interest Rates |
|
Expiration Date |
|
Notional Amounts |
|
|
|
|
|
|
|
|
|
(In millions) |
3.65% to 6.78%
|
|
|
December 2006 |
|
|
$ |
625 |
|
4.81% to 4.84%
|
|
|
December 2007 |
|
|
|
500 |
|
4.07% to 4.27%
|
|
|
December 2010 |
|
|
|
500 |
|
These swaps are required to be recorded as an asset or liability
on our Condensed Consolidated Balance Sheet at fair value, with
an offset to other comprehensive income to the extent the hedge
is effective. Derivative gains and losses included in other
comprehensive income are reclassified into earnings as the
underlying transaction occurs. Any ineffectiveness in our hedges
is recorded as an adjustment to interest expense.
As of September 30, 2006 and December 31, 2005, our
derivative asset and liability balances were:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
(In thousands) |
Current derivative asset
|
|
$ |
7,780 |
|
|
$ |
5,877 |
|
Long-term derivative asset
|
|
|
8,562 |
|
|
|
10,028 |
|
|
|
|
|
|
|
|
|
|
|
Total derivative asset
|
|
$ |
16,342 |
|
|
$ |
15,905 |
|
|
|
|
|
|
|
|
|
|
Current derivative liability
|
|
$ |
(264 |
) |
|
$ |
(1,926 |
) |
Long-term derivative liability
|
|
|
|
|
|
|
(400 |
) |
|
|
|
|
|
|
|
|
|
|
Total derivative liability
|
|
$ |
(264 |
) |
|
$ |
(2,326 |
) |
|
|
|
|
|
|
|
|
|
There was no hedge ineffectiveness for the three and nine months
ended September 30, 2006, respectively. Approximately
$3.7 million and $5.6 million of interest income (net
of taxes) were reclassified to interest expense from other
comprehensive income during the three and nine months ended
September 30, 2006, respectively. We estimate that
approximately $4.6 million of net derivative income (net of
taxes) included in other comprehensive income will be
reclassified into earnings within the next 12 months. These
gains will partially offset the higher interest payments
recorded on our variable rate debt.
We are exposed to market risk under these arrangements due to
the possibility of interest rates on the credit facilities
falling below the rates on our interest rate swap agreements.
Credit risk under these arrangements is remote because the
counterparties to our interest rate swap agreements are major
financial institutions.
Guarantor Information On May 17, 2006 we
issued $500 million aggregate principal amount of
7.0% senior notes. The senior notes are unsecured
obligations and are fully and unconditionally guaranteed by
substantially all of our wholly-owned U.S. subsidiaries
other than our receivables securitization subsidiaries.
-15-
The following condensed consolidating financial statements
present the financial position, results of operations and cash
flows of Dean Foods (Parent), the subsidiary
guarantors of the senior notes and separately the combined
results of the subsidiaries that are not a party to the
guarantees. The non-guarantor subsidiaries reflect our foreign
subsidiary operations in addition to our three receivables
securitization subsidiaries. We do not allocate interest expense
from the receivables-backed facility to the three receivables
securitization subsidiaries. Therefore, the interest costs
related to this facility are reflected within the guarantor
financial information presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet as of September 30, 2006 | |
|
|
| |
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
Consolidated | |
|
|
Parent | |
|
Entities | |
|
Subsidiaries | |
|
Eliminations | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
511 |
|
|
$ |
38,521 |
|
|
$ |
4,038 |
|
|
$ |
|
|
|
$ |
43,070 |
|
|
Receivables, net
|
|
|
18 |
|
|
|
31,315 |
|
|
|
725,939 |
|
|
|
|
|
|
|
757,272 |
|
|
Intercompany receivables
|
|
|
299,614 |
|
|
|
2,423,148 |
|
|
|
288,496 |
|
|
|
(3,011,258 |
) |
|
|
|
|
|
Other current assets
|
|
|
88,712 |
|
|
|
475,918 |
|
|
|
4 |
|
|
|
|
|
|
|
564,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
388,855 |
|
|
|
2,968,902 |
|
|
|
1,018,477 |
|
|
|
(3,011,258 |
) |
|
|
1,364,976 |
|
Property, plant and equipment, net
|
|
|
954 |
|
|
|
1,772,442 |
|
|
|
18,749 |
|
|
|
|
|
|
|
1,792,145 |
|
Goodwill
|
|
|
|
|
|
|
2,934,908 |
|
|
|
91 |
|
|
|
|
|
|
|
2,934,999 |
|
Identifiable intangible and other assets
|
|
|
60,112 |
|
|
|
593,385 |
|
|
|
4 |
|
|
|
|
|
|
|
653,501 |
|
Investment in subsidiaries
|
|
|
6,351,945 |
|
|
|
|
|
|
|
|
|
|
|
(6,351,945 |
) |
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
17,587 |
|
|
|
|
|
|
|
17,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,801,866 |
|
|
$ |
8,269,637 |
|
|
$ |
1,054,908 |
|
|
$ |
(9,363,203 |
) |
|
$ |
6,763,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$ |
48,695 |
|
|
$ |
786,629 |
|
|
$ |
429 |
|
|
$ |
|
|
|
$ |
835,753 |
|
|
Income taxes payable
|
|
|
255,243 |
|
|
|
(226,320 |
) |
|
|
132 |
|
|
|
|
|
|
|
29,055 |
|
|
Intercompany notes
|
|
|
1,945,752 |
|
|
|
589,004 |
|
|
|
476,502 |
|
|
|
(3,011,258 |
) |
|
|
|
|
|
Current portion of long-term debt
|
|
|
225,000 |
|
|
|
259,968 |
|
|
|
|
|
|
|
|
|
|
|
484,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,474,690 |
|
|
|
1,409,281 |
|
|
|
477,063 |
|
|
|
(3,011,258 |
) |
|
|
1,349,776 |
|
Long-term debt
|
|
|
1,885,777 |
|
|
|
324,428 |
|
|
|
481,200 |
|
|
|
|
|
|
|
2,691,405 |
|
Other long-term liabilities
|
|
|
456,519 |
|
|
|
263,041 |
|
|
|
|
|
|
|
|
|
|
|
719,560 |
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
6,490 |
|
|
|
|
|
|
|
6,490 |
|
Total stockholders equity
|
|
|
1,984,880 |
|
|
|
6,272,887 |
|
|
|
90,155 |
|
|
|
(6,351,945 |
) |
|
|
1,995,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,801,866 |
|
|
$ |
8,269,637 |
|
|
$ |
1,054,908 |
|
|
$ |
(9,363,203 |
) |
|
$ |
6,763,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-16-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet as of December 31, 2005 | |
|
|
| |
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
Consolidated | |
|
|
Parent | |
|
Entities | |
|
Subsidiaries | |
|
Eliminations | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
249 |
|
|
$ |
18,677 |
|
|
$ |
5,530 |
|
|
$ |
|
|
|
$ |
24,456 |
|
|
Receivables, net
|
|
|
21 |
|
|
|
41,962 |
|
|
|
776,448 |
|
|
|
|
|
|
|
818,431 |
|
|
Intercompany receivables
|
|
|
285,354 |
|
|
|
2,217,898 |
|
|
|
373,488 |
|
|
|
(2,876,740 |
) |
|
|
|
|
|
Other current assets
|
|
|
106,684 |
|
|
|
451,378 |
|
|
|
244 |
|
|
|
|
|
|
|
558,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
392,308 |
|
|
|
2,729,915 |
|
|
|
1,155,710 |
|
|
|
(2,876,740 |
) |
|
|
1,401,193 |
|
Property, plant and equipment, net
|
|
|
613 |
|
|
|
1,761,208 |
|
|
|
14,980 |
|
|
|
|
|
|
|
1,776,801 |
|
Goodwill
|
|
|
|
|
|
|
2,922,849 |
|
|
|
91 |
|
|
|
|
|
|
|
2,922,940 |
|
Identifiable intangible and other assets
|
|
|
54,468 |
|
|
|
593,746 |
|
|
|
9 |
|
|
|
|
|
|
|
648,223 |
|
Investment in subsidiaries
|
|
|
6,101,994 |
|
|
|
|
|
|
|
|
|
|
|
(6,101,994 |
) |
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
301,727 |
|
|
|
|
|
|
|
301,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,549,383 |
|
|
$ |
8,007,718 |
|
|
$ |
1,472,517 |
|
|
$ |
(8,978,734 |
) |
|
$ |
7,050,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$ |
55,354 |
|
|
$ |
870,336 |
|
|
$ |
377 |
|
|
$ |
|
|
|
$ |
926,067 |
|
|
Income taxes payable
|
|
|
233,928 |
|
|
|
(199,518 |
) |
|
|
131 |
|
|
|
|
|
|
|
34,541 |
|
|
Intercompany notes
|
|
|
1,674,132 |
|
|
|
658,512 |
|
|
|
544,096 |
|
|
|
(2,876,740 |
) |
|
|
|
|
|
Current portion of long-term debt
|
|
|
56,250 |
|
|
|
4,465 |
|
|
|
4,611 |
|
|
|
|
|
|
|
65,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,019,664 |
|
|
|
1,333,795 |
|
|
|
549,215 |
|
|
|
(2,876,740 |
) |
|
|
1,025,934 |
|
Long-term debt
|
|
|
2,202,350 |
|
|
|
570,772 |
|
|
|
548,400 |
|
|
|
|
|
|
|
3,321,522 |
|
Other long-term liabilities
|
|
|
425,156 |
|
|
|
250,030 |
|
|
|
|
|
|
|
|
|
|
|
675,186 |
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
126,029 |
|
|
|
|
|
|
|
126,029 |
|
Total stockholders equity
|
|
|
1,902,213 |
|
|
|
5,853,121 |
|
|
|
248,873 |
|
|
|
(6,101,994 |
) |
|
|
1,902,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,549,383 |
|
|
$ |
8,007,718 |
|
|
$ |
1,472,517 |
|
|
$ |
(8,978,734 |
) |
|
$ |
7,050,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-17-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income | |
|
|
for the Three Months Ended September 30, 2006 | |
|
|
| |
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
Consolidated | |
|
|
Parent | |
|
Entities | |
|
Subsidiaries | |
|
Eliminations | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net sales
|
|
$ |
|
|
|
$ |
2,514,021 |
|
|
$ |
3,771 |
|
|
$ |
|
|
|
$ |
2,517,792 |
|
Cost of sales
|
|
|
|
|
|
|
1,820,548 |
|
|
|
3,238 |
|
|
|
|
|
|
|
1,823,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
693,473 |
|
|
|
533 |
|
|
|
|
|
|
|
694,006 |
|
|
Selling and distribution
|
|
|
|
|
|
|
416,649 |
|
|
|
186 |
|
|
|
|
|
|
|
416,835 |
|
|
General and administrative
|
|
|
1,359 |
|
|
|
100,658 |
|
|
|
937 |
|
|
|
|
|
|
|
102,954 |
|
|
Facility closing and reorganization costs
|
|
|
|
|
|
|
5,471 |
|
|
|
|
|
|
|
|
|
|
|
5,471 |
|
|
Interest expense
|
|
|
29,367 |
|
|
|
18,353 |
|
|
|
311 |
|
|
|
|
|
|
|
48,031 |
|
|
Other (income) expense, net
|
|
|
|
|
|
|
393 |
|
|
|
(453 |
) |
|
|
|
|
|
|
(60 |
) |
|
Income from subsidiaries
|
|
|
(151,501 |
) |
|
|
|
|
|
|
|
|
|
|
151,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
120,775 |
|
|
|
151,949 |
|
|
|
(448 |
) |
|
|
(151,501 |
) |
|
|
120,775 |
|
Income taxes
|
|
|
46,277 |
|
|
|
57,988 |
|
|
|
(175 |
) |
|
|
(57,813 |
) |
|
|
46,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
74,498 |
|
|
|
93,961 |
|
|
|
(273 |
) |
|
|
(93,688 |
) |
|
|
74,498 |
|
Gain (loss) on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
(278 |
) |
|
|
368 |
|
|
|
|
|
|
|
90 |
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
(3,313 |
) |
|
|
(482 |
) |
|
|
|
|
|
|
(3,795 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
74,498 |
|
|
$ |
90,370 |
|
|
$ |
(387 |
) |
|
$ |
(93,688 |
) |
|
$ |
70,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-18-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income | |
|
|
for the Three Months Ended September 30, 2005 | |
|
|
| |
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
Consolidated | |
|
|
Parent | |
|
Entities | |
|
Subsidiaries | |
|
Eliminations | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net sales
|
|
$ |
|
|
|
$ |
2,567,740 |
|
|
$ |
1,665 |
|
|
$ |
|
|
|
$ |
2,569,405 |
|
Cost of sales
|
|
|
|
|
|
|
1,917,023 |
|
|
|
1,333 |
|
|
|
|
|
|
|
1,918,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
650,717 |
|
|
|
332 |
|
|
|
|
|
|
|
651,049 |
|
|
Selling and distribution
|
|
|
|
|
|
|
399,031 |
|
|
|
149 |
|
|
|
|
|
|
|
399,180 |
|
|
General and administrative
|
|
|
642 |
|
|
|
95,090 |
|
|
|
170 |
|
|
|
|
|
|
|
95,902 |
|
|
Facility closing and reorganization costs
|
|
|
|
|
|
|
17,993 |
|
|
|
|
|
|
|
|
|
|
|
17,993 |
|
|
Interest expense
|
|
|
19,011 |
|
|
|
18,278 |
|
|
|
548 |
|
|
|
|
|
|
|
37,837 |
|
|
Other (income) expense, net
|
|
|
(8 |
) |
|
|
(325 |
) |
|
|
160 |
|
|
|
|
|
|
|
(173 |
) |
|
Income from subsidiaries
|
|
|
(119,955 |
) |
|
|
|
|
|
|
|
|
|
|
119,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
100,310 |
|
|
|
120,650 |
|
|
|
(695 |
) |
|
|
(119,955 |
) |
|
|
100,310 |
|
Income taxes
|
|
|
38,129 |
|
|
|
45,517 |
|
|
|
(263 |
) |
|
|
(45,254 |
) |
|
|
38,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
62,181 |
|
|
|
75,133 |
|
|
|
(432 |
) |
|
|
(74,701 |
) |
|
|
62,181 |
|
Gain on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
37,766 |
|
|
|
|
|
|
|
|
|
|
|
37,766 |
|
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
(301 |
) |
|
|
(262 |
) |
|
|
|
|
|
|
(563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
62,181 |
|
|
$ |
112,598 |
|
|
$ |
(694 |
) |
|
$ |
(74,701 |
) |
|
$ |
99,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-19-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income | |
|
|
for the Nine Months Ended September 30, 2006 | |
|
|
| |
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
Consolidated | |
|
|
Parent | |
|
Entities | |
|
Subsidiaries | |
|
Eliminations | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net sales
|
|
$ |
|
|
|
$ |
7,497,904 |
|
|
$ |
6,813 |
|
|
$ |
|
|
|
$ |
7,504,717 |
|
Cost of sales
|
|
|
|
|
|
|
5,469,899 |
|
|
|
5,619 |
|
|
|
|
|
|
|
5,475,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
2,028,005 |
|
|
|
1,194 |
|
|
|
|
|
|
|
2,029,199 |
|
|
Selling and distribution
|
|
|
|
|
|
|
1,230,846 |
|
|
|
495 |
|
|
|
|
|
|
|
1,231,341 |
|
|
General and administrative
|
|
|
3,738 |
|
|
|
301,764 |
|
|
|
1,401 |
|
|
|
|
|
|
|
306,903 |
|
|
Facility closing and reorganization costs
|
|
|
|
|
|
|
12,823 |
|
|
|
|
|
|
|
|
|
|
|
12,823 |
|
|
Interest (income) expense
|
|
|
89,029 |
|
|
|
55,731 |
|
|
|
(425 |
) |
|
|
|
|
|
|
144,335 |
|
|
Other (income) expense, net
|
|
|
(10 |
) |
|
|
(321 |
) |
|
|
285 |
|
|
|
|
|
|
|
(46 |
) |
|
Income from subsidiaries
|
|
|
(426,600 |
) |
|
|
|
|
|
|
|
|
|
|
426,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
333,843 |
|
|
|
427,162 |
|
|
|
(562 |
) |
|
|
(426,600 |
) |
|
|
333,843 |
|
Income taxes
|
|
|
129,856 |
|
|
|
164,486 |
|
|
|
(235 |
) |
|
|
(164,251 |
) |
|
|
129,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
203,987 |
|
|
|
262,676 |
|
|
|
(327 |
) |
|
|
(262,349 |
) |
|
|
203,987 |
|
Gain (loss) on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
(504 |
) |
|
|
368 |
|
|
|
|
|
|
|
(136 |
) |
Loss from discontinued operations, net of tax
|
|
|
|
|
|
|
(3,313 |
) |
|
|
(48,085 |
) |
|
|
|
|
|
|
(51,398 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
203,987 |
|
|
$ |
258,859 |
|
|
$ |
(48,044 |
) |
|
$ |
(262,349 |
) |
|
$ |
152,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-20-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Income | |
|
|
for the Nine Months Ended September 30, 2005 | |
|
|
| |
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
|
|
Consolidated | |
|
|
Parent | |
|
Entities | |
|
Subsidiaries | |
|
Eliminations | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net sales
|
|
$ |
|
|
|
$ |
7,554,644 |
|
|
$ |
4,462 |
|
|
$ |
|
|
|
$ |
7,559,106 |
|
Cost of sales
|
|
|
|
|
|
|
5,646,064 |
|
|
|
3,535 |
|
|
|
|
|
|
|
5,649,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
1,908,580 |
|
|
|
927 |
|
|
|
|
|
|
|
1,909,507 |
|
|
Selling and distribution
|
|
|
|
|
|
|
1,173,077 |
|
|
|
416 |
|
|
|
|
|
|
|
1,173,493 |
|
|
General and administrative
|
|
|
700 |
|
|
|
286,836 |
|
|
|
457 |
|
|
|
|
|
|
|
287,993 |
|
|
Facility closing and reorganization costs
|
|
|
|
|
|
|
26,821 |
|
|
|
|
|
|
|
|
|
|
|
26,821 |
|
|
Interest expense
|
|
|
55,815 |
|
|
|
58,215 |
|
|
|
1,651 |
|
|
|
|
|
|
|
115,681 |
|
|
Other (income) expense, net
|
|
|
(8 |
) |
|
|
(813 |
) |
|
|
366 |
|
|
|
|
|
|
|
(455 |
) |
|
Income from subsidiaries
|
|
|
(362,481 |
) |
|
|
|
|
|
|
|
|
|
|
362,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
305,974 |
|
|
|
364,444 |
|
|
|
(1,963 |
) |
|
|
(362,481 |
) |
|
|
305,974 |
|
Income taxes
|
|
|
119,075 |
|
|
|
140,307 |
|
|
|
(739 |
) |
|
|
(139,568 |
) |
|
|
119,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
186,899 |
|
|
|
224,137 |
|
|
|
(1,224 |
) |
|
|
(222,913 |
) |
|
|
186,899 |
|
Gain on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
37,690 |
|
|
|
|
|
|
|
|
|
|
|
37,690 |
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
17,256 |
|
|
|
634 |
|
|
|
|
|
|
|
17,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
186,899 |
|
|
$ |
279,083 |
|
|
$ |
(590 |
) |
|
$ |
(222,913 |
) |
|
$ |
242,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-21-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows | |
|
|
for the Nine Months Ended September 30, 2006 | |
|
|
| |
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
Consolidated | |
|
|
Parent | |
|
Entities | |
|
Subsidiaries | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net cash provided by (used in) operating activities
|
|
$ |
(155,174 |
) |
|
$ |
531,773 |
|
|
$ |
49,453 |
|
|
$ |
426,052 |
|
|
Additions to property, plant and equipment
|
|
|
(2,065 |
) |
|
|
(168,768 |
) |
|
|
(4,080 |
) |
|
|
(174,913 |
) |
|
Cash outflows for acquisitions and investments
|
|
|
(16,819 |
) |
|
|
|
|
|
|
|
|
|
|
(16,819 |
) |
|
Net proceeds from divestitures
|
|
|
96,280 |
|
|
|
|
|
|
|
|
|
|
|
96,280 |
|
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
5,619 |
|
|
|
|
|
|
|
5,619 |
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(14,696 |
) |
|
|
(14,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
77,396 |
|
|
|
(163,149 |
) |
|
|
(18,776 |
) |
|
|
(104,529 |
) |
|
Proceeds from issuance of debt
|
|
|
498,020 |
|
|
|
|
|
|
|
|
|
|
|
498,020 |
|
|
Repayment of debt
|
|
|
(645,900 |
) |
|
|
(11,670 |
) |
|
|
(71,811 |
) |
|
|
(729,381 |
) |
|
Payment of deferred financing costs
|
|
|
(6,889 |
) |
|
|
|
|
|
|
|
|
|
|
(6,889 |
) |
|
Issuance of common stock, net of expenses
|
|
|
28,049 |
|
|
|
|
|
|
|
|
|
|
|
28,049 |
|
|
Tax savings on share-based compensation
|
|
|
31,211 |
|
|
|
|
|
|
|
|
|
|
|
31,211 |
|
|
Redemption of common stock
|
|
|
(135,679 |
) |
|
|
|
|
|
|
|
|
|
|
(135,679 |
) |
|
Other
|
|
|
|
|
|
|
|
|
|
|
11,760 |
|
|
|
11,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(231,188 |
) |
|
|
(11,670 |
) |
|
|
(60,051 |
) |
|
|
(302,909 |
) |
Net change in intercompany balances
|
|
|
309,228 |
|
|
|
(337,110 |
) |
|
|
27,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
262 |
|
|
|
19,844 |
|
|
|
(1,492 |
) |
|
|
18,614 |
|
Cash and cash equivalents, beginning of period
|
|
|
249 |
|
|
|
18,677 |
|
|
|
5,530 |
|
|
|
24,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
511 |
|
|
$ |
38,521 |
|
|
$ |
4,038 |
|
|
$ |
43,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-22-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statements of Cash Flows | |
|
|
for the Nine Months Ended September 30, 2005 | |
|
|
| |
|
|
|
|
Non- | |
|
|
|
|
|
|
Guarantor | |
|
Guarantor | |
|
Consolidated | |
|
|
Parent | |
|
Entities | |
|
Subsidiaries | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net cash provided by (used in) operating activities
|
|
$ |
(8,198 |
) |
|
$ |
487,572 |
|
|
$ |
(3,598 |
) |
|
$ |
475,776 |
|
|
Additions to property, plant and equipment
|
|
|
(534 |
) |
|
|
(204,367 |
) |
|
|
(1,134 |
) |
|
|
(206,035 |
) |
|
Cash outflows for acquisitions and investments
|
|
|
(361 |
) |
|
|
|
|
|
|
|
|
|
|
(361 |
) |
|
Net proceeds from divestitures
|
|
|
|
|
|
|
189,862 |
|
|
|
|
|
|
|
189,862 |
|
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
4,821 |
|
|
|
2,200 |
|
|
|
7,021 |
|
|
Other
|
|
|
|
|
|
|
(7,875 |
) |
|
|
(14,761 |
) |
|
|
(22,636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(895 |
) |
|
|
(17,559 |
) |
|
|
(13,695 |
) |
|
|
(32,149 |
) |
|
Proceeds from issuance of debt
|
|
|
9,100 |
|
|
|
|
|
|
|
|
|
|
|
9,100 |
|
|
Repayment of debt
|
|
|
(77,350 |
) |
|
|
(110,322 |
) |
|
|
(8,629 |
) |
|
|
(196,301 |
) |
|
Payment of deferred financing costs
|
|
|
(3,281 |
) |
|
|
|
|
|
|
|
|
|
|
(3,281 |
) |
|
Issuance of common stock, net of expenses
|
|
|
46,051 |
|
|
|
|
|
|
|
|
|
|
|
46,051 |
|
|
Tax savings on share-based compensation
|
|
|
16,895 |
|
|
|
|
|
|
|
|
|
|
|
16,895 |
|
|
Redemption of common stock
|
|
|
(345,087 |
) |
|
|
|
|
|
|
|
|
|
|
(345,087 |
) |
|
Other
|
|
|
|
|
|
|
11,153 |
|
|
|
22,168 |
|
|
|
33,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(353,672 |
) |
|
|
(99,169 |
) |
|
|
13,539 |
|
|
|
(439,302 |
) |
Net change in intercompany balances
|
|
|
363,354 |
|
|
|
(370,433 |
) |
|
|
7,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
589 |
|
|
|
411 |
|
|
|
3,325 |
|
|
|
4,325 |
|
Cash and cash equivalents, beginning of period
|
|
|
174 |
|
|
|
24,326 |
|
|
|
857 |
|
|
|
25,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
763 |
|
|
$ |
24,737 |
|
|
$ |
4,182 |
|
|
$ |
29,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. |
Common Stock and Share-Based Compensation |
Under our share-based long-term incentive compensation plans
(including inducement grants to newly-hired employees), we grant
stock options and restricted stock units to certain employees
and directors. Non-employee directors also can elect to receive
their compensation in the form of restricted stock in lieu of
cash.
Stock Options Under the terms of our stock
option plans, employees and non-employee directors may be
granted options to purchase our stock at a price equal to the
market price on the date the option is granted. Employee options
vest one-third on the first anniversary of the grant date,
one-third on the second anniversary of the grant date and
one-third on the third anniversary of the grant date. All
unvested options vest immediately upon a change of control. Each
non-employee director receives an immediately vested option to
purchase 7,500 shares of common stock on June 30
of each year.
We recognize share-based compensation expense for stock options
ratably over the vesting period. The fair value of each option
award is estimated on the date of grant using the Black-Scholes
valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
25% |
|
25% |
|
25% |
|
25% |
Expected dividend yield
|
|
0% |
|
0% |
|
0% |
|
0% |
Expected option term
|
|
4.5 years |
|
4.5 years |
|
4.5 years |
|
4.5 years |
Risk-free rate of return
|
|
4.70 to 5.10% |
|
3.84 to 4.16% |
|
4.28 to 5.10% |
|
3.63 to 4.26% |
-23-
The expected term of the options represents the estimated period
of time until exercise and is based on historical experience of
similar awards, giving consideration to contractual terms
(generally 10 years), vesting schedules and expectations of
future employee and director behavior. Expected stock price
volatility is based on a combination of historical volatility of
the Companys stock and expectations with regard to future
volatility. The risk-free rates are based on the implied yield
available on U.S. Treasury zero-coupon issues with an
equivalent remaining term. Historically, we have not paid
dividends and have no current intent to change such practice.
The following table summarizes stock option activity during the
first nine months of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
Aggregate |
|
|
|
|
Average |
|
Average |
|
Intrinsic |
|
|
Options |
|
Exercise Price |
|
Contractual Life |
|
Value |
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2005
|
|
|
17,859,283 |
|
|
$ |
18.87 |
|
|
|
|
|
|
|
|
|
|
Options granted during the first nine months
|
|
|
2,639,805 |
|
|
|
37.68 |
|
|
|
|
|
|
|
|
|
|
Options canceled or forfeited during the first nine months(1)
|
|
|
(721,902 |
) |
|
|
17.44 |
|
|
|
|
|
|
|
|
|
|
Options exercised during the first nine months
|
|
|
(4,158,435 |
) |
|
|
15.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2006
|
|
|
15,618,751 |
|
|
|
23.04 |
|
|
|
6.35 |
|
|
$ |
296,487,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2006
|
|
|
10,883,467 |
|
|
|
18.59 |
|
|
|
5.31 |
|
|
$ |
255,037,083 |
|
|
|
(1) |
Pursuant to the terms of our stock option plans, options that
are canceled or forfeited become available for future grants. |
The weighted-average grant date fair value of options granted
during the nine months ended September 30, 2006 and 2005
was $10.98 per share and $7.79 per share,
respectively, and the total intrinsic value of options exercised
during the same periods was $95.8 million and
$47.2 million, respectively. The fair value of shares
vested during the nine months ended September 30, 2006 and
2005 was $23.4 million and $41.7 million, respectively.
During the three months ended September 30, 2006 and 2005,
we recognized stock option expense of $5.7 million and
$5.8 million, respectively, and an income tax benefit
related to stock option expense of $2.2 million and
$1.3 million, respectively. During the first nine months of
2006 and 2005, we recognized stock option expense of
$16.7 million and $18.7 million, respectively, and an
income tax benefit related to the stock option expense of
$6.6 million and $4.5 million, respectively.
During the three months ended September 30, 2006 we
recognized a pre-tax cumulative non-cash charge of approximately
$500,000 resulting from administrative errors associated with
historical stock option compensation expense related to a few
stock option grants in 1997 and 2000. As the aggregate
differences were not deemed material, no restatement of our
historical financial statements is necessary and the full impact
of the cumulative non-cash charge was recognized in the third
quarter.
During the first nine months of 2006, cash received from stock
option exercises was $46.8 million and the total tax
benefit for tax deductions to be realized for these option
exercises was $39.9 million. In addition, we received
610,757 shares of common stock in lieu of cash for stock
option exercises.
At September 30, 2006, there was $29.4 million of
total unrecognized stock option expense, all of which is related
to nonvested awards. This compensation expense is expected to be
recognized over the weighted-average remaining period of
1.1 years.
Stock Units We issue restricted stock units
to certain senior employees and non-employee directors as part
of our long-term incentive program. A stock unit represents the
right to receive one share of common stock in the future. Stock
units have no exercise price. Each employees stock unit
grant typically vests ratably over five years, subject to
certain accelerated vesting provisions based primarily on our
stock
-24-
price. Stock units granted to non-employee directors vest
ratably over three years. All unvested stock units vest
immediately upon a change of control. The following table
summarizes stock unit activity during the first nine months of
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees | |
|
Directors | |
|
Total | |
|
|
| |
|
| |
|
| |
Stock units outstanding at December 31, 2005
|
|
|
825,248 |
|
|
|
67,774 |
|
|
|
893,022 |
|
|
Stock units issued during the first nine months
|
|
|
445,750 |
|
|
|
25,500 |
|
|
|
471,250 |
|
|
Shares issued during first nine months upon vesting of stock
units
|
|
|
(333,623 |
) |
|
|
(23,598 |
) |
|
|
(357,221 |
) |
|
Stock units cancelled or forfeited during the first nine
months(1)
|
|
|
(154,582 |
) |
|
|
|
|
|
|
(154,582 |
) |
|
|
|
|
|
|
|
|
|
|
Stock units outstanding at September 30, 2006
|
|
|
782,793 |
|
|
|
69,676 |
|
|
|
852,469 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value
|
|
$ |
33.35 |
|
|
$ |
35.47 |
|
|
$ |
33.49 |
|
|
|
(1) |
Pursuant to the terms of our stock unit plans, stock units that
are canceled or forfeited become available for future grants. |
During the three months ended September 30, 2006 and 2005,
we recognized stock unit expense of $2.5 million and
$5.3 million, respectively, and an income tax benefit
related to stock unit expense of $0.6 million and
$1.2 million, respectively. During the first nine months of
2006 and 2005, we recognized stock unit expense of
$11.7 million and $13.6 million, respectively, and an
income tax benefit related to the stock unit expense of
$3.4 million and $2.7 million, respectively.
The weighted-average grant date fair value of stock units
granted during the nine months ended September 30, 2006 and
2005 was $37.63 per share and $28.33 per share,
respectively. At September 30, 2006, there was
$23.8 million of total unrecognized stock unit expense, all
of which is related to nonvested awards. This compensation
expense is expected to be recognized over the weighted-average
remaining vesting period of 3.1 years.
Restricted Stock We offer our non-employee
directors the option to receive their compensation for services
rendered in either cash or shares of restricted stock. Shares of
restricted stock vest one-third on grant, one-third on the first
anniversary of grant and one-third on the second anniversary of
grant. The following table summarizes restricted stock activity
during the first nine months of 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
Average Grant |
|
|
Shares |
|
Date Fair Value |
|
|
|
|
|
Nonvested at December 31, 2005
|
|
|
29,516 |
|
|
$ |
35.27 |
|
Restricted shares granted during the first nine months
|
|
|
22,014 |
|
|
|
39.33 |
|
Restricted shares vested during the first nine months
|
|
|
(23,595 |
) |
|
|
36.10 |
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006
|
|
|
27,935 |
|
|
|
37.77 |
|
|
|
|
|
|
|
|
|
|
Stock Repurchases During the first nine
months of 2006, we incurred approximately $135.7 million,
including commissions and fees, to
repurchase 3,737,200 shares of our common stock for an
average price of $36.31 per share. The repurchases were
funded using borrowings under our senior credit facility and
cash flow from operations.
Basic earnings per share is based on the weighted average number
of common shares outstanding during each period. Diluted
earnings per share is based on the weighted average number of
common shares outstanding and the effect of all dilutive common
stock equivalents outstanding during each period. The
-25-
following table reconciles the numerators and denominators used
in the computations of both basic and diluted earnings per share
(EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30 | |
|
September 30 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except share data) | |
Basic EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
74,498 |
|
|
$ |
62,181 |
|
|
$ |
203,987 |
|
|
$ |
186,899 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares
|
|
|
133,739,115 |
|
|
|
148,098,362 |
|
|
|
134,643,557 |
|
|
|
149,578,334 |
|
|
|
Basic EPS from continuing operations
|
|
$ |
0.56 |
|
|
$ |
0.42 |
|
|
$ |
1.51 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
74,498 |
|
|
$ |
62,181 |
|
|
$ |
203,987 |
|
|
$ |
186,899 |
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares basic
|
|
|
133,739,115 |
|
|
|
148,098,362 |
|
|
|
134,643,557 |
|
|
|
149,578,334 |
|
|
|
Stock option conversion
|
|
|
5,219,835 |
|
|
|
6,502,384 |
|
|
|
5,503,163 |
|
|
|
5,476,012 |
|
|
|
Stock units
|
|
|
200,708 |
|
|
|
935,748 |
|
|
|
353,943 |
|
|
|
1,082,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares diluted
|
|
|
139,159,658 |
|
|
|
155,536,494 |
|
|
|
140,500,663 |
|
|
|
156,137,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS from continuing operations
|
|
$ |
0.54 |
|
|
$ |
0.40 |
|
|
$ |
1.45 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. |
Comprehensive Income (Loss) |
The components of comprehensive income (loss) are summarized
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30 | |
|
September 30 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Income from continuing operations
|
|
$ |
74,498 |
|
|
$ |
62,181 |
|
|
$ |
203,987 |
|
|
$ |
186,899 |
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
|
801 |
|
|
|
(342 |
) |
|
|
1,441 |
|
|
|
(1,035 |
) |
|
Change in fair value of derivative instruments, net of tax
|
|
|
(9,675 |
) |
|
|
1,440 |
|
|
|
7,160 |
|
|
|
3,255 |
|
|
Amounts reclassified to income statement related to hedging
activities, net of tax
|
|
|
(3,707 |
) |
|
|
1,897 |
|
|
|
(5,575 |
) |
|
|
7,305 |
|
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,581 |
) |
|
|
2,995 |
|
|
|
3,026 |
|
|
|
7,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income from continuing operations
|
|
|
61,917 |
|
|
|
65,176 |
|
|
|
207,013 |
|
|
|
194,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(3,705 |
) |
|
|
37,203 |
|
|
|
(51,534 |
) |
|
|
55,580 |
|
|
Cumulative translation adjustment
|
|
|
(24,408 |
) |
|
|
(281 |
) |
|
|
(13,850 |
) |
|
|
(23,506 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) from discontinued operations
|
|
|
(28,113 |
) |
|
|
36,922 |
|
|
|
(65,384 |
) |
|
|
32,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
33,804 |
|
|
$ |
102,098 |
|
|
$ |
141,629 |
|
|
$ |
226,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-26-
|
|
9. |
Employee Retirement and Postretirement Benefits |
Defined Benefit Plans The benefits under our
defined benefit plans are based on years of service and employee
compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30 | |
|
September 30 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Components of net period cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
633 |
|
|
$ |
727 |
|
|
$ |
1,898 |
|
|
$ |
2,182 |
|
|
Interest cost
|
|
|
4,143 |
|
|
|
4,251 |
|
|
|
12,428 |
|
|
|
12,752 |
|
|
Expected return on plan assets
|
|
|
(3,946 |
) |
|
|
(3,925 |
) |
|
|
(11,837 |
) |
|
|
(11,774 |
) |
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized transition obligation
|
|
|
28 |
|
|
|
27 |
|
|
|
83 |
|
|
|
80 |
|
|
Prior service cost
|
|
|
213 |
|
|
|
157 |
|
|
|
638 |
|
|
|
471 |
|
|
Unrecognized net loss
|
|
|
861 |
|
|
|
753 |
|
|
|
2,583 |
|
|
|
2,258 |
|
|
Effect of settlement
|
|
|
88 |
|
|
|
887 |
|
|
|
263 |
|
|
|
2,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
2,020 |
|
|
$ |
2,877 |
|
|
$ |
6,056 |
|
|
$ |
8,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to contribute $36.1 million to the pension plans
during 2006.
Postretirement Benefits Certain of our
subsidiaries provide healthcare benefits to certain retirees who
are covered under specific group contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Nine Months Ended | |
|
|
September 30 | |
|
September 30 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Components of net period cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
265 |
|
|
$ |
251 |
|
|
$ |
796 |
|
|
$ |
753 |
|
|
Interest cost
|
|
|
375 |
|
|
|
276 |
|
|
|
1,125 |
|
|
|
830 |
|
Amortizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
(17 |
) |
|
|
(17 |
) |
|
|
(51 |
) |
|
|
(52 |
) |
|
Unrecognized net loss
|
|
|
239 |
|
|
|
71 |
|
|
|
718 |
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
862 |
|
|
$ |
581 |
|
|
$ |
2,588 |
|
|
$ |
1,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to contribute $2.6 million to the postretirement
health plans during 2006.
|
|
10. |
Facility Closing And Reorganization Costs |
Facility Closing and Reorganization Costs We
recorded net facility closing and reorganization costs of
$5.5 million and $18.0 million during the three months
ended September 30, 2006 and 2005, respectively, and
$12.8 million and $26.8 million during the nine months
ended September 30, 2006 and 2005, respectively.
The charges recorded during 2006 are primarily related to the
closing of Dairy Group facilities in Union, New Jersey and
Madison, Wisconsin and the reorganization of WhiteWave Foods
Company.
We expect to incur additional charges related to these
restructuring plans of approximately $5.5 million,
including approximately $600,000 in work force reduction
costs and approximately $4.9 million in shutdown and other
costs. Approximately $3.4 million and $2.1 million of
these additional charges are expected to be completed by
December 31, 2006 and 2007, respectively.
-27-
The principal components of our continued reorganization and
cost reduction efforts include the following:
|
|
|
|
|
Workforce reductions as a result of facility closings, facility
reorganizations and consolidation of administrative functions; |
|
|
|
Shutdown costs, including those costs necessary to prepare
abandoned facilities for closure; |
|
|
|
Costs incurred after shutdown, such as lease obligations or
termination costs, utilities and property taxes; |
|
|
|
Costs associated with the reorganization of WhiteWave Foods
Company supply chain and distribution activities, including
termination of certain contractual agreements; and |
|
|
|
Write-downs of property, plant and equipment and other assets,
primarily for asset impairments as a result of facilities that
are no longer used in operations. The impairments relate
primarily to owned buildings, land and equipment at the
facilities, which are written down to their estimated fair value
and held for sale. The effect of suspending depreciation on the
buildings and equipment related to the closed facilities was not
significant. The carrying value of closed facilities at
September 30, 2006 was approximately $13.0 million. We
are marketing these properties for sale. |
We consider several factors when evaluating a potential facility
closure, including, among other things, the impact of such a
closure on our customers, the impact on production, distribution
and overhead costs, the investment required to complete any such
closure, and the impact on future investment decisions. Some
facility closures are pursued to improve our operating cost
structure, while others enable us to avoid unnecessary capital
expenditures, allowing us to more prudently invest our capital
expenditure dollars in our production facilities and better
serve our customers.
Activity for the first nine months of 2006 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
Accrued |
|
|
Charges at |
|
|
|
|
|
Charges at |
|
|
December 31, |
|
|
|
|
|
September 30, |
|
|
2005 |
|
Charges |
|
Payments |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
Cash charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reduction costs
|
|
$ |
8,302 |
|
|
$ |
2,842 |
|
|
$ |
(7,708 |
) |
|
$ |
3,436 |
|
|
Shutdown costs
|
|
|
209 |
|
|
|
4,223 |
|
|
|
(4,405 |
) |
|
|
27 |
|
|
Lease obligations after shutdown
|
|
|
2,072 |
|
|
|
1,160 |
|
|
|
(1,363 |
) |
|
|
1,869 |
|
|
Settlement of contracts
|
|
|
724 |
|
|
|
45 |
|
|
|
(769 |
) |
|
|
|
|
|
Other
|
|
|
470 |
|
|
|
1,416 |
|
|
|
(1,626 |
) |
|
|
260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$ |
11,777 |
|
|
|
9,686 |
|
|
$ |
(15,871 |
) |
|
$ |
5,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-down of assets
|
|
|
|
|
|
|
3,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charges
|
|
|
|
|
|
$ |
12,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Facility Closing and Other Exit
Costs As part of our purchase price allocations,
we accrue costs from time to time pursuant to plans to exit
certain facilities and activities of acquired businesses in
order to rationalize production and reduce costs and
inefficiencies. During 2004, we accrued costs to close two Dairy
Group facilities acquired in 2003 and the Horizon Organic Farm
and Education Center acquired in 2004, as well as to exit
certain acquired contractual obligations.
The principal components of the plans include the following:
|
|
|
|
|
Workforce reductions as a result of facility closings, facility
reorganizations and consolidation of administrative functions
and offices; |
-28-
|
|
|
|
|
Shutdown costs, including those costs necessary to clean and
prepare abandoned facilities for closure; and |
|
|
|
Costs incurred after shutdown, such as lease or termination
costs, utilities and property taxes after shutdown of the
facility, as well as, costs to exit certain contractual
obligations. |
Activity with respect to these acquisition liabilities during
the first nine months of 2006 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
Accrued |
|
|
Charges at |
|
|
|
Charges at |
|
|
December 31, |
|
|
|
September 30, |
|
|
2005 |
|
Payments |
|
2006 |
|
|
|
|
|
|
|
|
|
(In thousands) |
Workforce reduction costs
|
|
$ |
366 |
|
|
$ |
(222 |
) |
|
$ |
144 |
|
Shutdown and exit costs
|
|
|
40,479 |
|
|
|
(38,911 |
) |
|
|
1,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
40,845 |
|
|
$ |
(39,133 |
) |
|
$ |
1,712 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. |
Commitments and Contingencies |
Contingent Obligations Related to Divested
Operations We have divested several businesses
in recent years. In each case, we have retained certain known
contingent obligations related to those businesses and/or
assumed an obligation to indemnify the purchasers of the
businesses for certain unknown contingent liabilities, including
environmental liabilities. We believe we have established
adequate reserves for potential liabilities and indemnifications
related to our divested businesses. Moreover, we do not expect
any liability that we may have for these retained liabilities,
or any indemnification liability, to materially exceed amounts
accrued.
Contingent Obligations Related to Milk Supply
Arrangements On December 21, 2001, in
connection with our acquisition of the former Dean Foods
Company, we purchased Dairy Farmers of Americas
(DFA) 33.8% interest in our Dairy Group. In
connection with that transaction, we entered into two agreements
with DFA designed to ensure that DFA has the opportunity to
continue to supply raw milk to certain of our facilities, or be
paid for the loss of that business. One such agreement is a
promissory note with a
20-year term that bears
interest based on the consumer price index. Interest will not be
paid in cash but will be added to the principal amount of the
note annually, up to a maximum principal amount of
$96 million. We may prepay the note in whole or in part at
any time, without penalty. The note will only become payable if
we materially breach or terminate one of our milk supply
agreements with DFA without renewal or replacement. Otherwise,
the note will expire in 2021, without any obligation to pay any
portion of the principal or interest. Payments made under the
note, if any, would be expensed as incurred. The other agreement
would require us to pay damages to DFA if we fail to offer DFA
the right to supply milk to certain facilities that we acquired
as part of the former Dean Foods after the pre-existing
agreements with certain other suppliers or producers expire.
Insurance We retain selected levels of
property and casualty risks, primarily related to employee
health care, workers compensation claims and other
casualty losses. Many of these potential losses are covered
under conventional insurance programs with third party carriers
with high deductible limits. In other areas, we are self-insured
with stop-loss coverages. These deductibles range from $350,000
for medical claims to $2.0 million for casualty claims. We
believe we have established adequate reserves to cover these
claims.
During 2005, we experienced operational disruptions in our Dairy
Group segment caused by Hurricanes Katrina and Rita. Our
insurance policies cover a portion of our business interruption
losses for 12 months following the restoration of our
property. During the first quarter of 2006, we received
approximately $3.1 million in settlement of a portion of
our business interruption claim for the period of
August 29, 2005 through December 31, 2005. During the
third quarter of 2006, we received approximately $600,000 in
settlement of a portion of our business interruption claim for
the period of January 1, 2006
-29-
through March 31, 2006. The insurance proceeds are recorded
within cost of sales. We will continue to submit additional
business interruption claims during 2006, and we will recognize
these amounts upon settlement of the claims.
Leases and Purchase Obligations We lease
certain property, plant and equipment used in our operations
under both capital and operating lease agreements. Such leases,
which are primarily for machinery, equipment and vehicles, have
lease terms ranging from one to 20 years. Certain of the
operating lease agreements require the payment of additional
rentals for maintenance, along with additional rentals based on
miles driven or units produced. Certain leases require us to
guarantee a minimum value of the leased asset at the end of the
lease. Our maximum exposure under those guarantees is not a
material amount.
We have entered into various contracts obligating us to purchase
minimum quantities of raw materials used in our production
processes, including organic soybeans and organic raw milk. We
enter into these contracts from time to time to ensure a
sufficient supply of raw ingredients. In addition, we have
contractual obligations to purchase various services that are
part of our production process.
Litigation, Investigations and Audits We are
party from time to time to certain claims, litigation, audits
and investigations. We believe that we have established adequate
reserves to satisfy any probable liability we may have under all
such claims, litigations, audits and investigations that are
currently pending. In our opinion, the settlement of any such
currently pending or threatened matter is not expected to have a
material adverse impact on our financial position, results of
operations or cash flows.
Two shareholder derivative complaints have been filed against
the Company which allege stock option backdating. The complaints
name certain current and former members of the Board of
Directors and certain current and former members of management.
In response to the litigation, a special litigation committee of
the Board of Directors of the Company was established and has
been conducting its own independent review of our stock option
grants and the allegations made in the complaints. The committee
consists of independent board members not named in the
litigation.
The Company has also been informed by the staff of the
Securities and Exchange Commission (the SEC) that it
is conducting an informal inquiry into the Companys stock
option practices. The Company intends to cooperate fully with
the SECs inquiry.
|
|
12. |
Business and Geographic Information and Major Customers |
We have two reportable segments: the Dairy Group and WhiteWave
Foods Company.
Our Dairy Group segment is our largest segment. It manufactures,
markets and distributes a wide variety of branded and private
label dairy case products, such as milk, cream, ice cream,
cultured dairy products and juices, to retailers, distributors,
foodservice outlets, schools and governmental entities across
the United States.
Our WhiteWave Foods Company segment manufactures, develops,
markets and sells a variety of nationally branded soy, dairy and
dairy-related products, such as
Silk®
soymilk and cultured soy products, Horizon
Organic®
dairy products, International
Delight®
coffee creamers, LAND
OLAKES®
creamer and fluid dairy products and Rachels
Organic®
dairy products. WhiteWave Foods Company sells its products to a
variety of customers, including grocery stores, club stores,
natural foods stores, mass merchandisers, convenience stores and
foodservice outlets. Rachels Organic manufactures and
distributes organic dairy products in the United Kingdom under
the Rachels Organic and Divine
Rice®
brand names. A portion of our WhiteWave Foods Companys
products are sold through the Dairy Groups distribution
network. Those sales, together with their related costs, are
included in WhiteWave Foods Company for segment reporting
purposes.
We evaluate the performance of our segments based on operating
profit or loss before gains and losses on the sale of assets,
facility closing and reorganization costs and foreign exchange
gains and losses. In addition, the expense related to
share-based compensation has not been allocated to our segments
and is
-30-
reflected entirely within the caption Corporate.
Therefore, the measure of segment profit or loss presented below
is before such items. The accounting policies of our segments
are the same as those described in the summary of significant
accounting policies set forth in Note 1 to our 2005
Consolidated Financial Statements contained in our 2005 Annual
Report on
Form 10-K.
The amounts in the following tables are obtained from reports
used by our executive management team and do not include any
allocated income taxes or management fees. There are no
significant non-cash items reported in segment profit or loss
other than depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30 |
|
September 30 |
|
|
|
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dairy Group
|
|
$ |
2,204,143 |
|
|
$ |
2,270,310 |
|
|
$ |
6,576,901 |
|
|
$ |
6,690,986 |
|
|
WhiteWave Foods Company
|
|
|
313,649 |
|
|
|
299,095 |
|
|
|
927,816 |
|
|
|
868,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,517,792 |
|
|
$ |
2,569,405 |
|
|
$ |
7,504,717 |
|
|
$ |
7,559,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dairy Group
|
|
$ |
3,168 |
|
|
$ |
19,615 |
|
|
$ |
9,841 |
|
|
$ |
56,091 |
|
|
WhiteWave Foods Company
|
|
|
23,627 |
|
|
|
24,426 |
|
|
|
69,658 |
|
|
|
74,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
26,795 |
|
|
$ |
44,041 |
|
|
$ |
79,499 |
|
|
$ |
130,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dairy Group
|
|
$ |
172,653 |
|
|
$ |
156,498 |
|
|
$ |
505,878 |
|
|
$ |
476,890 |
|
|
WhiteWave Foods Company
|
|
|
36,484 |
|
|
|
36,188 |
|
|
|
92,560 |
|
|
|
77,394 |
|
|
Corporate
|
|
|
(34,920 |
) |
|
|
(36,719 |
) |
|
|
(107,483 |
) |
|
|
(106,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
|
174,217 |
|
|
|
155,967 |
|
|
|
490,955 |
|
|
|
448,021 |
|
|
Facility closing and reorganization costs
|
|
|
(5,471 |
) |
|
|
(17,993 |
) |
|
|
(12,823 |
) |
|
|
(26,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
168,746 |
|
|
$ |
137,974 |
|
|
$ |
478,132 |
|
|
$ |
421,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
(In thousands) |
Assets:
|
|
|
|
|
|
|
|
|
|
Dairy Group
|
|
$ |
5,129,789 |
|
|
$ |
5,197,092 |
|
|
WhiteWave Foods Company
|
|
|
1,376,502 |
|
|
|
1,308,388 |
|
|
Corporate
|
|
|
239,330 |
|
|
|
243,677 |
|
|
Discontinued operations
|
|
|
17,587 |
|
|
|
301,727 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,763,208 |
|
|
$ |
7,050,884 |
|
|
|
|
|
|
|
|
|
|
Geographic Information Less than 1% of our
net sales and long-lived assets relate to operations outside of
the United States.
Significant Customers Our WhiteWave Foods
Company and Dairy Group segments each had a single customer that
represented greater than 10% of their net sales in the first
nine months of 2006. Approximately 17.6% of our consolidated net
sales in the first nine months of 2006 were to this same
customer.
Stock Repurchase Between October 1, 2006
and November 3, 2006, we spent approximately
$29.8 million to repurchase 716,100 shares of our
common stock at an average price of $41.63 per share,
excluding commissions and fees. At November 3, 2006,
approximately $153.1 million remained available under our
stock repurchase authorization.
-31-
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Business Overview
We are a leading food and beverage company. Our Dairy Group is
the largest processor and distributor of milk and various other
dairy products in the United States. The Dairy Group
manufactures and sells its products under a variety of local and
regional brand names and under private labels. Our WhiteWave
Foods Company segment manufactures, markets and sells a variety
of well known soy, dairy and dairy-related nationally branded
products such as:
Silk®
soymilk and cultured soy products, Horizon
Organic®
dairy products, International
Delight®
coffee creamers, and LAND
OLAKES®
creamers and fluid dairy products.
Dairy Group Our Dairy Group segment is our
largest segment, with approximately 88% of our consolidated net
sales in the nine months ended September 30, 2006. Our
Dairy Group manufactures, markets and distributes a wide variety
of branded and private label dairy case products, such as milk,
cream, ice cream, cultured dairy products and juices to
retailers, distributors, foodservice outlets, schools and
governmental entities across the United States. Due to the
perishable nature of the Dairy Groups products, our Dairy
Group delivers the majority of its products directly to its
customers stores in refrigerated trucks or trailers that
we own or lease. This form of delivery is called a direct
store delivery or DSD system and we believe we
have one of the most extensive refrigerated DSD systems in the
United States. The Dairy Group sells its products primarily on a
local or regional basis through its local and regional sales
forces, although some national customer relationships are
coordinated by the Dairy Groups corporate sales
department. Most of the Dairy Groups customers, including
its largest customer, purchase products from the Dairy Group
either by purchase order or pursuant to contracts that are
generally terminable at will by the customer.
WhiteWave Foods Company WhiteWave Foods
Company manufactures, develops, markets and sells a variety of
nationally-branded soy, dairy and dairy-related products, such
as Silk soymilk and cultured soy products; Horizon
Organic dairy and other products; International Delight
coffee creamers; LAND OLAKES creamers and fluid
dairy products and Rachels Organic dairy products.
WhiteWave Foods Company also sells The Organic
Cow®
organic dairy products; White
Wave®
and Tofu
Town®
branded tofu and
Hersheys®
milks and milkshakes. We license the LAND OLAKES
and Hersheys names from third parties.
Recent Developments
Discontinued Operations
Iberian Operations Our Iberian operations
include the manufacture and distribution of private label and
branded milk across Spain and Portugal. We entered the Iberian
market in February 2000 prior to the merger of Suiza Foods
Corporation and Dean Foods Company, which occurred in December
2001, when we believed that opportunities for domestic expansion
appeared limited. With the emergence of the WhiteWave Foods
Company platform and additional growth opportunities within our
domestic Dairy Group, our primary focus has been on our domestic
operations. Accordingly, with the change in our strategic focus,
we concluded that there are other organizations that may be
better positioned to take advantage of the Iberian market. In
the second quarter of 2006, we committed to a plan to sell our
Iberian operations with the expectation that such sale could be
completed within one year. In the second quarter of 2006, we
recognized an estimated non-cash impairment charge of
$46.4 million, net of an income tax benefit of
$8.1 million, representing our best estimate as of
June 30, 2006 of the impairment required based on our
expected proceeds upon sale of the Iberian operations.
On September 14, 2006, we completed the sale of our
operations in Spain for cash proceeds of approximately
$96.3 million. In addition to customary indemnifications of
the purchaser of the business, we have retained contingent
obligations related to regulatory compliance, including an
obligation to pay the purchaser a maximum of 15 million
euros (approximately $19.1 million as of September 30,
2006) if certain regulatory approvals are not received with
respect to a specific facility. Primarily as a result of such
-32-
retained obligations and indemnifications, an incremental loss
on sale of our operations in Spain of $2.4 million (net of
tax) was recognized during the quarter ended September 30,
2006.
In connection with the sale of our operations in Spain, we
entered into an agreement to sell our Portuguese operations
(which comprise the remainder of our Iberian operations) for
approximately $11.4 million subject to regulatory
approvals. Other than transaction related costs, no incremental
loss is expected on the sale of our remaining Iberian
operations. The Iberian operations have been reclassified as
discontinued operations.
Other Discontinued Operations On
June 27, 2005, we completed the spin-off
(Spin-off) of our indirect, majority-owned
subsidiary TreeHouse Foods, Inc. (TreeHouse).
Immediately prior to the Spin-off, we transferred to TreeHouse
(1) the businesses previously conducted by our Specialty
Foods Group segment, (2) the Mocha
Mix®
and Second
Nature®
businesses previously conducted by WhiteWave Foods Company, and
(3) the foodservice salad dressings businesses previously
conducted by the Dairy Group and WhiteWave Foods Company. The
Spin-off was effected by means of a share dividend of the
TreeHouse common stock held by us to our stockholders of record
on June 20, 2005 (the Record Date). In the
distribution, our stockholders received one share of TreeHouse
common stock for every five shares of our common stock held by
them on the Record Date.
On August 22, 2005, we completed the sale of certain
tangible and intangible assets related to the production and
distribution of Maries dips and dressings and
Deans dips. We also licensed the Dean trademark to
Ventura Foods for use on certain non-dairy dips. Our net
proceeds were approximately $189.9 million.
Both the TreeHouse Spin-off and the Maries dips and
dressings and Deans dips transactions were part of
our strategy to focus on our core dairy and branded businesses.
Prior periods have been revised to remove the results of our
former Specialty Foods Group segment and Mocha Mix, Second
Nature and private label dressings businesses and our
Maries dips and dressings and Deans
dips businesses, which have been reclassified as
discontinued operations.
Facility Closing and Reorganization Activities
We recorded a total of approximately $12.8 million in
facility closing and reorganization costs during the first nine
months of 2006, related to previously announced plans. We expect
to incur additional charges related to these restructuring plans
of approximately $5.5 million. Approximately
$3.4 million and $2.1 million of these additional
charges are expected to be completed by December 31, 2006
and 2007, respectively. These charges include the following
costs:
|
|
|
|
|
Workforce reductions as a result of facility closings, facility
reorganizations and consolidation of administrative functions; |
|
|
|
Shutdown costs, including those costs necessary to prepare
abandoned facilities for closure; |
|
|
|
Costs incurred after shutdown, such as lease obligations or
termination costs, utilities and property taxes; |
|
|
|
Costs associated with the reorganization of WhiteWave Foods
Companys supply chain and distribution activities,
including termination of certain contractual agreements; and |
|
|
|
Write-downs of property, plant and equipment and other assets,
primarily for asset impairments as a result of facilities that
are no longer used in operations. The impairments relate
primarily to owned buildings, land and equipment at the
facilities, which are written down to their estimated fair value
and held for sale. |
See Note 10 to our Condensed Consolidated Financial
Statements for more information regarding our facility closing
and reorganization activities.
-33-
Results of Operations
The following table presents certain information concerning our
financial results, including information presented as a
percentage of net sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 | |
|
Nine Months Ended September 30 | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Dollars | |
|
Percent | |
|
Dollars | |
|
Percent | |
|
Dollars | |
|
Percent | |
|
Dollars | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Net sales
|
|
$ |
2,517.8 |
|
|
|
100.0 |
% |
|
$ |
2,569.4 |
|
|
|
100.0 |
% |
|
$ |
7,504.7 |
|
|
|
100.0 |
% |
|
$ |
7,559.1 |
|
|
|
100.0 |
% |
Cost of sales
|
|
|
1,823.8 |
|
|
|
72.4 |
|
|
|
1,918.3 |
|
|
|
74.7 |
|
|
|
5,475.5 |
|
|
|
73.0 |
|
|
|
5,649.6 |
|
|
|
74.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
694.0 |
|
|
|
27.6 |
|
|
|
651.1 |
|
|
|
25.3 |
|
|
|
2,029.2 |
|
|
|
27.0 |
|
|
|
1,909.5 |
|
|
|
25.3 |
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution
|
|
|
416.8 |
|
|
|
16.6 |
|
|
|
399.2 |
|
|
|
15.5 |
|
|
|
1,231.4 |
|
|
|
16.4 |
|
|
|
1,173.5 |
|
|
|
15.5 |
|
|
General and administrative
|
|
|
101.4 |
|
|
|
4.0 |
|
|
|
94.5 |
|
|
|
3.7 |
|
|
|
302.4 |
|
|
|
4.0 |
|
|
|
283.4 |
|
|
|
3.7 |
|
|
Amortization of intangibles
|
|
|
1.6 |
|
|
|
0.1 |
|
|
|
1.4 |
|
|
|
|
|
|
|
4.5 |
|
|
|
|
|
|
|
4.6 |
|
|
|
0.1 |
|
|
Facility closing and reorganization costs
|
|
|
5.5 |
|
|
|
0.2 |
|
|
|
18.0 |
|
|
|
0.7 |
|
|
|
12.8 |
|
|
|
0.2 |
|
|
|
26.8 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
525.3 |
|
|
|
20.9 |
|
|
|
513.1 |
|
|
|
19.9 |
|
|
|
1,551.1 |
|
|
|
20.6 |
|
|
|
1,488.3 |
|
|
|
19.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$ |
168.7 |
|
|
|
6.7 |
% |
|
$ |
138.0 |
|
|
|
5.4 |
% |
|
$ |
478.1 |
|
|
|
6.4 |
% |
|
$ |
421.2 |
|
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30, 2006 Compared to Quarter
Ended September 30, 2005 Consolidated
Results
Net Sales Consolidated net sales decreased
approximately $51.6 million to $2.52 billion during
the third quarter of 2006 from $2.57 billion in the third
quarter of 2005. Net sales by segment are shown in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30 |
|
|
|
|
|
|
|
$ Increase/ |
|
% Increase/ |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
Dairy Group
|
|
$ |
2,204.1 |
|
|
$ |
2,270.3 |
|
|
$ |
(66.2 |
) |
|
|
(2.9 |
)% |
WhiteWave Foods Company
|
|
|
313.7 |
|
|
|
299.1 |
|
|
|
14.6 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,517.8 |
|
|
$ |
2,569.4 |
|
|
$ |
(51.6 |
) |
|
|
(2.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales decreased primarily due to the effects of lower
selling prices in our Dairy Group resulting from the
pass-through of lower Class I raw skim milk and butterfat
costs. This decrease was partly offset by fluid dairy volume
growth in our Dairy Group segment and higher selling prices in
response to higher commodity costs and overall volume increases
at WhiteWave Foods Company. See Results by
Segment for more information.
Cost of Sales All expenses incurred to bring
a product to completion are included in cost of sales, such as
raw material, ingredient and packaging costs; labor costs; and
plant and equipment costs, including costs to operate and
maintain our coolers and freezers. In addition, our Dairy Group
includes costs associated with transporting finished products
from our manufacturing facilities to our own distribution
facilities. Our cost of sales as a percentage of net sales
decreased to 72.4% in the third quarter of 2006 compared to
74.7% in the third quarter of 2005 primarily due to lower raw
milk costs in our Dairy Group segment in the third quarter of
2006.
Operating Costs and Expenses Our operating
expenses increased approximately $12.2 million during the
third quarter of 2006 as compared to the same period in the
prior year. Our operating expense as a percentage of net sales
was 20.9% in the third quarter of 2006 compared to 19.9% during
the third quarter of 2005. Operating expenses increased
primarily due to an increase in distribution costs of
$14.4 million resulting from higher fuel prices and
increased volumes. In addition, general and administrative
expenses
-34-
increased approximately $6.9 million due to higher salaries
and benefits, legal and professional fees and information
technology expenditures partially offset by a reduction in
share-based compensation expense. These increases were offset by
a decline of approximately $12.5 million in facility
closing and reorganization costs. See Results
by Segment for more information.
Operating Income Operating income during the
third quarter of 2006 was $168.7 million, an increase of
$30.7 million from the third quarter of 2005 operating
income of $138.0 million. Our operating margin in the third
quarter of 2006 was 6.7% compared to 5.4% in the third quarter
of 2005. Our operating margin increased primarily as a result of
lower raw milk costs.
Other (Income) Expense Total other expense
increased to $48.0 million in the third quarter of 2006
compared to $37.7 million in the third quarter of 2005.
Interest expense increased to $48.0 million in the third
quarter of 2006 from $37.8 million in the third quarter of
2005 primarily due to higher average debt balances and higher
interest rates.
Income Taxes Income tax expense was recorded
at an effective rate of 38.3% in the third quarter of 2006
compared to 38.0% in the third quarter of 2005. Our tax rate
varies as the mix of earnings contributed by our various
business units changes.
Quarter Ended September 30, 2006 Compared to Quarter
Ended September 30, 2005 Results by
Segment
The key performance indicators of our Dairy Group are sales
volumes, gross profit and operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Dollars | |
|
Percent | |
|
Dollars | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Net sales
|
|
$ |
2,204.1 |
|
|
|
100.0 |
% |
|
$ |
2,270.3 |
|
|
|
100.0 |
% |
Cost of sales
|
|
|
1,619.1 |
|
|
|
73.5 |
|
|
|
1,729.5 |
|
|
|
76.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
585.0 |
|
|
|
26.5 |
|
|
|
540.8 |
|
|
|
23.8 |
|
Operating costs and expenses
|
|
|
412.3 |
|
|
|
18.7 |
|
|
|
384.3 |
|
|
|
16.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$ |
172.7 |
|
|
|
7.8 |
% |
|
$ |
156.5 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Dairy Groups net sales decreased approximately
$66.2 million, or 2.9%, in the third quarter of 2006 versus
the third quarter of 2005. The change in net sales from the
third quarter of 2005 to the third quarter of 2006 was due to
the following:
|
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
(Dollars in millions) |
2005 Net sales
|
|
$ |
2,270.3 |
|
|
|
|
|
|
Acquisitions
|
|
|
3.9 |
|
|
|
0.2 |
% |
|
Volume
|
|
|
4.7 |
|
|
|
0.2 |
|
|
Pricing and product mix
|
|
|
(74.8 |
) |
|
|
(3.3 |
) |
|
|
|
|
|
|
|
|
|
2006 Net sales
|
|
$ |
2,204.1 |
|
|
|
(2.9 |
)% |
|
|
|
|
|
|
|
|
|
The Dairy Groups net sales decreased primarily due to the
effects of lower selling prices resulting from the pass-through
of lower Class I raw skim milk and butterfat costs. In
general, we change the prices that we charge our customers for
fluid dairy products on a monthly basis, as the costs of our raw
materials fluctuate. Class I raw skim milk prices were
approximately 16% lower in the third quarter of 2006 compared to
the third quarter of 2005. The following table sets forth the
average monthly component
-35-
prices of the Class I mover and average monthly
Class II minimum prices for raw skim milk and butterfat for
the third quarter of 2006 compared to the third quarter of 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30* | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
% Change | |
|
|
| |
|
| |
|
| |
Class I raw skim milk mover(3)
|
|
$ |
6.95 |
(1) |
|
$ |
8.24 |
(1) |
|
|
(16 |
)% |
Class I butterfat mover(3)
|
|
|
1.24 |
(2) |
|
|
1.73 |
(2) |
|
|
(28 |
) |
Class II raw skim milk minimum(4)
|
|
|
6.86 |
(1) |
|
|
7.85 |
(1) |
|
|
(13 |
) |
Class II butterfat minimum(4)
|
|
|
1.32 |
(2) |
|
|
1.84 |
(2) |
|
|
(28 |
) |
|
|
* |
The prices noted in this table are not the prices that we
actually pay. The federal order minimum prices at any given
location for Class I raw skim milk or Class I
butterfat are based on the Class I mover prices plus a
location differential. Class II prices noted in the table
are federal minimum prices, applicable at all locations. Our
actual cost also includes producer premiums, procurement costs
and other related charges that vary by location and vendor.
Please see Part I Item 1.
Business Government Regulation Milk
Industry Regulation in our Annual Report on
Form 10-K for
2005, and Known Trends and
Uncertainties Prices of Raw Milk and Other
Inputs in this Quarterly Report for a more complete
description of raw milk pricing. |
|
(1) |
Prices are per hundredweight. |
|
(2) |
Prices are per pound. |
|
(3) |
We process Class I raw skim milk and butterfat into fluid
milk products. |
|
(4) |
We process Class II raw skim milk and butterfat into
products such as cottage cheese, creams and creamers, ice cream
and sour cream. |
These price decreases were partly offset by fluid milk volume
increases during the third quarter of 2006. Fluid milk volumes
(which represented approximately 68% of the Dairy Groups
sales volume during the quarter) increased approximately 1.3%.
We believe the increase in volumes is a result of the superior
value and service that we are able to offer our customers as the
largest dairy processor in the nation.
The Dairy Groups cost of sales as a percentage of net
sales decreased to 73.5% in the third quarter of 2006 compared
to 76.2% in the third quarter of 2005 primarily due to the
decrease in raw milk costs compared to the prior year. In
addition, we reached a favorable resolution of a dispute with
Consolidated Container Company, a supplier of resin and plastic
bottles, resulting in a $7.0 million reduction in cost of
sales in the third quarter of 2006. These decreases were partly
offset by higher resin costs of approximately $9.1 million
during the third quarter of 2006 compared to the third quarter
of 2005. Resin is the primary component used in our plastic
bottles.
The Dairy Groups operating expenses increased
approximately $28.0 million to $412.3 million during
the third quarter of 2006 compared to $384.3 million in the
third quarter of 2005, primarily due to a $16.2 million
increase in distribution costs. Distribution costs increased as
a result of higher fuel prices of approximately
$3.7 million, as well as, increased labor costs and volume.
General and administrative expenses increased approximately
$7.7 million due to higher salaries and benefits,
information technology expenditures, and losses on sales of
fixed assets.
-36-
|
|
|
WhiteWave Foods Company |
The key performance indicators of WhiteWave Foods Company are
sales dollars, gross profit and operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Dollars | |
|
Percent | |
|
Dollars | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Net sales
|
|
$ |
313.7 |
|
|
|
100.0 |
% |
|
$ |
299.1 |
|
|
|
100.0 |
% |
Cost of sales
|
|
|
204.4 |
|
|
|
65.2 |
|
|
|
188.5 |
|
|
|
63.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
109.3 |
|
|
|
34.8 |
|
|
|
110.6 |
|
|
|
37.0 |
|
Operating costs and expenses
|
|
|
72.8 |
|
|
|
23.2 |
|
|
|
74.4 |
|
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$ |
36.5 |
|
|
|
11.6 |
% |
|
$ |
36.2 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
WhiteWave Foods Companys net sales increased by
$14.6 million, or 4.9%, in the third quarter of 2006 versus
the third quarter of 2005. The change in net sales from the
third quarter of 2005 to the third quarter of 2006 was due to
the following:
|
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
(Dollars in millions) |
2005 Net sales
|
|
$ |
299.1 |
|
|
|
|
|
|
Volume
|
|
|
5.6 |
|
|
|
1.9 |
% |
|
Pricing and product mix
|
|
|
9.0 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
2006 Net sales
|
|
$ |
313.7 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
The increase in net sales was primarily due to increased prices
in response to higher raw material costs. Volumes increased
approximately 1.9% related to the growth of our key brands,
particularly Silk and Horizon Organic. Our overall
volume growth was significantly impacted by the elimination of
certain product offerings in late 2005 and early 2006.
Cost of sales as a percentage of net sales for WhiteWave Foods
Company increased to 65.2% in the third quarter of 2006 from
63.0% in the third quarter of 2005. Cost of sales dollars
increased approximately $15.9 million primarily due to
higher commodity costs, including organic raw milk and sugar, as
well as higher sales volumes.
Operating expenses decreased approximately $1.6 million in
the third quarter of 2006 compared to the same period in the
prior year primarily related to a decrease in distribution
expenses due to efficiencies gained through centralizing and
reducing distribution points.
Nine Months Ended September 30, 2006 Compared to Nine
Months Ended September 30, 2005 Consolidated
Results
Net Sales Consolidated net sales decreased to
$7.50 billion during the first nine months of 2006 compared
to $7.56 billion in the first nine months of 2005. Net
sales by segment are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 |
|
|
|
|
|
|
|
$ Increase/ |
|
% Increase/ |
|
|
2006 |
|
2005 |
|
(Decrease) |
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
Dairy Group
|
|
$ |
6,576.9 |
|
|
$ |
6,691.0 |
|
|
$ |
(114.1 |
) |
|
|
(1.7 |
)% |
WhiteWave Foods Company
|
|
|
927.8 |
|
|
|
868.1 |
|
|
|
59.7 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,504.7 |
|
|
$ |
7,559.1 |
|
|
$ |
(54.4 |
) |
|
|
(0.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-37-
Net sales decreased approximately $54.4 million during the
first nine months of 2006 compared to the same period in the
prior year primarily due to the pass-through of lower
Class I raw skim milk and butterfat costs in our Dairy
Group. These price decreases were partly offset by higher
pricing at WhiteWave Foods Company in response to higher
commodity costs, as well as increased volumes in both segments.
See Results by Segment for more
information.
Cost of Sales All expenses incurred to bring
a product to completion are included in cost of sales, such as
raw material, ingredient and packaging costs, labor costs, and
plant and equipment costs, including costs to operate and
maintain our coolers and freezers. In addition, our Dairy Group
includes costs associated with transporting finished products
from our manufacturing facilities to our own distribution
facilities. Our cost of sales as a percentage of net sales
decreased to 73.0% in the first nine months of 2006 compared to
74.7% in the first nine months of 2005 primarily due to lower
raw milk costs in our Dairy Group segment.
Operating Costs and Expenses Our operating
expenses increased $62.8 million during the first nine
months of 2006 as compared to the same period in the prior year.
Our operating expense as a percentage of net sales was 20.6% in
the first nine months of 2006 compared to 19.7% during the first
nine months of 2005. Operating expenses increased primarily due
to an increase in distribution costs of $50.7 million
related to higher fuel costs and increased volumes and an
increase in general and administrative expenses of
$19.0 million due to higher information technology
spending, losses on sales of fixed assets, higher salaries and
benefits, and higher legal and professional fees. These
increases were offset by an approximately $14.0 million
decrease in facility closing and reorganization costs.
Operating Income Our operating margin in the
first nine months of 2006 was 6.4% compared to 5.6% in the first
nine months of 2005. Operating income during the first nine
months of 2006 was $478.1 million, an increase of
$56.9 million from operating income of $421.2 million
during the first nine months of 2005. Operating income increased
primarily due to lower raw milk costs in our Dairy Group
segment. See Results by Segment for more
information.
Other (Income) Expense Total other expense
increased to $144.3 million in the first nine months of
2006 compared to $115.2 million in the first nine months of
2005. Interest expense increased to $144.3 million in the
first nine months of 2006 from $115.7 million in the first
nine months of 2005 primarily due to higher average debt
balances and higher interest rates.
Income Taxes Income tax expense was recorded
at an effective rate of 38.9% in both the first nine months of
2006 and 2005. Our tax rate varies as the mix of earnings
contributed by our various business units changes.
Nine Months Ended September 30, 2006 Compared to Nine
Months Ended September 30, 2005 Results by
Segment
The key performance indicators of our Dairy Group are sales
volumes, gross profit and operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Dollars | |
|
Percent | |
|
Dollars | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Net sales
|
|
$ |
6,576.9 |
|
|
|
100.0 |
% |
|
$ |
6,691.0 |
|
|
|
100.0 |
% |
Cost of sales
|
|
|
4,871.1 |
|
|
|
74.1 |
|
|
|
5,082.5 |
|
|
|
76.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,705.8 |
|
|
|
25.9 |
|
|
|
1,608.5 |
|
|
|
24.0 |
|
Operating costs and expenses
|
|
|
1,199.9 |
|
|
|
18.2 |
|
|
|
1,131.6 |
|
|
|
16.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$ |
505.9 |
|
|
|
7.7 |
% |
|
$ |
476.9 |
|
|
|
7.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
-38-
The Dairy Groups net sales decreased approximately
$114.1 million, or 1.7%, in the first nine months of 2006
versus the first nine months of 2005. The change in net sales
from the first nine months of 2005 to the first nine months of
2006 was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
(Dollars in millions) |
2005 Net sales
|
|
$ |
6,691.0 |
|
|
|
|
|
|
Acquisitions
|
|
|
3.9 |
|
|
|
0.1 |
% |
|
Volume
|
|
|
116.1 |
|
|
|
1.7 |
|
|
Pricing and product mix
|
|
|
(234.1 |
) |
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
2006 Net sales
|
|
$ |
6,576.9 |
|
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
The Dairy Groups net sales decreased primarily due to the
effects of lower selling prices resulting from the pass-through
of lower Class I raw skim milk and butterfat costs. In
general, we change the prices that we charge our customers for
fluid dairy products on a monthly basis, as the costs of our raw
materials fluctuate. Class I raw skim milk prices were
approximately 15% lower in the first nine months of 2006
compared to the first nine months of 2005. The following table
sets forth the average monthly component prices of the
Class I mover and average monthly Class II
minimum prices for raw skim milk and butterfat for the first
nine months of 2006 compared to the same period in 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30* |
|
|
|
|
|
2006 |
|
2005 |
|
% Change |
|
|
|
|
|
|
|
Class I raw skim milk mover(3)
|
|
$ |
7.36 |
(1) |
|
$ |
8.67 |
(1) |
|
|
(15 |
)% |
Class I butterfat mover(3)
|
|
|
1.32 |
(2) |
|
|
1.75 |
(2) |
|
|
(25 |
) |
Class II raw skim milk minimum(4)
|
|
|
7.30 |
(1) |
|
|
7.60 |
(1) |
|
|
(4 |
) |
Class II butterfat minimum(4)
|
|
|
1.31 |
(2) |
|
|
1.74 |
(2) |
|
|
(25 |
) |
|
|
|
|
* |
The prices noted in this table are not the prices that we
actually pay. The federal order minimum prices at any given
location for Class I raw skim milk or Class I
butterfat are based on the Class I mover prices plus a
location differential. Class II prices noted in the table
are federal minimum prices, applicable at all locations. Our
actual cost also includes producer premiums, procurement costs
and other related charges that vary by location and vendor.
Please see Part I Item 1.
Business Government Regulation Milk
Industry Regulation in our Annual Report on
Form 10-K for
2005, and Known Trends and
Uncertainties Prices of Raw Milk and Other
Inputs in this Quarterly Report for a more complete
description of raw milk pricing. |
|
|
(1) |
Prices are per hundredweight. |
|
(2) |
Prices are per pound. |
|
(3) |
We process Class I raw skim milk and butterfat into fluid
milk products. |
|
(4) |
We process Class II raw skim milk and butterfat into
products such as cottage cheese, creams and creamers, ice cream
and sour cream. |
The Dairy Groups sales volumes increased by 1.7% during
the first nine months of 2006 compared to the first nine months
of 2005. Fluid milk volumes (which represented approximately 68%
of the Dairy Groups sales volume during the first nine
months of 2006) increased approximately 2.3% during the first
nine months of 2006 compared to the same period in the prior
year. We believe the increase in volumes is a result of the
superior value and service that we are able to offer our
customers as the largest dairy processor in the nation.
The Dairy Groups cost of sales as a percentage of net
sales decreased to 74.1% in the first nine months of 2006
compared to 76.0% in the first nine months of 2005. Cost of
sales dollars decreased $211.4 million primarily due to
lower raw milk costs in the first nine months of 2006 compared
to the same period in the prior year.
-39-
The Dairy Groups operating expense as a percentage of net
sales increased to 18.2% in the first nine months of 2006 from
16.9% in the first nine months of 2005. Operating expense
dollars increased approximately $68.3 million during the
first nine months of 2006 compared to the first nine months of
2005, primarily due to an increase in distribution costs. Total
distribution costs increased $50.8 million primarily as a
result of higher fuel prices which impacted distribution costs
by approximately $16.3 million, increased deliveries in our
DSD system due to the addition of certain customers and the
acquisition of several small distributors in 2006. General and
administrative expenses increased approximately
$15.2 million primarily due to higher information
technology spending, losses on sales of fixed assets, higher
salaries and benefits, and higher legal and professional fees.
|
|
|
WhiteWave Foods Company |
The key performance indicators of WhiteWave Foods Company are
sales dollars, gross profit and operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Dollars | |
|
Percent | |
|
Dollars | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Net sales
|
|
$ |
927.8 |
|
|
|
100.0 |
% |
|
$ |
868.1 |
|
|
|
100.0 |
% |
Cost of sales
|
|
|
603.4 |
|
|
|
65.0 |
|
|
|
565.8 |
|
|
|
65.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
324.4 |
|
|
|
35.0 |
|
|
|
302.3 |
|
|
|
34.8 |
|
Operating costs and expenses
|
|
|
231.8 |
|
|
|
25.0 |
|
|
|
224.9 |
|
|
|
25.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$ |
92.6 |
|
|
|
10.0 |
% |
|
$ |
77.4 |
|
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
WhiteWave Foods Companys net sales increased by
$59.7 million, or 6.9%, in the first nine months of 2006
versus the first nine months of 2005. The change in net sales
from the first nine months of 2005 to the first nine months of
2006 was due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
Percent |
|
|
|
|
|
|
|
(Dollars in millions) |
2005 Net sales
|
|
$ |
868.1 |
|
|
|
|
|
|
Volume
|
|
|
23.9 |
|
|
|
2.8 |
% |
|
Pricing and product mix
|
|
|
35.8 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
2006 Net sales
|
|
$ |
927.8 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
The increase in net sales was primarily due to higher pricing in
response to increased commodity costs and increased volumes
related to the growth of our brands, particularly Silk
and Horizon Organic. Our overall volume growth was
significantly impacted by the elimination of certain product
offerings in late 2005 and early 2006.
Cost of sales as a percentage of net sales for WhiteWave Foods
Company decreased to 65.0% in the first nine months of 2006 from
65.2% in the first nine months of 2005. Cost of sales dollars
increased $37.6 million primarily due to higher organic raw
milk and sugar costs and increased volumes.
Operating expenses increased approximately $6.9 million in
the first nine months of 2006 compared to the same period in the
prior year primarily due to higher marketing expenses related to
a new marketing campaign for Silk soymilk.
Liquidity and Capital Resources
Historical Cash Flow
During the first nine months of 2006, we met our working capital
needs with cash flow from operations.
-40-
Net cash provided by operating activities from continuing
operations was $427.0 million for the first nine months of
2006 as contrasted to $468.2 million for the same period in
2005, a decrease of $41.2 million. Net cash provided by
operating activities was primarily impacted by changes in
operating assets and liabilities, which declined approximately
$81.3 million in the first nine months of 2006 compared to
the first nine months of the prior year. The decline primarily
relates to changes in working capital balances, lower raw milk
costs, payment of annual employee bonuses and a payment made in
settlement of contractual obligations under a co-pack agreement
entered into prior to our acquisition of an entity.
Net cash used in investing activities from continuing operations
was $89.8 million in the first nine months of 2006 compared
to $9.5 million in the first nine months of 2005, an
increase of $80.3 million. Our capital expenditures totaled
$174.9 million in the first nine months of 2006 compared to
$206.0 in the first nine months of 2005. We received net
proceeds of approximately $96.3 million for divestitures in
the first nine months of 2006 compared to $189.9 million in
the first nine months of 2005.
We repaid a net amount of $231.4 million of debt in the
first nine months of 2006.
Current Debt Obligations
The table below summarizes our obligations for indebtedness and
purchase and lease obligations at September 30, 2006. See
Note 5 to our Condensed Consolidated Financial Statements
for additional information regarding our indebtedness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
Indebtedness, Purchase & |
|
|
|
10/1/06- | |
|
10/1/07- | |
|
10/1/08- | |
|
10/1/09- | |
|
10/1/10- | |
|
|
Lease Obligations |
|
Total | |
|
9/30/07 | |
|
9/30/08 | |
|
9/30/09 | |
|
9/30/10 | |
|
9/30/11 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Senior credit facility
|
|
$ |
1,612.7 |
|
|
$ |
225.0 |
|
|
$ |
225.0 |
|
|
$ |
1,162.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Dean Foods senior notes(1)
|
|
|
500.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500.0 |
|
Subsidiary senior notes(1)
|
|
|
600.0 |
|
|
|
250.0 |
|
|
|
|
|
|
|
200.0 |
|
|
|
|
|
|
|
|
|
|
|
150.0 |
|
Receivables-backed facility
|
|
|
481.2 |
|
|
|
|
|
|
|
|
|
|
|
481.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations and other
|
|
|
13.3 |
|
|
|
9.9 |
|
|
|
0.8 |
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.4 |
|
|
|
0.8 |
|
Purchase obligations(2)
|
|
|
487.0 |
|
|
|
244.5 |
|
|
|
94.6 |
|
|
|
41.7 |
|
|
|
19.7 |
|
|
|
10.7 |
|
|
|
75.8 |
|
Operating leases
|
|
|
474.0 |
|
|
|
104.6 |
|
|
|
91.8 |
|
|
|
79.9 |
|
|
|
66.7 |
|
|
|
47.6 |
|
|
|
83.4 |
|
Interest payments(3)
|
|
|
891.2 |
|
|
|
235.0 |
|
|
|
202.9 |
|
|
|
136.3 |
|
|
|
45.4 |
|
|
|
45.4 |
|
|
|
226.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5,059.4 |
|
|
$ |
1,069.0 |
|
|
$ |
615.1 |
|
|
$ |
2,102.5 |
|
|
$ |
132.5 |
|
|
$ |
104.1 |
|
|
$ |
1,036.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents face value. |
|
(2) |
Primarily represents commitments to purchase minimum quantities
of raw materials used in our production processes, including
organic soybeans and organic raw milk. We enter into these
contracts from time to time in an effort to ensure a sufficient
supply of raw ingredients. In addition, we have contractual
obligations to purchase various services that are part of our
production process. |
|
(3) |
Includes fixed rate interest obligations, as well as interest on
our variable rate debt based on the rates and balances in effect
at September 30, 2006. Interest that may be due in the
future on the variable rate portion of our senior credit
facility and receivables backed-facility will vary based on the
interest rate in effect at the time and the borrowings
outstanding at the time. |
Other Long-Term Liabilities
We offer pension benefits through various defined benefit
pension plans and also offer certain health care and life
insurance benefits to eligible employees and their eligible
dependents upon the retirement of such employees. Reported costs
of providing non-contributory defined pension benefits and other
postretirement benefits are dependent upon numerous factors,
assumptions and estimates. For example, these costs are impacted
by actual employee demographics (including age, compensation
levels and
-41-
employment periods), the level of contributions made to the plan
and earnings on plan assets. Our pension plan assets are
primarily made up of equity and fixed income investments.
Changes made to the provisions of the plan may impact current
and future pension costs. Fluctuations in actual equity market
returns, as well as changes in general interest rates may result
in increased or decreased pension costs in future periods.
Pension costs may be significantly affected by changes in key
actuarial assumptions, including anticipated rates of return on
plan assets and the discount rates used in determining the
projected benefit obligation and pension costs.
We expect to contribute approximately $36.1 million to the
pension plans and approximately $2.6 million to the
postretirement health plans in 2006.
Other Commitments and Contingencies
On December 21, 2001, in connection with our acquisition of
Legacy Dean, we issued a contingent, subordinated promissory
note to Dairy Farmers of America (DFA) in the
original principal amount of $40 million. DFA is our
primary supplier of raw milk, and the promissory note is
designed to ensure that DFA has the opportunity to continue to
supply raw milk to certain of our facilities until 2021, or be
paid for the loss of that business. The promissory note has a
20-year term and bears
interest based on the consumer price index. Interest will not be
paid in cash, but will be added to the principal amount of the
note annually, up to a maximum principal amount of
$96 million. We may prepay the note in whole or in part at
any time, without penalty. The note will only become payable if
we materially breach or terminate one of our milk supply
agreements with DFA without renewal or replacement. Otherwise,
the note will expire at the end of 20 years, without any
obligation to pay any portion of the principal or interest.
Payments we make under this note, if any, will be expensed as
incurred.
We also have the following commitments and contingent
liabilities, in addition to contingent liabilities related to
ordinary course litigation, investigations and audits:
|
|
|
|
|
certain indemnification obligations related to businesses that
we have divested; |
|
|
|
certain lease obligations, which require us to guarantee the
minimum value of the leased asset at the end of the
lease; and |
|
|
|
selected levels of property and casualty risks, primarily
related to employee health care, workers compensation
claims and other casualty losses. |
See Note 11 to our Condensed Consolidated Financial
Statements for more information about our commitments and
contingent obligations.
Future Capital Requirements
During 2006, we intend to invest a total of approximately
$250 million in capital expenditures primarily for our
existing manufacturing facilities and distribution capabilities.
We expect cash interest to be approximately $185 million to
$190 million based on current debt levels and cash taxes to
be approximately $50 million to $55 million.
As of September 30, 2006 the portion of our
long-term debt due
within the next 12 months totaled $485.0 million. We
expect that cash flow from operations together with availability
under our existing senior credit facility will be sufficient to
meet our anticipated future capital requirements. As of
November 3, 2006, approximately $1.36 billion was
available for future borrowings under our senior credit facility.
Known Trends and Uncertainties
Prices of Raw Milk and Other Inputs
Dairy Group The primary raw material used in
our Dairy Group is raw milk (which contains both raw skim milk
and butterfat). The federal government and certain state
governments set minimum prices
-42-
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).
Another significant raw material used by our Dairy Group is
resin, which is used to make plastic bottles. We purchase
approximately 27 million pounds of resin and bottles per
month. Resin is a petroleum-based product, and the price of
resin is subject to fluctuations based on changes in crude oil
prices. Our Dairy Group purchases approximately 4 million
gallons of diesel fuel per month to operate our extensive direct
store delivery system. In general, our Dairy Group changes the
prices that it charges for Class I dairy products on a
monthly basis, as the costs of raw milk, packaging, fuel and
other materials fluctuate. Prices for some Class II
products are also changed monthly while others are changed from
time to time as circumstances warrant. However, there can be a
lag between the time of a raw material cost increase or decrease
and a corresponding price change to our customers, especially in
the case of Class II butterfat because Class II
butterfat prices for each month are not announced by the
government until after the end of that month. Also, in some
cases we are competitively or contractually constrained with the
means and timing of implementing price changes. These factors
can cause volatility in our earnings. Our sales and operating
profit margin fluctuate with the price of our raw materials and
other inputs.
During the first nine months of 2006, Class I raw skim milk
and butterfat prices declined. We expect raw skim milk and
butterfat prices to increase in the fourth quarter of 2006.
However, these prices are difficult to predict, and we change
our forecasts frequently based on current market activity.
During the first nine months of 2006, the prices of resin and
fuel have continued to increase. As resin supplies have from
time to time been insufficient to meet demand, we are
undertaking all reasonable measures in an attempt to secure an
adequate resin supply; however, there can be no assurance that
we will always be successful in our attempts. We expect prices
of both resin and diesel fuel to remain high throughout the
remainder of 2006.
WhiteWave Foods Company A significant raw
material used to manufacture products sold by WhiteWave Foods
Company is organic soybeans. We have entered into supply
agreements for organic soybeans, which we believe will meet our
needs for 2006 and 2007. Generally, these agreements provide for
pricing at fixed levels. However, should our need for organic
soybeans exceed the quantity that we have under contract, or if
the suppliers do not perform under the contracts, we may have
difficulty obtaining sufficient supply, and the price we could
be required to pay could be significantly higher.
Significant raw materials used in our products include organic
raw milk and sugar. Organic raw milk is not readily available
and the growth of our organic dairy business depends on us being
able to procure sufficient quantities of organic raw milk in
time to meet our needs. We obtain our supply of organic raw milk
by entering into one to two year agreements with farmers
pursuant to which the farmers agree to sell us specified
quantities of organic raw milk for fixed prices for the duration
of the agreement. We also source approximately 20% of our
organic raw milk supply from our own farms. The industry-wide
demand for organic raw milk has exceeded supply, resulting in
our inability to fully meet customer demand. As a result, at
times we are forced to limit quantities we ship to our
customers. While we are not currently on allocation, we expect
supply to be tight for the foreseeable future. Also, as our
contracts with farmers expire, we may have to renew at higher
prices as a result of increased competition for organic raw milk
-43-
supply. The increase in the demand for organic milk combined
with competitive activity and a limited supply has put
significant upward pressure on organic milk costs. We also have
experienced an increase in sugar costs during the first nine
months of 2006 and expect these costs to remain high during the
remainder of the year.
Competitive Environment
There has been significant consolidation in the retail grocery
industry in recent years, and this trend is continuing. As our
customer base consolidates, we expect competition to intensify
as we compete for the business of fewer customers. There can be
no assurance that we will be able to keep our existing
customers, or gain new customers. There are several large
regional grocery chains that have captive dairy operations. As
the consolidation of the grocery industry continues, we could
lose sales if any one or more of our existing customers were to
be sold to a chain with captive dairy operations.
Many of our retail customers have become increasingly price
sensitive in the current intensely competitive environment. Over
the past few years, we have been subject to a number of
competitive bidding situations in our Dairy Group, which reduced
our profitability on sales to several customers. We expect this
trend to continue. In bidding situations, we may lose certain
customers altogether. The loss of any of our largest customers
could have a material adverse impact on our financial results.
We do not have contracts with many of our largest customers, and
most of the contracts that we do have are generally terminable
at will by the customer.
Both the difficult economic environment and the increased
competitive environment at the retail level have caused
competition to become increasingly intense at the processor
level. We expect this trend to continue for the foreseeable
future.
Tax Rate
Our tax rate was 38.9% for the first nine months of 2006 and
2005. We expect our effective tax rate for the full year 2006 to
be approximately 39.0%.
See Part II Item 1A Risk
Factors for a description of various other risks and
uncertainties concerning our business.
|
|
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Fluctuations
In order to reduce the volatility of earnings that arises from
changes in interest rates, we manage interest rate risk through
the use of interest rate swap agreements. These swap agreements
provide hedges for loans under our senior credit facility by
limiting or fixing the LIBOR interest rates specified in the
senior credit facility at the interest rates noted below until
the indicated expiration dates.
The following table summarizes our various interest rate
agreements in effect at September 30, 2006:
|
|
|
|
|
|
|
|
|
Fixed Interest Rates |
|
Expiration Date |
|
Notional Amounts |
|
|
|
|
|
|
|
|
|
(In millions) |
3.65% to 6.78%
|
|
|
December 2006 |
|
|
$ |
550 |
|
4.81% to 4.84%
|
|
|
December 2007 |
|
|
|
500 |
|
4.07% to 4.27%
|
|
|
December 2010 |
|
|
|
450 |
|
-44-
The following table summarizes our various interest rate
agreements in effect at December 31, 2005:
|
|
|
|
|
|
|
|
|
Fixed Interest Rates |
|
Expiration Date |
|
Notional Amounts |
|
|
|
|
|
|
|
|
|
(In millions) |
3.65% to 6.78%
|
|
|
December 2006 |
|
|
$ |
625 |
|
4.81% to 4.84%
|
|
|
December 2007 |
|
|
|
500 |
|
4.07% to 4.27%
|
|
|
December 2010 |
|
|
|
500 |
|
We are exposed to market risk under these arrangements due to
the possibility of interest rates on our senior credit facility
falling below the rates on our interest rate derivative
agreements. We recorded $5.6 million of interest income,
net of taxes, during the first nine months of 2006 primarily as
a result of interest rates on our variable rate debt rising
above the agreed-upon interest rate on our existing swap
agreements. Credit risk under these arrangements is remote since
the counterparties to our interest rate derivative agreements
are major financial institutions.
A majority of our debt obligations are currently at variable
rates. We have performed a sensitivity analysis assuming a
hypothetical 10% adverse movement in interest rates. As of
September 30, 2006, the analysis indicated that such
interest rate movement would not have a material effect on our
financial position, results of operations or cash flows.
However, actual gains and losses in the future may differ
materially from that analysis based on changes in the timing and
amount of interest rate movement and our actual exposure and
hedges.
Foreign Currency
We are exposed to foreign currency risk due to operating cash
flows that are denominated in foreign currencies. Our most
significant foreign currency exposures relate to the euro and
British pound. We have performed a sensitivity analysis assuming
a hypothetical 10% adverse movement in foreign currency exchange
rates. As of September 30, 2006, the analysis indicated
that such foreign currency exchange rate change would not have a
material effect on our financial position, results of operations
or cash flows.
Butterfat
Our Dairy Group utilizes a significant amount of butterfat to
produce Class II products. This butterfat is acquired
through the purchase of raw milk and bulk cream. Butterfat
acquired in raw milk is priced based on the Class II
butterfat price in federal orders, which is announced near the
end of the applicable month. The Class II butterfat price
can generally be tied to the pricing of AA butter traded on the
CME. The cost of butterfat acquired in bulk cream is typically
based on a multiple of the AA butter price on the CME. From time
to time, we purchase butter futures and butter inventory in an
effort to better manage our butterfat cost in Class II
products. Futures contracts are marked to market in accordance
with SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, and physical inventory
is valued at the lower of cost or market. We are exposed to
market risk under these arrangements if the cost of butter falls
below the cost that we have agreed to pay in a futures contract
or that we actually paid for the physical inventory and we are
unable to pass on the difference to our customers. At this time
we believe that potential losses due to butterfat hedging
activities would not have a material impact on our consolidated
financial position, results of operations or operating cash flow.
|
|
Item 4. |
Controls and Procedures |
Controls Evaluation and Related Certifications
We conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and
procedures (Disclosure Controls) as of the end
of the period covered by this quarterly report. The controls
evaluation was done under the supervision and with the
participation of management, including our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO).
-45-
Attached as exhibits to this quarterly report are certifications
of the CEO and the CFO, which are required in accordance with
Rule 13a-14 of the
Exchange Act. This Controls and Procedures section includes the
information concerning the controls evaluation referred to in
the certifications and it should be read in conjunction with the
certifications for a more complete understanding of the topics
presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to
reasonably assure that information required to be disclosed in
our reports filed with the Securities and Exchange Commission
(the SEC) is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms. Disclosure Controls are also designed to
reasonably assure that such information is accumulated and
communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required
disclosure. Our Disclosure Controls include components of our
internal control over financial reporting, which consists of
control processes designed to provide reasonable assurance
regarding the reliability of our financial reporting and the
preparation of financial statements in accordance with US
generally accepted accounting principles.
Limitations on the Effectiveness of Controls
We do not expect that our Disclosure Controls or our internal
control over financial reporting will prevent all errors and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control systems objectives will be met. Further,
the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Controls can also
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
Scope of the Controls Evaluation
Our evaluations of our Disclosure Controls include reviews of
the controls objectives and design, our implementation of
the controls and the effect of the controls on the information
generated for use in our SEC filings. In the course of our
controls evaluations, we seek to identify data errors, controls
problems or acts of fraud and confirm that appropriate
corrective actions, including process improvements, are
undertaken. Many of the components of our Disclosure Controls
are evaluated on an ongoing basis by our Audit Services
department. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls, and to modify
them as necessary. Our intent is to maintain the Disclosure
Controls as dynamic systems that change as conditions warrant.
-46-
Changes in Internal Control over Financial Reporting
During the third quarter of 2006, WhiteWave Foods Company
implemented SAP as its primary financial reporting and resource
planning system. SAP was implemented at all locations of
WhiteWave Foods Company in the United States except for the
manufacturing facilities located in City of Industry, CA,
Jacksonville, FL and Mt. Crawford, VA. WhiteWave Foods Company
will implement SAP at these facilities during the first half of
2007.
Conclusions
Based upon our most recent controls evaluation, our CEO and CFO
have concluded that as of the end of the period covered by this
quarterly report, our Disclosure Controls were effective at the
reasonable assurance level. Other than the implementation of SAP
as discussed above, there was no change in our internal control
over financial reporting in the quarter ended September 30,
2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
-47-
Part II Other Information
|
|
Item 1. |
Legal Proceedings |
We are not party to, nor are our properties the subject of, any
material pending legal proceedings. However, we are parties from
time to time to certain claims, litigation, audits and
investigations. We believe that we have established adequate
reserves to satisfy any potential liability we may have under
all such claims, litigations, audits and investigations that are
currently pending. In our opinion, the settlement of any such
currently pending or threatened matter is not expected to have a
material adverse impact on our financial position, results of
operations or cash flows.
Two shareholder derivative complaints have been filed in July
and October, 2006 in the district court of Dallas County, Texas,
against the Company which allege stock option backdating. The
complaints name certain current and former members of the Board
of Directors and certain current and former members of
management. In response to the litigation, a special litigation
committee of the Board of Directors of the Company was
established and has been conducting its own independent review
of our stock option grants and the allegations made in the
complaints. The committee consists of independent board members
not named in the litigation.
The Company also has been informed by the staff of the
Securities and Exchange Commission (the SEC) that it
is conducting an informal inquiry into the Companys stock
option practices. The Company intends to cooperate fully with
the SECs inquiry.
This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act.
Statements that are not historical in nature are forward-looking
statements about our future that are not statements of
historical fact. Most of these statements are found in this
report under the following subheadings: Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Quantitative and Qualitative
Disclosures About Market Risk. In some cases, you can
identify these statements by terminology such as
may, should, could,
expects, seek to,
anticipates, plans,
believes, estimates,
intends, predicts, projects,
potential or continue or the negative of
such terms and other comparable terminology. These statements
are only predictions, and in evaluating those statements, you
should carefully consider the information above, including in
Known Trends and Uncertainties, as well
as the risks outlined below. Actual performance or results may
differ materially and adversely. Except as reported in any
previously filed Quarterly Report on
Form 10-Q and the
third and sixth items identified below, there have been no
material changes from the risk factors disclosed in our Annual
Report on
Form 10-K for the
year ended December 31, 2005.
Reorganization of Our WhiteWave Foods Company Segment
Could Temporarily Adversely Affect the Performance of the
Segment
In 2004, we began the process of consolidating the operations of
the three operating units that comprise our WhiteWave Foods
Company segment into a single business. During 2005, we
appointed a new President of WhiteWave Foods, which was a key
step in the development of a consolidated leadership team for
the organization. We also completed the consolidation of the
sales, marketing and research and development organization and
the supply chain integration is in process. We consolidated most
product manufacturing into five primary facilities, three of
which were transferred from our Dairy Group in 2005, and we
narrowed our network of co-packers. In 2006, we will continue to
focus on streamlining our product portfolio, focusing on the
most profitable opportunities and on continuing to optimize our
supply chain. We are in the process of implementing the SAP
platform across WhiteWave Foods Company, which we expect will
enable us to more effectively and efficiently manage our supply
chain and business processes. During the third quarter of 2006,
we implemented SAP at all locations of WhiteWave Foods Company
in the United States except for three of our manufacturing
facilities. We will implement SAP at these facilities during the
first half of 2007. Our failure to successfully manage this
process could cause us
-48-
to incur unexpected costs or to lose customers or sales, which
could have a material adverse effect on our financial results.
Reorganization of our Dairy Group Segment Could
Temporarily Adversely Affect the Performance of the
Segment
During the first quarter of 2006, we started the process of
realigning our Dairy Group segment in order to further
streamline our organization, improve efficiency within our
operations and better meet the needs of our customers. Effective
January 1, 2006, we transitioned from five operating
regions to three operating regions. We are currently focused on
reorganizing our purchasing and other administrative functions
to better leverage our scale, which we expect will enable us to
more effectively and efficiently manage our business processes.
Furthermore, we are in the process of consolidating our
information technology systems, including the implementation of
standard accounting and distribution software packages. Our
failure to successfully manage this process could cause us to
incur unexpected costs, which could have a material adverse
effect on our financial results.
The Consolidation of Retail Customers May Put Pressures on
the Companys Operating Margins and Profitability
The Companys customers such as supermarkets, warehouse
clubs and food distributors, have consolidated in recent years
and consolidation is expected to continue. These consolidations
have produced large, sophisticated customers with increased
buying power. These customers also may use shelf space currently
used for the Companys products for their private label
products. If the Company fails to respond to these trends, its
volume growth could slow or it may need to lower prices or
increase promotional spending for its products, any of which
would adversely affect its profitability.
Changes in Raw Material and Other Input Costs Can
Adversely Affect Us
Raw skim milk is the most significant raw material that we use
in our Dairy Group. Organic raw milk, organic soy beans and
sugar are significant inputs utilized by WhiteWave Foods
Company. The prices of these materials increase and decrease
based on supply and demand, and in some cases, governmental
regulation. Weather also affects the availability and pricing of
these inputs. In many cases we are able to adjust our pricing to
reflect changes in raw material costs. Volatility in the cost of
our raw materials can adversely affect our performance as price
changes often lag changes in costs. These lags tend to erode our
profit margins. Furthermore, cost increases may exceed the price
increases we are able to pass along to our customers. Extremely
high raw material costs also can put downward pressure on our
margins and our volumes. Although we cannot predict future
changes in raw material costs, we do expect raw material prices
to increase throughout 2006.
Because our Dairy Group delivers the majority of its products
directly to customers through its direct store
delivery system, we are a large consumer of fuel.
Similarly, our WhiteWave Foods business is impacted by the costs
of petroleum-based products through the use of common carriers
in delivering their products. The Dairy Group utilizes a
significant amount of resin, which is the primary component used
in our plastic bottles. Over the past year, the prices of resin
and fuel have increased and resin supplies have from time to
time been insufficient to meet demand. Increases in fuel and
resin prices can adversely affect our results of operations. In
addition, a disruption in our ability to secure an adequate
resin supply could adversely affect our operations.
Our Products Could Attract Increased Competitive Activity,
Which Could Impede Our Growth Rate and Cost Us Sales and, in the
Case of Organic Products, Put Pressure on the Availability of
Raw Materials
Our Silk soymilk and Horizon Organic organic food
and beverage products have leading market shares in their
categories and have benefited in many cases from being the first
to introduce products in their categories. As soy and organic
products continue to gain in popularity with consumers, we
expect our products in these categories to continue to attract
competitors. Many large food and beverage companies
-49-
have substantially more resources than we do, and they may be
able to market their soy and organic products more successfully
than us, which could cause our growth rate in these categories
to be slower than our forecast and could cause us to lose sales.
The increase in popularity of soy and organic milks is also
attracting private label competitors who sell their products at
a lower price. The success of private label brands could
adversely affect our sales and profitability. The willingness of
consumers to purchase the Companys products will depend
upon the Companys ability to offer products providing the
right consumer benefits at the right price. Furthermore, in
periods of economic uncertainty, consumers tend to purchase more
private label or other lower-priced products which could result
in a reduction of sales. Finally, there is a limited supply of
organic raw materials in the United States, especially organic
soybeans and organic raw milk. New entrants into our markets can
reduce available supply and drive up costs. Even without new
entrants, our own growth can put pressure on the availability
and price of organic raw materials.
Our International Delight coffee creamer competes
intensely with Nestlé CoffeeMate business, and our
Hersheys milks and milkshakes compete intensely
with Nestlé Nesquik. Nestle has significantly
greater resources than we do, which allows them to promote their
products more aggressively. Our failure to successfully compete
with Nestle could have a material adverse effect on the sales
and profitability of our International Delight and/or our
Hersheys businesses.
The Company May Experience Liabilities or Negative Effects
on Its Reputation as a Result of Product Recalls, Product
Injuries or Other Legal Claims
The Company sells products for human consumption, which involves
a number of legal risks. Product contamination, spoilage or
other adulteration, product misbranding or product tampering
could require the Company to recall products. The Company also
may be subject to liability if its products or operations
violate applicable laws or regulations or in the event its
products cause injury, illness or death. In addition, the
Company advertises its 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 the Company or a widespread product recall may
negatively impact the Companys profitability. Even if a
product liability or consumer fraud claim is unsuccessful or is
not merited, the negative publicity surrounding such assertions
regarding the Companys products or processes could
adversely affect its reputation and brand image.
Changes in Laws, Regulations and Accounting Standards
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 and
numerous related regulations promulgated by the Securities and
Exchange Commission, the Public Company Accounting Oversight
Board 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.
-50-
Loss of Rights to Any of Our Licensed Brands Could
Adversely Affect Our Sales and Profits
We sell certain of our products under licensed brand names such
as
Borden®,
Hersheys, LAND OLAKES,
Pet®
and others. In some cases, we have invested significant capital
in product development and marketing and advertising related to
these licensed brands. Should our rights to manufacture and sell
products under any of these names be terminated for any reason,
our financial performance and results of operations could be
materially and adversely affected.
We Have Substantial Debt and Other Financial Obligations
and We May Incur Even More Debt
We have substantial debt and other financial obligations and
significant unused borrowing capacity. See
Liquidity and Capital Resources.
We have pledged substantially all of our assets (including the
assets of our subsidiaries) to secure our indebtedness. Our high
debt level and related debt service obligations:
|
|
|
|
|
require us to dedicate significant cash flow to the payment of
principal and interest on our debt which reduces the funds we
have available for other purposes, |
|
|
|
may limit our flexibility in planning for or reacting to changes
in our business and market conditions, |
|
|
|
impose on us additional financial and operational
restrictions, and |
|
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|
expose us to interest rate risk since a portion of our debt
obligations are at variable rates. |
The interest rate on our debt is based on our debt rating, as
issued by Standard & Poors and Moodys. We
have no ability to control the ratings issued by
Standard & Poors and Moodys. A downgrade in
our debt rating could cause our interest rate to increase, which
could adversely affect our ability to achieve our targeted
profitability level, as well as our cash flow.
Our ability to make scheduled payments on our debt and other
financial obligations depends on our financial and operating
performance. Our financial and operating performance is subject
to prevailing economic conditions and to financial, business and
other factors, some of which are beyond our control. A
significant increase in interest rates could adversely impact
our net income. If we do not comply with the financial and other
restrictive covenants under our credit facilities, we may
default under them. Upon default, our lenders could accelerate
the indebtedness under the facilities, foreclose against their
collateral or seek other remedies, which would jeopardize our
ability to continue our current operations.
-51-
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
The following table summarizes the repurchase of our common
stock during 2006:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Maximum |
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|
|
|
|
|
|
Number (or |
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
Total Number of |
|
Dollar Value) of |
|
|
|
|
|
|
Shares (or Units) |
|
Shares (or Units) |
|
|
|
|
|
|
Purchased as Part |
|
that May Yet be |
|
|
Total Number of |
|
Average Price |
|
of Publicly |
|
Purchased Under |
|
|
Shares (or Units) |
|
Paid Per |
|
Announced Plans |
|
the Plans or |
Period |
|
Purchased |
|
Share(1) |
|
or Programs |
|
Programs(2) |
|
|
|
|
|
|
|
|
|
January 2006
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
February 2006
|
|
|
400,000 |
|
|
|
38.37 |
|
|
|
70,382,766 |
|
|
|
3.2 million |
|
March 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 2006
|
|
|
2,050,800 |
|
|
|
36.25 |
|
|
|
72,433,566 |
|
|
|
228.8 million |
|
June 2006
|
|
|
1,286,400 |
|
|
|
35.69 |
|
|
|
73,719,966 |
|
|
|
182.9 million |
|
July 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,737,200 |
|
|
|
36.29 |
|
|
|
73,719,966 |
|
|
|
182.9 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes fees and commissions paid on stock repurchases. |
|
(2) |
Amount represents maximum amount authorized for share
repurchases. At September 30, 2006, approximately
$182.9 million remained available pursuant to the stock
repurchase program approved by our Board of Directors on
May 3, 2006, which allowed for the repurchase of an
additional $300 million in stock beyond amounts previously
authorized. The amount can be increased by actions of our Board
of Directors. |
(a) Exhibits
|
|
|
|
|
|
10 |
.1 |
|
Executive Severance Pay Plan |
|
|
31 |
.1 |
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31 |
.2 |
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
32 |
.1 |
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
32 |
.2 |
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
-52-
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
DEAN FOODS COMPANY |
|
|
/s/ Ronald L. McCrummen |
|
|
|
Ronald L. McCrummen |
|
Senior Vice President and Chief Accounting Officer |
November 9, 2006
-53-