UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2015
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from              to             
Commission File Number 001-12755 
 
Dean Foods Company
(Exact name of the registrant as specified in its charter)
 
Delaware
 
75-2559681
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
2711 North Haskell Avenue, Suite 3400
Dallas, Texas 75204
(214) 303-3400
(Address, including zip code, and telephone number, including area code, of the registrant’s principal executive offices) 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer)”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
ý
 
 
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  ý
As of May 4, 2015, the number of shares of the registrant's common stock outstanding was: 94,357,083.
Common Stock, par value $.01


Table of Contents
 


2

Part I — Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
30,056

 
$
16,362

Receivables, net allowances of $14,869 and $14,850
655,135

 
747,630

Income tax receivable
7,203

 
64,443

Inventories
254,657

 
251,831

Deferred income taxes
52,727

 
50,362

Prepaid expenses and other current assets
41,011

 
49,432

Total current assets
1,040,789

 
1,180,060

Property, plant and equipment, net
1,158,550

 
1,172,596

Goodwill
86,841

 
86,841

Identifiable intangible and other assets, net
189,271

 
294,724

Deferred income taxes
38,056

 
35,415

Total
$
2,513,507

 
$
2,769,636

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
693,824

 
$
774,900

Current portion of debt
1,188

 
698

Current portion of litigation settlements
18,853

 
18,853

Total current liabilities
713,865

 
794,451

Long-term debt
852,238

 
916,481

Deferred income taxes
99,385

 
137,944

Other long-term liabilities
279,861

 
276,318

Long-term litigation settlements
17,551

 
17,124

Commitments and contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Preferred stock, none issued
—

 
—

Common stock, 94,355,048 and 94,080,840 shares issued and outstanding, with a par value of $0.01 per share
944

 
941

Additional paid-in capital
748,194

 
752,375

Accumulated deficit
(114,755
)
 
(41,015
)
Accumulated other comprehensive loss
(83,776
)
 
(84,983
)
Total stockholders’ equity
550,607

 
627,318

Total
$
2,513,507

 
$
2,769,636


See Notes to unaudited Condensed Consolidated Financial Statements.


3

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
 
Three Months Ended 
 March 31
 
2015
 
2014
Net sales
$
2,050,762

 
$
2,341,040

Cost of sales
1,572,453

 
1,924,865

Gross profit
478,309

 
416,175

Operating costs and expenses:
 
 
 
Selling and distribution
338,184

 
339,379

General and administrative
87,476

 
72,299

Amortization of intangibles
706

 
744

Facility closing and reorganization costs
1,245

 
977

Impairment of intangible assets
109,910

 
—

Litigation settlements
—

 
(2,521
)
Total operating costs and expenses
537,521

 
410,878

Operating income (loss)
(59,212
)
 
5,297

Other (income) expense:
 
 
 
Interest expense
16,528

 
15,023

Other income, net
(446
)
 
(321
)
Loss on early retirement of long- term debt
43,609

 
—

Total other (income) expense
59,691

 
14,702

Loss from continuing operations before income taxes
(118,903
)
 
(9,405
)
Income tax expense (benefit)
(45,252
)
 
387

Loss from continuing operations
(73,651
)
 
(9,792
)
Gain (loss) on sale of discontinued operations, net of tax
(89
)
 
836

Net loss
$
(73,740
)
 
$
(8,956
)
Average common shares:
 
 
 
Basic
94,222,243

 
94,398,665

Diluted
94,222,243

 
94,398,665

Basic income (loss) per common share:
 
 
 
Loss from continuing operations
$
(0.78
)
 
$
(0.10
)
Income from discontinued operations
—

 
0.01

Net loss
$
(0.78
)
 
$
(0.09
)
Diluted income (loss) per common share:
 
 
 
Loss from continuing operations
$
(0.78
)
 
$
(0.10
)
Income from discontinued operations
—

 
0.01

Net loss
$
(0.78
)
 
$
(0.09
)
Cash dividends declared per common share
$
0.07

 
$
0.07


See Notes to unaudited Condensed Consolidated Financial Statements.

4

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
 
Three Months Ended 
 March 31
 
2015
 
2014
Net loss
$
(73,740
)
 
$
(8,956
)
Other comprehensive income (loss):
 
 
 
Cumulative translation adjustments
(170
)
 
555

Net change in fair value of derivative instruments, net of tax
(87
)
 
(16
)
Net pension and other postretirement liability adjustment, net of tax
1,464

 
705

Reclassification to income statement related to de-designation of cash flow hedges
—

 
(220
)
Other comprehensive income
1,207

 
1,024

Comprehensive loss
$
(72,533
)
 
$
(7,932
)

See Notes to unaudited Condensed Consolidated Financial Statements.

5

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
Common Stock
 
 
 
Retained Earnings
(Accumulated
Deficit)
 
Accumulated Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity 
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
 
 
Balance, December 31, 2014
94,080,840

 
$
941

 
$
752,375

 
$
(41,015
)
 
$
(84,983
)
 
$
627,318

Issuance of common stock, net of tax impact of share-based compensation
274,208

 
3

 
202

 
—

 
—

 
205

Share-based compensation expense
—

 
—

 
2,221

 
—

 
—

 
2,221

Cash dividends paid
 
 
 
 
(6,604
)
 
—

 
—

 
(6,604
)
Net loss
—

 
—

 
—

 
(73,740
)
 
—

 
(73,740
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of derivative instruments, net of tax benefit of $54
—

 
—

 
—

 
—

 
(87
)
 
(87
)
Cumulative translation adjustment
—

 
—

 
—

 
—

 
(170
)
 
(170
)
Pension and other postretirement benefit liability adjustment, net of tax of $925
—

 
—

 
—

 
—

 
1,464

 
1,464

Balance, March 31, 2015
94,355,048

 
$
944

 
$
748,194

 
$
(114,755
)
 
$
(83,776
)
 
$
550,607

 

See Notes to unaudited Condensed Consolidated Financial Statements.

6

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
Common Stock
 
 
 
Retained
 
Accumulated
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Additional
Paid-In Capital
 
Earnings
(Accumulated
Deficit)
 
Other
Comprehensive
Income (Loss)
 
Balance, December 31, 2013
94,831,377

 
$
948

 
$
791,276

 
$
(20,719
)
 
$
(57,190
)
 
$
714,315

Issuance of common stock, net of tax impact of share-based compensation
367,672

 
4

 
524

 
—

 
—

 
528

Share-based compensation expense
—

 
—

 
950

 
—

 
—

 
950

Repurchase of common stock
(1,727,275
)
 
(17
)
 
(24,983
)
 
—

 
—

 
(25,000
)
Cash dividend paid
—

 
—

 
(6,543
)
 
—

 
—

 
(6,543
)
Net loss
—

 
—

 
—

 
(8,956
)
 
—

 
(8,956
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of derivative instruments, net of tax benefit of $11
—

 
—

 
—

 
—

 
(16
)
 
(16
)
Amounts reclassified to income statement related to de-designation of cash flow hedges, net of tax benefit of $139
—

 
—

 
—

 
—

 
(220
)
 
(220
)
Cumulative translation adjustment
—

 
—

 
—

 
—

 
555

 
555

Pension and other postretirement benefit liability adjustment, net of tax of $803
—

 
—

 
—

 
—

 
705

 
705

Balance, March 31, 2014
93,471,774

 
$
935

 
$
761,224

 
$
(29,675
)
 
$
(56,166
)
 
$
676,318

 

See Notes to unaudited Condensed Consolidated Financial Statements.


7

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
Three Months Ended 
 March 31
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(73,740
)
 
$
(8,956
)
(Gain) loss on sale of discontinued operations, net of tax
89

 
(836
)
Adjustments to reconcile net loss to net cash flows from operating activities:
 
 
 
Depreciation and amortization
39,258

 
40,246

Share-based compensation expense
2,905

 
1,695

Gain on divestitures and other, net
(1,106
)
 
(1,224
)
Impairment of intangible assets
109,910

 
—

Loss on early retirement of long-term debt
43,609

 
—

Deferred income taxes
(44,573
)
 
18,772

Litigation settlements
—

 
(2,521
)
Other, net
(220
)
 
517

Changes in operating assets and liabilities:
 
 
 
Receivables, net
92,234

 
(18,972
)
Inventories
(2,826
)
 
(23,230
)
Prepaid expenses and other assets
12,814

 
4,846

Accounts payable and accrued expenses
(77,951
)
 
44,950

Income tax receivable/payable
57,176

 
(22,488
)
Net cash provided by operating activities
157,579

 
32,799

Cash flows from investing activities:
 
 
 
Payments for property, plant and equipment
(19,304
)
 
(28,035
)
Proceeds from sale of fixed assets
1,638

 
1,372

Net cash used in investing activities
(17,666
)
 
(26,663
)
Cash flows from financing activities:
 
 
 
Repayments of debt, net
(347
)
 
(164
)
Early retirement of long-term debt
(476,188
)
 
—

Premiums paid on early retirement of debt
(37,309
)
 
—

Payments of financing costs
(14,796
)
 
—

Proceeds from senior secured revolver
315,570

 
701,795

Payments for senior secured revolver
(371,371
)
 
(423,105
)
Proceeds from receivables-backed facility
635,000

 
501,000

Payments for receivables-backed facility
(870,000
)
 
(714,000
)
Proceeds from issuance of 2023 notes
700,000

 
—

Common stock repurchase
—

 
(25,000
)
Cash dividends paid
(6,604
)
 
(6,543
)
Issuance of common stock, net of share repurchases for withholding taxes
17

 
869

Tax savings on share-based compensation
217

 
259

Net cash provided by (used in) financing activities
(125,811
)
 
35,111

Effect of exchange rate changes on cash and cash equivalents
(408
)
 
(258
)
Increase in cash and cash equivalents
13,694

 
40,989

Cash and cash equivalents, beginning of period
16,362

 
16,762

Cash and cash equivalents, end of period
$
30,056

 
$
57,751

See Notes to unaudited Condensed Consolidated Financial Statements.

8

DEAN FOODS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2015 and 2014
(Unaudited)
1. General
Nature of Our Business — We are a leading food and beverage company and the largest processor and direct-to-store distributor of milk and other dairy and dairy case products in the United States. We have aligned our leadership teams, operating strategies and supply chain initiatives under a single operating and reportable segment. We manufacture, market and distribute a wide variety of branded and private label dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products across the United States. Our portfolio includes DairyPure®, our recently launched national white milk brand; and TruMoo®, a leading national flavored milk brand, along with well-known regional dairy brands. In all, we have more than 50 local and regional dairy brands and private labels.
Basis of Presentation — The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q 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, 2014 (the “2014 Annual Report on Form 10-K”), which we filed with the Securities and Exchange Commission on February 17, 2015. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) 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 (“GAAP”) have been omitted. Our results of operations for the three month period ended March 31, 2015 may not be indicative of our operating results for the full year. The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements contained in our 2014 Annual Report on Form 10-K.
Unless otherwise indicated, references in this report to “we,” “us” or “our” or "the Company" refer to Dean Foods Company and its subsidiaries, taken as a whole.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued FASB Accounting Standards Update ("ASU") No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. We are required to adopt the standard prospectively for new disposals and new classifications of disposal groups as held for sale beginning the first quarter of 2015. The adoption of this standard had no material impact on our financial statements as of March 31, 2015.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently evaluating the effect that the adoption of this standard will have on our financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Compensation — Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We are currently evaluating the effect that the adoption of this standard will have on our financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going

9

concern. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not expect the adoption of this standard to have a material impact on our financial statements.
In January 2015, the FASB issued ASU No. 2015- 01, Extraordinary and Unusual Items - Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates the concept of extraordinary items and their segregation from the results of ordinary operations and expands presentation and disclosure guidance to include items that are both unusual in nature and occur infrequently. The new accounting standard is effective for annual periods ending after December 15, 2015 and we are assessing the potential impact to our financial statements and financial statement disclosures.
In April 2015, the FASB issued ASU No. 2015- 03, Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by this ASU. The amendments in this ASU are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. We are currently assessing the potential impact to our financial statements and financial statement disclosures.
2. Discontinued Operations
WhiteWave — We separated The WhiteWave Foods Company ("WhiteWave") from the Company in a series of three transactions: an initial public offering for 13.3% of the WhiteWave common stock in the fourth quarter of 2012 (the "WhiteWave IPO"); a tax-free spin-off of 66.8% of the WhiteWave common stock in the second quarter of 2013; and a tax-free debt-for-equity exchange of 19.9% of the WhiteWave common stock in the third quarter of 2013. Refer to Note 2 to the Consolidated Financial Statements in the 2014 Annual Report on Form 10-K for more information about the WhiteWave separation. While we are a party to certain commercial agreements with WhiteWave, we have determined that the continuing cash flows generated by these agreements (which are not expected to extend beyond June 2015) did not constitute significant continuing involvement in the operations of WhiteWave and are not reflected in results from discontinued operations for the three months ended March 31, 2015 and March 31, 2014.
Other Discontinued Operations — During the three months ended March 31, 2015 and March 31, 2014, we recognized a $0.1 million charge and a $0.8 million gain, net of tax, respectively, related to prior discontinued operations.
3. Inventories
Inventories, net of obsolescence reserves of $1.8 million and $0.7 million at March 31, 2015 and December 31, 2014, respectively, consisted of the following:
 
March 31, 2015
 
December 31, 2014
 
(In thousands)
Raw materials and supplies
$
96,974

 
$
100,587

Finished goods
157,683

 
151,244

Total
$
254,657

 
$
251,831

4. Goodwill and Intangible Assets
As of March 31, 2015, the gross carrying value of goodwill was $2.2 billion and accumulated impairment was $2.1 billion. The company took an impairment charge of $2.1 billion in 2011 with no impairment charges in subsequent years. The net carrying amount of goodwill at March 31, 2015 and December 31, 2014 was $86.8 million.

10

The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of March 31, 2015 and December 31, 2014 are as follows:
 
March 31, 2015
 
December 31, 2014
 
Gross
Carrying
Amount
 
Impairment
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
(In thousands)
Intangible assets with indefinite lives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
$
—

 
$
—

 
$
—

 
$
—

 
$
221,681

 
$
—

 
$
221,681

Intangible assets with finite lives:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer-related and other
49,225

 
—

 
(31,798
)
 
17,427

 
49,225

 
(31,153
)
 
18,072

Trademarks
229,777

 
(109,910
)
 
(5,376
)
 
114,491

 
8,096

 
(5,315
)
 
2,781

Total
$
279,002

 
$
(109,910
)
 
$
(37,174
)
 
$
131,918

 
$
279,002

 
$
(36,468
)
 
$
242,534


Prior to 2015, certain of our trademarks were not amortized because they had indefinite remaining useful lives as our intent was to continue to use these intangible assets indefinitely. During the first quarter of 2015, we approved the launch of DairyPure®; our fresh white milk national brand. In connection with the approval of the launch of DairyPure®; we changed our indefinite lived trademarks to finite lived, resulting in a triggering event for impairment testing purposes. Based upon our analysis, we recorded a non-cash impairment charge of $109.9 million and related income tax benefit of $41.2 million in the first quarter of 2015. The remaining balance for these trademarks of $111.8 million will be amortized on a straight-line basis over the next five years, which is our estimate of the remaining useful life of these assets. The impairment charge is reported on a separate line item, impairment of intangible assets in our unaudited Condensed Consolidated Statements of Operations.
We estimated the fair value of these trademarks based on an income approach using the relief-from-royalty method. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain.
Amortization expense on intangible assets for the each of the three months ended March 31, 2015 and 2014 was $0.7 million. Estimated aggregate intangible asset amortization expense for the next five years is as follows (in millions):
2015
$
25.4

2016
25.3

2017
24.7

2018
24.6

2019
24.5


11

5. Debt
Our outstanding debt as of March 31, 2015 and December 31, 2014 consisted of the following:
 
March 31, 2015
 
 
December 31, 2014
 
 
Amount
Outstanding
 
Interest
Rate
 
 
Amount
Outstanding
 
Interest
Rate
 
 
(In thousands, except percentages)
 
Dean Foods Company debt obligations:
 
 
 
 
 
 
 
 
 
Senior secured credit facility
$
14,500

 
2.68
%*
 
$
70,301

 
2.93
%*
Senior notes due 2016
—

 
—
 
 
475,819

 
7.00
 
Senior notes due 2023
700,000

 
6.50
 
 
—

 
—
 
 
714,500

 
 
 
 
546,120

 
 
 
Subsidiary debt obligations:
 
 
 
 
 
 
 
 
 
Senior notes due 2017
135,469

 
6.90
 
 
134,913

 
6.90
 
Receivables-backed facility
—

 
—
 
 
235,000

 
1.30
 
Capital lease and other
3,457

 
—
 
 
1,146

 
—
 
 
138,926

 
 
 
 
371,059

 
 
 
 
853,426

 
 
 
 
917,179

 
 
 
Less current portion
(1,188
)
 
 
 
 
(698
)
 
 
 
Total long-term portion
$
852,238

 
 
 
 
$
916,481

 
 
 

*
Represents a weighted average rate, including applicable interest rate margins, for the credit facility.
The scheduled debt maturities at March 31, 2015 were as follows (in thousands):
2015
$
1,188

2016
865

2017
142,587

2018
586

2019
231

Thereafter
714,500

Subtotal
859,957

Less discounts
(6,531
)
Total outstanding debt
$
853,426

Dean Foods Company Senior Notes due 2023 — On February 25, 2015, we issued $700 million in aggregate principal amount of 6.50% senior notes due 2023 (the “2023 Notes”) at an issue price of 100% of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act.
In connection with the issuance of the 2023 Notes, the Company paid certain arrangement fees of approximately $7.0 million to initial purchasers and other fees of approximately $1.6 million, which were capitalized and will be amortized to interest expense over the remaining term of the 2023 Notes.
The 2023 Notes are senior unsecured obligations. Accordingly, the 2023 Notes rank equally in right of payment with all of our existing and future senior obligations and are effectively subordinated in right of payment to all of our existing and future secured obligations, including obligations under our senior secured credit facility and receivables-backed facility, to the extent of the value of the collateral securing such obligations. The 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by our subsidiaries that guarantee obligations under the senior secured credit facility.
The 2023 Notes will mature on March 15, 2023 and bear interest at an annual rate of 6.50%. Interest on the 2023 Notes will accrue from February 25, 2015 and is payable semi-annually in arrears in March and September of each year, commencing September 2015.
We may, at our option, redeem all or a portion of the 2023 Notes at any time on or after March 15, 2018 at the applicable redemption prices specified in the indenture governing the 2023 Notes (the "Indenture"), plus any accrued and

12

unpaid interest to, but excluding, the applicable redemption date. We are also entitled to redeem up to 40% of the aggregate principal amount of the 2023 Notes before March 15, 2018 with the net cash proceeds that we receive from certain equity offerings at a redemption price equal to 106.5% of the principal amount of the 2023 Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, prior to March 15, 2018, we may redeem all or a portion of the 2023 Notes, at a redemption price equal to 100% of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
If we undergo certain kinds of changes of control, holders of the 2023 Notes have the right to require us to repurchase all or any portion of such holder’s 2023 Notes at 101% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit our ability to: (i) create certain liens; (ii) enter into sale and lease-back transactions; (iii) assume, incur or guarantee indebtedness for borrowed money that is secured by a lien on certain principal properties (or on any shares of capital stock of our subsidiaries that own such principal property) without securing the 2023 Notes on a pari passu basis; and (iv) consolidate with or merge with or into, or sell, transfer, convey or lease all or substantially all of our properties and assets, taken as a whole, to another person.
We used the net proceeds from the 2023 Notes to redeem all of our outstanding senior unsecured notes due 2016, as described below, and to repay a portion of the outstanding borrowings under our senior secured credit facility and receivables-backed facility.
Senior Secured Credit Facility — In July 2013, we executed a credit agreement pursuant to which the lenders provided us with a five-year senior secured revolving credit facility in the amount of up to $750 million (the "Old Credit Facility"). The Old Credit Facility was amended in June 2014 and further amended in August 2014.
In March 2015, we terminated the Old Credit Facility, replacing it with the new credit facility described below. As a result of the termination, we recorded a write-off of unamortized debt issue costs of $5.2 million during the three months ended March 31, 2015. The write-off was recorded in the loss on early retirement of long-term debt line in our unaudited Condensed Consolidated Statements of Operations.
In March 2015, we executed a new credit agreement (the "Credit Agreement") pursuant to which the lenders have provided us with a five-year revolving credit facility in the amount of up to $450 million (the “New Credit Facility”). Under the Credit Agreement, we have the right to request an increase of the aggregate commitments under the New Credit Facility by up to $200 million without the consent of any lenders not participating in such increase, subject to specified conditions.  The New Credit Facility is available for the issuance of up to $75 million of letters of credit and up to $100 million of swing line loans. The New Credit Facility will terminate in March 2020.
In connection with the execution of the New Credit Facility, we paid certain arrangement fees of approximately $4.8 million to lenders and other fees of approximately $0.5 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility.
Loans outstanding under the New Credit Facility will bear interest, at our option, at either (i) the LIBO Rate (as defined in the Credit Agreement) plus a margin of between 2.25% and 2.75% (2.50% as of March 31, 2015) based on the Total Net Leverage Ratio (as defined in the Credit Agreement), or (ii) the Alternate Base Rate (as defined in the Credit Agreement) plus a margin of between 1.25% and 1.75% (1.50% as of March 31, 2015) based on the Total Net Leverage Ratio.
We may make optional prepayments of the loans, in whole or in part, without premium or penalty (other than applicable breakage costs). Subject to certain exceptions and conditions described in the agreement, we will be obligated to prepay the New Credit Facility, but without a corresponding commitment reduction, with the net cash proceeds of certain asset sales and with casualty and insurance proceeds. The New Credit Facility is guaranteed by the our existing and future domestic material restricted subsidiaries (as defined in the agreement), which are substantially all of our wholly-owned U.S. subsidiaries other than the receivables securitization subsidiaries (the “Guarantors”).
The New Credit Facility is secured by a first priority perfected security interest in substantially all of our assets and the assets of the Guarantors, whether consisting of personal, tangible or intangible property, including a pledge of, and a perfected security interest in, (i) all of the shares of capital stock of the Guarantors and (ii) 65% of the shares of capital stock of the Guarantor’s first-tier foreign subsidiaries which are material restricted subsidiaries, in each case subject to certain exceptions as set forth in the Credit Agreement. The collateral does not include, among other things, (a) any real property with an individual net book value below $10 million, (b) the capital stock and any assets of any unrestricted subsidiary, (c) any capital stock of any direct or indirect subsidiary of Dean Holding Company ("Legacy Dean") which owns any real property, or (d) receivables sold pursuant to the receivables securitization facility.

13

 The Credit Agreement agreement contains customary representations, warranties and covenants, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, investments, loans and advances, transactions with affiliates and sale and leaseback transactions. The Credit Agreement also contains customary events of default and related cure provisions. We are required to comply with (a) a maximum senior secured net leverage ratio of 2.50x (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility); and (b) a minimum consolidated interest coverage ratio of 2.25x.
At March 31, 2015, there were outstanding borrowings of $14.5 million under the New Credit Facility. Our combined average daily balance during the three months ended March 31, 2015 under both the Old Credit Facility and New Credit Facility was $22.7 million. There were no letters of credit issued under the New Credit Facility as of March 31, 2015.
Dean Foods Receivables-Backed Facility — We have a $550 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to two wholly-owned entities intended to be bankruptcy-remote. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our unaudited Condensed Consolidated Balance Sheets, and the securitization is treated as a borrowing for accounting purposes. In June 2014, the receivables-backed facility was modified to, among other things, increase the amount available for the issuance of letters of credit from $300 million to $350 million and to extend the liquidity termination date from March 2015 to June 2017. The receivables-backed facility was further amended in August 2014 to be consistent with the amended financial covenants under the credit agreement governing the Old Credit Facility.
In March 2015, the receivables-backed facility was further modified to, among other things, extend the liquidity termination date from June 2017 to March 2018 and modify the consolidated and senior secured net leverage ratio requirements to be consistent with those contained in the Credit Agreement described above.
In connection with the modification of the receivable-backed facility, we paid certain arrangement fees of approximately $0.7 million to lenders, which were capitalized and will be amortized to interest expense over the remaining term of the facility.
Based on the monthly borrowing base formula, we had the ability to borrow up to $534.9 million of the total commitment amount under the receivables-backed facility as of March 31, 2015. The total amount of receivables sold to these entities as of March 31, 2015 was $599.6 million. During the first three months of 2015, we borrowed $635.0 million and repaid $870.0 million under the facility with no remaining drawn balance as of March 31, 2015. Excluding letters of credit in the aggregate amount of $164.8 million, the remaining available borrowing capacity was $370.1 million at March 31, 2015. Our average daily balance under this facility during the three months ended March 31, 2015 was $172.8 million. The receivables-backed facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin based on our net leverage ratio.
Standby Letter of Credit — In February 2012, in connection with a litigation settlement agreement we entered into with the plaintiffs in the Tennessee dairy farmer actions, we issued a standby letter of credit in the amount of $80 million, representing the approximate amount of subsequent payments due under the terms of the settlement agreement. The total amount of the letter of credit will decrease proportionately as we make each of the four installment payments. We made installment payments in June of 2014 and 2013. As of March 31, 2015, the letter of credit has been reduced to $37.7 million.
Dean Foods Company Senior Notes due 2016 — In March 2015, we redeemed the remaining principal amount of $476.2 million of our outstanding Senior Notes due 2016 at a total redemption price of approximately $521.8 million. As a result, we recorded a $38.3 million pre-tax loss on early retirement of long-term debt in the first quarter of 2015, which consisted of debt redemption premiums and unpaid interest of $37.3 million, a write-off of unamortized long-term debt issue costs of $0.8 million and write-off of the remaining bond discount and interest rate swaps of approximately $0.2 million. The loss was recorded in the loss on early retirement of long-term debt line in our unaudited Condensed Consolidated Statements of Operations. The redemption was financed with proceeds from the issuance of the 2023 Notes.
Subsidiary Senior Notes due 2017 — Legacy Dean had certain senior notes outstanding at the time of its acquisition, of which one series ($142 million aggregate principal amount) remains outstanding and matures in October 2017. The carrying value of these notes on March 31, 2015 was $135.5 million at 6.90% interest. The indenture governing the Legacy Dean senior notes does not contain financial covenants but does contain certain restrictions, including a prohibition against Legacy Dean and its subsidiaries granting liens on certain of their real property interests and a prohibition against Legacy Dean granting liens on the stock of its subsidiaries. The Legacy Dean senior notes are not guaranteed by Dean Foods Company or Legacy Dean’s wholly-owned subsidiaries.

14

See Note 6 for information regarding the fair value of the 2023 senior notes and the subsidiary senior notes due 2017 as of March 31, 2015.
Capital Lease Obligations and Other — Capital lease obligations as of March 31, 2015, included our land and building lease, as well as leases for equipment. As of December 31, 2014 capital lease obligations were comprised of a lease for land and building related to one of our production facilities. See Note 12.
6. Derivative Financial Instruments and Fair Value Measurements
Derivative Financial Instruments
Commodities — We are exposed to commodity price fluctuations, including milk, butterfat, sweeteners and other commodity costs used in the manufacturing, packaging and distribution of our products, such as natural gas, resin and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month’s to one year’s anticipated requirements, depending on the ingredient or commodity. These contracts are considered normal purchases.
In addition to entering into forward purchase contracts, from time to time we may purchase over-the-counter contracts from our qualified banking partners or enter into exchange-traded commodity futures contracts for raw materials that are ingredients of our products or components of such ingredients. Effective January 1, 2014, we have de-designated all open commodity derivative positions that were previously designated as cash flow hedges. During the first quarter of 2014, we reclassified $0.2 million, net of tax, of hedging activity related to these commodities contracts from accumulated other comprehensive income into operating income. As of the de-designation date, all commodities contracts are now marked to market in our income statement at each reporting period and a derivative asset or liability is recorded on our balance sheet.
Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies.

15

At March 31, 2015 and December 31, 2014, our derivatives recorded at fair value in our unaudited Condensed Consolidated Balance Sheets consisted of the following:
 
Derivative Assets
 
Derivative Liabilities
 
March 31, 2015
 
December 31, 2014
 
March 31, 2015
 
December 31, 2014
 
(In thousands)
Derivatives not Designated as Hedging Instruments
 
 
 
 
 
 
 
Commodities contracts — current(1)
$
758

 
$
2

 
$
4,095

 
$
4,392

Total derivatives
$
758

 
$
2

 
$
4,095

 
$
4,392

(1)
Derivative assets and liabilities that have settlement dates equal to or less than 12 months from the respective balance sheet date are included in other current assets and accounts payable and accrued expenses, respectively, in our unaudited Condensed Consolidated Balance Sheets.

Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, we follow a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
•
Level 1 — Quoted prices for identical instruments in active markets.
•
Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.
•
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 is as follows (in thousands):
 
Fair Value as of March 31, 2015
 
Level 1
 
Level 2
 
Level 3
Asset — Commodities contracts
$
758

 
$
—

 
$
758

 
$
—

Liability — Commodities contracts
4,095

 
—

 
4,095

 
—

A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 is as follows (in thousands):
 
Fair Value as of December 31, 2014
 
Level 1
 
Level 2
 
Level 3
Asset — Commodities contracts
$
2

 
$
—

 
$
2

 
$
—

Liability — Commodities contracts
4,392

 
—

 
4,392

 
—


Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value. In addition, because the interest rates on our New Credit Facility, receivables-backed facility, and certain other debt are variable, their fair values approximate their carrying values.

16

The fair values of our Dean Foods Company senior notes and subsidiary senior notes were determined based on quoted market prices obtained through an external pricing source which derives its price valuations from daily marketplace transactions, with adjustments to reflect the spreads of benchmark bonds, credit risk and certain other variables. We have determined these fair values to be Level 2 measurements as all significant inputs into the quotes provided by our pricing source are observable in active markets. The following table presents the carrying values and fair values of our senior and subsidiary senior notes at March 31, 2015 and December 31, 2014:
 
March 31, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
(In thousands)
Dean Foods Company senior notes due 2023
$
700,000

 
$
702,625

 
$
—

 
$
—

Dean Foods Company senior notes due 2016
—

 
—

 
475,819

 
507,140

Subsidiary senior notes due 2017
135,469

 
150,520

 
134,913

 
151,230

Additionally, we maintain a Supplemental Executive Retirement Plan (“SERP”), which is a nonqualified deferred compensation arrangement for our executive officers and other employees earning compensation in excess of the maximum compensation that can be taken into account with respect to our 401(k) plan. The SERP is designed to provide these employees with retirement benefits from us that are equivalent, as a percentage of total compensation, to the benefits provided to other employees. The assets related to the SERP are primarily invested in money market and mutual funds and are held at fair value. We classify these assets as Level 2 as fair value can be corroborated based on quoted market prices for identical or similar instruments in markets that are not active. The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of March 31, 2015 (in thousands):
 
Total
 
Level 1
 
Level 2
 
Level 3
Money market
$
5

 
$
—

 
$
5

 
$
—

Mutual funds
1,959

 
—

 
1,959

 
—


The following table presents a summary of the SERP assets measured at fair value on a recurring basis as of December 31, 2014 (in thousands):
 
Total
 
Level 1
 
Level 2
 
Level 3
Money market
$
12

 
$
—

 
$
12

 
$
—

Mutual funds
1,929

 
—

 
1,929

 
—

7. Common Stock and Share-Based Compensation
Cash Dividends— In November 2013, we announced that our Board of Directors had adopted a cash dividend policy. Under the policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. Pursuant to the policy, we expect to pay quarterly dividends of $0.07 per share ($0.28 per share annually). Quarterly dividends of $0.07 per share, totaling approximately $6.6 million and $6.5 million, were paid in March 2015 and March 2014, respectively. Our cash dividend policy is subject to modification, suspension or cancellation at any time.
Our authorized shares of capital stock include one million shares of preferred stock and 500 million shares of common stock with a par value of $0.01 per share.
Stock Repurchase Program — Since 1998, our Board of Directors has from time to time authorized the repurchase of our common stock up to an aggregate of $2.38 billion, excluding fees and commissions. We made no share repurchases during the three months ended March 31, 2015. We repurchased 1,727,275 shares during the three months ended March 31, 2014. As of March 31, 2015, $275.0 million was available for repurchases under this program (excluding fees and commissions). Our management is authorized to purchase shares from time to time through open market transactions at prevailing prices or in privately negotiated transactions, subject to market conditions and other factors. Shares, when repurchased, are retired.

17

Stock Options — The following table summarizes stock option activity during the three months ended March 31, 2015:
 
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Contractual
Life (Years)
 
Aggregate
Intrinsic
Value
Options outstanding at January 1, 2015
3,691,567

 
$
20.13

 
 
 
 
Granted
—

 
—

 
 
 
 
Forfeited and canceled
(67,589
)
 
21.52

 
 
 
 
Exercised
(67,942
)
 
16.56

 
 
 
 
Options outstanding at March 31, 2015
3,556,036

 
$
20.17

 
2.6
 
$
3,130,571

Options exercisable at March 31, 2015
3,543,688

 
$
20.19

 
2.5
 
$
2,594,178

 
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 a Black-Scholes valuation model. During each of the three months ended March 31, 2015 and 2014, there were no stock options granted.
Restricted Stock Units — The following table summarizes RSU activity during the three months ended March 31, 2015:
 
Employees
 
Directors
 
Total
RSUs at January 1, 2015
898,550

 
112,579

 
1,011,129

RSUs issued
362,426

 
44,821

 
407,247

Shares issued upon vesting of RSUs
(148,616
)
 
(48,069
)
 
(196,685
)
RSUs canceled or forfeited(1)
(88,579
)
 
(1,629
)
 
(90,208
)
RSUs outstanding at March 31, 2015
1,023,781

 
107,702

 
1,131,483

Weighted average grant date fair value
$
15.36

 
$
15.04

 
$
15.33


(1)
Pursuant to the terms of our plans, employees have the option of forfeiting RSUs to cover their minimum statutory tax withholding when shares are issued. Any RSUs surrendered or canceled in satisfaction of participants’ tax withholding obligations are not available for future grants under the plans.
    
Phantom Shares — We grant phantom shares as part of our long-term incentive compensation program, which are similar to RSUs in that they are based on the price of our stock and vest ratably over a three-year period, but are cash-settled based upon the value of our stock at each vesting period. The fair value of the awards is remeasured at each reporting period. Compensation expense is recognized over the vesting period with a corresponding liability, which is recorded in accounts payable and accrued expenses in our unaudited Condensed Consolidated Balance Sheets. The following table summarizes the phantom share activity during the three months ended March 31, 2015:
 
Shares
 
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2015
1,036,331

 
$
15.91

Granted
661,949

 
16.26

Converted/paid
(473,286
)
 
16.40

Forfeited
(33,986
)
 
15.65

Outstanding at March 31, 2015
1,191,008

 
$
15.92


18


Share-Based Compensation Expense — The following table summarizes the share-based compensation expense recognized during the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31
 
2015
 
2014
 
(In thousands)
Stock options
$
61

 
$
145

RSUs
2,160

 
1,208

Phantom Shares
684

 
342

Total
$
2,905


$
1,695


8. Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is based on the weighted average number of common shares outstanding during each period. Diluted EPS is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period. Stock option conversions and RSUs were not included in the computation of diluted loss per share for each of the three months ended March 31, 2015 or March 31, 2014, as we incurred a loss from continuing operations for these periods and any effect on loss per share would have been anti-dilutive. The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS:
 
Three Months Ended March 31
 
2015
 
2014
 
(In thousands, except share data)
Basic earnings (loss) per share computation:
 
Numerator:
 
Loss from continuing operations
$
(73,651
)
 
$
(9,792
)
Denominator:
 
 
 
Average common shares
94,222,243

 
94,398,665

Basic loss per share from continuing operations
$
(0.78
)
 
$
(0.10
)
Diluted earnings (loss) per share computation:
 
Numerator:
 
Loss from continuing operations
$
(73,651
)
 
$
(9,792
)
Denominator:
 
 
 
Average common shares — basic
94,222,243

 
94,398,665

Stock option conversion(1)
—

 
—

RSUs(2)
—

 
—

Average common shares — diluted
94,222,243

 
94,398,665

Diluted loss per share from continuing operations
$
(0.78
)
 
$
(0.10
)
(1) Anti-dilutive common shares excluded
3,104,628

 
4,244,244

(2) Anti-dilutive stock units excluded
440,375

 
297,726



19

9. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended March 31, 2015 were as follows (in thousands):
 
Changes in
Cash Flow 
Hedges
 
Pension and 
Other
Postretirement
Benefits Items
 
Foreign 
Currency
Items
 
Total
Balance, December 31, 2014
$
87

 
$
(83,879
)
 
$
(1,191
)
 
$
(84,983
)
Other comprehensive income (loss) before reclassifications
(87
)
 
2,933

 
(170
)
 
2,676

Amounts reclassified from accumulated other comprehensive loss(1)
—

 
(1,469
)
(1)
—

 
(1,469
)
Net current-period other comprehensive income (loss)
(87
)
 
1,464

 
(170
)
 
1,207

Balance, March 31, 2015
$
—

 
$
(82,415
)
 
$
(1,361
)
 
$
(83,776
)

(1)
The accumulated other comprehensive loss reclassification components are related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic pension cost. See Note 10.
The changes in accumulated other comprehensive income (loss) by component, net of tax, during the three months ended March 31, 2014 were as follows (in thousands):
 
Changes in
Cash Flow 
Hedges
 
Pension and 
Other
Postretirement
Benefits Items
 
Foreign 
Currency
Items
 
Total
Balance, December 31, 2013
$
423

 
$
(57,224
)
 
$
(389
)
 
$
(57,190
)
Other comprehensive income (loss) before reclassifications
(16
)
 
1,632

 
555

 
2,171

Amounts reclassified from accumulated other comprehensive loss
(220
)
(1)
(927
)
(2)
—

 
(1,147
)
Net current-period other comprehensive income (loss)
(236
)
 
705

 
555

 
1,024

Balance, March 31, 2014
$
187

 
$
(56,519
)
 
$
166

 
$
(56,166
)

(1)
The accumulated other comprehensive loss component is related to the hedging activity amount at December 31, 2013 that was reclassified to operating income as we de-designated our cash flow hedges. See Note 6.
(2)
The accumulated other comprehensive loss reclassification components are related to amortization of unrecognized actuarial losses and prior service costs, both of which are included in the computation of net periodic pension cost. See Note 10.


20

10. Employee Retirement and Postretirement Benefits
We sponsor various defined benefit and defined contribution retirement plans, including various employee savings and profit sharing plans, and contribute to various multiemployer pension plans on behalf of our employees. All full-time union and non-union employees who have met requirements pursuant to the plans are eligible to participate in one or more of these plans.
Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation. The following table sets forth the components of net periodic benefit cost for our defined benefit plans during the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31
 
2015
 
2014
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
Service cost
$
908

 
$
770

Interest cost
3,434

 
3,495

Expected return on plan assets
(4,938
)
 
(4,690
)
Amortizations:
 
 
 
Prior service cost
214

 
197

Unrecognized net loss
2,136

 
1,276

Net periodic benefit cost
$
1,754

 
$
1,048


Postretirement Benefits — Certain of our subsidiaries provide health care benefits to certain retirees who are covered under specific group contracts. The following table sets forth the components of net periodic benefit cost for our postretirement benefit plans during the three months ended March 31, 2015 and 2014: 
 
Three Months Ended March 31
 
2015
 
2014
 
(In thousands)
Components of net periodic benefit cost:
 
 
 
Service cost
$
205

 
$
206

Interest cost
364

 
416

Amortizations:
 
 
 
Prior service cost
23

 
16

Unrecognized net loss
16

 
19

Net periodic benefit cost
$
608

 
$
657


11. Asset Impairment Charges and Facility Closing and Reorganization Costs
Asset Impairment Charges
We evaluate our long-lived assets for impairment when circumstances indicate that the carrying value may not be recoverable. Indicators of impairment could include, among other factors, significant changes in the business environment or the planned closure of a facility. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. As a result of certain changes to our business and plans for consolidating our production network, we evaluated the impact that we expect these changes to have on our projected future cash flows as of March 31, 2015.
Testing the assets for recoverability involved developing estimates of future cash flows directly associated with, and that are expected to arise as a direct result of, the use and eventual disposition of the assets. Other inputs were based on assessment of an individual asset’s alternative use within other production facilities, evaluation of recent market data and historical liquidation sales values for similar assets. As the inputs for testing for recoverability are largely based on management’s judgments and are not generally observable in active markets, we consider such measurements to be Level 3 measurements in the fair value hierarchy. See Note 6.

21

The results of our analysis indicated no impairment of our plant, property and equipment for the three months ended March 31, 2015 and 2014. We can provide no assurance that we will not have impairment charges in future periods as a result of changes in our business environment, operating results or the assumptions and estimates utilized in our impairment tests.
Facility Closing and Reorganization Costs
Approved plans within our multi-year initiatives and related charges are summarized as follows:
 
Three Months Ended March 31
 
2015
 
2014
 
(In thousands)
Closure of facilities(1)
$
1,245

 
$
977

Total
$
1,245

 
$
977

(1)
These charges in 2015 and 2014 primarily relate to facility closures in Riverside, California; Delta, Colorado; Denver, Colorado; Dallas, Texas; Waco, Texas; Springfield, Virginia; Buena Park, California; Evart, Michigan; Bangor, Maine; Shreveport, Louisiana; Mendon, Massachusetts; and Sheboygan, Wisconsin; as well as other approved closures. We have incurred $46.5 million of charges related to these initiatives through March 31, 2015. We expect to incur additional charges related to these facility closures of approximately $5.5 million related to contract termination, shutdown and other costs. As we continue the evaluation of our supply chain and distribution network, it is likely that we will close additional facilities in the future.

Activity with respect to facility closing and reorganization costs during the three months ended March 31, 2015 is summarized below and includes items expensed as incurred:
 
Accrued Charges at December 31, 2014
 
Charges and Adjustments
 
Payments
 
Accrued Charges at March 31, 2015
 
(In thousands)
Cash charges:
 
 
 
 
 
 
 
Workforce reduction costs
$
1,283

 
$
731

 
$
(128
)
 
$
1,886

Shutdown costs
—

 
729

 
(729
)
 
—

Lease obligations after shutdown
6,855

 
144

 
(465
)
 
6,534

Other
—

 
112

 
(112
)
 
—

Subtotal
$
8,138

 
1,716

 
$
(1,434
)
 
$
8,420

Noncash charges:
 
 
 
 
 
 
 
Other, net
 
 
(471
)
 
 
 
 
Total charges
 
 
$
1,245

 
 
 
 

 
12. Commitments and Contingencies
Contingent Obligations Related to Divested Operations — We have divested certain businesses in recent years. In each case, we have retained certain known contingent obligations related to those businesses and/or assumed an obligation to indemnify the purchasers of the businesses for certain unknown contingent liabilities, including environmental liabilities. We believe that we have established adequate reserves, which are immaterial to the unaudited Condensed Consolidated Financial Statements, 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 — In 2001, in connection with our acquisition of Legacy Dean, we purchased Dairy Farmers of America’s (“DFA”) 33.8% interest in our operations. In connection with that transaction, we issued a contingent, subordinated promissory note to DFA in the original principal amount of $40 million. The promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we materially breach or terminate one of our related milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire in 2021, without any obligation to pay any portion of the principal or interest. Payments made under the note, if any, would be

22

expensed as incurred. We have not terminated, and we have not materially breached, any of our milk supply agreements with DFA related to the promissory note. We have previously terminated unrelated supply agreements with respect to several plants that were supplied by DFA. In connection with our goals of accelerated cost control and increased supply chain efficiency, we continue to evaluate our sources of raw milk supply.
Insurance — We use a combination of insurance and self-insurance for a number of risks, including property, workers’ compensation, general liability, automobile liability, product liability and employee health care utilizing high deductibles. Deductibles vary due to insurance market conditions and risk. Liabilities associated with these risks are estimated considering historical claims experience and other actuarial assumptions. Based on current information, we believe that we have established adequate reserves to cover these claims.
Lease 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, in the normal course of business, obligating us to purchase minimum quantities of raw materials used in our production and distribution processes, including conventional raw milk, diesel fuel, sugar and other ingredients that are inputs into our finished products. 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
Tennessee Retailer and Indirect Purchaser Actions
A putative class action antitrust complaint (the “retailer action”) was filed against Dean Foods and other milk processors on August 9, 2007 in the United States District Court for the Eastern District of Tennessee. Plaintiffs allege generally that we, either acting alone or in conjunction with others in the milk industry, lessened competition in the Southeastern United States for the sale of processed fluid Grade A milk to retail outlets and other customers. Plaintiffs further allege that the defendants’ conduct artificially inflated wholesale prices paid by direct milk purchasers. In March 2012, the district court granted summary judgment in favor of defendants, including the Company, as to all counts then remaining. Plaintiffs appealed the district court’s decision; and in January 2014, the United States Court of Appeals for the Sixth Circuit reversed the grant of summary judgment as to one of the five original counts in the Tennessee retailer action. Following the Sixth Circuit’s denial of our request to reconsider the case en banc; the Company petitioned the Supreme Court of the United States for review. On November 17, 2014, the Supreme Court denied our petition and the case returned to the district court. There are now various motions and briefs pending before the district court, including defendants’ motion for summary judgment on grounds previously raised but not yet decided, and plaintiffs’ motion for class certification. The district court is scheduled to hear argument on these and other related issues in June 2015.
On June 29, 2009, another putative class action lawsuit was filed in the Eastern District of Tennessee on behalf of indirect purchasers of processed fluid Grade A milk (the “indirect purchaser action”). This case was voluntarily dismissed, and the same plaintiffs filed a nearly identical complaint on January 17, 2013. The allegations in this complaint are similar to those in both the retailer action and the 2009 indirect purchaser action, but involve only claims arising under Tennessee law. The Company filed a motion to dismiss, and on September 11, 2014, the district court granted in part and denied in part that motion, dismissing the non-Tennessee plaintiffs’ claims. The Company filed its answer to the surviving claims on October 15, 2014. The parties have jointly proposed that further proceedings (including any discovery) in this case be deferred until after the district court rules on the summary judgment and class certification issues in the Tennessee retailer action.
At this time, it is not possible for us to predict the ultimate outcome of these matters. In addition to the pending legal proceedings set forth above, we are party from time to time to certain claims, litigations, audits and investigations. Potential liabilities associated with these other matters are not expected to have a material adverse impact on our financial position, results of operations, or cash flows.
Other
We have settled with substantially all states in regards to our obligations under state unclaimed property laws, the results of which did not have a material adverse impact on our financial position, results of operations or cash flows.

23

13. Segment, Geographic and Customers Information
We operate as a single reportable segment in manufacturing, marketing, selling and distributing a wide variety of branded and private label dairy case products. We operate 68 manufacturing facilities geographically located largely based on local and regional customer needs and other market factors. We manufacture, market and distribute a wide variety of branded and private label dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our products are primarily delivered through what we believe to be one of the most extensive refrigerated direct store delivery (“DSD”) systems in the United States. Our Chief Executive Officer evaluates the performance of our business based on sales and operating income or loss before gains and losses on the sale of businesses, facility closing and reorganization costs, litigation settlements, impairments of long-lived assets and other non-recurring gains and losses.
Geographic Information — Net sales related to our foreign operations comprised less than 1% of our consolidated net sales during each of the three months ended March 31, 2015 and 2014, respectively. None of our long-lived assets are associated with our foreign operations.
Significant Customers — Our largest customer accounted for approximately 16% and 17% of our consolidated net sales in the three months ended March 31, 2015 and 2014, respectively.

24

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are predictions based on our current expectations and our projections about future events, and are not statements of historical fact. Forward-looking statements include statements concerning our business strategy, among other things, including anticipated trends and developments in, and management plans for, our business and the markets in which we operate. In some cases, you can identify these statements by forward-looking words, such as “estimate,” “expect,” “anticipate,” “project,” “plan,” “intend,” “believe,” “forecast,” “foresee,” “likely,” “may,” “should,” “goal,” “target,” “might,” “will,” “could,” “predict,” and “continue,” the negative or plural of these words and other comparable terminology. All forward-looking statements included in this Form 10-Q are based upon information available to us as of the filing date of this Form 10-Q, and we undertake no obligation to update any of these forward-looking statements for any reason. You should not place undue reliance on these forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in “Part I — Item 1A — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 Annual Report on Forn 10-K"), and elsewhere in this Form 10-Q. You should carefully consider the risks and uncertainties described under these sections.
Business Overview
We are a leading food and beverage company and the largest processor and direct-to-store distributor of fluid milk and other dairy and dairy case products in the United States, with a vision to be the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion. As we continue to evaluate and seek to maximize the value of our national operational network and our leading brands and product offerings, we have aligned our leadership team, operating strategy, and sales, logistics and supply chain initiatives into a single operating and reportable segment.
We manufacture, market and distribute a wide variety of branded and private label dairy case products, including fluid milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products to retailers, distributors, foodservice outlets, educational institutions and governmental entities across the United States. Our portfolio includes DairyPure®, our recently launched national white milk brand; and TruMoo®, a leading national flavored milk brand, along with well-known regional dairy brands such as Alta Dena ®, Berkeley Farms ®, Country Fresh ®, Dean’s ®, Garelick Farms ®, LAND O LAKES ® milk and cultured products (licensed brand), Lehigh Valley Dairy Farms ®, Mayfield ®, McArthur ®, Meadow Gold®, Oak Farms ®, PET ® (licensed brand), T.G. Lee ®, Tuscan ® and more. In all, we have more than 50 local and regional dairy brands and private labels. Due to the perishable nature of our products, we deliver the majority of our products directly to our customers’ locations in refrigerated trucks or trailers that we own or lease. We believe that we have one of the most extensive refrigerated direct store delivery (“DSD”) systems in the United States. Our products are sold primarily on a local or regional basis through local and regional sales forces, although some national customer relationships are coordinated by a centralized corporate sales department.
Recent Developments
Launch of DairyPure® — In April 2015, we launched the first and largest fresh, white milk national brand - DairyPure®. We believe DairyPure® will reinvigorate the dairy case and provides a number of clear benefits for the category, our retail customers, consumers and us. For the category, with its unprecedented scale, DairyPure® provides a national platform to educate consumers on the health and nutrition benefits of conventional white milk as a cost-effective source of protein in their diets. For our retail customers, DairyPure® enhances their efficiency and effectiveness and enables them to advertise the same branded features across the United States. For the consumer, DairyPure® is on trend with their desire for clean label, locally sourced, fresh, protein and nutrient packed products. DairyPure® is an easy transition for them, building on the regional brands they already know and value. For us, DairyPure® provides a rational platform for advertising and promotional spending.
Results of Operations
Our key performance indicators are volume performance, brand mix and achieving low cost, which are realized within net sales, gross profit and operating income, respectively. We evaluate our financial performance based on sales and operating profit or loss before gains and losses on the sale of businesses, facility closing and reorganization costs, asset impairment charges, litigation settlements and other nonrecurring gains and losses. The following table presents certain information concerning our financial results, including information presented as a percentage of net sales:

25

 
Three Months Ended March 31
 
2015
 
2014
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
2,050.8

 
100.0
 %
 
$
2,341.0

 
100.0
 %
Cost of sales
1,572.5

 
76.7

 
1,924.8

 
82.2

Gross profit(1)
478.3

 
23.3

 
416.2

 
17.8

Operating costs and expenses:
 
 
 
 
 
 
 
Selling and distribution
338.2

 
16.5

 
339.4

 
14.5

General and administrative
87.5

 
4.3

 
72.3

 
3.1

Amortization of intangibles
0.7

 
—

 
0.7

 
—

Facility closing and reorganization costs
1.2

 
0.1

 
1.0

 
—

Impairment of intangible assets
109.9

 
23.0

 
—

 
—

Litigation settlements
—

 
—

 
(2.5
)
 
(0.1
)
Total operating costs and expenses
537.5

 
26.2

 
410.9

 
17.6

Operating income (loss)
$
(59.2
)
 
(2.9
)%
 
$
5.3

 
0.2
 %
 
(1)
As disclosed in Note 1 to the Consolidated Financial Statements in our 2014 Annual Report on Form 10-K, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales.
Quarter Ended March 31, 2015 Compared to Quarter Ended March 31, 2014
Net Sales — The change in net sales was due to the following:
 
Three Months Ended  March 31, 2015 vs. 2014
 
(In millions)
Volume
$
(76.8
)
Pricing and product mix changes
(213.4
)
Total decrease
$
(290.2
)

Net sales decreased $290.2 million, or 12.4%, during the first quarter of 2015 as compared to the first quarter of 2014, primarily due to decreased pricing, as a result of significant declines in dairy commodity costs from year-ago levels. On average, during the first quarter of 2015, the Class I raw milk price was approximately 25% below prior-year levels. Net sales were further impacted by a sales volume decline of 3.3% from year-ago levels, as a result of pricing levels remaining relatively high, despite year-over-year declines, as retailers restore greater profitability to the dairy case. Volume declines across our fluid milk business, which accounted for approximately 74% of our total sales volume, were most significant across our portfolio of branded white milk. Volumes also declined across all channel business, except food service.
We generally increase or decrease the prices of our fluid dairy products on a monthly basis in correlation with fluctuations in the costs of raw materials, packaging supplies and delivery costs. However, in some cases, we are competitively or contractually constrained with respect to the means and/or timing of price increases. The following table sets forth the average monthly Class I “mover” and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for the first quarter of 2015 in comparison to the first quarter of 2014:
 
Three Months Ended March 31*
 
2015
 
2014
 
% Change
Class I mover(1)
$
16.79

 
$
22.38

 
(25.0
)%
Class I raw skim milk mover(1)(2)
10.57

 
16.51

 
(36.0
)
Class I butterfat mover(2)(3)
1.88

 
1.84

 
2.2

Class II raw skim milk minimum(1)(4)
9.09

 
17.15

 
(47.0
)
Class II butterfat minimum(3)(4)
1.79

 
1.95

 
(8.2
)

26


*
The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and supplier. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” in our 2014 Annual Report on Form 10-K and “— Known Trends and Uncertainties — Prices of Conventional Raw Milk and Other Inputs” below for a more complete description of raw milk pricing.
(1)
Prices are per hundredweight.
(2)
We process Class I raw skim milk and butterfat into fluid milk products.
(3)
Prices are per pound.
(4)
We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.
Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; and plant and equipment costs. Cost of sales decreased by 18.3% in the first quarter of 2015 compared to the first quarter of 2014, primarily due to decreased dairy commodity costs. The Class I raw milk price was approximately 25% below prior year levels. In addition this decrease was due to our ongoing cost and efficiency initiatives and lower sales volumes.
Gross Profit — Our gross profit percentage increased to 23.3% in the first quarter of 2015 as compared to 17.8% in the first quarter of 2014. This increase was primarily due to declining commodity costs and pricing mechanisms for our Class II products, price adjustments for our private label products, pricing actions and increased margin pool for our branded products, and declining shrink costs resulting from the decline in dairy commodity costs. Increases to gross profit were partially offset by volume declines discussed above.
Operating Costs and Expenses — Operating costs and expenses increased by 30.8% in the first quarter of 2015 as compared to the first quarter of 2014. Significant changes within operating costs and expenses in the first quarter of 2015 include the following:
•
General and administrative costs increased $15.2 million primarily due to higher incentive based compensation associated with higher earnings in first quarter of 2015 as compared to the first quarter of 2014.
•
Selling and distribution costs decreased $1.2 million primarily due to the impact of lower sales volumes.
•
Facility closing and reorganization costs increased by $0.2 million. See Note 11 to our unaudited Condensed Consolidated Financial Statements.
•
Impairment of intangibles assets of $109.9 million. See Note 4 to our unaudited Condensed Consolidated Financial Statements.

Other (Income) Expense — Other (income) expense increased by $45.0 million during the first quarter of 2015 as compared to the first quarter of 2014. This increase in expense was primarily due to the loss on early retirement of long term debt of $43.6 million recorded on the early retirement of our 2016 senior notes and extinguishment of our Old Credit Facility, which occurred during the first quarter of 2015. Additionally, interest expense increased by $1.5 million in the first quarter of 2015 compared to the first quarter of 2014 primarily due to a higher average weighted debt maturity profile resulting from the issuance of our 2023 senior notes. See Note 5 to our unaudited Condensed Consolidated Financial Statements for further information regarding our debt activities during the quarter.
Income Taxes — Income tax benefit was recorded at an effective rate of 38.1% for the first quarter of 2015 compared to income tax expense at a (4.1)% effective tax rate for the first quarter of 2014. Generally, our effective tax rate varies primarily based on our profitability level and the relative earnings of our business units. In the first quarter of 2014, our effective tax rate was also impacted by several sate law changes.
Liquidity and Capital Resources
We believe that our cash on hand coupled with future cash flows from operations and other available sources of liquidity, including our $450 million senior secured revolving credit facility and our amended $550 million receivables-backed facility, together will provide sufficient liquidity to allow us to meet our cash requirements in the next twelve months. Our anticipated uses of cash include capital expenditures; working capital; pension contributions; financial obligations, including tax payments; and certain other costs that may be necessary to execute our cost reduction initiatives. On an ongoing basis, we

27

will evaluate and consider strategic acquisitions, divestitures, joint ventures, or other transactions to create shareholder value and enhance financial performance. As discussed below, we have also instituted a regular quarterly cash dividend policy and began repurchasing shares of our common stock opportunistically.
Under our cash dividend policy, holders of our common stock will receive dividends when and as declared by our Board of Directors. Pursuant to the policy, we expect to pay quarterly dividends of $0.07 per share ($0.28 per share annually). Quarterly dividends totaling approximately $6.6 million and $6.5 million were paid in March 2015 and March 2014, respectively. Our cash dividend policy is subject to modification, suspension or cancellation in any manner and at any time. Please see “Note 7 to our unaudited Condensed Consolidated Financial Statements” above for additional details regarding the dividend policy.
Additionally, since 1998, our Board of Directors has from time to time authorized the repurchase of our common stock up to an aggregate of $2.38 billion, excluding fees and commissions. We made no share repurchases during the three months ended March 31, 2015, and we repurchased 1,727,275 shares during the three months ended March 31, 2014 for $25.0 million. The repurchase was funded using borrowings under both the receivables-backed facility and the senior secured credit facility. As of March 31, 2015, $275.0 million was available for repurchases under this program (excluding fees and commissions). Management is authorized to purchase shares from time to time through open market transactions at prevailing prices or in privately negotiated transactions, subject to market conditions and other factors. Shares, when repurchased, are retired.
As of March 31, 2015, $10.8 million of our total cash on hand of $30.1 million was attributable to our foreign operations. We are evaluating strategies and alternatives with respect to the cash attributable to our foreign operations. However, we believe that our existing sources of liquidity, as described more fully above, will enable us to meet our cash requirements for the next twelve months.
At March 31, 2015, we had $852.2 million of outstanding long-term debt obligations. We had total cash on hand of $30.1 million and an additional $805.6 million of combined available future borrowing capacity under our senior secured credit facility and receivables-backed facility, subject to compliance with the covenants in our credit agreements. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may, from time to time, raise additional funds through borrowings or public or private sales of debt or equity securities. The amount, nature and timing of any borrowings or sales of debt or equity securities will depend on our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
Dean Foods Company Senior Notes due 2023 — On February 25, 2015, we issued $700 million in aggregate principal amount of 6.50% senior notes due 2023 (the “2023 Notes”) at an issue price of 100% of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and in offshore transactions pursuant to Regulation S under the Securities Act.
In connection with the issuance of the 2023 Notes, the Company paid certain arrangement fees of approximately $7.0 million to initial purchasers and other fees of approximately $1.6 million, which were capitalized and will be amortized to interest expense over the remaining term of the 2023 Notes.
The 2023 Notes are senior unsecured obligations. Accordingly, the 2023 Notes rank equally in right of payment with all of our existing and future senior obligations and are effectively subordinated in right of payment to all of our existing and future secured obligations, including obligations under our senior secured credit facility and receivables-backed facility, to the extent of the value of the collateral securing such obligations. The 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by our subsidiaries that guarantee obligations under the senior secured credit facility.
The 2023 Notes will mature on March 15, 2023 and bear interest at an annual rate of 6.50%. Interest on the 2023 Notes will accrue from February 25, 2015 and is payable semi-annually in arrears in March and September of each year, commencing September 2015.
We may, at our option, redeem all or a portion of the 2023 Notes at any time on or after March 15, 2018 at the applicable redemption prices specified in the indenture governing the 2023 Notes (the "Indenture"), plus any accrued and unpaid interest to, but excluding, the applicable redemption date. We are also entitled to redeem up to 40% of the aggregate principal amount of the 2023 Notes before March 15, 2018 with the net cash proceeds that we receive from certain equity offerings at a redemption price equal to 106.5% of the principal amount of the 2023 Notes, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. In addition, prior to March 15, 2018, we may redeem all or a portion of

28

the 2023 Notes, at a redemption price equal to 100% of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date.
If we undergo certain kinds of changes of control, holders of the 2023 Notes have the right to require us to repurchase all or any portion of such holder’s 2023 Notes at 101% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the date of repurchase.
The Indenture contains covenants that, among other things, limit our ability to: (i) create certain liens; (ii) enter into sale and lease-back transactions; (iii) assume, incur or guarantee indebtedness for borrowed money that is secured by a lien on certain principal properties (or on any shares of capital stock of our subsidiaries that own such principal property) without securing the 2023 Notes on a pari passu basis; and (iv) consolidate with or merge with or into, or sell, transfer, convey or lease all or substantially all of our properties and assets, taken as a whole, to another person.
We used the net proceeds from the 2023 Notes to redeem all of our outstanding senior unsecured notes due 2016, as described below, and to repay a portion of the outstanding borrowings under our senior secured credit facility and receivables-backed facility.
Senior Secured Credit Facility — In July 2013, we executed a credit agreement pursuant to which the lenders provided us with a five-year senior secured revolving credit facility in the amount of up to $750 million (the "Old Credit Facility"). The Old Credit Facility was amended in June 2014 and further amended in August 2014.
In March 2015, we terminated the Old Credit Facility, replacing it with the new credit facility described below. As a result of the termination, we recorded a write-off of unamortized debt issue costs of $5.2 million during the three months ended March 31, 2015. The write-off was recorded in the loss on early retirement of long-term debt line in our unaudited Consolidated Statements of Operations.
In March 2015, we executed a new credit agreement (the "Credit Agreement") pursuant to which the lenders have provided us with a five-year revolving credit facility in the amount of up to $450 million (the “New Credit Facility”). Under the Credit Agreement, we had the right to request an increase of the aggregate commitments under the New Credit Facility by up to $200 million without the consent of any lenders not participating in such increase, subject to specified conditions.  The New Credit Facility is available for the issuance of up to $75 million of letters of credit and up to $100 million of swing line loans. The New Credit Facility will terminate in March 2020.
In connection with the execution of the New Credit Facility, we paid certain arrangement fees of approximately $4.8 million to lenders and other fees of approximately $0.5 million, which were capitalized and will be amortized to interest expense over the remaining term of the facility.
Loans outstanding under the New Credit Facility will bear interest, at our option, at either (i) the LIBO Rate (as defined in the Credit Agreement) plus a margin of between 2.25% and 2.75% (2.50% as of March 31, 2015) based on the Total Net Leverage Ratio (as defined in the Credit Agreement), or (ii) the Alternate Base Rate (as defined in the Credit Agreement) plus a margin of between 1.25% and 1.75% (1.50% as of March 31, 2015) based on the Total Net Leverage Ratio.
We may make optional prepayments of the loans, in whole or in part, without premium or penalty (other than applicable breakage costs). Subject to certain exceptions and conditions described in the agreement, we will be obligated to prepay the New Credit Facility, but without a corresponding commitment reduction, with the net cash proceeds of certain asset sales and with casualty and insurance proceeds. The New Credit Facility is guaranteed by the our existing and future domestic material restricted subsidiaries (as defined in the agreement), which are substantially all of our wholly-owned U.S. subsidiaries other than the receivables securitization subsidiaries (the “Guarantors”).
The New Credit Facility is secured by a first priority perfected security interest in substantially all of our assets and the assets of the Guarantors, whether consisting of personal, tangible or intangible property, including a pledge of, and a perfected security interest in, (i) all of the shares of capital stock of the Guarantors and (ii) 65% of the shares of capital stock of the Guarantor’s first-tier foreign subsidiaries which are material restricted subsidiaries, in each case subject to certain exceptions as set forth in the Credit Agreement. The collateral does not include, among other things, (a) any real property with an individual net book value below $10 million, (b) the capital stock and any assets of any unrestricted subsidiary, (c) any capital stock of any direct or indirect subsidiary of Dean Holding Company ("Legacy Dean") which owns any real property, or (d) receivables sold pursuant to the receivables securitization facility.
 The Credit Agreement agreement contains customary representations, warranties and covenants, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, investments, loans

29

and advances, transactions with affiliates and sale and leaseback transactions. The Credit Agreement also contains customary events of default and related cure provisions. We are required to comply with (a) a maximum senior secured net leverage ratio of 2.50x (which, for purposes of calculating indebtedness, excludes borrowings under our receivables securitization facility); and (b) a minimum consolidated interest coverage ratio of 2.25x.
At March 31, 2015, there were outstanding borrowings of $14.5 million under the New Credit Facility. Our average daily balance under the New Credit Facility during the three months ended March 31, 2015 was $22.7 million. There were no letters of credit issued under the New Credit Facility as of March 31, 2015.
Dean Foods Receivables-Backed Facility — We have a $550 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to two wholly-owned entities intended to be bankruptcy-remote. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these two entities are fully reflected in our unaudited Condensed Consolidated Balance Sheets, and the securitization is treated as a borrowing for accounting purposes. In June 2014, the receivables-backed facility was modified to, among other things, increase the amount available for the issuance of letters of credit from $300 million to $350 million and to extend the liquidity termination date from March 2015 to June 2017. The receivables-backed facility was further amended in August 2014 to be consistent with the amended financial covenants under the credit agreement governing the Old Credit Facility.
In March 2015, the receivables-backed facility was further modified to, among other things, extend the liquidity termination date from June 2017 to March 2018 and modify the consolidated and senior secured net leverage ratio requirements to be consistent with those contained in the Credit Agreement described above.
In connection with the modification of the receivable-backed facility, we paid certain arrangement fees of approximately $0.7 million to lenders, which were capitalized and will be amortized to interest expense over the remaining term of the facility.
There were no outstanding borrowings under the receivables-backed facility, as amended, as of March 31, 2015. Excluding letters of credit in the aggregate amount of $164.8 million that were issued but undrawn, resulting in remaining available borrowing capacity of $370.1 million at March 31, 2015. Availability under the receivables-backed facility is calculated using the current receivables balance for the seller entities, less adjustments for customer concentration limits, reserve requirements, and other adjustments as described in the amended and restated receivables repurchase agreement, not to exceed the total commitment amount less current borrowings and outstanding letters of credit. The receivables-backed facility bears interest at a variable rate based upon commercial paper and one-month LIBO rates plus an applicable margin.
At May 4, 2015, we had no outstanding borrowings under the senior secured revolving credit facility and the receivables-backed facility, excluding letters of credit in the aggregate amount of $164.8 million that were issued but undrawn.
Dean Foods Company Senior Notes due 2016 — In March 2015, we redeemed the remaining principal amount of $476.2 million of our outstanding Senior Notes due 2016 at a total redemption price of approximately $521.8 million. As a result, we recorded a $38.3 million pre-tax loss on early extinguishment of debt in the first quarter of 2015, which consisted of debt redemption premiums of $37.3 million, a write-off of unamortized long-term debt issue costs of $0.8 million and write-off of the remaining bond discount and interest rate swaps of approximately $0.2 million. The loss was recorded in the loss on early retirement of long-term debt line in our unaudited Consolidated Statements of Operations. The redemption was financed with proceeds from the issuance of the 2023 Notes.
Our leverage ratio at March 31, 2015 was 3.35 times consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters, as defined in our credit agreement. As described in more detail in our credit agreement and the purchase agreement governing our receivables-backed facility, the leverage ratio is calculated as the ratio of consolidated funded indebtedness, less cash up to $50 million to the extent held by us and our restricted subsidiaries, to consolidated EBITDA for the period of four consecutive fiscal quarters ended on the measurement date. Consolidated funded indebtedness is comprised of our outstanding indebtedness and the outstanding indebtedness of certain of our subsidiaries, excluding our unrestricted subsidiaries. Consolidated EBITDA is comprised of net income for us and our restricted subsidiaries plus interest expense, taxes, depreciation and amortization expense and other non-cash expenses, and certain other add-backs for non-recurring charges and other adjustments permitted in calculating covenant compliance under the credit agreement, and is calculated on a pro-forma basis to give effect to any acquisitions, divestitures or relevant changes in our composition or the composition of certain of our subsidiaries. In addition, the calculation of consolidated EBITDA may include adjustments related to other charges reasonably acceptable to the administrative agent.
Our interest coverage ratio at March 31, 2015 was 4.28 times consolidated EBITDA to consolidated interest expense for the prior four consecutive quarters, as defined in our credit agreement. As described in more detail in our credit

30

agreement and the purchase agreement governing our receivables-backed facility, our interest coverage ratio is calculated as the ratio of consolidated EBITDA to consolidated interest expense for the period of four consecutive fiscal quarters ended on the measurement date. Consolidated EBITDA is calculated as described above in the discussion of our leverage ratio. Consolidated interest expense is comprised of consolidated interest expense paid or payable in cash by us and our restricted subsidiaries, as calculated in accordance with generally accepted accounting principles, but excluding write-offs or amortization of deferred financing fees and amounts paid on early termination of swap agreements.
We are currently in compliance with all covenants under our credit agreements.
Historical Cash Flow
The following table summarizes our cash flows from operating, investing and financing activities:
 
Three Months Ended March 31
 
2015
 
2014
 
Change
 
(In thousands)
Net cash flows from continuing operations:
 
 
 
 
 
Operating activities
$
157,579

 
$
32,799

 
$
124,780

Investing activities
(17,666
)
 
(26,663
)
 
8,997

Financing activities
(125,811
)
 
35,111

 
(160,922
)
Effect of exchange rate changes on cash and cash equivalents
(408
)
 
(258
)
 
(150
)
Net increase in cash and cash equivalents
$
13,694

 
$
40,989

 
$
(27,295
)

Operating Activities
Net cash provided by operating activities was $157.6 million for the three months ended March 31, 2015 compared to net cash provided by operating activities of $32.8 million for the three months ended March 31, 2014. The increase was primarily due to higher gross profit during the three months ended March 31, 2015, compared to the same period ended March 31, 2014. Additionally, the increase was attributable to the early receipt of our 2014 income tax refund of $56 million during the three months ended March 31, 2015.
Investing Activities
Net cash used in investing activities decreased by $9.0 million in the three months ended March 31, 2015 in comparison to the three months ended March 31, 2014 and is primarily attributable to decreased capital expenditures.
Financing Activities
Net cash used in financing activities of $125.8 million in the three months ended March 31, 2015 changed from net cash provided by financing activities of $35.1 million in the year-ago period. This change was driven by net debt payments of $291.4 million in the first quarter of 2015 as compared to net proceeds from borrowings of $65.5 million for the first quarter of 2014. In addition, we made payments on the early retirement of long-term debt of $513.5 million, off-set by proceeds from the issuance of $700 million aggregate principal amount of the 2023 Notes.
Contractual Obligations
The following is an update, as of March 31, 2015, to certain contractual obligations for indebtedness, and related cash interest payments, from those reported in our 2014 Annual Report on Form 10-K:
 
Payments Due by Period
 
Total
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
(in millions)
Senior secured credit facility
$
14.5

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
14.5

Dean Foods Company senior notes(1)
700.0

 
—

 
—

 
—

 
—

 
—

 
700.0

Interest payments (2)
428.3

 
61.1

 
62.5

 
60.5

 
49.1

 
47.9

 
147.2

Total
$
1,142.8

 
$
61.1

 
$
62.5

 
$
60.5

 
$
49.1

 
$
47.9

 
$
861.7

(1)
Represents face amount.

31

(2)
Includes fixed rate interest obligations and interest on variable rate debt based on the rates in effect at March 31, 2015. Interest that may be due in the future on variable rate borrowings under the senior secured credit facility and receivables-backed facility will vary based on the interest rate in effect at the time and the borrowings outstanding at the time.
Obligations for Indebtedness and Related Interest Payments — In March 2015, we executed a new credit agreement pursuant to which the lenders have provided us with a five-year revolving credit facility in the amount of up to $450 million. Under the Credit Agreement, we have the right to request an increase of the aggregate commitments under the New Credit Facility by up to $200 million without the consent of any lenders not participating in such increase, subject to specified conditions. The New Credit Facility is available for the issuance of up to $75 million of letters of credit and up to $100 million of swing line loans. The New Credit Facility replaced our prior credit facility and will terminate in March 2020.
In March 2015, the receivables-backed facility was further modified to, among other things, extend the liquidity termination date from June 2017 to March 2018 and modify the consolidated and senior secured net leverage ratio requirements to be consistent with those contained in the Credit Agreement described above. There were no outstanding borrowings under the receivables-backed facility at March 31, 2015.
On February 25, 2015, we issued $700 million in aggregate principal amount of 6.50% senior notes due 2023 at an issue price of 100% of the principal amount of the 2023 Notes in a private placement for resale to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933, as amended, and in offshore transactions pursuant to Regulation S under the Securities Act. We used the net proceeds from the 2023 Notes to redeem all of our outstanding senior unsecured notes due 2016.
Other Long-Term Liabilities
We offer pension benefits through various defined benefit pension plans and also offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees. Reported costs of providing non-contributory defined pension benefits and other postretirement benefits are dependent upon numerous factors, assumptions and estimates. For example, these costs are impacted by actual employee demographics (including age, compensation levels and employment periods), the level of contributions made to the plan and earnings on plan assets. Pension and postretirement costs also may be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and annual periodic pension costs.
We expect to contribute approximately $5.4 million to the pension plans and approximately $2.6 million to the postretirement health plans in 2015.
Other Commitments and Contingencies
In 2001, in connection with our acquisition of Legacy Dean, we purchased Dairy Farmers of America’s (“DFA”) 33.8% interest in our operations. In connection with that transaction, we issued a contingent, subordinated promissory note to DFA in the original principal amount of $40 million. The promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we materially breach or terminate one of our related milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire 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. We have not terminated, and we have not materially breached, any of our related milk supply agreements with DFA related to the promissory note. We have previously terminated unrelated supply agreements with respect to several plants that were supplied by DFA. In connection with our goals of accelerated cost control and increased supply chain efficiency, we continue to evaluate our sources of raw milk supply.
We also have the following commitments and contingent liabilities, in addition to contingent liabilities related to ordinary course litigation, investigations and audits:
•
certain indemnification obligations related to businesses that we have divested;
•
certain lease obligations, which require us to guarantee the minimum value of the leased asset at the end of the lease;
•
selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims and other casualty losses; and
•
certain litigation-related contingencies.

32

See Note 12 to our unaudited Condensed Consolidated Financial Statements for more information about our commitments and contingent obligations, including our litigation contingencies.
Future Capital Requirements
During 2015, we intend to invest a total of approximately $150 million in capital expenditures primarily for our existing manufacturing facilities and distribution capabilities.
On an ongoing basis, we will evaluate and consider strategic acquisitions, divestitures, joint ventures, or other transactions to create shareholder value and enhance financial performance. We have also instituted a regular quarterly cash dividend policy and may repurchase shares of our common stock opportunistically.

Known Trends and Uncertainties
Prices of Conventional Raw Milk and Other Inputs
Conventional Raw Milk and Butterfat — The primary raw materials used in the products we manufacture, distribute and sell are conventional milk (which contains both raw milk and butterfat) and bulk cream. On a monthly basis, the federal government and certain state governments set minimum prices for raw milk. 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 can sometimes differ 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 Grade AA butter price on the Chicago Mercantile Exchange.
Prices for conventional raw milk were 25% lower than the first quarter of the prior year and declined 29% sequentially from the fourth quarter of 2014. From a near-term perspective, raw milk costs are leveling and stabilizing. For the second half of 2015, we expect raw milk costs to gradually and sequentially increase, but the global milk production growth and reduced import demand should mitigate significant upside price risk to the Class I price. However, given the multitude of factors that influence the dairy commodity environment, we believe prices remain volatile.

Fuel and Resin Costs — We purchase diesel fuel to operate our extensive DSD system, and we incur fuel surcharge expense related to the products we deliver through third-party carriers. Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuations, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies.
Another significant raw material we use is resin, which is a fossil fuel based product used to make plastic bottles. The prices of diesel and resin are subject to fluctuations based on changes in crude oil and natural gas prices. For 2015, we expect our fuel and resin costs to be lower than the prior year.
Retail and Customer Environment and Fluid Milk Volumes
As conventional raw milk prices have fallen, retailers have restored some of the margin over milk (the difference between retail milk prices and the cost of raw milk). With raw milk costs declining rapidly and retailers only marginally reflecting lower private label retail prices on the shelf, we expected soft volume categories in the first quarter of 2015. As a result, we continued our focus on net price realization within our branded portfolio. With this focus, we realized increased profitability in our branded white milk portfolio in the first quarter of 2015 compared to the first quarter of the prior year, despite a volume decline of low single digits.
 
The fluid milk industry remains highly competitive. Fluid milk category volumes remained soft, and overall category volume declines have continued. Total volumes across all products declined 3% during the first quarter of 2015 as compared to the prior year with a modest deterioration from our run rate in the second half of 2014. We expect to continue to experience volume declines in fluid milk, in line with recent category trends, that will drive low single digit declines for our

33

total volume performance in the second quarter of 2015. In terms of our branded versus private-label mix, our first quarter of 2015 branded white milk volumes were approximately 35%.

Tax Rate
Income tax benefit for the first three months of 2015 was recorded at an effective rate of 38.1%. Changes in our profitability levels and the relative earnings of our business units, as well as changes to federal, state, and foreign tax laws, may cause the rate to change from historical rates.
See “Part I — Item 1A — Risk Factors” in our 2014 Annual Report on Form 10-K, "Part II — Item 1A — Risk Factors" below, and elsewhere in this Form 10-Q herein for a description of various other risks and uncertainties concerning our business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our quantitative and qualitative disclosures about market risk as set forth in our 2014 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Controls Evaluation and Related Certifications
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), referred to herein as “Disclosure Controls”) as of the end of the period covered by this quarterly report. The controls evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon our most recent controls evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of March 31, 2015.
Changes in Internal Control over Financial Reporting
During the period covered by this quarterly report, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

34

Part II — Other Information
Item 1. Legal Proceedings
Tennessee Retailer and Indirect Purchaser Actions
A putative class action antitrust complaint (the “retailer action”) was filed against Dean Foods and other milk processors on August 9, 2007 in the United States District Court for the Eastern District of Tennessee. Plaintiffs allege generally that we, either acting alone or in conjunction with others in the milk industry, lessened competition in the Southeastern United States for the sale of processed fluid Grade A milk to retail outlets and other customers. Plaintiffs further allege that the defendants’ conduct artificially inflated wholesale prices paid by direct milk purchasers. In March 2012, the district court granted summary judgment in favor of defendants, including the Company, as to all counts then remaining. Plaintiffs appealed the district court’s decision; and in January 2014, the United States Court of Appeals for the Sixth Circuit reversed the grant of summary judgment as to one of the five original counts in the Tennessee retailer action. Following the Sixth Circuit’s denial of our request to reconsider the case en banc; the Company petitioned the Supreme Court of the United States for review. On November 17, 2014, the Supreme Court denied our petition and the case returned to the district court. There are now various motions and briefs pending before the district court, including defendants’ motion for summary judgment on grounds previously raised but not yet decided, and plaintiffs’ motion for class certification. The district court is scheduled to hear argument on these and other related issues in June 2015.
On June 29, 2009, another putative class action lawsuit was filed in the Eastern District of Tennessee on behalf of indirect purchasers of processed fluid Grade A milk (the “indirect purchaser action”). This case was voluntarily dismissed, and the same plaintiffs filed a nearly identical complaint on January 17, 2013. The allegations in this complaint are similar to those in both the retailer action and the 2009 indirect purchaser action, but involve only claims arising under Tennessee law. The Company filed a motion to dismiss, and on September 11, 2014, the district court granted in part and denied in part that motion, dismissing the non-Tennessee plaintiffs’ claims. The Company filed its answer to the surviving claims on October 15, 2014. The parties have jointly proposed that further proceedings (including any discovery) in this case be deferred until after the district court rules on the summary judgment and class certification issues in the Tennessee retailer action.
At this time, it is not possible for us to predict the ultimate outcome of these matters. In addition to the pending legal proceedings set forth above, we are party from time to time to certain claims, litigations, audits and investigations. Potential liabilities associated with these other matters are not expected to have a material adverse impact on our financial position, results of operations, or cash flows.
Other
We have settled with substantially all states in regards to our obligations under state unclaimed property laws, the results of which did not have a material adverse impact on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes in the Company's risk factors from those set forth in our 2014 Annual Report on Form 10-K.

35


Item 6. Exhibits
4.1
Indenture, dated as of February 25, 2015, between Dean Foods Company, the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed March 3, 2015).

10.1
Credit Agreement, dated as of March 26, 2015 among Dean Foods Company; Bank of America, N.A., as Administrative Agent; JPMorgan Chase Bank, N.A. and Morgan Stanley Senior Funding, Inc., as Syndication Agents; CoBank, ACB, Suntrust Robinson Humphrey, Inc., Coöperatieve Centrale Raiffeisen - Boerenleenbank, B.A. “Rabobank Nederland,” New York Branch, Credit Agricole Corporate & Investment Bank, and PNC Bank, National Association, as Co-Documentation Agents; and certain other lenders that are parties thereto (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 27, 2015).

10.2
Seventh Amended and Restated Receivables Purchase Agreement, dated as of March 26, 2015, among Dairy Group Receivables L.P. and Dairy Group Receivables II, L.P., as Sellers; the Servicers, Companies and Financial Institutions listed therein; and Cooperatieve Centrale Raiffeisen - Boerenleenbank B.A. “Rabobank International”, New York Branch, as Agent (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed March 27, 2015).

10.3
Dean Foods Company 2015 Short-Term Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 10, 2015).

10.4(1)
Letter Agreement between Dean Foods Company and Marc Kesselman dated January 16, 2015 (filed herewith).
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
99
Supplemental Financial Information for Dean Holding Company (filed herewith).
 
 
101.INS XBRL Instance Document(1).
101.SCH XBRL Taxonomy Extension Schema Document(1).
101.CAL XBRL Taxonomy Calculation Linkbase Document(1).
101.DEF XBRL Taxonomy Extension Definition Linkbase Document(1).
101.LAB XBRL Taxonomy Label Linkbase Document(1).
101.PRE XBRL Taxonomy Presentation Linkbase Document(1).
(1)
Submitted electronically herewith.

36

SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
DEAN FOODS COMPANY
 
 
 
/S/ SCOTT K. VOPNI
 
Scott K. Vopni
 
Senior Vice President Investor Relations and Chief Accounting Officer
May 11, 2015





37

Exhibit Index

4.1
Indenture, dated as of February 25, 2015, between Dean Foods Company, the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed March 3, 2015).
10.1
Credit Agreement, dated as of March 26, 2015 among Dean Foods Company; Bank of America, N.A., as Administrative Agent; JPMorgan Chase Bank, N.A. and Morgan Stanley Senior Funding, Inc., as Syndication Agents; CoBank, ACB, Suntrust Robinson Humphrey, Inc., Coöperatieve Centrale Raiffeisen - Boerenleenbank, B.A. “Rabobank Nederland,” New York Branch, Credit Agricole Corporate & Investment Bank, and PNC Bank, National Association, as Co-Documentation Agents; and certain other lenders that are parties thereto (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 27, 2015).
10.2
Seventh Amended and Restated Receivables Purchase Agreement, dated as of March 26, 2015, among Dairy Group Receivables L.P. and Dairy Group Receivables II, L.P., as Sellers; the Servicers, Companies and Financial Institutions listed therein; and Cooperatieve Centrale Raiffeisen - Boerenleenbank B.A. “Rabobank International”, New York Branch, as Agent (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed March 27, 2015).
10.3
Dean Foods Company 2015 Short-Term Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 10, 2015).
10.4(1)
Letter Agreement between Dean Foods Company and Marc Kesselman dated January 16, 2015 (filed herewith).
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
99
Supplemental Financial Information for Dean Holding Company (filed herewith).
 
 
101.INS XBRL Instance Document(1).
101.SCH XBRL Taxonomy Extension Schema Document(1).
101.CAL XBRL Taxonomy Calculation Linkbase Document(1).
101.DEF XBRL Taxonomy Extension Definition Linkbase Document(1).
101.LAB XBRL Taxonomy Label Linkbase Document(1).
101.PRE XBRL Taxonomy Presentation Linkbase Document(1).

(1)
Submitted electronically herewith.


38







 

 
Revised Offer

Dear Marc:

I am pleased to offer you the position of Executive Vice President, General Counsel & Corporate Secretary (Grade 99) for Dean Foods Company. This position will report to Gregg Tanner, CEO, and will be based out of Dallas, Texas. We look forward to having you join our team in January 2015.

Here are the specifics of your assignment:

Base Salary
You will be paid $18,750 on a semi-monthly basis, less payroll taxes, which equates to an annual salary of $450,000.00, less payroll taxes. Your salary will be reviewed annually (next in March 2016).

Signing Bonus
You will receive a one-time $660,000.00 signing bonus payable in April 2015. If you voluntarily leave Dean Foods during your first 24 months of employment, you will be responsible for reimbursing Dean Foods for the full gross amount of the signing bonus on a prorated basis (based on number of months worked).

Annual Incentive Opportunity
As a grade 99 employee, you will be eligible to earn an annual incentive as a participant in the Dean Foods Corporate Short-Term Incentive (STI) Plan with a 2015 target amount equal to 70% of your annualized base salary, subject to the achievement of certain financial targets as well as your performance against certain individual objectives. Your 2015 incentive payment will be prorated based on your actual hire date if you start after January 15, 2015.

Annual Long Term Incentive Compensation
You will be eligible for future Long Term Incentive (LTI) grants under the Dean Foods LTI Program. The exact amount and nature of any future long term incentive awards will be determined by the Board of Directors or the Compensation Committee thereof. Your LTI target in your offer package for 2015 is $700,000.

Special LTI Grants
You will be eligible to receive three special all RSUs LTI grants under the Dean Foods LTI Program. Below is the schedule indicating when you will receive these three special grants:





Timing of Grant
Target Value
Equity
Q1 2015
$340,000
100% in RSUs
Q1 2016
$250,000
100% in RSUs
Q1 2017
$250,000
100% in RSUs

These grants are subject to you being actively employed by Dean Foods at the timing of said grants in order to be eligible to receive them. These grants are also subject to your acceptance of the terms and conditions of their applicable equity award agreements.

Executive Deferred Compensation Plan
You will be eligible to participate in the Dean Foods Executive Deferred Compensation Plan. The plan provides eligible executives with the opportunity to defer compensation on a pre-tax basis. You will receive general information and enrollment materials during the next enrollment cycle.

SERP and 401k
You will be covered by the Dean Foods Supplemental Executive Retirement Plan (SERP) and will also be eligible to participate in the Dean Foods 401k plan under the plan rules.

Paid Time Off (PTO)
You will be granted twenty five (25) days of PTO. For 2015, your PTO will be prorated based on your actual start date if you start after January 15, 2015. Unused PTO is not carried forward from year to year unless required by state law.

Executive Physical
You will be eligible for a company paid Executive Physical every calendar year with The Cooper Clinic Institute in Dallas.

Financial Counseling
As an Executive Vice President, you are eligible to receive a reimbursement of up to $14,000 net per year (grossed up for taxes) to reimburse you for any financial planning activities for which you have engaged during each calendar year, including tax preparation.

Benefits Plan
Attached to this letter is an overview of the health benefits, 401(k) programs, and all other benefits. Please note that you must complete the health benefits enrollment process within 45 days of your hire date. You will be eligible to participate in Dean Foods benefits program on the first of the month following 60 days of employment with the Company. Once hired, if you have questions regarding the health benefits programs or eligibility, please call the Dean Foods Benefits Service Center at 877-224-4909 or go online at www.deanfoods.mercerhrs.com. For questions regarding 401(k) programs or eligibility, please contact Mike Adams, Senior Director of Benefits for Dean Foods at 214-721-1345 or mike_adams@deanfoods.com.






COBRA Support
Should you elect COBRA health insurance coverage from your previous employer, Dean Foods will reimburse you, grossed up for taxes, for your COBRA health insurance premiums (less your comparable Dean Foods contribution) until you become eligible for Dean Foods benefits (first of the month following 60 days of employment).

Insider Trading
As an Executive Vice President, you will have access to sensitive business and financial information. Accordingly, from time to time and in accordance with the company's Insider Trading Policy, you will be prohibited from trading Dean Foods’ securities (or, in some circumstances, the securities of companies doing business with Dean Foods).

Change-In-Control Provisions
You will be provided a Change in Control agreement comparable to that currently provided to other Dean Foods Executive Vice Presidents.

Severance
Dean Foods maintains an Executive Severance Plan. As an Executive Vice President, you will be an eligible participant. A copy of the plan is attached for your information.

New Hire Process
This offer of employment is contingent upon your submission to and successful completion of a background check and drug screen. By signing this offer letter, you represent that there is no agreement or promise in place between you and any other company (for example, a non-competition agreement) that would prohibit you from working for Dean Foods. You are also required to comply with the Dean Foods Code of Ethics as a condition of employment. Your employment is on an at-will basis.

Conclusion
I am very excited about the opportunities at Dean Foods and very excited to have you be a part of our team. I am confident that with your experience, skills, vision, and standards, you will make significant contributions to our company in the years to come.

Best regards,

/s/ Kim Warmbier

Kim Warmbier
EVP, Chief Human Resources Officer


Agreed and accepted:


/s/ Marc Kesselman    
Marc Kesselman

01/16/15    
Date





Exhibit 31.1
Certification
I, Gregg A. Tanner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dean Foods Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
/S/ GREGG A. TANNER
 
Chief Executive Officer and Director
May 11, 2015






Exhibit 31.2
Certification
I, Chris Bellairs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Dean Foods Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/S/ CHRIS BELLAIRS
 
Executive Vice President and
Chief Financial Officer

May 11, 2015






Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Dean Foods Company (the "Company") for the quarter ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregg A. Tanner, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/S/ GREGG A. TANNER
 
Gregg A. Tanner
 
Chief Executive
Officer and Director

May 11, 2015






Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Dean Foods Company (the "Company") for the quarter ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Chris Bellairs, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
/S/ CHRIS BELLAIRS
 
Chris Bellairs
 
Executive Vice President and Chief
Financial Officer

May 11, 2015






EXHIBIT 99
DEAN HOLDING COMPANY
CONSOLIDATED BALANCE SHEET INFORMATION
(Unaudited)
(In thousands)
 
 
March 31, 2015 
 
Assets
 
Current assets:
 
Cash and cash equivalents
$
12,822

Receivables, net
291,272

Inventories
126,391

Deferred income taxes
14,991

Prepaid expenses and other current assets
10,584

Total current assets
456,060

Property, plant and equipment, net
489,128

Goodwill
44,057

Identifiable intangible and other assets, net
84,664

Total
$
1,073,909

Liabilities and Parent’s Net Investment
 
Current liabilities:
 
Accounts payable and accrued expenses
$
233,596

Total current liabilities
233,596

Long-term debt
135,469

Deferred income taxes
80,535

Other long-term liabilities
47,571

Parent’s net investment:
 
Parent’s net investment
581,159

Accumulated other comprehensive loss
(4,421
)
Total parent’s net investment
576,738

Total
$
1,073,909

 
 
 





DEAN HOLDING COMPANY
CONSOLIDATED OPERATING INFORMATION
(Unaudited)
(In thousands)
 
 
Three Months Ended
March 31, 2015 
 
Net sales
$
969,127

Cost of sales
744,524

Gross profit
224,603

Operating costs and expenses:
 
Selling and distribution
147,580

General and administrative
15,902

Amortization of intangibles
408

Restructuring and non-recurring costs
92,289

Total operating costs and expenses
256,179

Operating loss
(31,576
)
Other expense:
 
Interest expense
2,978

Other expense, net
39,177

Total other expense
42,155

Loss from continuing operations before income taxes
(73,731
)
Income tax benefit
(27,561
)
Net loss from continuing operations
(46,170
)
Loss from discontinued operations, net of tax
(53
)
Net loss
(46,223
)
Other comprehensive loss, net of tax
(142
)
Comprehensive loss
$
(46,365
)





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