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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(MARK ONE)

For the Quarterly Period Ended September 30, 2003

or

For the Transition Period from                to

Commission File Number 001-12755

Dean Foods Company

2515 McKinney Avenue, Suite 1200
Dallas, Texas 75201
(214) 303-3400
(Address, including zip code, and telephone number, including
area code, of the registrant’s principal executive offices)

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x   No o

     As of November 10, 2003 the number of shares outstanding of each class of common stock was:

Common Stock, par value $.01  156,026,363

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Part I — Financial Information

Item 1. Financial Statements

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

See Notes to Condensed Consolidated Financial Statements.

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DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)

See Notes to Condensed Consolidated Financial Statements.

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DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

See Notes to Condensed Consolidated Financial Statements.

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DEAN FOODS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003
(unaudited)

1. General

     Basis of Presentation — The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2002 (as amended). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain reclassifications have been made to conform our 2002 Consolidated Financial Statements to the current classifications. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. Our results of operations for the period ended September 30, 2003 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2002 Consolidated Financial Statements contained in our Annual Report on Form 10-K (filed with the Securities and Exchange Commission on March 27, 2003), as amended on our Annual Report on Form 10-K/A (filed with the Securities and Exchange Commission on July 3, 2003).

     On June 9, 2003, we effected a three-for-two split of our common stock. Pursuant to the split, all shareholders of record as of May 23, 2003 received an additional half share of common stock for each share held on that date. All share numbers contained in our Condensed Consolidated Financial Statements and in these Notes have been adjusted for all periods to reflect the stock split.

     This Quarterly Report, including these Notes, has been written in accordance with the Securities and Exchange Commission’s “Plain English” guidelines. Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to Dean Foods Company and its subsidiaries, taken as a whole.

     Recently Adopted Accounting Pronouncements — In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which the associated legal obligation for the liability is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and amortized over the useful life of the asset. SFAS No. 143 became effective for us in 2003. The adoption of this pronouncement did not have a material impact on our Consolidated Financial Statements.

     SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” was issued in April 2002 and is applicable to fiscal years beginning after May 15, 2002. One of the provisions of this technical statement is the rescission of SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” whereby any gain or loss on the early extinguishment of debt that was classified as an extraordinary item in prior periods in accordance with SFAS No. 4, which does not meet the criteria of an extraordinary item as defined by APB Opinion 30, must be reclassified. Adoption of this standard requires us to reclassify extraordinary losses previously reported from the early extinguishment of debt as a component of “other expense.”

     In June 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, and is effective for exit or disposal activities that are initiated after December 31, 2002. Our adoption of this standard changes the timing of the recognition of certain charges associated with exit and disposal activities.

     In November 2002, FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 clarifies the requirements of SFAS No. 5 “Accounting for Contingencies,” relating to the accounting for and disclosure of certain guarantees issued and indemnification obligations incurred. FIN No. 45 requires disclosure of certain guarantees and indemnification obligations. It also requires liability recognition for the fair value of certain guarantees and indemnification obligations made or incurred after December 31, 2002. We adopted FIN No. 45 effective January 1, 2003. See Note 10 for the disclosures required by FIN No. 45. The adoption of this pronouncement did not have a material effect on our Consolidated Financial Statements.

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     In May of 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement, which became effective for us on July 1, 2003, requires that certain financial instruments which had previously been classified as equity be classified as liabilities. We have no outstanding securities that meet the criteria of SFAS No. 150. Therefore, SFAS No. 150 had no impact on our Consolidated Financial Statements.

     Recently Issued Accounting Pronouncements — In April of 2003, FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including derivative instruments embedded in other contracts and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement requires that contracts with comparable characteristics be accounted for similarly and is effective for contracts entered into or modified after June 30, 2003. Our reporting for our hedging activities is within the requirements of this statement, therefore SFAS No. 149 will have no impact on our Consolidated Financial Statements.

     In January 2003, FASB issued FIN No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or in which equity investors do not bear the residual economic risks. The FIN, which will become effective for us on December 31, 2003, applies to variable interest entities (“VIEs”) created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. We currently utilize special purpose limited liability entities to facilitate our receivable-backed loan. Since their formations, these entities have been consolidated in our financial statements for financial reporting purposes. Therefore, FIN No. 46 will have no impact on our Consolidated Financial Statements.

     Stock-Based Compensation — We measure compensation expense for our stock-based compensation plans using the intrinsic value method and provide the required pro forma disclosures of the effect on net income and earnings per share as if the fair value-based method had been applied in measuring compensation expense.

     We have elected to follow Accounting Principles Board Opinion No. 25 and related interpretations in accounting for our stock options. All options granted to date have been to employees, officers and directors. Accordingly, no compensation expense has been recognized since stock options granted were at exercise prices which equaled or exceeded market value at the grant date. Had compensation expense been determined for stock option grants using fair value methods provided for in SFAS No. 123, “Accounting for Stock-Based Compensation,” our pro forma net income and net income per common share would have been the amounts indicated below:

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2. Acquisitions, Discontinued Operations and Divestiture

     Acquisitions — On June 30, 2003, we announced that we had signed a definitive agreement to acquire the 87% of Horizon Organic Holding Corporation (Nasdaq: HCOW) that we do not already own for an aggregate purchase price of approximately $216 million, all of which will be funded using borrowings under our senior credit facility and our receivables-backed loan. We also intend to repay Horizon Organic’s borrowings under its senior credit facility (estimated to be approximately $40 million at closing) using borrowings under our senior credit facility and our receivables-backed loan. Horizon Organic is the maker of nationally-branded Horizon® organic dairy products and juices and had sales of approximately $215 million during the 12-month period ended September 30, 2003. We currently own approximately 13% of the outstanding common stock of Horizon Organic. Completion of the acquisition is subject to various customary closing conditions, including receipt of approval of Horizon Organic’s shareholders, and is expected to close in early January 2004.

     On June 9, 2003, we completed the acquisition of Melody Farms, LLC. Melody Farms, which is now a part of the Midwest region of our Dairy Group, is a regional dairy processor based in Livonia, Michigan. Melody Farms produces a full line of fluid dairy and ice cream products from two plants in Michigan. Melody Farms had net sales of approximately $116 million during the 12-month period ended March 31, 2003.

     On October 15, 2003, we completed the acquisition of Kohler Mix Specialties, Inc. See Note 12 (“Subsequent Events”).

     Discontinued Operations — On December 30, 2002, we sold our operations in Puerto Rico for a net price of approximately $119.4 million. In accordance with generally accepted accounting principles, our financial statements have been restated to reflect our former Puerto Rico business as a discontinued operation. Revenues and income before taxes generated by our former Puerto Rico operations in 2002 are set forth in the table below. All intercompany revenues and expenses have been appropriately eliminated in the table.

     Divestiture — On July 31, 2003, we completed the sale of the frozen pre-whipped topping and frozen coffee creamer business of Morningstar Foods for cash proceeds of approximately $90 million. We recorded a pretax gain on the sale of approximately $65.9 million.

3. Inventories

     Approximately $119.6 million and $97.3 million of our inventory was accounted for under the last-in, first-out (LIFO) method of accounting at September 30, 2003 and December 31, 2002, respectively. There was no material excess of current cost over the stated value of LIFO inventories at either date.

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4. Intangible Assets

     Changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows:

     The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of September 30, 2003 and December 31, 2002 are as follows:

     In the first quarter of 2002 we recognized an impairment charge of $37.7 million related to the goodwill of our former Puerto Rico operations in accordance with our implementation of SFAS No. 142 “Goodwill and Other Intangible Assets.” This loss is reflected as a cumulative change in accounting principle in our Consolidated Financial Statements. During the third quarter of 2002, we completed an impairment assessment, as of January 1, 2002, of our intangibles with an indefinite useful life, other than goodwill, in accordance with SFAS No. 142. We determined that an impairment of $47.3 million, net of an income tax benefit of $29 million, existed at January 1, 2002. The impairment related to certain trademarks in our Dairy Group and Morningstar/White Wave segments and was recorded in the first quarter as the cumulative effect of an accounting change. The fair value of these trademarks was determined using a present value technique.

     Amortization expense on intangible assets for the three months ended September 30, 2003 and 2002 was $1.4 million and $2.8 million, and $4.2 million and $5.8 million for the nine months ended September 30, 2003 and 2002, respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows:

5. Long-Term Debt

     Senior Credit Facility — Our senior credit facility provides for a revolving line of credit and two term loans. During the third quarter of 2003, we amended our senior credit facility to lower our interest rates, modify certain covenants, increase the revolving line of credit from $800 million to $1 billion, increase the Tranche A term loan from $765 million to $1 billion and decrease the Tranche B term loan from $990 million to $750 million. At September 30, 2003 there were outstanding term loan borrowings of $1.71 billion under this facility, and $43 million outstanding under the revolving line of credit. Letters of credit in the aggregate amount of $123 million were issued but undrawn. At September 30, 2003, approximately $834 million was available for future borrowings under the revolving credit facility, subject to satisfaction of certain conditions contained in the credit agreement. We are currently in compliance with all covenants contained in our credit agreement.

     Amounts outstanding under the revolver and the Tranche A term loan bear interest at a rate per annum equal to one of the following rates, at our option:

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	•		a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin that varies from 0 to 75 basis points, depending on our leverage ratio (which is computed as the ratio of indebtedness to EBITDA, as such terms are defined in the credit agreement), or
	•		the London Interbank Offering Rate (“LIBOR”) divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin that varies from 125 to 200 basis points, depending on our leverage ratio (as defined in the credit agreement).

     Borrowings under the Tranche B term loan bear interest at a rate per annum equal to one of the following rates, at our option:

	•		a base rate equal to the higher of the Federal Funds rate plus 50 basis points or the prime rate, plus a margin of 75 basis points, or
	•		LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin of 200 basis points.

     The blended interest rate in effect on borrowings under the senior credit facility, including the applicable interest rate margin, was 3% at September 30, 2003. However, we had interest rate swap agreements in place that hedged $1.43 billion of our borrowings under this facility at an average rate of 4.27%, plus the applicable interest rate margin. Interest is payable quarterly or at the end of the applicable interest period.

     Principal payments are required on the Tranche A term loan as follows:

	•		$37.5 million quarterly beginning on September 30, 2003 through December 31, 2004;
	•		$43.75 million quarterly on March 31, 2005 through December 31, 2005;
	•		$50.0 million quarterly on March 31, 2006 through December 31, 2006;
	•		$62.5 million quarterly on March 31, 2007 and June 30, 2007; and
	•		A final payment of $275.0 million on July 15, 2007.

     Principal payments are required on the Tranche B term loan as follows:

	•		$1.875 million quarterly beginning on September 30, 2003 through December 31, 2007; and
	•		$358.1 million on each of March 31, 2008 and July 15, 2008.

     No principal payments are due on the $1 billion line of credit until maturity on July 15, 2007.

     The credit agreement also requires mandatory principal prepayments upon the occurrence of certain asset dispositions not in the ordinary course of business.

     In consideration for the revolving commitment, we pay a quarterly commitment fee on unused amounts of the $1 billion revolving credit facility that ranges from 25 to 37.5 basis points, depending on our leverage ratio (as defined in the credit agreement).

     The senior credit facility contains various financial and other restrictive covenants and requires that we maintain certain financial ratios, including a leverage ratio (computed as the ratio of the aggregate outstanding principal amount of defined indebtedness to defined EBITDA) and an interest coverage ratio (computed as the ratio of defined EBITDA to interest expense). In addition, this facility requires that we maintain a minimum level of net worth (as defined in the credit agreement).

     Our leverage ratio must be less than or equal to 3.75 to 1. As of September 30, 2003, our leverage ratio was 3.17 to 1. Our interest coverage ratio must be greater than or equal to 3 to 1. As of September 30, 2003, our interest coverage ratio was 4.92 to 1.

     Our consolidated net worth must be greater than or equal to $1.75 billion, as increased each quarter (beginning with the quarter ended September 30, 2003) by an amount equal to 50% of our consolidated net income for the quarter, plus 50% of the amount by which stockholders’ equity is increased by certain equity issuances. As of September 30, 2003, the minimum net worth requirement was $1.81 billion, and our actual net worth (as defined in the credit agreement) was $2.38 billion.

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     Our credit agreement permits us to complete acquisitions that meet the following conditions without obtaining prior approval: (1) the acquired company is involved in the manufacture, processing and distribution of food or packaging products or any other line of business in which we are currently engaged, (2) the net cash consideration is not greater than $300 million, (3) we acquire at least 51% of the acquired entity, and (4) the transaction is approved by the Board of Directors or shareholders, as appropriate, of the target. All other acquisitions must be approved in advance by the required lenders.

     The facility also contains limitations on liens, investments and the incurrence of additional indebtedness, and prohibits certain dispositions of property and restricts certain payments, including dividends. The credit facility is secured by liens on substantially all of our domestic assets (including the assets of our subsidiaries, but excluding the capital stock of Legacy Dean Foods Company’s subsidiaries, and the real property owned by Legacy Dean Foods Company and its subsidiaries).

     The agreement contains standard default triggers, including without limitation: failure to maintain compliance with the financial and other covenants contained in the agreement, default on certain of our other debt, a change in control and certain other material adverse changes in our business. The agreement does not contain any default triggers based on our debt rating.

     Senior Notes — Legacy Dean Foods Company had certain senior notes outstanding at the time we acquired it which remain outstanding. The notes carry the following interest rates and maturities:

	•		$97.7 million ($100 million face value), at 6.75% interest, maturing in 2005;
	•		$250.4 million ($250 million face value), at 8.15% interest, maturing in 2007;
	•		$185.6 million ($200 million face value), at 6.625% interest, maturing in 2009; and
	•		$126.0 million ($150 million face value), at 6.9% interest, maturing in 2017.

     The related indentures do not contain financial covenants but they do contain certain restrictions including a prohibition against Legacy Dean Foods Company and its subsidiaries granting liens on their respective real estate interests and a prohibition against Legacy Dean Foods Company granting liens on the stock of its subsidiaries. The indentures also place certain restrictions on Legacy Dean Foods Company’s ability to divest assets not in the ordinary course of business.

     Receivables-Backed Loan — We have entered into a $400 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to three wholly-owned special purpose entities intended to be bankruptcy-remote. The special purpose entities then transfer the receivables to third party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these three special purpose entities are fully reflected on our balance sheet, and the securitization is treated as a borrowing for accounting purposes. During the first nine months of 2003, we had net payments of $17.5 million under this facility leaving an outstanding balance of $127.5 million at September 30, 2003. The receivables-backed loan bears interest at a variable rate based on the commercial paper yield as defined in the agreement. The average interest rate on the receivables-backed loan was 2.3% at September 30, 2003. Our ability to re-borrow under this facility is subject to a standard “borrowing base” formula. At September 30, 2003, we could have re-borrowed an additional $229.2 million under this facility.

     Foreign Subsidiary Term Loan — In connection with our acquisition of Leche Celta in February 2000, our Spanish subsidiary obtained a 42.1 million euro (as of September 30, 2003, approximately $49.1 million) non-recourse term loan from a syndicate of lenders, all of which was borrowed at closing and used to finance a portion of the purchase price. The loan, which is secured by our equity interest in Leche Celta, will expire on February 21, 2007, bears interest at a variable rate based on the ratio of Leche Celta’s debt to EBITDA (as defined in the corresponding loan agreement), and requires semi-annual principal payments. At September 30, 2003, a total of $31.7 million was outstanding under this facility. The interest rate in effect on this loan at September 30, 2003 was 3.94%. However, we had interest rate swap agreements in place that hedged 21 million euros of our borrowings under this facility at an average rate of 5.57%, plus the applicable interest rate margin.

     Other Lines of Credit — Leche Celta is our only subsidiary with its own lines of credit separate from the senior credit facility described above. Leche Celta’s primary line of credit, which is in the principal amount of 15 million euros (as of September 30, 2003 approximately $17.5 million), was obtained on July 12, 2000, bears interest at a variable interest rate based on the ratio of Leche Celta’s debt to EBITDA (as defined in the corresponding loan agreement), is secured by our equity interest in Leche Celta and will expire in June 2007. Leche Celta also utilizes other local commercial lines of credit. At September 30, 2003, $12 million was outstanding under these lines of credit at an average interest rate of 3.09%.

     Industrial Development Revenue Bonds — Certain of our subsidiaries have revenue bonds outstanding, some of which require nominal annual sinking fund redemptions. Typically, these bonds are secured by irrevocable letters of credit issued by financial

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institutions, along with first mortgages on the related real property and equipment. Interest on these bonds is due semiannually at interest rates that vary based on market conditions which, at September 30, 2003 ranged from 1.15% to 1.35%.

     Other Subsidiary Debt — Other subsidiary debt includes various promissory notes for the purchase of property, plant and equipment and capital lease obligations. The various promissory notes payable provide for interest at varying rates and are payable in monthly installments of principal and interest until maturity, when the remaining principal balances are due. Capital lease obligations represent machinery and equipment financing obligations which are payable in monthly installments of principal and interest and are collateralized by the related assets financed.

     Letters of Credit — At September 30, 2003 there were $123 million of issued but undrawn letters of credit secured by our senior credit facility. In addition to the letters of credit secured by our senior credit facility, an additional $16.2 million of letters of credit were outstanding at September 30, 2003. The majority of these letters of credit were required by various utilities and government entities for performance and insurance guarantees.

     Interest Rate Agreements — We have interest rate swap agreements in place that have been designated as cash flow hedges against variable interest rate exposure on a portion of our debt, with the objective of minimizing our interest rate risk and stabilizing cash flows. These swap agreements provide hedges for loans under our senior credit facility by limiting or fixing the LIBOR interest rates specified in the senior credit facility at the interest rates noted below until the indicated expiration dates of these interest rate swap agreements.

     The following table summarizes our various interest rate agreements in effect as of September 30, 2003:

     The following table summarizes our various interest rate agreements as of December 31, 2002:

     We have also entered into interest rate swap agreements that provide hedges for loans under Leche Celta’s term loan. The following table summarizes these agreements:

     These swaps are required to be recorded as an asset or liability on our consolidated balance sheet at fair value, with an offset to other comprehensive income to the extent the hedge is effective. Derivative gains and losses included in other comprehensive income are reclassified into earnings as the underlying transaction occurs. Any ineffectiveness in our hedges is recorded as an adjustment to interest expense.

     As of September 30, 2003, our derivative liability totaled $60.8 million on our consolidated balance sheet including approximately $37.3 million recorded as a component of accounts payable and accrued expenses and $23.5 million recorded as a component of other long-term liabilities. There was no hedge ineffectiveness, as determined in accordance with SFAS No. 133, for the quarter or nine months ended September 30, 2003. Approximately $7 million and $20.1 million of losses (net of taxes) were reclassified to interest expense from other comprehensive income during the quarter and nine months ended September 30, 2003, respectively. We estimate that approximately $23.8 million of net derivative losses (net of taxes) included in other comprehensive income will be reclassified into earnings within the next 12 months. These losses, if realized, will effectively raise the interest expense that would otherwise be payable on our variable rate debt.

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     Credit risk under these arrangements is remote since the counterparties to our interest rate swap agreements are major financial institutions.

6. Stockholders’ Equity

     Stock Award Plans — The following table summarizes stock option activity during the first three quarters of 2003 under our stock-based compensation programs: