DEAN FOODS CO/ - 10-Q Quarterly Report

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

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

As of May 5, 2004 the number of shares outstanding of each class of common stock was: 157,112,933

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, 2003. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain reclassifications have been made to conform the prior year’s Consolidated Financial Statements to the current year’s classifications. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. Our results of operations for the period ended March 31, 2004 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 2003 Consolidated Financial Statements contained in our Annual Report on Form 10-K (filed with the Securities and Exchange Commission on March 15, 2004).

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 December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” to improve financial statement disclosures for defined benefit plans. This standard requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. In addition to expanded annual disclosures, we are required to report the various elements of pension and other postretirement benefit costs on a quarterly basis. SFAS No. 132 (revised 2003) is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003. The expanded disclosure requirements are included in this report.

Recently Issued Accounting Pronouncements — In January 2004, the FASB issued FASB Staff Position (“FSP”) 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” in response to a new law regarding prescription drug benefits under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. Currently, SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” requires that changes in relevant law be considered in current measurement of postretirement benefit costs. We are currently evaluating the impact of the new law and will defer recognition, as permitted by FSP 106-1, until authoritative guidance is issued.

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

We have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our stock options. All options granted to date have been to employees, officers or directors. Accordingly, no compensation expense has been recognized since stock options granted were at exercise prices which approximated or exceeded market value at the grant date. Compensation expense for grants of deferred stock units (“DSUs”) is recorded over the vesting period. Had compensation expense been determined for all stock-based compensation

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:

The fair value of each stock option grant is calculated using the Black-Scholes option pricing model, with the following assumptions:

Shipping and Handling Fees — Our shipping and handling costs are included in both cost of sales and selling and distribution expense, depending on the nature of such costs. Shipping and handling costs included in cost of sales reflect inventory warehouse costs, product loading and handling costs and costs associated with transporting finished products from our manufacturing facilities to our own distribution warehouses. Shipping and handling costs included in selling and distribution expense consist primarily of route delivery costs for both company-owned delivery routes and independent distributor routes, to the extent that such independent distributors are paid a delivery fee, and the cost of shipping products to customers through third party carriers. Shipping and handling costs that were recorded as a component of selling and distribution expense were approximately $268.2 million and $241.5 million during the first quarter of 2004 and 2003, respectively.

On January 2, 2004, we completed the acquisition of the 87% of Horizon Organic Holding Corporation (“Horizon Organic”) that we did not already own. Horizon Organic had sales of over $200 million during 2003. We already owned approximately 13% of the outstanding common stock of Horizon Organic as a result of investments made in 1998. All of Horizon Organic’s manufacturing has historically been done by third-party co-packers, including us. During 2003, we produced approximately 27% of Horizon Organic’s fluid dairy products. We also distributed Horizon Organic’s products in several parts of the country. Horizon Organic is the leading branded organic foods company in the United States. Because organic foods are gaining popularity with consumers and because Horizon Organic’s products offer consumers an alternative to our Dairy Group’s traditional dairy products, we believe Horizon Organic is an

important addition to our portfolio of strategic brands. The aggregate purchase price for the 87% of Horizon Organic that we did not already own was approximately $287 million, including approximately $217 million of cash paid to Horizon Organic’s stockholders, the repayment of approximately $40 million of borrowings under Horizon Organic’s former credit facilities, and estimated transaction expenses of approximately $9 million, all of which was funded using borrowings under our senior credit facility and our receivables-backed facility. In addition, each of the options to purchase Horizon Organic’s common stock outstanding on January 2, 2004 was converted into an option to purchase .7301 shares of our stock. Beginning with the first quarter of 2004, Horizon Organic’s financial results are reported in our Branded Products Group segment.

On January 26, 2004, our Dairy Group acquired Ross Swiss Dairies, a dairy distributor based in Los Angeles, California, which had net sales of approximately $120 million in 2003. As a result of this acquisition, we have increased the distribution capability of our Dairy Group in southern California, allowing us to better serve our customers. Ross Swiss Dairies has historically purchased a significant portion of its products from other processors. We transitioned the majority of Ross Swiss Dairies’ manufacturing needs into our southern California plants in May 2004. We paid approximately $21 million, including transaction costs, for the purchase of Ross Swiss Dairies and funded the purchase price with borrowings under our receivables-backed facility.

Effective March 31, 2004, we acquired certain rights and customer relationships related to LAND O’LAKES brand cream and sour cream products for an aggregate purchase price of approximately $16.8 million, all of which was funded using borrowings under our senior credit facility. In 2002, we purchased a perpetual license to use the LAND O’LAKES brand on certain dairy products nationally, excluding cheese and butter. This perpetual license was subject, however, to a pre-existing sublicense entitling a competitor to manufacture and sell cream, sour cream and whipping cream in certain channels in the eastern United States. We now have the exclusive right to use the LAND O’LAKES brand on dairy products (other than cheese and butter) throughout the entire United States.

We have not completed the final allocation of purchase price to the fair values of assets and liabilities acquired in the first quarter of 2004, or the related business integration plans. We expect that the ultimate purchase price allocation may include additional adjustments to the fair values of depreciable tangible assets, identifiable intangible assets and the carrying values of certain liabilities. Accordingly, to the extent that such assessments indicate that the fair value of the assets and liabilities differ from their preliminary purchase price allocation, such difference would adjust the amounts allocated to the assets and liabilities and would change the amounts allocated to goodwill.

Approximately $77.4 million and $97.6 million of our inventory was accounted for under the last-in, first-out (LIFO) method of accounting at March 31, 2004 and December 31, 2003, respectively. There was no material excess of current cost over the stated value of LIFO inventories at either date.

Effective January 1, 2004, we implemented a new segment reporting structure. See Note 11 to our Consolidated Financial Statements for more information regarding segment reporting. As a result of this change, the carrying amount of goodwill at January 1, 2004 at the Dairy Group and the Branded Products Group has been adjusted to reflect the allocation of the former Morningstar Foods’ goodwill based on a

The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of March 31, 2004 and December 31, 2003 are as follows:

Amortization expense on intangible assets for the three months ended March 31, 2004 and 2003 was $1.2 million and $1.6 million, respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows:

Senior Credit Facility — At March 31, 2004, our senior credit facility provided for a revolving line of credit and two term loans. At March 31, 2004 there were outstanding term loan borrowings of $1.63 billion under this facility, and $240.4 million outstanding under the revolving line of credit. Letters of credit in the aggregate amount of $117 million were issued but undrawn. At March 31, 2004, approximately $642.6 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:


	•	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).

EBITDA is defined in the credit agreement for any period as, the sum of (i) net income (excluding extraordinary items) after taxes for such period as determined in accordance with generally accepted accounting principles (“GAAP”), plus (ii) an amount which, in the determination of such net income, has been deducted for (a) all interest expense, including the interest component under capital leases and the implied interest component under our receivables-backed facilities, plus net amounts payable (or minus net amounts receivable) under hedging agreements, minus interest income for such period, in each case as determined in accordance with GAAP, (b) total federal, state, local and foreign income, value added and similar taxes, (c) depreciation, amortization expense and other noncash charges, (d) pro forma cost savings add-backs resulting from non-recurring charges related to acquisitions to the extent permitted under the credit agreement and under Regulation S-X of the Securities Exchange Act of 1934 or as approved by the representative of the lenders and (e) other adjustments reasonably acceptable to the representative of the lenders.

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 3.06% at March 31, 2004. However, we had interest rate swap agreements in place that hedged $1.13 billion of our borrowings under this facility at an average rate of 4.32%, plus the applicable interest rate margin. Interest is payable quarterly or at the end of the applicable interest period.


	•	$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 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 million on July 15, 2007.


	•	$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).

For the period from December 31, 2003 through March 31, 2005, our leverage ratio must be less than or equal to 4 to 1. Beginning April 1, 2005, our leverage ratio, calculated according to the definitions in the credit agreement, must be less than or equal to 3.75 to 1. As of March 31, 2004, our leverage ratio, calculated according to the definitions in the credit agreement, was 3.34 to 1.

EBITDA, as used in our credit agreement, is not intended to represent cash flow from operations as defined by GAAP and should not be used as an alternative to net income as an indicator of our operating performance or to cash flow as a measure of our liquidity. Moreover, EBITDA is a term used by many companies to mean many different things. Therefore, neither our EBITDA nor our leverage ratio, calculated under our credit agreement, should be compared to any other company’s EBITDA or leverage ratio. We present our leverage ratio in this discussion not as a measure of our liquidity or performance but only to demonstrate our level of compliance with our credit agreement.

Our interest coverage ratio must be greater than or equal to 3 to 1. As of March 31, 2004, our interest coverage ratio, calculated according to the definitions in the credit agreement, was 5.58 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 December 31, 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 March 31, 2004, the minimum net worth requirement was $1.89 billion, and our actual net worth (as defined in the credit agreement) was $2.65 billion.

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

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 the former Dean Foods Company’s subsidiaries, and the real property owned by the former 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 — One of our subsidiaries, the former Dean Foods Company, has certain senior notes outstanding. The notes carry the following interest rates and maturities:


	•	$98.3 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;

	•	$186.5 million ($200 million face value), at 6.625% interest, maturing in 2009; and

	•	$126.4 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 the former Dean Foods Company and its subsidiaries granting liens on their respective real estate interests and a prohibition against the former Dean Foods Company granting liens on the stock of its subsidiaries. The indentures also place certain restrictions on the former Dean Foods Company’s ability to divest assets not in the ordinary course of business.

Receivables-Backed Facility — We have entered into a $500 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to four 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 four special purpose entities are fully reflected on our balance sheet, and the securitization is treated as a borrowing for accounting purposes. During the first three months of 2004, we had net borrowings of $162.5 million under this facility leaving an outstanding balance of $465 million at March 31, 2004. The receivables-backed facility bears interest at a variable rate based on the commercial paper yield as defined in the agreement. The average interest rate on the receivables backed loan was 1.58% at March 31, 2004. Our ability to re-borrow under this facility is subject to a standard “borrowing base” formula. At March 31, 2004, we had no available borrowing capacity under our receivables-backed facility.

Other Lines of Credit — Leche Celta, our Spanish subsidiary, has certain lines of credit separate from the senior credit facility described above. At March 31, 2004, $8.3 million was outstanding under these lines of credit at an average interest rate of 2.65%.

Industrial Development Revenue Bonds — One of our subsidiaries has a revenue bond outstanding, which is secured by first mortgages on the related real property and equipment. In January 2004, we made a payment of $3.5 million to retire a revenue bond leaving only one revenue bond outstanding with a balance of $8.2 million. Interest on this bond is due semiannually at an interest rate that varies based on market conditions which, at March 31, 2004 was 1.11%.

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

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

The following table summarizes our various interest rate agreements in effect as of March 31, 2004 and December 31, 2003:

We also have an interest rate swap agreement that provides a hedge for euro-denominated loans under our senior credit facility. The following table describes this agreement at March 31, 2004 and December 31, 2003:

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

As of March 31, 2004, our derivative liability totaled $45.7 million on our consolidated balance sheet including approximately $32 million recorded as a component of accounts payable and accrued expenses and $13.7 million recorded as a component of other long-term liabilities. There was no hedge ineffectiveness, as determined in accordance with SFAS No. 133, for the quarter ended March 31, 2004. Approximately $5.9 million of losses (net of taxes) were reclassified to interest expense from other comprehensive income during the quarter ended March 31, 2004. We estimate that approximately $20.8 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.

We are exposed to market risk under these arrangements due to the possibility of interest rates on the credit facilities falling below the rates on our interest rate swap agreements. Credit risk under these arrangements is remote since the counterparties to our interest rate swap agreements are major financial institutions.

Stock Award Plans — The following table summarizes stock option activity during the first quarter of 2004 under our stock-based compensation programs:


(1)	Except as set forth in footnote 2 below, employee options vest as follows: one-third on the first anniversary of the grant date, one-third on the second anniversary of the grant date, and one-third on the third anniversary of the grant date. Options granted to non-employee directors vest upon grant. On June 30 of each year, each non-employee director receives an immediately-vested option to purchase 7,500 shares of common stock.

(2)	In connection with our acquisition of Horizon Organic, all options to purchase Horizon Organic stock outstanding at the time of the acquisition were converted into options to purchase our stock, most of which were automatically vested when we completed the acquisition.

(3)	Pursuant to the terms of our stock award plans, options that are canceled or forfeited become available for future grants.

We issued 8,508 shares of restricted stock during the first quarter of 2004 to non-employee directors as compensation for services rendered. Shares of restricted stock granted to non-employee directors vest one-third on grant, one-third on the first anniversary of grant and one-third on the second anniversary of grant.

In January 2003, we began issuing deferred stock units (“DSUs”) to certain key employees and directors as part of our long-term incentive program. A DSU represents the right to receive one share of common stock in the future. DSUs have no exercise price. Each employee’s DSU grant vests ratably over five years, subject to certain accelerated vesting provisions based primarily on our stock price. DSUs granted to non-employee directors vest ratably over three years. The following table summarizes the status of our DSU compensation program:

Earnings Per Share — Basic earnings per share is based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents during each period. The following table reconciles the numerators and denominators used in the computations of both basic and diluted earnings per share (“EPS”):


(1)	There were no anti-dilutive shares for the three months ended March 31, 2004 or 2003.

Stock Repurchases — During the first quarter of 2004, we spent approximately $5.2 million to repurchase 150,000 shares of our common stock for an average price of $34.40 per share. At March 31, 2004, approximately $109.4 million remained available under our stock repurchase authorization.

Comprehensive income consists of net income plus all other changes in equity from non-owner sources. Consolidated comprehensive income was $66.7 million for the three months ended March 31,

2004. The amounts of income tax (expense) benefit allocated to each component of other comprehensive income during the three months ended March 31, 2004 are included below.

Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation.

Postretirement Benefits — Certain of our subsidiaries provide healthcare benefits to certain retirees who are covered under specific group contracts.

We expect to contribute $2.8 million to the postretirement health plans for 2004.

Plant Closing and Rationalization Costs — As part of our overall rationalization and cost reduction program, we recorded plant closing costs of $7.7 million and a gain of $1.7 million during the first three months of 2004 and 2003, respectively.

The charges recorded during the first three months of 2004 are primarily related to the following:


	•	Closing of a Dairy Group manufacturing facility in Wisconsin scheduled for later this year;

	•	Closing of two Dairy Group manufacturing facilities in California, one of which was closed in the first quarter of 2004 and one of which is scheduled to close later this year; and

	•	Elimination of certain administrative functions at the Northeast region of our Dairy Group.

These charges were accounted for in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” which became effective for us in January 2003. We expect to incur additional charges related to these restructuring plans of approximately $9.4 million, including an additional $2.5 million in workforce reduction costs, $6 million in shutdown and other costs and $0.9 million in lease obligation costs. The majority of these additional charges are expected to be completed by December 2004.

The principal components of our overall rationalization and cost reduction program include the following:


	•	Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions;

	•	Shutdown costs, including those costs that are necessary to prepare the abandoned facilities for closure;

	•	Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes; and

	•	Write-downs of property, plant and equipment and other assets, primarily for asset impairments as a result of facilities that are no longer used in operations. The impairments relate primarily to owned buildings, land and equipment at the facilities which are written down to their estimated fair value and held for sale. The effect of suspending depreciation on the buildings and equipment related to the closed facilities was not significant. The carrying value of closed facilities at March 31, 2004 was approximately $2.6 million. We are marketing these properties for sale. Divestitures of the closed facilities have not resulted in significant modification to the estimate of fair value.

In the first quarter of 2003, we sold a closed Dairy Group plant in Port Huron, Michigan. In 2001, when we closed this plant, we recorded plant closing costs which included a write-down in the value of the plant. We sold the plant for more than expected, resulting in a gain of $1.7 million. This gain was recorded as a reduction of plant closing expense.

Activity with respect to plant closing and rationalization costs for exit plans approved after January 1, 2003, which was accounted for under FAS No. 146, is summarized below:

Activity with respect to plant closing and rationalization costs for exit plans approved before January 1, 2003, which was accounted for under EITF 94-3, is summarized below:

There have not been significant adjustments to the plans and the majority of future cash requirements to reduce the liability at March 31, 2004 are expected to be completed within a year.

The net plant closing and rationalization expense for the three months ended March 31, 2004 also includes income of $100,000 related to the sale of our frozen creamer and frozen pre-whipped topping operations in the summer of 2003.

Acquired Facility Closing Costs — As part of our purchase price allocations, we accrue costs from time to time pursuant to plans to exit certain activities and operations of acquired businesses in order to rationalize production and reduce costs and inefficiencies. During the first quarter of 2004, we accrued costs to close two Dairy Group plants acquired in 2003 and the Horizon Organic Farm and Education Center acquired in 2004. Also during the first quarter of 2004, we recorded certain adjustments to reduce our acquisition liability by approximately $1.5 million related to exit activities in our Specialty Foods Group segment as part of our overall integration and efficiency efforts related to our acquisition of the former Dean Foods Company. These adjustments reduced goodwill.


	•	Workforce reductions as a result of plant closings, plant rationalizations and consolidation of administrative functions and offices;

	•	Shutdown costs, including those costs that are necessary to clean and prepare the abandoned facilities for closure; and


	•	Costs incurred after shutdown such as lease obligations or termination costs, utilities and property taxes after shutdown of the facility.

Activity with respect to these acquisition liabilities during the first three months of 2004 is summarized below:

Leases — We lease certain property, plant and equipment used in our operations under both capital and operating lease agreements. Such leases, which are primarily for machinery, equipment and vehicles, have lease terms ranging from 1 to 20 years. Certain of the operating lease agreements require the payment of additional rentals for maintenance, along with additional rentals based on miles driven or units produced. 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.

Contingent Obligations Related to Milk Supply Arrangements — On December 21, 2001, in connection with our acquisition of the former Dean Foods Company, we purchased Dairy Farmers of America’s (“DFA”) 33.8% interest in our Dairy Group. In connection with that transaction, we entered into two agreements with DFA designed to ensure that DFA has the opportunity to continue to supply raw milk to certain of our plants, or be paid for the loss of that business. One such agreement is a promissory note with a 20-year term that bears interest based on the consumer price index. Interest will not be paid in cash but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we ever materially breach or terminate one of our milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire in 2021, without any obligation to pay any portion of the principal or interest. Payments made under the note, if any, would be expensed as incurred. The other agreement would require us to pay damages to DFA if we fail to offer DFA the right to supply milk to certain plants that we acquired as part of the former Dean Foods after the pre-existing agreements with certain other processors expire.

Contingent Obligations Related to Divested Operations — We have sold several businesses in recent years. In each case, we have retained certain known contingent liabilities related to those businesses and/or assumed an obligation to indemnify the purchasers of the businesses for certain unknown contingent liabilities, including environmental liabilities. In the case of the sale of our Puerto Rico operations, we were required to post collateral, including one surety bond and one letter of credit, to secure our obligation to satisfy the retained known liabilities and to fulfill our indemnification obligation. We believe we have established adequate reserves for any potential liability related to our divested businesses. Moreover, we do not expect any liability that we may have for these retained liabilities, or any indemnification liability, to be material.

Fleming Matter — On November 4, 2003, we received a notice (a so-called “Wells Notice”) from the Staff of the Securities and Exchange Commission (the “SEC”) informing us that the Staff was planning to recommend that the SEC bring a civil injunctive action against our company. The notice cites the Staff’s belief that we aided and abetted The Fleming Companies in Fleming’s acceleration of revenue recognition by providing Fleming with correspondence that allowed Fleming to characterize two payments totaling $2.7 million made by us to Fleming as current income rather than deferred revenue to be

recognized over future periods. Two officers of our Dairy Group received similar notices. We expensed the two payments made to Fleming during the quarters in which they were paid, and the Wells Notice contains no allegations regarding our financial statements. We have cooperated fully in the investigation and we are currently engaged in settlement discussions with the Staff. We do not expect the investigation or a settlement thereof to have a material adverse impact on our company.

White Wave Performance Bonus — When we acquired White Wave in May 2002, we established a Performance Bonus Plan pursuant to which we agreed to pay performance bonuses to certain employees of White Wave if certain performance targets were achieved during the period from April 1, 2002 to March 31, 2004. The performance targets were achieved and we are now obligated to pay the bonus, in the amount of $38.3 million, by no later than May 30, 2004.

Litigation, Investigations and Audits — We and our subsidiaries are parties from time to time to certain other claims, litigation, audits and investigations. In our opinion, the settlement of any such currently pending or threatened matter is not expected to have a material adverse impact on our financial position, results of operations or cash flows.

Segment Data — We have three reportable operating segments: the Dairy Group, the Branded Products Group and the Specialty Foods Group.

Our Dairy Group segment is our largest segment. It manufactures, markets and distributes a wide variety of branded and private label “dairy case” products, such as milk, cream, ice cream, cultured dairy products and juices, to retailers, distributors, foodservice outlets, schools and governmental entities across the United States. The Dairy Group also manufactures most of the products marketed and sold by our Branded Products Group segment.

Our Branded Products Group segment develops, markets and sells a variety of value-added dairy and dairy-related products, and consists of three distinct operating groups: White Wave, Horizon Organic and the National Brand Group. White Wave markets and sells Silk soymilk; Sun Soy soymilk; Silk cultured soy products; and White Wave branded tofu, tempeh and seitan to a variety of customers across the United States and in several foreign countries, including mass merchandisers, club stores, grocery stores, natural foods stores, convenience stores and foodservice outlets, using its internal sales force and independent brokers. A very small percentage of White Wave’s sales are of private label soy products. Horizon Organic, which we acquired on January 2, 2004, markets and sells a full-line of branded and private label organic dairy products, juices and infant formula to retailers across the United States and in the U.K. using its internal sales force and independent brokers. Its branded products are sold under the Horizon Organic, The Organic Cow of Vermont and Rachel’s Organic brands. All of Horizon Organic’s products are “certified organic products,” as defined by the USDA’s Organic Regulations or the U.K. Register of Organic Food Standards, as applicable. The National Brand Group markets and sells a variety of dairy and dairy-related branded products such as International Delight coffee creamers, Hershey’s milks and milkshakes, certain LAND O’LAKES products, Marie’s dips and dressings, Folgers Jakada milk and coffee beverage, Dean’s dips, Mocha Mix® non-dairy liquid coffee creamer, Naturally Yours^TM sour cream and Second Nature® egg substitute.

Our Specialty Foods Group is the nation’s leading pickle processor, and one of the largest manufacturers and sellers of powdered non-dairy coffee creamers in the United States. The Specialty Foods Group also manufactures and sells a variety of specialty foods, such as powdered ingredients, aseptic sauces and nutritional beverages.

Prior to 2004, we had a Morningstar Foods division that manufactured, marketed and sold all of our nationally branded products except for our soy products, and also manufactured and sold private label dairy products. Approximately half of Morningstar Foods’ 2003 sales consisted of private label dairy products. In mid-2003, we began the process of reorganizing the operations of our Morningstar Foods division, as part of a company-wide effort to sharpen our focus on our strategic brands and to maximize our manufacturing

efficiency. Effective January 1, 2004, we (1) shifted all of Morningstar Foods’ private label sales and all of its manufacturing operations to the Dairy Group, (2) formed the National Brand Group, and (3) transferred Morningstar Foods’ branded business to the National Brand Group. As a result of this reorganization, we implemented a new segment reporting structure effective January 1, 2004. All periods prior to 2004 have been restated to reflect our new segment reporting structure.

The Dairy Group, which now manufactures most of the Branded Products Group’s products, transfers finished products to the Branded Products Group at cost. A small percentage of our Branded Products Group’s products (approximately $10.5 million and $4.7 million in the first three months of 2004 and 2003, respectively) are sold through the Dairy Group’s direct store delivery network. Those sales, together with their related costs, are included in the Branded Products Group for segment reporting purposes. Fixed assets, capital expenditures and depreciation related to the plants that manufacture the Branded Products Group’s products (except for two plants which are owned and operated by White Wave) are reported as part of the Dairy Group, while intangibles and any associated amortization related to the Branded Products Group’s brands are reported as part of the Branded Products Group.

Our International Group, which does not qualify as a reportable segment, manufactures, markets and sells private label and branded milk, butter, cream and cheese through its internal sales force to retailers and distributors across Spain and Portugal.

We evaluate the performance of our segments based on operating profit or loss before gains (losses) on sale of assets, plant closing and rationalization costs and foreign exchange gains (losses). Therefore, the measure of segment profit or loss presented below is before such items.

The accounting policies of our segments are the same as those described in the summary of significant accounting policies set forth in Note 1 to our 2003 Consolidated Financial Statements contained in our 2003 Annual Report on Form 10-K.

The amounts in the following tables are obtained from reports used by our executive management team and do not include any allocated income taxes or management fees. There are no significant non-cash items reported in segment profit or loss other than depreciation and amortization.

Significant Customers — Our Dairy Group, Branded Products Group and Specialty Foods Group segments had one customer that represented greater than 10% of their sales in the first quarter of 2004. Approximately 12% of our consolidated sales in the first quarter of 2004 were to that same customer. In addition, our International Group had two customers that represented greater than 10% of their sales in the first quarter of 2004. Each of these customers represented less than 1% of our consolidated sales.

Acquisition of Soy Processing Facility — On April 5, 2004, our Branded Products Group acquired a soy processing and packaging plant located in Bridgeton, New Jersey. Prior to the acquisition, the prior owner of the plant co-packed Silk products for us at the plant. As a result of the acquisition, we have increased our owned processing and packaging capabilities for our soy products. We paid approximately $25.1 million for the purchase of the plant, all of which was funded using borrowings under our senior credit facility.

Senior Credit Facility — On April 5, 2004, we amended our senior credit facility to add a Tranche C term loan in the amount of $400 million, which will mature in July 2008. Borrowings under the Tranche C 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 50 basis points, or

	•	LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin of 175 basis points.

Proceeds of the Tranche C term loan were used to pay down our receivables-backed facility and our revolving credit facility.

The amendment also added a $250 million “accordion” feature to the revolving line of credit. This feature allows us to expand our revolving line of credit from $1 billion to $1.25 billion if we are in compliance with all of the terms of the credit facility, and we can show that we will continue to be in compliance with the financial covenants after giving effect to the increase. The accordion feature only gives us the ability to request increases to the revolver; the lenders are not obligated to increase their revolving credit commitments.

We are a leading food and beverage company. Our Dairy Group is the largest processor and distributor of milk and various other dairy products in the United States. Our Branded Products Group markets and sells a variety of well known dairy and dairy-related branded products including, for example: Silk soymilk; Horizon Organic dairy products and juices; International Delight coffee creamers; Marie’s refrigerated dips and dressings; and Hershey’s milks and milkshakes. Our Specialty Foods Group is the leading pickle processor in the United States and maker of a variety of other specialty food products. We also own the fourth largest dairy processor in Spain.

We have the following reportable segments: the Dairy Group, the Branded Products Group and the Specialty Foods Group. The key performance indicators that we use to evaluate the performance of our segments are sales volumes, gross profit (sales less cost of sales) and segment operating income. Because we cannot predict the timing and amount of gains and losses on sales of assets, plant closing and rationalization costs, and foreign exchange gains and losses, we do not consider these types of charges when evaluating the performance of our segments, when making decisions regarding the allocation of resources, or in determining incentive compensation for management. Therefore, gains and losses on sales of assets, plant closing and rationalization costs and foreign exchange gains and losses are not reported in any of our operating segments.

Dairy Group — Our Dairy Group segment is our largest segment, with approximately 82% of our 2003 consolidated sales. Our Dairy Group manufactures, markets and distributes a wide variety of branded and private label “dairy case” products, such as milk, cream, ice cream, cultured dairy products and juices, to retailers, distributors, foodservice outlets, schools and governmental entities across the United States. The Dairy Group also manufactures most of the products marketed and sold by our Branded Products Group. Due to the perishable nature of the Dairy Group’s products, our Dairy Group delivers the majority of its products directly to its customers’ stores in refrigerated trucks that we own or lease. This form of delivery is called a “direct store delivery” or “DSD” system and we believe we have one of the most extensive DSD systems in the United States.

Branded Products Group — Our Branded Products Group segment develops, markets and sells a variety of value-added dairy and dairy-related products, and consists of three distinct operating groups: White Wave, Horizon Organic and the National Brand Group. White Wave markets and sells Silk soymilk; Sun Soy soymilk; Silk cultured soy products; and White Wave branded tofu, tempeh and seitan to a variety of customers across the United States and in several foreign countries, including mass merchandisers, club stores, grocery stores, natural foods stores, convenience stores and foodservice outlets, using its internal sales force and independent brokers. A very small percentage of White Wave’s sales are of private label soy products. Horizon Organic, which we acquired on January 2, 2004, markets and sells a full-line of branded and private label organic dairy products, juices and infant formula to retailers across the United States and in the U.K. using its internal sales force and independent brokers. Its branded products are sold under the Horizon Organic, The Organic Cow of Vermont and Rachel’s Organic brands. All of Horizon Organic’s products are “certified organic products,” as defined by the USDA’s Organic Regulations or the U.K. Register of Organic Food Standards, as applicable. The National Brand Group markets and sells a variety of dairy and dairy-related branded products such as International Delight coffee creamers, Hershey’s milks and milkshakes, certain LAND O’LAKES products, Marie’s dips and dressings, Folgers Jakada milk and coffee beverage, Dean’s dips, Mocha Mix® non-dairy liquid coffee creamer, Naturally Yours^TM sour cream and Second Nature® egg substitute.

products. Approximately half of Morningstar Foods’ 2003 sales consisted of private label dairy products. In mid-2003, we began the process of reorganizing the operations of our Morningstar Foods division, as part of a company-wide effort to sharpen our focus on our strategic brands and to maximize our manufacturing efficiency. Effective January 1, 2004, we (1) shifted all of Morningstar Foods’ private label sales and all of its manufacturing operations to the Dairy Group, (2) formed the National Brand Group, and (3) transferred Morningstar Foods’ branded business to the National Brand Group. As a result of this reorganization, we implemented a new segment reporting structure effective January 1, 2004. All periods prior to 2004 have been restated to reflect our new segment reporting structure.

Specialty Foods Group — Our Specialty Foods Group is the nation’s leading pickle processor, and one of the largest manufacturers and sellers of powdered non-dairy coffee creamers in the United States. The Specialty Foods Group also manufactures and sells a variety of specialty foods, such as powdered ingredients, aseptic sauces and nutritional beverages.

International Group — Our International Group, which does not qualify as a reportable segment, manufactures, markets and sells private label and branded milk, butter, cream and cheese through its internal sales force to retailers and distributors across Spain and Portugal.

On January 2, 2004, we completed the acquisition of the 87% of Horizon Organic that we did not already own. Horizon Organic had sales of over $200 million during 2003. We already owned approximately 13% of the outstanding common stock of Horizon Organic as a result of investments we made in 1998. All of Horizon Organic’s manufacturing has historically been done by third-party co-packers, including us. During 2003, we produced approximately 27% of Horizon Organic’s fluid dairy products. We also distributed Horizon Organic’s products in several parts of the country. Because organic foods are gaining popularity with consumers and because Horizon Organic’s products offer consumers an alternative to our Dairy Group’s traditional dairy products, we believe Horizon Organic is an important addition to our portfolio of strategic brands. The aggregate purchase price for the 87% of Horizon Organic that we did not already own was approximately $287 million, including approximately $217 million of cash paid to Horizon Organic’s stockholders, the repayment of approximately $40 million of borrowings under Horizon Organic’s former credit facilities, and estimated transaction expenses of approximately $9 million, all of which was funded using borrowings under our senior credit facility and our receivables-backed facility. In addition, each of the options to purchase Horizon Organic’s common stock outstanding on January 2, 2004 was converted into an option to purchase ..7301 shares of our stock. Beginning in the first quarter of 2004, Horizon Organic’s financial results are reported in our Branded Products Group segment.

On April 5, 2004, our Branded Products Group acquired a soy processing and packaging plant located in Bridgeton, New Jersey. Prior to the acquisition, the prior owner of the plant co-packed Silk® products for us at the plant. As a result of the acquisition, we have increased our owned processing and packaging capabilities for our soy products. We paid approximately $25.1 million for the purchase of the plant, all of which was funded using borrowings under our senior credit facility.

On April 5, 2004, we amended our senior credit facility to add a Tranche C term loan in the amount of $400 million, which will mature in July 2008. Borrowings under the Tranche C 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 50 basis points, or

	•	LIBOR divided by the product of one minus the Eurodollar Reserve Percentage, plus a margin of 175 basis points.

Proceeds of the Tranche C term loan were used to pay down our receivables-backed facility and our revolving credit facility.

During the first quarter of 2004, we spent approximately $5.2 million to repurchase 150,000 shares of our common stock for an average price of $34.40 per share. At May 5, 2004, approximately $109.4 million remained available under our stock repurchase authorization.

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

Net Sales — Consolidated net sales increased approximately 14.3% to $2.45 billion during the first quarter of 2004 from $2.14 billion during the first quarter of 2003. Net sales by segment are shown in the table below.

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; plant and equipment costs, including costs to operate and maintain our coolers and freezers; and costs associated with transporting our finished products from our manufacturing facilities to our own distribution facilities. Our cost of sales ratio was 75% in the first quarter of 2004 compared to 73.4% in the first quarter of 2003. Increased raw material costs affected all of our segments in 2004.

Operating Costs and Expenses — Our operating expenses increased approximately $45.8 million during the first quarter of 2004 as compared to the same period in the prior year. Our operating expense ratio was 18.8% in the first quarter of 2004 compared to 19.3% during the first quarter of 2003. Operating expenses increased primarily due to acquisitions, which represented approximately $36 million of the increase, and due to a $9.3 million increase in plant closing and rationalization costs.

Operating Income — Operating income during the first quarter of 2004 was $152.4 million, a decrease of $4.6 million from the first quarter of 2003 operating income of $157 million. Our operating margin in the first quarter of 2004 was 6.2% compared to 7.3% in the first quarter of 2003. Our operating margin decreased primarily as a result of higher raw material costs, increased plant closing and rationalization costs and the effect of increased sales. See “— Results by Segment” for more information.

Other (Income) Expense — Total other expense decreased by $13.6 million in the first quarter of 2004 compared to the first quarter of 2003. Interest expense decreased to $42.5 million in the first quarter of 2004 from $46.9 million in the first quarter of 2003. This decrease was the result of lower interest rates in the first quarter of 2004 compared to the same period in the prior year. Financing charges on preferred securities were $0 in the first quarter of 2004 versus $8.4 million in the first quarter of 2003. The preferred securities were eliminated in the second quarter of 2003.

Income Taxes — Income tax expense was recorded at an effective rate of 37.8% in the first quarter of 2004 compared to 38.3% in the first quarter of 2003. Our tax rate varies as the mix of earnings contributed by our various business units changes, and as tax savings initiatives are adopted.

The Dairy Group’s net sales increased by approximately $187 million, or 10.6%, in the first quarter of 2004 versus the first quarter of 2003. The change in net sales from the first quarter of 2003 to the first quarter of 2004 was due to the following:

The most significant cause of the increase in the Dairy Group’s net sales was acquisitions. The Dairy Group acquired Melody Farms, LLC in June 2003, Kohler Mix Specialties, Inc. in October 2003 and Ross Swiss Dairies in January 2004, which contributed a total of $114.2 million in sales during the first quarter of 2004, or approximately 61% of the Dairy Group’s net increase in net sales.

The other primary cause of the net increase in the Dairy Group’s net sales was price increases. In general, we change the prices that we charge our customers for fluid dairy products on a monthly basis, as the costs of our raw materials fluctuate. The increase in net sales due to price and product mix shown in the above table primarily results from higher raw milk costs in the first quarter of 2004 compared to the first quarter of 2003. These price increases due to increases in the cost of raw milk were offset somewhat by price concessions that were granted in some markets in the summer of 2003 due to the competitive environment. The following table sets forth the average monthly Class I “mover” and average monthly Class II minimum prices for raw skim milk and butterfat for the first quarter of 2004 compared to the first quarter of 2003:


	*	The prices noted in this table are not the prices that we actually pay. The federal order minimum prices at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and vendor. Please see “Part I — Item 1. Business — Government Regulation — Milk Industry Regulation” in our Annual Report on Form 10-K for 2003, and “— Known Trends and Uncertainties — Prices of Raw Milk, Cream and Other Commodities” in this Quarterly Report for a more complete description of raw milk pricing.


(1)	Prices are per hundredweight.

(2)	Prices are per pound.

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

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

A small portion of these increases in sales was offset by decreases attributable to the divestiture in the summer of 2003 of the private label frozen creamer and frozen pre-whipped topping operations, and by volume declines. Volume sales of all products, net of the effect of acquisitions, fell 0.3% in the first quarter of 2004 compared to the first quarter of 2003, primarily due to decreased demand.

The Dairy Group’s cost of sales ratio was higher in the first quarter of 2004 compared to the first quarter of 2003 primarily due to the increase in raw milk costs compared to the prior year.

The Dairy Group’s operating expense ratio decreased to 17.5% in the first quarter of 2004 from 18.2% in the first quarter of 2003. The decrease in the operating expense ratio was due to the effects of increased raw milk costs. Higher raw milk costs generally increase sales dollars because we increase the prices that we charge for fluid dairy products on a monthly basis in accordance with fluctuations in the price of raw milk. Therefore, increased raw milk costs will generally decrease the Dairy Group’s operating expense ratio and decreased raw milk costs will generally increase the Dairy Group’s operating expense ratio. Operating expense dollars increased approximately $20 million during the first quarter of 2004 compared to the first quarter of 2003. The increase was primarily due to acquisitions, which contributed approximately $23.3 million in operating costs.

The Branded Products Group’s net sales increased by $105.8 million, or 67.6%, in the first quarter of 2004 versus the first quarter of 2003. The change in net sales in the first quarter of 2004 compared to 2003 was due to the following:

The most significant cause of the increase in the Branded Products Group’s sales, accounting for approximately 55% of the net increase, was the acquisition of Horizon Organic effective January 1, 2004. This increase was offset slightly by the divestiture in the summer of 2003 of the branded frozen pre-whipped topping and frozen creamer operations.

Another significant cause of the increase in sales, representing approximately 33% of the net increase, was increased volume sales. Volume sales for the Branded Products Group increased 22.2% in the first quarter of 2004 (net of the effects of acquisitions and divestitures) due to the success of our strategic brands, particularly Silk. Silk volumes increased 36% compared to the first quarter of 2003.

Increased pricing also contributed to the net increase in sales. Approximately $4.3 million of the net increase in sales due to pricing and product mix was related to a decrease in slotting fees, couponing and certain other promotional costs, which were recorded as reductions of revenue.

The cost of sales ratio for the Branded Products Group increased from 63.7% in the first quarter of 2003 to 68.5% in the first quarter of 2004 primarily due to the impact of higher raw material costs, particularly Class II butterfat, soybean oil and eggs, and the addition of Horizon Organic which has a higher cost of sales ratio. The increase in commodity costs represented approximately $10 million of the change.

Operating expenses increased approximately $17.8 million in the first quarter of 2004 compared to the prior year primarily due to the acquisition of Horizon Organic, which contributed approximately $12.7 million in costs, and to a $4.4 million increase in marketing spending at the National Brand Group and White Wave. The operating expense ratio decreased during the first quarter of 2004 primarily due to the relative increase in operating expense dollars compared to the increase in sales dollars.

The Specialty Foods Group’s net sales increased by $2.5 million, or 1.6%, in the first quarter of 2004 versus the first quarter of 2003. The change in net sales from the first quarter of 2003 to the first quarter of 2004 was due to the following:

The increase in sales was due primarily to increased pricing on non-dairy coffee creamers. The Specialty Foods Group’s sales were also affected by the acquisition of the Cremora powdered non-dairy coffee creamer business in December 2003.

The increases in pricing were substantially offset by a 1% decline in pickle volumes in the first quarter of 2004 compared to the first quarter of 2003 due to the bankruptcy of a large customer. Aseptic product volumes also declined by 15% during the first quarter of 2004 compared to the same period of the prior year due to reduced sales to certain customers as a result of the relocation of certain production lines. These decreases were partially offset by an increase in unit volumes of nutritional beverages due to increased demand.

The Specialty Foods Group’s cost of sales ratio increased in the first quarter of 2004. Approximately $3.7 million of this increase was due to substantially higher commodity costs, particularly soybean oil, casein and cheese as well as increases in glass and other packaging costs.

Operating expenses for the Specialty Foods Group remained flat, and the operating expense ratio improved slightly due to increased sales.

During the first quarter of 2004, we met our working capital needs with cash flow from operations.

Net cash provided by operating activities was $90.5 million for the first quarter of 2004 as contrasted to $64.5 million for the same period in 2003, an increase of $26 million. Net cash provided by operating activities was impacted by:


	•	Changes in assets and liabilities, which improved by $15.4 million in the first quarter of 2004 compared to the first quarter of the prior year; and

	•	An increase of $6 million in net income, and an increase in non-cash depreciation and amortization of $8.1 million in the first quarter of 2004 as compared to the first quarter of 2003.

Net cash used in investing activities was $373.5 million in the first quarter of 2004 compared to $49.7 million in the first quarter of 2003, an increase of $323.8 million. We used approximately $305.4 million for the acquisitions and approximately $71.3 million for capital expenditures.

We received a net amount of $230.4 million from borrowings in the first quarter of 2004.

Our senior credit facility provides us with a revolving line of credit of up to $1 billion, a Tranche A term loan in the amount of $1 billion, a Tranche B term loan in the amount of $750 million and a Tranche C term loan in the amount of $400 million. We also have an “accordion” feature in our senior credit facility which permits us to expand our revolving line of credit up to $1.25 billion in certain circumstances. See Note 12 to our Condensed Consolidated Financial Statements.

The senior credit facility, which is secured by substantially all of our assets, contains various financial and other restrictive covenants and requires that we maintain certain financial ratios, including a leverage ratio (computed as the ratio of the aggregate outstanding principal amount of defined indebtedness to defined EBITDA) and an interest coverage ratio (computed as the ratio of defined EBITDA to interest expense). In addition, this facility requires that we maintain a minimum level of net worth (as defined by the agreement). The agreement contains standard default triggers, including without limitation: failure to maintain compliance with the financial and other covenants contained in the agreement, default on certain of our other debt, a change in control and certain other material adverse changes in our business. The agreement does not contain any default triggers based on our debt rating. See Notes 5 and 12 to our Condensed Consolidated Financial Statements for detailed information regarding the terms of our credit agreement, including interest rates, principal payment schedules, mandatory prepayment provisions.

At March 31, 2004, we had outstanding borrowings of $1.87 billion under our senior credit facility (compared to $1.78 billion at December 31, 2003), including $1.63 billion in term loan borrowings, and $240.4 million outstanding under the revolving credit facility. In addition, at March 31, 2004, there were $117 million of letters of credit under the revolver that were issued but undrawn. We are currently, and have always been, in compliance with all covenants contained in our credit agreement.

In addition to our senior credit facility, we also have a $500 million receivables-backed credit facility, which had $465 million outstanding at March 31, 2004. See Note 5 to our Condensed Consolidated Financial Statements for more information about our receivables-backed facility.

We amended our senior credit facility on April 5, 2004 to add the $400 million Tranche C term loan and “accordian” feature referred to above. Proceeds of the Tranche C term loan were used to pay down borrowings under the revolver and the receivables-backed facility.

Other indebtedness outstanding at March 31, 2004 included $700 million face value of outstanding indebtedness under senior notes issued by a subsidiary, a $8.3 million line of credit at our Spanish subsidiary, $8.2 million of industrial development revenue bonds and approximately $24.2 million face value of capital lease and other obligations. See Note 5 to our Consolidated Financial Statements.

The table below summarizes our obligations for indebtedness and lease obligations at March 31, 2004.

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. Our pension plan assets are primarily made up of equity and fixed income investments. Changes made to the provisions of the plan may also impact current and future pension costs. Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased pension costs in future periods. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the discount rates used in determining the projected benefit obligation and pension costs.

We expect to contribute approximately $37.8 million to the pension plans and approximately $2.8 million to the postretirement health plans in 2004.

On December 21, 2001, in connection with our acquisition of the former Dean Foods, we issued a contingent, subordinated promissory note to Dairy Farmers of America (“DFA”) in the original principal amount of $40 million. DFA is our primary supplier of raw milk, and the promissory note is designed to ensure that DFA has the opportunity to continue to supply raw milk to certain of our plants until 2021, or be paid for the loss of that business. The promissory note has a 20-year term and bears interest based on the consumer price index. Interest will not be paid in cash, but will be added to the principal amount of the note annually, up to a maximum principal amount of $96 million. We may prepay the note in whole or in part at any time, without penalty. The note will only become payable if we ever materially breach or terminate one of our milk supply agreements with DFA without renewal or replacement. Otherwise, the note will expire in 2021, without any obligation to pay any portion of the principal or interest. Payments we make under this note, if any, will be expensed as incurred. In addition, one of our milk supply agreements with DFA would require us to pay damages to DFA if we fail to offer DFA the right to supply milk to certain plants that we acquired as part of the former Dean Foods after the pre-existing agreements with other processors expire.

We also have the following commitments and contingent liabilities, in addition to contingent liabilities related to litigation and audits described in Note 10 to our Condensed Consolidated Financial Statements:


	•	an obligation to pay a $38.3 million bonus by May 31, 2004 to certain employees of White Wave pursuant to the Performance Bonus Plan that was established when we acquired White Wave in May 2002; and

	•	certain indemnification obligations related to businesses that we have divested.

See Note 10 to our Condensed Consolidated Financial Statements for more information about our commitments and contingent obligations.

In the first quarter of 2004, we spent approximately $71.3 million on capital expenditures. For 2004, we intend to invest a total of approximately $350 million in capital expenditures primarily for our existing manufacturing facilities and distribution capabilities. We intend to fund these expenditures using cash flow from operations. We intend to spend this amount as follows:

For 2004, we expect cash interest to be approximately $160 million based on current debt levels and cash taxes to be approximately $90 million.

We expect that cash flow from operations will be sufficient to meet our requirements for our existing businesses for the foreseeable future.

In 2004, we intend to pursue additional acquisitions that are compatible with our core business strategy. We may also repurchase our stock pursuant to open market or privately negotiated transactions. Approximately $109.4 million was available for spending under our stock repurchase program as of May 5, 2004. We base our decisions regarding when to repurchase stock on a variety of factors, including primarily an analysis of the optimal use of available capital, taking into account the market value of our stock, the relative expected return on alternative investments and the financial covenants in our credit facility. Any acquisitions or stock repurchases will be funded through cash flows from operations or borrowings under our senior credit facility. If necessary, we believe that we have the ability to secure additional debt or equity financing for our future capital requirements and we will explore those alternatives as appropriate.

As a result of the recent economic environment in this country, and due to the highly competitive environment currently existing in the food retailing and foodservice industries, many of our retail and foodservice customers have experienced economic difficulty over the past 18 months to 2 years. A number of our customers have been forced to close stores and certain others have sought bankruptcy protection. This trend could have a material adverse effect on us if a material number of our customers, or any one large customer, were to be forced to close a significant number of stores or file for bankruptcy protection.

Many of our retail customers have become increasingly price sensitive in the current economic environment. Over the past year, we have been subject to a number of intensely competitive bidding situations, which has resulted in margin erosion on sales to several customers. We expect this trend to continue. In bidding situations we are subject to the risk of losing certain customers altogether. Loss of any of our largest customers could have a material adverse impact on our financial results. We do not have contracts with many of our largest customers, and most of the contracts that we do have are generally terminable at will by the customer.

Our business was adversely affected by rising raw material costs during the first quarter of 2004, and we expect our financial results to continue to be adversely affected by high raw material costs for the remainder of the year.

Dairy Group — The primary raw material used in our Dairy Group is raw milk (which contains both raw skim milk and butterfat). The federal government and certain state governments set minimum prices for raw milk, and those prices change on a monthly basis. The regulated minimum prices differ based on how the raw milk is utilized. Raw milk processed into fluid dairy products is priced at the Class I price, and raw milk processed into products such as cottage cheese, creams and creamers, ice cream and sour cream is priced at the Class II price. Generally, we pay the federal minimum prices for raw milk, plus certain producer premiums (or “over-order” premiums) and location differentials. We also incur other raw milk procurement costs in some locations (such as hauling, field personnel, etc.). A change in the federal minimum price does not necessarily mean an identical change in our total raw milk costs, as over-order premiums may increase or decrease. This relationship is different in every region of the country, and sometimes within a region based on supplier arrangements. However, in general, the overall change in our raw milk costs can be linked to the change in federal minimum prices.

In April and May of this year, the federal minimum price for Class I raw milk has risen to record high levels, and the size of the increase from April to May was unusually large for a one-month period. We expect Class I prices to rise to an even higher level in June. Class II prices started rising in March of this year. Although we currently expect Class I and Class II prices to decrease somewhat in the latter part of 2004, we anticipate that they will still be at levels higher than we experienced in 2003.

Because our Class II products typically have a higher fat content than that contained in raw milk, we also purchase bulk cream for use in some of our Class II products. Bulk cream is typically purchased based on a multiple of the AA butter price on the Chicago Mercantile Exchange. The prices of AA butter started rising by moderate amounts in late 2003, and then increased significantly during the first quarter of 2004. They remain very high during the second quarter and we currently anticipate that these costs will remain high for the near term, then start to decline in the latter part of 2004.

Of course, raw milk and bulk cream prices are difficult to predict and we change our forecasts frequently based on current market activity.

Prices for resin, which is used in plastic milk bottles, are also extremely high and are expected to remain high for the foreseeable future. Finally, the Dairy Group uses a great deal of diesel fuel in its direct store delivery system, and diesel fuel prices are expected to increase over the next several months.

In general, our Dairy Group changes the prices that it charges for fluid dairy products on a monthly basis, as the costs of our raw materials fluctuate. Prices for many Class II products are not changed on a monthly basis, but are changed from time to time as circumstances warrant. There can be a lag between the time of a raw material cost increase or decrease and the effectiveness of a corresponding price change to our customers, especially in the case of Class II butterfat because Class II butterfat prices for each month are not announced by the government until after the end of that month. Also, in some cases we are contractually constrained with the means and timing of implementing price changes, and at some point price increases could erode our volumes. These factors can cause volatility in our earnings. Our sales and operating profit margin fluctuate with the price of our raw materials.

Specialty Foods Group — Many of the raw materials used by our Specialty Foods Group also rose to unusually high levels during the first quarter of 2004, including soybean oil, casein, cheese and packaging materials. Prices for many of these materials are expected to remain high for the foreseeable future. For competitive reasons, the Specialty Foods Group is not able to pass along increases in raw material costs as quickly as the Dairy Group. Therefore, the current raw material environment is expected to adversely affect the Specialty Foods Group’s financial results for the remainder of 2004.

As part of our ongoing efforts to reduce our costs and improve our manufacturing efficiency, we expect to close or announce the planned closure of approximately eight to ten plants in 2004. We will incur costs in connection with these plant closings, which will be recorded as operating expenses on our consolidated income statement in the quarter in which they are incurred. Expenses associated with plant closings generally include severance costs, property and equipment write-down costs and in some cases, lease termination expenses. These costs vary from plant to plant and cannot be estimated with certainty. We incurred $7.7 million in plant closing costs in the first quarter of 2004, and we expect to incur approximately $9.4 million of additional expenses in 2004 related to plants that we have closed or announced for closure to date.

Our 2003 tax rate was approximately 38%. We believe that our effective tax rate will be approximately 38% for 2004.

See “— Risk Factors” for a description of various other risks and uncertainties concerning our business.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Statements that are not historical in nature are forward-looking statements about our future that are not statements of historical fact. Most of these statements are found in this report under the following subheadings: “Management’s Discussion and Analysis of Financial Condition and

Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk.” In some cases, you can identify these statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “seek to,” “anticipates,” “plans,” “believes,” “estimates,” “intends,” “predicts,” “projects,” “potential” or “continue” or the negative of such terms and other comparable terminology. These statements are only predictions, and in evaluating those statements, you should carefully consider the information above, including in “— Known Trends and Uncertainties,” as well as the risks outlined below. Actual performance or results may differ materially and adversely.

Over the past several years, the retail grocery and foodservice industries have experienced significant consolidation. As our customer base continues to consolidate, we expect competition to intensify as we compete for the business of fewer customers. There can be no assurance that we will be able to keep our existing customers, or gain new customers. Winning new customers is especially important to the growth of our Dairy Group, as demand tends to be relatively flat in the dairy industry.

There are several large regional grocery chains that have captive dairy operations. As the consolidation of the grocery industry continues, we could lose sales if any one or more of our existing customers were to be sold to a chain with captive dairy operations.

Our Silk soymilk and Horizon Organic organic food and beverage products have leading market shares in their categories and have benefited in many cases from being the first to introduce products in their categories. As soy and organic products continue to gain in popularity with consumers, we expect our products in these categories to continue to attract competitors. Many large food and beverage companies have substantially more resources than we do and they may be able to market their soy and organic products more successfully than us, which could cause our growth rate in these categories to slow and could cause us to lose sales. Our International Delight coffee creamer competes intensely with Nestle’s CoffeeMate business, and our Hershey’s milks and milkshakes compete intensely with Nestle’s Nesquick. Nestle has significantly greater resources than we do, which allows them to promote their products more aggressively. Our failure to successfully compete with Nestle could have a material adverse affect on the sales and profitability of our International Delight and/or our Hershey’s businesses.

Loss of Rights to Any of Our Licensed Brands Could Adversely Affect Our Sales and Profits

We sell certain of our products under licensed brand names such as Hershey’s, Borden®, Pet®, Folgers, LAND O’LAKES and others. In some cases, we have invested, and intend to continue to invest, significant capital in product development and marketing and advertising related to these licensed brands. Should our rights to manufacture and sell products under any of these names be terminated for any reason, our financial performance and results of operations could be materially and adversely affected.

We Have Substantial Debt and Other Financial Obligations and We May Incur Even More Debt

We have substantial debt and other financial obligations and significant unused borrowing capacity. See “— Liquidity and Capital Resources.”

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


	•	require us to dedicate significant cash flow to the payment of principal and interest on our debt which reduces the funds we have available for other purposes,

	•	may limit our flexibility in planning for or reacting to changes in our business and market conditions,


	•	impose on us additional financial and operational restrictions, and

	•	expose us to interest rate risk since a portion of our debt obligations are at variable rates.

Our ability to make scheduled payments on our debt and other financial obligations depends on our financial and operating performance. Our financial and operating performance is subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. A significant increase in interest rates could adversely impact our net income. If we do not comply with the financial and other restrictive covenants under our credit facilities, we may default under them. Upon default, our lenders could accelerate the indebtedness under the facilities, foreclose against their collateral or seek other remedies, which would jeopardize our ability to continue our current operations.

In order to reduce the volatility of earnings that arises from changes in interest rates, we manage interest rate risk through the use of interest rate swap agreements. These swap agreements provide hedges for loans under our senior credit facility by limiting or fixing the LIBOR interest rates specified in the senior credit facility at the interest rates noted below until the indicated expiration dates.

These swaps have been designated as cash flow hedges against variable interest rate exposure. The following table summarizes our various interest rate swap agreements in effect as of March 31, 2004 and December 31, 2003:

We have also entered into an interest rate swap agreement that provides a hedge for euro-denominated loans under our senior credit facility. See Note 5 to our Condensed Consolidated Financial Statements. The following table summarizes this agreement as of March 31, 2004 and December 31, 2003:

We are exposed to market risk under these arrangements due to the possibility of interest rates on our credit facilities falling below the rates on our interest rate derivative agreements. We incurred approximately $5.9 million of additional interest expense, net of taxes, during the quarter ending March 31, 2004 as a result of interest rates on our variable rate debt falling below the agreed-upon interest rate on our existing swap agreements. Credit risk under these arrangements is remote since the counterparties to our interest rate derivative agreements are major financial institutions.

A majority of our debt obligations are currently at variable rates. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates. As of March 31, 2004, the analysis indicated that such interest rate movement would not have a material effect on our financial position, results of operations or cash flows. However, actual gains and losses in the future may differ materially from that analysis based on changes in the timing and amount of interest rate movement and our actual exposure and hedges.

We are exposed to foreign currency risk due to operating cash flows and various financial instruments that are denominated in foreign currencies. Our most significant foreign currency exposures relate to the

euro. At this time, we believe that potential losses due to foreign currency fluctuations would not have a material impact on our consolidated financial position, results of operations or operating cash flow.

We conducted an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (Disclosure Controls) as of the end of the period covered by this Quarterly Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Attached as exhibits to this quarterly report are certifications of the CEO and the CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with US generally accepted accounting principles.

We do not expect that our Disclosure Controls or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our evaluations of our Disclosure Controls include reviews of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in our SEC filings. In the course of our controls evaluations, we seek to identify data errors, controls problems or acts of fraud and confirm that appropriate corrective actions, including process improvements, are undertaken. Many of the components of our Disclosure Controls are evaluated on an ongoing basis by our Audit Services department. The overall goals of these various evaluation activities are to monitor our

Based upon our most recent controls evaluation, our CEO and CFO have concluded that as of the end of the period covered by this Quarterly Report, our Disclosure Controls were effective to provide reasonable assurance that material information is made known to management, particularly during the period when our periodic reports are being prepared. In the first quarter of 2004, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

On November 4, 2003, we received a notice (a so-called “Wells Notice”) from the Securities and Exchange Commission (the “SEC”) informing us that the staff of the SEC was planning to recommend that the SEC bring a civil injunctive action against our company. The notice cited the staff’s belief that we aided and abetted The Fleming Companies in Fleming’s improper acceleration of revenue recognition by providing Fleming with correspondence that allowed Fleming to characterize two payments totaling $2.7 million made by us to Fleming as current income rather than deferred revenue to be recognized over future periods. Two officers of our Dairy Group received similar notices. We expensed the two payments made to Fleming during the quarters in which they were paid, and the Wells Notice contains no allegations regarding our financial statements. We have cooperated fully in the investigation and we are currently engaged in settlement discussions with the staff. We do not expect this matter to have a material adverse impact on our company.


(1)	No shares were repurchased in January or February of 2004.

(2)	Does not include DSUs and options cancelled in the first quarter of 2004. See Note 6 to our Condensed Consolidated Financial Statements for the first quarter of 2004.

(3)	On September 15, 1998, our Board of Directors authorized a stock repurchase program of up to $100 million. Thereafter, the Board increased the authorization on the following dates in the following amounts:


	•	8-K dated January 5, 2004 regarding our acquisition of Horizon Organic

	•	8-K dated February 12, 2004 announcing our earnings for the fourth quarter of 2003

	•	8-K dated May 4, 2004 announcing our earnings for the first quarter of 2004

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	DEAN FOODS COMPANY

	/s/ Barry A. Fromberg

	Barry A. Fromberg
	Executive Vice President, Chief Financial Officer
	(Principal Accounting Officer)


(Mark One)
[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the Quarterly Period Ended March 31, 2004

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


Delaware		75-2559681
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)


		Page

Part I — Financial Information
	Item 1 — Financial Statements		3
	Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
	Item 3 — Quantitative and Qualitative Disclosures About Market Risk		37
	Item 4 — Controls and Procedures		38
Part II — Other Information
	Item 1 — Legal Proceedings		40
	Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		40
	Item 6 — Exhibits and Reports on Form 8-K		41
Sixth Amendment to Credit Agreement
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906


			March 31,			December 31,
			2004			2003

			(unaudited)
Assets

Current assets:
	Cash and cash equivalents		$	27,124		$	47,143
	Accounts receivable, net			763,055			742,934
	Inventories			494,009			426,478
	Deferred income taxes			140,816			137,055
	Prepaid expenses and other current assets			56,227			47,271

		Total current assets		1,481,231			1,400,881
Property, plant and equipment, net				1,817,986			1,773,555
Goodwill				3,334,831			3,197,548
Identifiable intangible and other assets				800,749			620,552

		Total	$	7,434,797		$	6,992,536


Liabilities and Stockholders’ Equity

Current liabilities:
	Accounts payable and accrued expenses		$	976,960		$	924,707
	Income taxes payable			39,945			65,528
	Current portion of long-term debt			180,630			180,158

		Total current liabilities		1,197,535			1,170,393
Long-term debt				2,858,687			2,611,356
Other long-term liabilities				292,288			279,823
Deferred income taxes				411,704			388,151
Commitments and contingencies (See Note 10)
Stockholders’ equity:
	Common stock, 157,055,294 and 154,993,214 shares issued and outstanding			1,571			1,550
	Additional paid-in capital			1,563,121			1,498,025
	Retained earnings			1,143,498			1,074,258
	Accumulated other comprehensive income			(33,607	)		(31,020	)

		Total stockholders’ equity		2,674,583			2,542,813

		Total	$	7,434,797		$	6,992,536



			Three Months Ended
			March 31

			2004			2003


			(unaudited)
Net sales			$	2,452,151		$	2,144,878
Cost of sales				1,839,706			1,573,645

Gross profit				612,445			571,233
Operating costs and expenses:
	Selling and distribution			361,023			329,673
	General and administrative			90,271			84,632
	Amortization expense			1,176			1,636
	Plant closing and rationalization costs, net			7,573			(1,690	)

		Total operating costs and expenses		460,043			414,251

Operating income				152,402			156,982
Other (income) expense:
	Interest expense, net			42,501			46,871
	Financing charges on trust issued preferred securities						8,395
	Equity in earnings of unconsolidated affiliates						(196	)
	Other income, net			(1,485	)		(467	)

		Total other (income) expense		41,016			54,603

Income before income taxes				111,386			102,379
Income taxes				42,146			39,170

Net income			$	69,240		$	63,209

Average common shares: Basic				156,105,471			130,288,178
Average common shares: Diluted				162,730,286			159,300,942
Basic earnings per common share:
	Net income		$	0.44		$	0.49

Diluted earnings per common share:
	Net income		$	0.43		$	0.43



		Three Months Ended
		March 31

		2004		2003


		(In thousands, except
		share data)
Net income, as reported		$	69,240	$	63,209
Add: Stock-based compensation expense included in net income, net of tax			906		596
Less: Stock-based employee compensation, determined under fair value-based methods for all awards, net of income tax benefit			8,704		9,055

Pro forma net income		$	61,442	$	54,750

Net income per share:
	Basic — as reported	$	0.44	$	0.49
	Basic — pro forma		0.39		0.42
	Diluted — as reported		0.43		0.43
	Diluted — pro forma		0.38		0.38
Stock option share data:
	Stock options granted during period		2,054,690		3,337,991
	Weighted-average option fair value	$	8.75	$	11.50


		At March 31,		At December 31,
		2004		2003


		(In thousands)
Raw materials and supplies		$	187,185	$	165,206
Finished goods			306,824		261,272

	Total	$	494,009	$	426,478


			Branded		Specialty
			Products		Foods
	Dairy Group		Group		Group			Other			Total


	(In thousands)
Balance at January 1, 2004	$	2,410,364	$	390,269	$	311,790		$	85,125		$	3,197,548
Acquisitions		18,081		115,271								133,352
Purchase accounting adjustments		8,376				(1,613	)					6,763
Currency changes and other									(2,832	)		(2,832	)

Balance at March 31, 2004	$	2,436,821	$	505,540	$	310,177		$	82,293		$	3,334,831



			At March 31, 2004							At December 31, 2003

			Gross					Net		Gross					Net
			Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
			Amount		Amortization			Amount		Amount		Amortization			Amount


			(In thousands)
Intangible assets with indefinite lives:
	Trademarks		$	670,213	$	(14,274	)	$	655,939	$	485,358	$	(14,274	)	$	471,084
Intangible assets with finite lives:
		Customer-related		50,739		(13,339	)		37,400		50,850		(12,187	)		38,663

Total			$	720,952	$	(27,613	)	$	693,339	$	536,208	$	(26,461	)	$	509,747


2005	$	4.9 million
2006		4.7 million
2007		4.5 million
2008		4.4 million
2009		4.3 million


Fixed Interest Rates	Expiration Date		Notional Amounts

			(In millions)
1.48% to 6.69%		December 2004	$	650
5.20% to 6.74%		December 2005		400
6.78%		December 2006		75


					Weighted
					Average
		Options			Exercise Price

Options outstanding at December 31, 2003			16,599,126		$	18.50
	Options granted during first quarter(1)		2,054,690			31.17
	Options issued to Horizon option holders(2)		1,137,308			16.37
	Options canceled or forfeited during first quarter(3)		(80,450	)		21.76
	Options exercised during first quarter		(2,011,690	)		17.14

Options outstanding at March 31, 2004			17,698,984		$	19.95


		Employees			Directors		Total

DSUs outstanding at December 31, 2003			653,500			28,088		681,588
	DSUs issued during first quarter		401,700					401,700
	Shares issued during first quarter upon vesting of DSUs granted in 2003		(99,930	)				(99,930	)
	DSUs cancelled during first quarter		(42,770	)				(42,770	)

Outstanding at March 31, 2004			912,500			28,088		940,588

Weighted average fair value		$	27.20		$	31.50	$	27.31
Compensation expense (in thousands)		$	1,388		$	74	$	1,462


		Pre-Tax			Tax Benefit			Net
		Income (Loss)			(Expense)			Amount


		(In thousands)
Accumulated other comprehensive income, December 31, 2003		$	(62,731	)	$	31,711		$	(31,020	)
	Cumulative translation adjustment arising during period		(1,937	)					(1,937	)
	Net change in fair value of derivative instruments		(6,364	)		1,647			(4,717	)
	Amounts reclassified to income statement related to derivatives		8,989			(3,139	)		5,850
	Minimum pension liability adjustment		(2,876	)		1,093			(1,783	)

Accumulated other comprehensive income, March 31, 2004		$	(64,919	)	$	31,312		$	(33,607	)



			Accrued		Three Months Ended					Accrued
			Charges at		March 31, 2004					Charges at
			December 31,							March 31,
			2003		Charges		Payments			2004


			(In thousands)
Cash charges:
	Workforce reduction costs		$	5,962	$	2,779	$	(2,902	)	$	5,839
	Shutdown costs					944		(944	)
	Lease obligations after shutdown			477		274		(110	)		641
	Other			53		1,482		(1,494	)		41

	Subtotal		$	6,492		5,479	$	(5,450	)	$	6,521

Noncash charges:
Write-down of assets						2,194

		Total charges			$	7,673


Item 1.	Financial Statements


1.	General


2.	Acquisitions


3.	Inventories


11.	Business and Geographic Information and Major Customers



		At March 31

		2004		2003


		(In thousands)
Assets:
	Dairy Group	$	5,234,587	$	4,869,913
	Branded Products Group		1,066,829		632,066
	Specialty Foods Group		622,630		597,396
	Corporate/ Other		510,751		471,638

	Total	$	7,434,797	$	6,571,013



		Net Sales


		Three Months Ended				Long-Lived Assets at
		March 31				March 31

		2004		2003		2004		2003


		(In thousands)
United States		$	2,369,343	$	2,085,855	$	5,751,345	$	5,152,972
Europe			82,808		59,023		202,221		132,164

	Total	$	2,452,151	$	2,144,878	$	5,953,566	$	5,285,136


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations



			Quarter Ended March 31


			2004					2003

			Dollars		Percent			Dollars			Percent


			(Dollars in thousands)
Net sales			$	2,452,151		100.0	%	$	2,144,878			100.0	%
Cost of sales				1,839,706		75.0			1,573,645			73.4

Gross profit				612,445		25.0			571,233			26.6
Operating costs and expenses:
	Selling and distribution			361,023		14.7			329,673			15.4
	General and administrative			90,271		3.7			84,632			3.9
	Amortization of intangibles			1,176		0.1			1,636			0.1
	Plant closing and rationalization costs, net			7,573		0.3			(1,690	)		(0.1	)

		Total operating costs and expenses		460,043		18.8			414,251			19.3

Total operating income			$	152,402		6.2	%	$	156,982			7.3	%


	*Quarter Ended March 31, 2004 Compared to Quarter Ended March 31, 2003 — Consolidated Results*



		Quarter Ended March 31, 2004 vs.
		Quarter Ended March 31, 2003

									Pricing, Volume
							Foreign		and Product		Total
		Acquisitions		Divestitures			Exchange		Mix Changes		Increase


		(Dollars in thousands)
Dairy Group		$	114,194	$	(6,903	)			$	79,669	$	186,960
Branded Products Group			58,464		(1,822	)				49,188		105,830
Specialty Foods Group			1,588							957		2,545
Corporate/ Other							$	9,967		1,971		11,938

	Total	$	174,246	$	(8,725	)	$	9,967	$	131,785	$	307,273


		Dollars			Percent


		(Dollars in millions)
2003 Net sales		$	1,766.4
	Acquisitions		114.2			6.5	%
	Divestitures		(6.9	)		(0.4	)
	Volume		(5.8	)		(0.3	)
	Pricing and product mix		85.4			4.8

2004 Net sales		$	1,953.3			10.6	%



	Quarter Ended March 31*

	2004			2003			% Change

Class I raw skim milk mover(3)	$	6.66	(1)	$	6.30	(1)		6	%
Class I butterfat mover(3)		1.53	(2)		1.18	(2)		30
Class II raw skim milk minimum(4)		6.64	(1)		7.00	(1)		(5	)
Class II butterfat minimum(4)		1.92	(2)		1.16	(2)		66


		Dollars			Percentage


		(Dollars in millions)
2003 Net sales		$	162.9
	Acquisitions		1.6			1.0	%
	Volume		(2.0	)		(1.2	)
	Pricing and product mix		3.0			1.8

2004 Net sales		$	165.5			1.6	%



				Payments Due by Period

				04/01/04-		04/01/05-		04/01/06-		04/01/07-		04/01/08-
Indebtedness & Lease Obligations		Total		03/31/05		03/31/06		03/31/07		03/31/08		03/31/09		Thereafter


		(Dollars in thousands)
Senior credit facility		$	1,872,305	$	163,750	$	188,750	$	220,000	$	941,680	$	358,125
Senior notes(1)			700,000				100,000				250,000			$	350,000
Receivables-backed facility			465,000						465,000
Foreign line of credit			8,292		8,292
Industrial development revenue bonds			8,200												8,200
Capital lease obligations and other(1)			24,168		8,588		5,359		6,671		2,774		663		113
Purchasing obligations			372,089		237,746		82,426		19,971		11,954		9,717		10,275
Operating leases			452,950		94,625		77,385		63,016		53,428		43,738		120,758

	Total	$	3,903,004	$	513,001	$	453,920	$	774,658	$	1,259,836	$	412,243	$	489,346


Operating Division		Amount

		(Dollars in millions)
Dairy Group		$	275
Branded Products Group			25
Specialty Foods Group			20
Other			30

	Total	$	350


	*Further Consolidation of the Grocery and Foodservice Industries Could Cost Us Customers and Sales*


	*Recent Successes of Silk, Horizon Organic, International Delight and Hershey’s Milks Could Attract Increased Competitive Activity, Which Could Impede Our Growth Rate and Cost Us Sales*


Item 3.	Quantitative and Qualitative Disclosures About Market Risk


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds


			New
	Amount of		Authorized
Date of Increase	Increase		Total

September 28, 1999	$	100 million	$	200 million
November 17, 1999	$	100 million	$	300 million
May 19, 2000	$	100 million	$	400 million
November 2, 2000	$	100 million	$	500 million
January 8, 2003	$	150 million	$	650 million
February 12, 2003	$	150 million	$	800 million


10	.1	Sixth Amendment to Credit Agreement Certification of Chief Executive Officer pursuant to Section 302 of
31	.1	the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Section 302 of
31	.2	the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer pursuant to Section 906 of
32	.1	the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Section 906 of
32	.2	the Sarbanes-Oxley Act of 2002