Edgar Filing: DEAN FOODS CO

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2011

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from to

Commission File Number 001-12755

Dean Foods Company

(Exact name of the registrant as specified in its charter)

LOGO

Delaware

75-2559681

(State or other jurisdiction of

incorporation or organization)

(I.R.S. employer

identification no.)

2711 North Haskell Avenue, Suite 3400

Dallas, Texas 75204

(214) 303-3400

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

area code, of the registrant’s principal executive offices)

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

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

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


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

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

As of October 28, 2011, the number of shares outstanding of each class of common stock was: 183,699,141

Common Stock, par value $.01

Table of Contents


			Page
Part I — Financial Information

Item 1	—	Condensed Consolidated Financial Statements (Unaudited)		3

Item 2	—	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39

Item 3	—	Quantitative and Qualitative Disclosures About Market Risk		56

Item 4	—	Controls and Procedures		56

Part II — Other Information

Item 1	—	Legal Proceedings		57

Item 1A	—	Risk Factors		59

Item 5	—	Other Information		61

Item 6	—	Exhibits		61

Signatures				62

Part I — Financial Information

Item 1.

Condensed Consolidated Financial Statements

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)


	September 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	107,731		$	92,007
Receivables, net		1,000,391			891,019
Income tax receivable		20,111			71,337
Inventories, net		481,157			425,576
Deferred income taxes		115,758			141,653
Prepaid expenses and other current assets		75,157			77,510
Assets held for sale		—			117,114

Total current assets		1,800,305			1,816,216
Property, plant and equipment, net		2,068,935			2,113,391
Goodwill		1,253,415			3,179,192
Identifiable intangible and other assets, net		788,546			847,868

Total	$	5,911,201		$	7,956,667

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	1,262,397		$	1,232,876
Current portion of debt		150,240			174,250
Current portion of litigation settlements		59,998			30,000
Liabilities of disposal groups held for sale		—			3,839

Total current liabilities		1,472,635			1,440,965
Long-term debt		3,700,562			3,893,275
Deferred income taxes		336,458			756,714
Other long-term liabilities		387,536			351,645
Long-term litigation settlements		72,150			—
Commitments and contingencies (Note 11)
Stockholders’ equity (deficit):
Dean Foods Company stockholders’ equity (deficit):
Preferred stock, none issued		—			—
Common stock, 183,686,884 and 182,255,334 shares issued and outstanding, with a par value of $0.01 per share		1,837			1,823
Additional paid-in capital		1,079,174			1,061,253
Retained earnings (Accumulated deficit)		(982,645	)		583,102
Accumulated other comprehensive loss		(161,428	)		(146,653	)

Total Dean Foods Company stockholders’ equity (deficit)		(63,062	)		1,499,525
Non-controlling interest		4,922			14,543

Total stockholders’ equity (deficit)		(58,140	)		1,514,068

Total	$	5,911,201		$	7,956,667

See Notes to Condensed Consolidated Financial Statements.

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share data)


	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Net sales	$	3,410,797		$	3,054,130		$	9,759,459		$	8,969,926
Cost of sales		2,669,532			2,304,501			7,508,351			6,721,080

Gross profit		741,265			749,629			2,251,108			2,248,846
Operating costs and expenses:
Selling and distribution		498,682			491,154			1,476,578			1,421,586
General and administrative		148,191			154,895			466,498			465,283
Amortization of intangibles		2,584			2,810			7,959			8,480
Facility closing and reorganization costs		10,283			8,253			42,152			16,313
Litigation settlements		—			—			131,300			—
Goodwill impairment		1,926,000			—			1,926,000			—
Other operating (income) loss		27,827			—			(16,561	)		—

Total operating costs and expenses		2,613,567			657,112			4,033,926			1,911,662

Operating income (loss)		(1,872,302	)		92,517			(1,782,818	)		337,184
Other (income) expense:
Interest expense		62,873			64,304			191,636			177,742
Other (income) expense, net		(414	)		383			(1,169	)		(102	)

Total other expense		62,459			64,687			190,467			177,640

Income (loss) from continuing operations before income taxes		(1,934,761	)		27,830			(1,973,285	)		159,544
Income tax expense (benefit)		(379,111	)		10,653			(387,997	)		59,095

Income (loss) from continuing operations		(1,555,650	)		17,177			(1,585,288	)		100,449
Gain on sale of discontinued operations, net of tax		3,616			6,357			3,616			8,194
Loss from discontinued operations, net of tax		—			(1,577	)		—			(2,919	)

Net income (loss)		(1,552,034	)		21,957			(1,581,672	)		105,724
Net loss attributable to non-controlling interest		11,537			2,339			15,925			6,511

Net income (loss) attributable to Dean Foods Company	$	(1,540,497	)	$	24,296		$	(1,565,747	)	$	112,235

Average common shares:
Basic		183,649,597			182,118,506			183,278,667			181,666,251
Diluted		183,649,597			182,322,597			183,278,667			182,839,073
Basic earnings (loss) per common share:
Income (loss) from continuing operations attributable to Dean Foods Company	$	(8.41	)	$	0.11		$	(8.56	)	$	0.59
Income from discontinued operations attributable to Dean Foods Company		0.02			0.02			0.02			0.03

Net income (loss) attributable to Dean Foods Company	$	(8.39	)	$	0.13		$	(8.54	)	$	0.62

Diluted earnings (loss) per common share:
Income (loss) from continuing operations attributable to Dean Foods Company	$	(8.41	)	$	0.11		$	(8.56	)	$	0.58
Income from discontinued operations attributable to Dean Foods Company		0.02			0.02			0.02			0.03

Net income (loss) attributable to Dean Foods Company	$	(8.39	)	$	0.13		$	(8.54	)	$	0.61

See Notes to Condensed Consolidated Financial Statements.

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

(In thousands, except share data)


	Dean Foods Company Stockholders
	Common Stock				Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total Stockholders’ Equity (Deficit)			Comprehensive Income (Loss)
	Shares		Amount		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total Stockholders’ Equity (Deficit)			Comprehensive Income (Loss)
Balance, December 31, 2010		182,255,334	$	1,823	$	1,061,253		$	583,102		$	(146,653	)	$	14,543		$	1,514,068
Issuance of common stock, net of tax impact of share-based compensation		1,431,550		14		(5,923	)		—			—			—			(5,909	)
Share-based compensation expense		—		—		23,844			—			—			—			23,844
Capital contribution from non-controlling interest		—		—		—			—			—			6,304			6,304
Net loss attributable to non-controlling interest		—		—		—			—			—			(15,925	)		(15,925	)
Other comprehensive income (loss):
Net loss attributable to Dean Foods Company		—		—		—			(1,565,747	)		—			—			(1,565,747	)	$	(1,565,747	)
Change in fair value of derivative instruments, net of tax benefit of $34,664		—		—		—			—			(53,337	)		—			(53,337	)		(53,337	)
Amounts reclassified to statement of operations related to hedging activities, net of tax of $16,668		—		—		—			—			25,644			—			25,644			25,644
Cumulative translation adjustment		—		—		—			—			8,118			—			8,118			8,118
Pension liability adjustment, net of tax of $2,679		—		—		—			—			4,800			—			4,800			4,800

Comprehensive loss																				$	(1,580,522	)

Balance, September 30, 2011		183,686,884	$	1,837	$	1,079,174		$	(982,645	)	$	(161,428	)	$	4,922		$	(58,140	)

See Notes to Condensed Consolidated Financial Statements.

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share data)


	Dean Foods Company Stockholders
	Common Stock				Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total Stockholders’ Equity			Comprehensive Income
	Shares		Amount		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Non- controlling Interest			Total Stockholders’ Equity			Comprehensive Income
Balance, December 31, 2009		180,854,163	$	1,809	$	1,025,502	$	491,611	$	(166,976	)	$	15,286		$	1,367,232
Issuance of common stock, net of tax impact of share-based compensation		1,322,946		13		86		—		—			—			99
Share-based compensation expense		—		—		28,855		—		—			—			28,855
Capital contribution from non-controlling interest		—		—		—		—		—			6,916			6,916
Net loss attributable to non-controlling interest		—		—		—		—		—			(6,511	)		(6,511	)
Other comprehensive income (loss):
Net income attributable to Dean Foods Company		—		—		—		112,235		—			—			112,235		$	112,235
Change in fair value of derivative instruments, net of tax benefit of $17,254		—		—		—		—		(27,302	)		—			(27,302	)		(27,302	)
Amounts reclassified to income statement related to hedging activities, net of tax of $28,649		—		—		—		—		45,768			—			45,768			45,768
Cumulative translation adjustment		—		—		—		—		(9,290	)		—			(9,290	)		(9,290	)
Pension liability adjustment, net of tax of $3,014		—		—		—		—		4,820			—			4,820			4,820

Comprehensive income attributable to Dean Foods Company																		$	126,231

Balance, September 30, 2010		182,177,109	$	1,822	$	1,054,443	$	603,846	$	(152,980	)	$	15,691		$	1,522,822

See Notes to Condensed Consolidated Financial Statements.

DEAN FOODS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)


	Nine Months Ended September 30
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	(1,581,672	)	$	105,724
Loss from discontinued operations		—			2,919
Gain on sale of discontinued operations		(3,616	)		(8,194	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		213,895			203,125
Share-based compensation expense		25,882			29,628
Loss on divestitures and other, net		6,176			10,913
Goodwill impairment		1,926,000			—
Deferred income taxes		(386,869	)		85,990
Other		159			1,368
Changes in operating assets and liabilities, net of acquisitions:
Receivables, net		(116,038	)		(13,804	)
Inventories, net		(60,102	)		(37,543	)
Prepaid expenses and other assets		12,268			5,065
Accounts payable and accrued expenses		60,173			33,969
Income taxes receivable/payable		47,245			(39,867	)
Litigation settlements		102,148			—

Net cash provided by operating activities-continuing operations		245,649			379,293
Net cash provided by operating activities-discontinued operations		774			8,890

Net cash provided by operating activities		246,423			388,183
Cash flows from investing activities:
Payments for property, plant and equipment		(215,412	)		(180,557	)
Proceeds from divestitures		185,270			—
Proceeds from sale of fixed assets		5,277			3,807

Net cash used in investing activities-continuing operations		(24,865	)		(176,750	)
Net cash provided by investing activities-discontinued operations		3,616			24,795

Net cash used in investing activities		(21,249	)		(151,955	)
Cash flows from financing activities:
Repayment of debt		(196,468	)		(104,721	)
Proceeds from senior secured revolver		2,449,740			2,875,580
Payments for senior secured revolver		(2,856,340	)		(2,927,780	)
Proceeds from receivables-backed facility		3,802,000			1,440,000
Payments for receivables-backed facility		(3,417,000	)		(1,440,000	)
Payments for deferred financing costs		(600	)		(34,233	)
Capital contribution from non-controlling interest		6,304			6,916
Tax savings on share-based compensation		—			275
Issuance of common stock, net of share repurchases for withholding taxes		3,764			3,298

Net cash used in financing activities		(208,600	)		(180,665	)
Effect of exchange rate changes on cash and cash equivalents		(850	)		1,347

Increase in cash and cash equivalents		15,724			56,910
Cash and cash equivalents, beginning of period		92,007			45,190

Cash and cash equivalents, end of period	$	107,731		$	102,100

See Notes to Condensed Consolidated Financial Statements.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

1. General

Nature of Our Business — We are one of the leading food and beverage companies in the United States, as well as a global leader in branded plant-based beverages, such as soy, almond and coconut milks, and soy-based food products. We align our leadership teams, operating strategies and supply chain initiatives around our two lines of business: Fresh Dairy Direct-Morningstar and WhiteWave-Alpro.

Fresh Dairy Direct-Morningstar is the largest processor and distributor of milk and other dairy products in the United States, with products such as milk, ice cream, cultured dairy products, creamers, ice cream mix and other dairy products sold under more than 50 familiar local and regional brands and a wide array of private labels.

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

Basis of Presentation — The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q have been prepared on the same basis as the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report on Form 10-K”), which we filed with the Securities and Exchange Commission on March 1, 2011. In our opinion, we have made all necessary adjustments (which include normal recurring adjustments) to present fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted. Our results of operations for the period ended September 30, 2011 may not be indicative of our operating results for the full year. The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with the Consolidated Financial Statements contained in our 2010 Annual Report on Form 10-K.

As of September 30, 2011, we have presented an accrual related to a proposed litigation settlement in a line item entitled current portion of litigation settlements. Prior to June 30, 2011, litigation settlement accruals were presented within the accounts payable and other accrued expenses line item. Our historical balance sheet has been recast to conform to the current presentation. See Note 11 for further information regarding our litigation settlements.

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

In June 2011, the FASB issued an Accounting Standards Update related to “Presentation of Comprehensive Income.” This standard revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the previously accepted presentation options and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income, or two separate but consecutive statements. This standard only impacts the presentation of comprehensive income and does not change the items that must be reported in other comprehensive income. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and requires retrospective application for all periods presented in the financial statements.

In September 2011, the FASB issued an Accounting Standards Update related to “Testing Goodwill for Impairment.” The new guidance permits entities to make a qualitative assessment of whether it is more likely than not that a reporting

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. Unless an entity concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. The standard is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011, and early adoption is permitted. We are currently evaluating the impact this standard will have on our annual goodwill impairment testing process.

In September 2011, the FASB issued an Accounting Standards Update related to “Compensation –Retirement Benefits- Multiemployer Plans”. This standard requires new quantitative and qualitative disclosures for multiemployer pension and other postretirement benefit plans. The amended disclosures will provide users with more detailed information about the plans in which we participate. The standard is effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. We are currently evaluating the impact this standard will have on our pension and other postretirement benefit disclosures.

2. Divestitures and Discontinued Operations

Pending and Completed Divestitures

In the second quarter of 2011, we began evaluating strategic alternatives related to our 50% owned joint venture between WhiteWave and Hero Group, which is a part of our WhiteWave-Alpro segment. During the third quarter of 2011, due to continued poor performance by the venture and a desire on our part to invest in core operations, a recommendation was made to, and approved by, the joint venture partners to wind down the joint venture operations during the fourth quarter of 2011. In conjunction with this action plan, we wrote down the joint venture’s long-lived assets to fair value less cost to sell as of September 30, 2011. This business did not meet the requirements to be accounted for as a discontinued operations as of September 30, 2011. Additionally, based on our continuing level of involvement with the joint venture, we have continued to consolidate the venture in our unaudited Condensed Consolidated Financial Statements. We expect to complete the majority of the wind down of the joint venture during the fourth quarter of 2011.

In the first quarter of 2011, we committed to a plan to sell the fluid milk operations at our Fresh Dairy Direct manufacturing facility in Waukesha, Wisconsin (“Waukesha”) as a result of the settlement of the United States Department of Justice (“DOJ”) civil action related to our acquisition of the Consumer Products Division of Foremost Farms USA in April 2009. This operation did not meet the requirements to be accounted for as a discontinued operation. On September 8, 2011, we completed the sale of our Waukesha facility.

In the fourth quarter of 2010, we entered into two separate agreements to sell our Mountain High and private label yogurt operations. These operations were a part of our Fresh Dairy Direct-Morningstar segment. The decision to sell these operations was part of our strategic growth plan and allows us to target our investments in growing our core dairy and branded businesses. These operations did not meet the requirements to be accounted for as discontinued operations.

On February 1, 2011, we completed the sale of our Mountain High yogurt operations for cash proceeds of approximately $85 million. We used the proceeds from the sale to prepay a portion of the outstanding 2012 tranche A term loan borrowings under our senior secured credit facility. We completed the sale of our private label yogurt operations for cash proceeds of approximately $93 million on April 1, 2011 and used these proceeds for additional debt repayments, including the full repayment of the remaining outstanding 2012 tranche A term loan borrowings. See Note 5.

We recorded a net pre-tax loss of $27.8 million and a net pre-tax gain of $16.6 million during the three-month and nine-month periods ended September 30, 2011, respectively, related to our pending and completed divestitures. The three- month period loss and the nine-month period gain were recorded in other operating (income) loss in our unaudited Condensed Consolidated Statements of Operations.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

The following is a summary of the assets and liabilities of our Mountain High and private label yogurt operations that were held for sale as of December 31, 2010:


	December 31, 2010
	(In thousands)
Assets:
Current assets	$	8,329
Property, plant and equipment, net		26,346
Goodwill, identifiable intangible and other assets		82,439

Assets held for sale	$	117,114

Liabilities:
Accounts payable and accrued expenses	$	3,839

Discontinued Operations

On August 4, 2010 we completed the sale of the business operations of our Rachel’s Dairy Companies (“Rachel’s”), which provided organic branded dairy-based chilled yogurt, milk and related dairy products primarily in the United Kingdom. As a result of the sale, we recognized a gain of $5.7 million, net of tax, in the third quarter of 2010. The decision to sell Rachel’s was part of our strategic growth plan and allows us to target our investments in growing our core dairy and branded businesses. Our Rachel’s operations, previously reported within the WhiteWave-Alpro segment, have been reclassified as discontinued operations in our unaudited Condensed Consolidated Financial Statements for the three-month and nine-month periods ended September 30, 2010.

In September 2011, we recorded an additional pre-tax gain on the sale of Rachel’s of $4.1 million as a result of the final working capital cash settlement, which has been recorded in gain on sale of discontinued operations, net of tax in our unaudited Condensed Consolidated Statement of Operations.

The following is a summary of the operating results of our Rachel’s discontinued operations:


	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
	(In thousands)
Operations:
Net sales	$	3,962		$	26,319

Loss before income taxes		(1,788	)		(3,566	)
Income tax benefit		211			768

Net loss	$	(1,577	)	$	(2,798	)

3. Inventories, net

Inventories, net of reserves of $4.5 million and $5.9 million at September 30, 2011 and December 31, 2010, respectively, consisted of the following:


	September 30, 2011		December 31, 2010
	(In thousands)
Raw materials and supplies	$	201,429	$	187,176
Finished goods		279,728		238,400

Total	$	481,157	$	425,576

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

4. Goodwill and Intangible Assets

We conduct impairment tests of goodwill and intangible assets with indefinite lives annually in the fourth quarter and on an interim basis when circumstances arise that indicate a possible impairment. We evaluate goodwill at the reporting unit level; our reporting units include Fresh Dairy Direct, WhiteWave, Morningstar and Alpro.

During the third quarter of 2011, we performed a step one interim goodwill analysis of our Fresh Dairy Direct reporting unit. A prolonged recession has resulted in significantly lower consumer spending, declining volumes in the fluid milk industry and increased competitive pricing pressures that are unlikely to improve materially. These conditions have continued to affect both consumption and pricing in our Fresh Dairy Direct product categories, which culminated in a change to our outlook for that business. We believe that these indicators of impairment are isolated to the Fresh Dairy Direct reporting unit and that business conditions affecting our WhiteWave, Morningstar and Alpro reporting units have not indicated a possible impairment for those businesses. We will assess each of these reporting units for impairment during the fourth quarter of 2011 in connection with our annual impairment test.

Based on the results of the step one analysis we determined that the carrying value of our Fresh Dairy Direct reporting unit exceeded its fair value. For purposes of the step one analysis, we estimated the fair value of the Fresh Dairy Direct reporting unit using both an income approach that analyzed projected discounted cash flows and a market approach that considered other comparable companies. Both approaches resulted in substantially similar values for our Fresh Dairy Direct reporting unit. We also compared the aggregate fair value estimates of all of our reporting units, using the fair values derived in our 2010 annual impairment test conducted in the fourth quarter of 2010, for our other three reporting units, to our enterprise value (market capitalization plus outstanding indebtedness) as of the valuation date. In our view, the comparison indicated that the step one determination of fair value of Fresh Dairy Direct was reasonable.

In calculating the fair value of our Fresh Dairy Direct reporting unit we used unobservable inputs (Level 3, as defined in Note 6) and significant management judgment. We used the following estimates and assumptions in the discounted cash flow analysis:

•

A terminal EBITDA margin percentage reflecting our historical and forecasted EBITDA margins;

•

A terminal growth rate based on long term real growth rate potential and a long-term inflation forecast;

•

Assumptions regarding future capital expenditures reflective of maintaining facilities under normalized operations; and

•

An overall discount rate based on our weighted average cost of capital for the Fresh Dairy Direct reporting unit.

Additionally, under the market approach analysis, we used significant other observable inputs (Level 2, as defined in Note 6) including various peer company comparisons. Changes in these estimates or assumptions could materially affect the determination of fair value and the conclusions of the step one analysis for the reporting unit.

Because our Fresh Dairy Direct reporting unit carrying value was determined to be in excess of its fair value in our step one analysis, we were required to perform step two of the impairment analysis to determine the amount of goodwill impairment to be recorded. The amount of the impairment is calculated by comparing the implied fair value of the goodwill to its carrying amount, which requires us to allocate the fair value determined in the step one analysis to the individual assets and liabilities of the reporting unit. Any remaining fair value would represent the implied fair value of goodwill on the testing date.

As of the filing date of this Quarterly Report on Form 10-Q, we have not completed the analysis. However, based on the work performed through the date of the filing, we concluded that an impairment charge between $1.9 billion and $2.1 billion could be reasonably estimated. Accordingly, we recorded a $1.9 billion, non-cash charge ($1.6 billion, net of tax), during the third quarter of 2011, which represents our best estimate of the impairment present at September 30, 2011. This impairment charge does not impact our operations, compliance with our debt covenants or our cash flows.

We expect to finalize our interim impairment analysis of Fresh Dairy Direct goodwill and other indefinite-lived intangible assets prior to filing our 2011 Annual Report on Form 10-K. Following completion of the analysis, we will adjust our preliminary estimate if necessary, and record any required adjustment in our consolidated financial statements for the year ended December 31, 2011.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

The changes in the carrying amount of goodwill for the nine months ended September 30, 2011 are as follows:


	Fresh Dairy Direct- Morningstar			WhiteWave- Alpro		Total
	(In thousands)
Balance at December 31, 2010	$	2,472,767		$	706,425	$	3,179,192
Goodwill impairment		(1,926,000	)		—		(1,926,000	)
Foreign currency translation		—			4,219		4,219
Divestitures (see Note 2)		(3,996	)		—		(3,996	)

Balance at September 30, 2011	$	542,771		$	710,644	$	1,253,415

The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of September 30, 2011 and December 31, 2010 are as follows:


	September 30, 2011							December 31, 2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
	(In thousands)
Intangible assets with indefinite lives:
Trademarks(1)	$	591,135	$	—		$	591,135	$	593,387	$	—		$	593,387
Intangible assets with finite lives:
Customer-related and other(1)		132,483		(51,462	)		81,021		133,829		(44,622	)		89,207
Trademarks(1)(2)		10,564		(4,649	)		5,915		18,614		(4,474	)		14,140

Total	$	734,182	$	(56,111	)	$	678,071	$	745,830	$	(49,096	)	$	696,734

(1)

We wrote off $4.6 million of indefinite-lived intangibles and $2.1 million of net finite-lived intangibles during the first nine months of 2011 related to the divestitures disclosed in Note 2. The remainder of the fluctuation in the gross carrying amount of intangible assets with indefinite lives is primarily the result of foreign currency translation adjustments.

(2)	In the first nine months of 2011, we sold a trademark with a gross carrying amount of $7.5 million.

Amortization expense on intangible assets for the three months ended September 30, 2011 and 2010 was $2.6 million and $2.8 million, respectively. Amortization expense on intangible assets for the nine months ended September 30, 2011 and 2010 was $8.0 million and $8.5 million, respectively. Estimated aggregate intangible asset amortization expense for the next five years is as follows (in millions):


2011	$	10.5
2012		9.3
2013		9.2
2014		8.5
2015		8.5

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

5. Debt


	September 30, 2011						December 31, 2010
	Amount Outstanding			Interest Rate			Amount Outstanding			Interest Rate
	(In thousands)
Dean Foods Company debt obligations:
Senior secured credit facility	$	2,437,194			2.90	%*	$	3,033,529			2.96	%*
Senior notes due 2016		498,910			7.00			498,765			7.00
Senior notes due 2018		400,000			9.75			400,000			9.75

		3,336,104						3,932,294

Subsidiary debt obligations:
Senior notes due 2017		128,700			6.90			127,504			6.90
Receivables-backed facility		385,000			1.26	**		—
Capital lease obligations and other		998						7,727
Alpro revolving credit facility		—						—

		514,698						135,231

		3,850,802						4,067,525
Less current portion		(150,240	)					(174,250	)

Total long-term portion	$	3,700,562					$	3,893,275

*	Represents a weighted average rate, including applicable interest rate margins, for the senior secured revolving credit facility, term loan A and term loan B.

**	Represents a weighted-average rate, including applicable interest rate margins, for indebtedness outstanding under the receivables securitization facility.

The scheduled maturities of long-term debt at September 30, 2011, were as follows (in thousands):


	Total			Term Loan A		Term Loan B			Other*
2011	$	13,552		$	8,916	$	4,418		$	218
2012		194,725			169,396		17,675			7,654
2013		616,729			213,975		17,675			385,079
2014		992,061			276,384		676,230			39,447
2015		10,535			—		10,535			—
Thereafter		2,037,590			—		995,590	**		1,042,000

Subtotal		3,865,192			668,671		1,722,123			1,474,398
Less discounts		(14,390	)		—		—			(14,390	)

Total outstanding debt	$	3,850,802		$	668,671	$	1,722,123		$	1,460,008

*	Includes our revolving credit facility, receivables-backed facility, Dean Foods Company senior notes, subsidiary senior notes, capital lease obligations and other debt.

The scheduled maturity of a portion of term loan B is April 2, 2017, subject to the condition that we meet certain leverage, debt, cash or credit rating tests as of December 31, 2015. However, if at least one of these tests is not met, the maturity date for this portion of term loan B will be April 2, 2016.

Senior Secured Credit Facility — Our senior secured credit facility consists of an original combination of a $1.5 billion five-year revolving credit facility, a $1.5 billion five-year term loan A, and a $1.8 billion seven-year term loan B. In June 2010, we amended and restated the agreement governing the senior secured credit facility, and entered into a further amendment in December 2010, which included extension of the maturity dates for certain principal amounts, amendment of the maximum permitted leverage ratio and minimum interest coverage ratio and the addition of a senior secured leverage ratio (each as defined in our credit agreement), and the amendment of certain other terms. At September 30, 2011, there were outstanding borrowings of $669 million under the term loan A, $1.72 billion under the term loan B and $46 million under the revolving credit facility. Our average daily balance under the revolving credit facility during the nine months ended September 30, 2011 was $121.7 million. Letters of credit in the aggregate amount of $169.9 million were issued under the revolving credit facility but undrawn.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

On July 12, 2011, we announced that we entered into a settlement agreement with the plaintiffs in the Tennessee dairy farmer actions. As part of the proposed settlement agreement, we issued a standby letter of credit in the amount of $80 million, representing the subsequent payments due under the terms of the settlement agreement. In connection with the court’s order partially decertifying the settlement class and the judge’s subsequent order vacating preliminary approval of the settlement agreement, the letter of credit was cancelled in September 2011. See Note 11 for further information regarding the settlement.

As of October 28, 2011, $113.4 million was outstanding under our senior secured revolving credit facility, excluding letters of credit in the aggregate amount of $2.9 million that were issued but undrawn.

The amended and restated senior secured revolving credit facility is available for the issuance of up to $350 million of letters of credit and up to $150 million of swingline loans. No principal payments are due on the revolving credit facility until April 2, 2012, at which time any principal borrowings on a pro rata basis related to $225 million of revolving credit facility commitments would become payable. No principal payments are due on the remaining $1.275 billion portion of revolving credit facility commitments until April 2, 2014. The credit agreement requires mandatory principal prepayments upon the occurrence of certain asset sales (provided that such sales, in total, exceed $250 million in any fiscal year), recovery events or as a result of exceeding certain leverage limits.

As discussed in Note 2, on February 1, 2011, we completed the sale of our Mountain High yogurt operations. We used the cash proceeds of approximately $85 million to prepay a portion of the outstanding 2012 tranche A term loan borrowings. Additionally, on April 1, 2011, we completed the sale of our private label yogurt operations and used the cash proceeds of approximately $93 million for additional debt repayments, including the full repayment of the remaining outstanding 2012 tranche A term loan borrowings.

Our credit agreement permits us to complete acquisitions that meet all of the following conditions without obtaining prior approval from our lenders: (1) the acquired company is involved in the manufacture, processing and distribution of food or packaging products or any other line of business in which we were engaged as of April 2007, (2) the net cash purchase price for any single acquisition is not greater than $500 million and not greater than $100 million if our leverage ratio is greater than 4.50 times on a pro-forma basis, (3) we acquire at least 51% of the acquired entity, (4) the transaction is approved by the board of directors or shareholders, as appropriate, of the target and (5) after giving effect to such acquisition on a pro-forma basis, we would have been in compliance with all financial covenants. All other acquisitions must be approved in advance by the required lenders.

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

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

Receivables-Backed Facility — We have a $600 million receivables securitization facility pursuant to which certain of our subsidiaries sell their accounts receivable to four wholly-owned entities intended to be bankruptcy-remote. The entities then transfer the receivables to third-party asset-backed commercial paper conduits sponsored by major financial institutions. The assets and liabilities of these four entities are fully reflected in our unaudited Condensed Consolidated Balance Sheets, and the securitization is treated as a borrowing for accounting purposes.

On September 28, 2011, we amended the agreement governing the receivables-backed facility. The terms of the agreement were modified to extend the liquidity termination date to September 25, 2013, to include the ability to issue letters of credit of up to $300 million under the facility, and to amend certain other terms. As a result of the amendment, we incurred fees of approximately $0.6 million.

The total value of receivables sold to these entities as of September 30, 2011 was $930.6 million. During the first nine months of 2011, we borrowed $3.8 billion and subsequently repaid $3.4 billion under this facility with a remaining drawn balance of $385.0 million at September 30, 2011. Our average daily balance under the receivables-backed facility during the

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

nine months ended September 30, 2011 was $321.5 million. The facility bears interest at a variable rate based upon commercial paper and LIBOR rates plus an applicable margin. Our ability to re-borrow under this facility is subject to a monthly borrowing base formula. This facility had $215.0 million of availability as of September 30, 2011, based on this formula. As of October 28, 2011, $390.0 million was outstanding under our receivables-backed facility, excluding letters of credit in the aggregate amount of $169.0 million that were issued but undrawn.

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

Dean Foods Company Senior Notes due 2018 — On December 16, 2010, we issued $400 million aggregate principal amount of 9.75% senior unsecured notes. The senior notes were sold in a private placement to qualified institutional buyers and in offshore transactions and were not registered under the Securities Act of 1933. On August 3, 2011, we exchanged $400 million of the senior notes for new notes evidencing the same indebtedness and with substantially similar terms as the corresponding series of old notes, except that the new notes are registered under the Securities Act and do not have restrictions on transfer, rights to special interest or registration rights. These notes are our senior unsecured obligations and mature on December 15, 2018 with interest payable on June 15 and December 15 of each year. The indenture under which we issued the senior notes due 2018 does not contain financial covenants but does contain covenants that, among other things, limit our ability to incur certain indebtedness, enter into sale-leaseback transactions and engage in mergers, consolidations and sales of all or substantially all of our assets. The carrying value of these notes at September 30, 2011 was $400.0 million.

Dean Foods Company Senior Notes due 2016 — On May 17, 2006, we issued $500 million aggregate principal amount of 7.0% senior unsecured notes. The senior unsecured notes mature on June 1, 2016, and interest is payable on June 1 and December 1 of each year. The indenture under which we issued the senior notes due 2016 does not contain financial covenants but does contain covenants that, among other things, limit our ability to incur certain indebtedness, enter into sale-leaseback transactions and engage in mergers, consolidations and sales of all or substantially all of our assets. The carrying value of these notes at September 30, 2011 was $498.9 million.

Subsidiary Senior Notes due 2017 — Legacy Dean had certain senior notes outstanding at the time of its acquisition, of which one series ($142 million aggregate principal amount) remains outstanding with a maturity date of October 15, 2017. The carrying value of these notes at September 30, 2011 was $128.7 million at 6.90% interest.

The indenture governing the Legacy Dean senior notes does not contain financial covenants but does contain certain restrictions, including a prohibition against Legacy Dean and its subsidiaries granting liens on certain of their real property interests and a prohibition against Legacy Dean granting liens on the stock of its subsidiaries. The Legacy Dean senior notes are not guaranteed by Dean Foods Company or Legacy Dean’s wholly-owned subsidiaries.

Capital Lease Obligations and Other — Capital lease obligations and other subsidiary debt includes various promissory notes related to the purchase of property, plant and equipment and capital lease obligations. As of December 31, 2010, other subsidiary debt also included promissory notes for financing current year property and casualty insurance premiums. The various promissory notes payable provide for interest at varying rates and are payable in periodic 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. See Note 11.

Alpro Revolving Credit Facility — On July 8, 2011, Alpro N.V. renewed its multicurrency revolving credit facility for borrowings in an amount not to exceed €1 million (or its currency equivalent). The facility is unsecured and is guaranteed by Dean Foods Company and various Alpro N.V. subsidiaries. Proceeds under the facility may be used for working capital and other general corporate purposes of Alpro N.V. The subsidiary revolving credit facility is available for the issuance of up to €1 million of letters of credit. No principal payments are due under the subsidiary revolving credit facility until maturity on July 2, 2012. At September 30, 2011, there were no outstanding borrowings under this facility.

Interest Rate Agreements — See Note 6 for information related to interest rate swap arrangements associated with our debt.

Guarantor Information — The 2016 and 2018 senior notes described above are our unsecured obligations and are fully and unconditionally, joint and severally guaranteed by substantially all of our wholly-owned U.S. subsidiaries other than our receivables securitization subsidiaries.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

The following condensed consolidating financial statements present the financial position, results of operations and cash flows of Dean Foods Company (“Parent”), the wholly-owned subsidiary guarantors of the Dean Foods Company senior notes due 2016 and 2018, and separately the combined results of the wholly-owned subsidiaries that are not a party to the guarantees. The wholly-owned non-guarantor subsidiaries reflect certain foreign and other operations, including our Hero/WhiteWave joint venture, in addition to our receivables securitization subsidiaries. We do not allocate interest expense from the receivables-backed facility to the receivables securitization subsidiaries. Therefore, the interest costs related to this facility are reflected within the guarantor financial information presented.


	Unaudited Condensed Consolidating Balance Sheet as of September 30, 2011
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated Totals
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	9,811		$	—	$	97,920	$	—		$	107,731
Receivables, net		17			24,836		975,538		—			1,000,391
Income tax receivable		20,104			—		7		—			20,111
Inventories, net		—			452,170		28,987		—			481,157
Intercompany receivables		—			4,507,529		—		(4,507,529	)		—
Other current assets		86,824			91,379		12,712		—			190,915

Total current assets		116,756			5,075,914		1,115,164		(4,507,529	)		1,800,305
Property, plant and equipment, net		694			1,873,866		194,375		—			2,068,935
Goodwill		—			1,083,522		169,893		—			1,253,415
Identifiable intangible and other assets, net		72,546			592,880		123,120		—			788,546
Investment in subsidiaries		7,641,963			—		—		(7,641,963	)		—

Total	$	7,831,959		$	8,626,182	$	1,602,552	$	(12,149,492	)	$	5,911,201

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	143,325		$	1,047,592	$	71,480	$	—		$	1,262,397
Intercompany payables		3,944,324			—		563,205		(4,507,529	)		—
Current portion of debt		149,446			260		534		—			150,240
Current portion of litigation settlements		59,998			—		—		—			59,998

Total current liabilities		4,297,093			1,047,852		635,219		(4,507,529	)		1,472,635
Long-term debt		3,186,657			128,905		385,000		—			3,700,562
Other long-term liabilities		339,121			306,232		78,641		—			723,994
Long-term litigation settlements		72,150			—		—		—			72,150
Stockholders’ equity (deficit):
Dean Foods Company stockholders’ equity (deficit)		(63,062	)		7,143,193		498,770		(7,641,963	)		(63,062	)
Non-controlling interest		—			—		4,922		—			4,922

Total stockholders’ equity (deficit)		(63,062	)		7,143,193		503,692		(7,641,963	)		(58,140	)

Total	$	7,831,959		$	8,626,182	$	1,602,552	$	(12,149,492	)	$	5,911,201

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)


	Unaudited Condensed Consolidating Balance Sheet as of December 31, 2010
	Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated Totals
	(In thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	307	$	9,750	$	81,950	$	—		$	92,007
Receivables, net		353		33,941		856,725		—			891,019
Income tax receivable		71,173		—		164		—			71,337
Inventories, net		—		394,862		30,714		—			425,576
Intercompany receivables		193,051		4,211,670		13,924		(4,418,645	)		—
Other current assets		105,345		96,967		16,851		—			219,163
Assets held for sale		—		117,114		—		—			117,114

Total current assets		370,229		4,864,304		1,000,328		(4,418,645	)		1,816,216
Property, plant and equipment, net		222		1,900,192		212,977		—			2,113,391
Goodwill		—		3,013,516		165,676		—			3,179,192
Identifiable intangible and other assets, net		88,135		616,435		143,298		—			847,868
Investment in subsidiaries		9,335,787		—		—		(9,335,787	)		—

Total	$	9,794,373	$	10,394,447	$	1,522,279	$	(13,754,432	)	$	7,956,667

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	138,869	$	1,014,819	$	79,188	$	—		$	1,232,876
Intercompany payables		3,568,750		21,586		828,309		(4,418,645	)		—
Current portion of debt		167,540		6,454		256		—			174,250
Litigation settlements		30,000		—		—		—			30,000
Liabilities of disposal groups held for sale		—		3,839		—		—			3,839

Total current liabilities		3,905,159		1,046,698		907,753		(4,418,645	)		1,440,965
Long-term debt		3,764,754		127,892		629		—			3,893,275
Other long-term liabilities		624,935		379,017		104,407		—			1,108,359
Stockholders’ equity:
Dean Foods Company stockholders’ equity		1,499,525		8,840,840		494,947		(9,335,787	)		1,499,525
Non-controlling interest		—		—		14,543		—			14,543

Total stockholders’ equity		1,499,525		8,840,840		509,490		(9,335,787	)		1,514,068

Total	$	9,794,373	$	10,394,447	$	1,522,279	$	(13,754,432	)	$	7,956,667

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

		$00000000			$00000000			$00000000			$00000000			$00000000
	Unaudited Condensed Consolidating Statements of Operations for the Three Months Ended September 30, 2011
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated Totals
	(In thousands)
Net sales	$	—		$	3,316,497		$	94,300		$	—		$	3,410,797
Cost of sales		—			2,611,630			57,902			—			2,669,532

Gross profit		—			704,867			36,398			—			741,265
Selling and distribution		—			477,942			20,740			—			498,682
General and administrative		2,842			135,095			10,254			—			148,191
Amortization of intangibles		—			2,233			351			—			2,584
Facility closing and reorganization costs		—			10,283			—			—			10,283
Goodwill impairment		—			1,926,000			—			—			1,926,000
Other operating loss		—			7,481			20,346			—			27,827
Interest (income) expense		60,528			2,630			(285	)		—			62,873
Other (income) expense, net		(2,902	)		1,667			821			—			(414	)
Loss from subsidiaries		1,874,293			—			—			(1,874,293	)		—

Loss from continuing operations before income taxes		(1,934,761	)		(1,858,464	)		(15,829	)		1,874,293			(1,934,761	)
Income tax benefit		(379,111	)		(733,174	)		(6,780	)		739,954			(379,111	)

Loss from continuing operations		(1,555,650	)		(1,125,290	)		(9,049	)		1,134,339			(1,555,650	)
Gain on sale of discontinued operations, net of tax		3,616			—			3,616			(3,616	)		3,616

Net loss		(1,552,034	)		(1,125,290	)		(5,433	)		1,130,723			(1,552,034	)
Net loss attributable to non-controlling interest		11,537			—			11,537			(11,537	)		11,537

Net income (loss) attributable to Dean Foods Company	$	(1,540,497	)	$	(1,125,290	)	$	6,104		$	1,119,186		$	(1,540,497	)

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

		$00000000			$00000000		$00000000			$00000000			$00000000
	Unaudited Condensed Consolidating Statements of Operations for the Three Months Ended September 30, 2010
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations			Consolidated Totals
	(In thousands)
Net sales	$	—		$	2,966,595	$	87,535		$	—		$	3,054,130
Cost of sales		—			2,254,171		50,330			—			2,304,501

Gross profit		—			712,424		37,205			—			749,629
Selling and distribution		—			466,306		24,848			—			491,154
General and administrative		3,023			140,499		11,373			—			154,895
Amortization of intangibles		—			2,485		325			—			2,810
Facility closing and reorganization costs		—			8,253		—			—			8,253
Interest expense		61,692			2,351		261			—			64,304
Other (income) expense, net		(2,949	)		3,670		(338	)		—			383
Income from subsidiaries		(89,596	)		—		—			89,596			—

Income from continuing operations before income taxes		27,830			88,860		736			(89,596	)		27,830
Income tax expense		10,653			34,015		74			(34,089	)		10,653

Income from continuing operations		17,177			54,845		662			(55,507	)		17,177
Gain on sale of discontinued operations, net of tax		6,357			—		6,357			(6,357	)		6,357
Loss from discontinued operations, net of tax		(1,577	)		—		(1,577	)		1,577			(1,577	)

Net income		21,957			54,845		5,442			(60,287	)		21,957
Net loss attributable to non-controlling interest		2,339			—		2,339			(2,339	)		2,339

Net income attributable to Dean Foods Company	$	24,296		$	54,845	$	7,781		$	(62,626	)	$	24,296

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

		$00000000			$00000000			$00000000			$00000000			$00000000
	Unaudited Condensed Consolidating Statements of Operations for the Nine Months Ended September 30, 2011
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated Totals
	(In thousands)
Net sales	$	—		$	9,465,780		$	293,679		$	—		$	9,759,459
Cost of sales		—			7,331,771			176,580			—			7,508,351

Gross profit		—			2,134,009			117,099			—			2,251,108
Selling and distribution		—			1,406,008			70,570			—			1,476,578
General and administrative		8,149			423,482			34,867			—			466,498
Amortization of intangibles		—			6,910			1,049			—			7,959
Facility closing and reorganization costs		—			42,152			—			—			42,152
Litigation settlements		131,300			—			—			—			131,300
Goodwill impairment		—			1,926,000			—			—			1,926,000
Other operating (income) loss		(800	)		(36,107	)		20,346			—			(16,561	)
Interest expense		183,095			8,452			89			—			191,636
Other (income) expense, net		(7,400	)		6,833			(602	)		—			(1,169	)
Loss from subsidiaries		1,658,941			—			—			(1,658,941	)		—

Loss from continuing operations before income taxes		(1,973,285	)		(1,649,721	)		(9,220	)		1,658,941			(1,973,285	)
Income tax benefit		(387,997	)		(647,589	)		(7,393	)		654,982			(387,997	)

Loss from continuing operations		(1,585,288	)		(1,002,132	)		(1,827	)		1,003,959			(1,585,288	)
Gain on sale of discontinued operations, net of tax		3,616			—			3,616			(3,616	)		3,616

Net income (loss)		(1,581,672	)		(1,002,132	)		1,789			1,000,343			(1,581,672	)
Net loss attributable to non-controlling interest		15,925			—			15,925			(15,925	)		15,925

Net income (loss) attributable to Dean Foods Company	$	(1,565,747	)	$	(1,002,132	)	$	17,714		$	984,418		$	(1,565,747	)

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

		$00000000			$00000000			$00000000			$00000000			$00000000
	Unaudited Condensed Consolidating Statements of Operations for the Nine Months Ended September 30, 2010
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated Totals
	(In thousands)
Net sales	$	—		$	8,699,240		$	270,686		$	—		$	8,969,926
Cost of sales		—			6,563,034			158,046			—			6,721,080

Gross profit		—			2,136,206			112,640			—			2,248,846
Selling and distribution		—			1,349,005			72,581			—			1,421,586
General and administrative		5,242			424,770			35,271			—			465,283
Amortization of intangibles		—			7,495			985			—			8,480
Facility closing and reorganization costs		—			16,313			—			—			16,313
Interest expense		169,669			7,203			870			—			177,742
Other (income) expense, net		(5,208	)		6,104			(998	)		—			(102	)
Income from subsidiaries		(329,247	)		—			—			329,247			—

Income from continuing operations before income taxes		159,544			325,316			3,931			(329,247	)		159,544
Income tax expense		59,095			120,497			396			(120,893	)		59,095

Income from continuing operations		100,449			204,819			3,535			(208,354	)		100,449
Gain on sale of discontinued operations, net of tax		8,194			—			8,194			(8,194	)		8,194
Loss from discontinued operations, net of tax		(2,919	)		(121	)		(2,798	)		2,919			(2,919	)

Net income		105,724			204,698			8,931			(213,629	)		105,724
Net loss attributable to non-controlling interest		6,511			—			6,511			(6,511	)		6,511

Net income attributable to Dean Foods Company	$	112,235		$	204,698		$	15,442		$	(220,140	)	$	112,235

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)


	Unaudited Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2011
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidated Totals
	(In thousands)
Net cash provided by (used in) operating activities – continuing operations	$	130,572		$	214,802		$	(99,725	)	$	245,649
Net cash provided by operating activities – discontinued operations		—			—			774			774

Net cash provided by (used in) operating activities		130,572			214,802			(98,951	)		246,423
Payments for property, plant and equipment		—			(204,896	)		(10,516	)		(215,412	)
Proceeds from divestitures		—			185,270			—			185,270
Proceeds from sale of fixed assets		—			5,236			41			5,277

Net cash used in investing activities – continuing operations		—			(14,390	)		(10,475	)		(24,865	)
Net cash provided by investing activities – discontinued operations		—			—			3,616			3,616

Net cash used in investing activities		—			(14,390	)		(6,859	)		(21,249	)
Repayment of debt		(189,736	)		(6,375	)		(357	)		(196,468	)
Proceeds from senior secured revolver		2,449,740			—			—			2,449,740
Payments for senior secured revolver		(2,856,340	)		—			—			(2,856,340	)
Proceeds from receivables-backed facility		—			—			3,802,000			3,802,000
Payments for receivables-backed facility		—			—			(3,417,000	)		(3,417,000	)
Payment of deferred financing costs		(600	)								(600	)
Capital contribution from non-controlling interest		—			—			6,304			6,304
Issuance of common stock, net of share repurchases for withholding taxes		3,764			—			—			3,764
Net change in intercompany balances		472,104			(203,787	)		(268,317	)		—

Net cash provided by (used in) financing activities		(121,068	)		(210,162	)		122,630			(208,600	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(850	)		(850	)

Increase (decrease) in cash and cash equivalents		9,504			(9,750	)		15,970			15,724
Cash and cash equivalents, beginning of period		307			9,750			81,950			92,007

Cash and cash equivalents, end of period	$	9,811		$	—		$	97,920		$	107,731

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)


	Unaudited Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2010
	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidated Totals
	(In thousands)
Net cash provided by (used in) operating activities - continuing operations	$	131,138		$	263,165		$	(15,010	)	$	379,293
Net cash provided by operating activities - discontinued operations		—			—			8,890			8,890

Net cash provided by (used in) operating activities		131,138			263,165			(6,120	)		388,183
Payments for property, plant and equipment		(401	)		(173,633	)		(6,523	)		(180,557	)
Proceeds from sale of fixed assets		—			3,770			37			3,807

Net cash used in investing activities — continuing operations		(401	)		(169,863	)		(6,486	)		(176,750	)
Net cash provided by investing activities — discontinued operations		—			—			24,795			24,795

Net cash provided by (used in) investing activities		(401	)		(169,863	)		18,309			(151,955	)
Repayment of debt		(94,475	)		(10,113	)		(133	)		(104,721	)
Proceeds from senior secured revolver		2,875,580			—			—			2,875,580
Payments for senior secured revolver		(2,927,780	)		—			—			(2,927,780	)
Proceeds from receivables-backed facility		—			—			1,440,000			1,440,000
Payments for receivables-backed facility		—			—			(1,440,000	)		(1,440,000	)
Payment of deferred financing costs		(34,233	)		—			—			(34,233	)
Capital contribution from non-controlling interest		—			—			6,916			6,916
Tax savings on share-based compensation		275			—			—			275
Issuance of common stock, net of share repurchases for withholding taxes		3,298			—			—			3,298
Net change in intercompany balances		55,042			(75,894	)		20,852			—

Net cash provided by (used in) financing activities		(122,293	)		(86,007	)		27,635			(180,665	)
Effect of exchange rate changes on cash and cash equivalents		—			—			1,347			1,347

Increase in cash and cash equivalents		8,444			7,295			41,171			56,910
Cash and cash equivalents, beginning of period		9,665			—			35,525			45,190

Cash and cash equivalents, end of period	$	18,109		$	7,295		$	76,696		$	102,100

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

6. Derivative Financial Instruments and Fair Value Measurements

Derivatives

Interest Rates — 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 the impact of interest rate fluctuations and stabilizing cash flows. These swap agreements provide hedges for interest on our senior secured credit facility by fixing the LIBOR component of interest rates specified in the senior secured 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 as of September 30, 2011:


Fixed Interest Rates	Expiration Date		Notional Amounts
			(In millions)
0.3150% to 0.3165%(1)		December 30, 2011	$	1,000
4.91%		March 30, 2012		1,250
0.415% to 0.418%(2)		March 30, 2012 – December 30, 2012		900
1.60% to 1.84%(3)		December 31, 2013		800
2.75% to 2.84%(3)		March 31, 2016		200
2.70% to 3.17%(3)		March 31, 2017		650

(1)	In August 2011, we entered into forward-starting interest rate swap agreements with an effective date of August 31, 2011.

(2)	In September 2011, we entered into forward-starting interest rate swap agreements with an effective date of December 30, 2011. The notional amounts of the swap agreements decrease by $400 million on March 30, 2012 and the remaining notional amounts expire on December 30, 2012.

(3)	In August 2010 and April 2011, we entered into forward-starting interest rate swap agreements with an effective date of March 30, 2012.

These swaps are recorded as an asset or liability in our unaudited Condensed Consolidated Balance Sheets at fair value, with an offset to accumulated other comprehensive income to the extent the hedges are 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. There was no hedge ineffectiveness during the three and nine months ended September 30, 2011 and 2010.

We are exposed to market risk under these arrangements due to the possibility of interest rates on our senior secured credit facility rising above the rates on our interest rate swap agreements. Credit risk under these arrangements is believed to be remote as the counterparties to our interest rate swap agreements are major financial institutions; however, if any of the counterparties to our hedging arrangements become unable to fulfill their obligations to us, we may lose the financial benefits of these arrangements.

Commodities — We are exposed to commodity price fluctuations, including milk, soybeans, butterfat, sweeteners and other commodity costs used in the manufacturing, packaging and distribution of our products; including utilities, natural gas, resin and diesel fuel. To secure adequate supplies of materials and bring greater stability to the cost of ingredients and their related manufacturing, packaging and distribution, we routinely enter into forward purchase contracts and other purchase arrangements with suppliers. Under the forward purchase contracts, we commit to purchasing agreed-upon quantities of ingredients and commodities at agreed-upon prices at specified future dates. The outstanding purchase commitment for these commodities at any point in time typically ranges from one month’s to one year’s anticipated requirements, depending on the ingredient or commodity. These contracts are considered normal purchases. In addition to entering into forward purchase contracts, from time to time we may purchase over-the-counter contracts with our qualified banking partners or exchange-traded commodity futures contracts for raw materials that are ingredients of our products or components of such ingredients. Certain of the contracts offset the risk of increases in our commodity costs and are designated as hedging instruments when appropriate. Other contracts may be executed related to certain customer pricing arrangements. We have not designated such contracts as hedging instruments; therefore, the contracts are marked to market at each reporting period, and a derivative asset or liability is recorded on our balance sheet. A summary of these open commodities contracts recorded at fair value in our unaudited Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010 is included in the table below.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuations, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies.

Foreign Currency — Sales in foreign countries, as well as certain expenses related to those sales, are transacted in currencies other than our reporting currency, the U.S. dollar. Our foreign currency exchange rate risk is primarily limited to the euro and the British pound. We may, from time to time, employ derivative financial instruments to manage our exposure to fluctuations in foreign currency rates or enter into forward currency exchange contracts to hedge our net investment and intercompany payable or receivable balances in foreign operations. See the table below for a summary of the foreign currency related financial instruments outstanding at September 30, 2011. We did not have any outstanding foreign currency related financial instruments at December 31, 2010.

As of September 30, 2011 and December 31, 2010, our derivatives recorded at fair value in our unaudited Condensed Consolidated Balance Sheets were:


	Derivative Assets				Derivative Liabilities
	September 30, 2011		December 31, 2010		September 30, 2011		December 31, 2010
	(In thousands)
Derivatives Designated as Hedging Instruments
Interest rate swap contracts — current(1)	$	—	$	—	$	44,259	$	59,379
Interest rate swap contracts — noncurrent(2)		—		4,156		65,276		13,058
Commodities contracts — current(1)				2,754		1,641		—
Foreign currency contracts — current(1)		15		—		—		—
Derivatives not Designated as Hedging Instruments
Commodities contracts — current(1)		439		1,478		640		947

Total derivatives	$	454	$	8,388	$	111,816	$	73,384

(1)

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

(2)	Derivative assets and liabilities that have settlement dates greater than 12 months from the respective balance sheet date were included in identifiable intangible and other assets, net and other long-term liabilities, respectively, in our unaudited Condensed Consolidated Balance Sheets.

Gains and losses on derivatives designated as cash flow hedges reclassified from accumulated other comprehensive income into income for the three and nine months ended September 30, 2011 and 2010 were:


	Three Months Ended September 30				Nine Months Ended September 30
	2011		2010		2011			2010
	(In thousands)
Losses on interest rate swap contracts(1)	$	14,965	$	21,232	$	46,735		$	74,417
(Gains)/losses on commodities contracts(2)		161		—		(4,445	)		—
Losses on foreign currency contracts(3)		21		—		21			—

(1)	Recorded in interest expense in our unaudited Condensed Consolidated Statements of Operations.

(2)	Recorded in selling and distribution or cost of sales, depending on commodity type, in our unaudited Condensed Consolidated Statements of Operations.

(3)	Recorded in cost of sales in our unaudited Condensed Consolidated Statements of Operations.

Based on current interest rates, commodity prices and exchange rates, we estimate that $44.3 million of hedging activity related to our interest rate swaps, $1.6 million of hedging activity related to our commodities contracts and an immaterial amount of hedging activity related to our foreign currency contracts will be reclassified from accumulated other comprehensive income into income within the next 12 months.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, we follow a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

•

Level 1 — Quoted prices for identical instruments in active markets.

•

Level 2 — Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations, in which all significant inputs are observable in active markets.

•

Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 is as follows (in thousands):


	Fair Value as of September 30, 2011		Level 1		Level 2		Level 3
Liability — Interest rate swap contracts	$	109,535	$	—	$	109,535	$	—
Asset — Commodities contracts		439		—		439		—
Asset — Foreign currency contracts		15		—		15		—
Liability — Commodities contracts		2,281		—		2,281		—

A summary of our derivative assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 is as follows (in thousands):


	Fair Value as of December 31, 2010		Level 1		Level 2		Level 3
Asset — Interest rate swap contracts	$	4,156	$	—	$	4,156	$	—
Liability — Interest rate swap contracts		72,437		—		72,437		—
Asset — Commodity contracts		4,232		—		4,232		—
Liability — Commodity contracts		947		—		947		—

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

The fair value of our Dean Foods Company senior notes and subsidiary senior notes was determined based on quoted market prices. The following table presents the carrying value and fair value of our senior and subsidiary senior notes at September 30, 2011 and December 31, 2010:


	September 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(In thousands)
Subsidiary senior notes due 2017	$	128,700	$	132,770	$	127,504	$	123,185
Dean Foods Company senior notes due 2016		498,910		471,250		498,765		458,750
Dean Foods Company senior notes due 2018		400,000		405,000		400,000		403,000

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

We hold certain deferred compensation assets that are held at fair value. The following table presents a summary of these assets measured at fair value on a recurring basis as of September 30, 2011 (in thousands):

		$0,000		$0,000		$0,000		$0,000
	Total		Level 1		Level 2		Level 3
Money market	$	87	$	—	$	87	$	—
Mutual funds		3		—		3		—

The following table presents a summary of the deferred compensation assets measured at fair value on a recurring basis as of December 31, 2010 (in thousands):

		$0,000		$0,000		$0,000		$0,000
	Total		Level 1		Level 2		Level 3
Money market	$	3,502	$	—	$	3,502	$	—
Mutual funds		1,013		—		1,013		—

7. Common Stock and Share-Based Compensation

Stock Options — The following table summarizes stock option activity during the first nine months of 2011:


	Options			Weighted Average Exercise Price		Weighted Average Contractual Life (Years)		Aggregate Intrinsic Value
Options outstanding at December 31, 2010		21,523,733		$	20.20
Granted		1,869,603			10.35
Forfeited and canceled(1)		(2,757,211	)		22.52
Exercised		(688,754	)		10.00

Options outstanding at September 30, 2011		19,947,371			19.31		4.75	$	36,931

Options exercisable at September 30, 2011		16,507,781			20.49		3.94	$	—

(1)	Pursuant to the terms of our stock option plans, options that are forfeited or canceled may be available for future grants.

We recognize share-based compensation expense for stock options ratably over the vesting period. The fair value of each option award is estimated on the date of grant using a Black-Scholes valuation model. The following weighted average assumptions were used to estimate the fair value of grants issued during these periods:


	Nine Months Ended September 30
	2011			2010
Expected volatility		41	%		34	%
Expected dividend yield		—	%		—	%
Expected option term		5 years			5 years
Risk-free rate of return		1.32% to 2.3	%		1.46% to 2.59	%

Restricted Stock Units — The following table summarizes restricted stock unit (“RSU”) activity during the first nine months of 2011:


	Employees			Directors			Total
Stock units outstanding at December 31, 2010		2,648,843			70,386			2,719,229
Stock units issued		865,735			53,792			919,527
Shares issued upon vesting of stock units		(669,007	)		(21,797	)		(690,804	)
Stock units canceled or forfeited(1)		(565,362	)		—			(565,362	)

Stock units outstanding at September 30, 2011		2,280,209			102,381			2,382,590

Weighted average grant date fair value	$	15.10		$	11.83		$	14.99

(1)	Pursuant to the terms of our stock unit plans, employees have the option of forfeiting stock units to cover their minimum statutory tax withholding when shares are issued. Stock units that are canceled or forfeited become available for future grants.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

Cash Performance Units — We grant awards of cash performance units (“CPUs”) as part of our long-term incentive compensation program under the terms of our 2007 Stock Incentive Plan (the “2007 Plan”). The CPU awards are cash-settled awards and are designed to link compensation of certain executive officers and other key employees to our performance over a three-year period. The performance metric, as defined in the award, is the performance of our stock price relative to that of a peer group of companies. The range of payout under the award is between 0% and 200% and is payable in cash at the end of each respective performance period. The fair value of the awards is measured at each reporting period. Compensation expense is recognized over the vesting period with a corresponding liability, which is recorded in other long-term liabilities in our unaudited Condensed Consolidated Balance Sheets. The following table summarizes CPU activity during the first nine months of 2011:


	Units
Outstanding at December 31, 2010		10,812,001
Granted		2,593,750
Converted/paid		—
Forfeited		(1,476,667	)

Outstanding at September 30, 2011		11,929,084

We reversed $0.9 million of expense in the third quarter of 2011 due to the underperformance of the plan. We have no liability recorded related to this plan at September 30, 2011.

Phantom Shares — We grant phantom shares as part of our long-term incentive compensation program, which are similar to RSUs in that they are based on the price of our stock and vest ratably over a three-year period, but are cash-settled based upon the value of our stock at each vesting period. The fair value of the awards is remeasured at each reporting period. Compensation expense is recognized over the vesting period with a corresponding liability, which is recorded in accounts payable and accrued expenses in our unaudited Condensed Consolidated Balance Sheets. The following table summarizes the phantom share activity during the first nine months of 2011:


	Shares
Outstanding at December 31, 2010		—
Granted		1,191,162
Converted/paid		(3,002	)
Forfeited		(77,357	)

Outstanding at September 30, 2011		1,110,803

Share-Based Compensation Expense — The following table summarizes the share-based compensation expense recognized during the three and nine months ended September 30, 2011 and 2010:


	Three Months Ended September 30					Nine Months Ended September 30
	2011			2010		2011		2010
	(In thousands)
Stock Options	$	2,808		$	3,786	$	9,004	$	12,332
Stock Units		4,964			5,483		14,841		16,476
Cash Performance Units		(865	)		—		—		—
Phantom Shares		324			—		2,037		—

Total	$	7,231		$	9,269	$	25,882	$	28,808

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

8. Earnings (Loss) Per Share

Basic earnings (loss) per share is based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is based on the weighted average number of common shares outstanding and the effect of all dilutive common stock equivalents outstanding during each period. Stock option conversions and stock units were not included in the computation of diluted loss per share for the three-month or nine-month periods ended September 30, 2011, as we incurred a loss for these periods and any effect on loss per share would have been anti-dilutive. The following table reconciles the numerators and denominators used in the computations of both basic and diluted earnings (loss) per share:


	Three Months Ended September 30					Nine Months Ended September 30
	2011			2010		2011			2010
	(In thousands, except share data)
Basic earnings (loss) per share computation:
Numerator:
Income (loss) from continuing operations	$	(1,555,650	)	$	17,177	$	(1,585,288	)	$	100,449
Net loss attributable to non-controlling interest		11,537			2,339		15,925			6,511

Income (loss) from continuing operations attributable to Dean Foods Company	$	(1,544,113	)	$	19,516	$	(1,569,363	)	$	106,960
Denominator:
Average common shares		183,649,597			182,118,506		183,278,667			181,666,251

Basic earnings (loss) per share from continuing operations attributable to Dean Foods Company	$	(8.41	)	$	0.11	$	(8.56	)	$	0.59

Diluted earnings (loss) per share computation:
Numerator:
Income (loss) from continuing operations	$	(1,555,650	)	$	17,177	$	(1,585,288	)	$	100,449
Net loss attributable to non-controlling interest		11,537			2,339		15,925			6,511

Income (loss) from continuing operations attributable to Dean Foods Company	$	(1,544,113	)	$	19,516	$	(1,569,363	)	$	106,960
Denominator:
Average common shares — basic		183,649,597			182,118,506		183,278,667			181,666,251
Stock option conversion(1)		—			137,323		—			730,842
Stock units(2)		—			66,768		—			441,980

Average common shares — diluted		183,649,597			182,322,597		183,278,667			182,839,073

Diluted earnings (loss) per share from continuing operations attributable to Dean Foods Company	$	(8.41	)	$	0.11	$	(8.56	)	$	0.58


(1) Anti-dilutive common shares excluded		20,124,594			21,682,740		20,772,321			19,749,866
(2) Anti-dilutive stock units excluded		850,517			1,466,850		937,473			164,971

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

9. Employee Retirement and Postretirement Benefits

We sponsor various defined benefit and defined contribution retirement plans, including various employee savings and profit sharing plans, and we contribute to various multi-employer pension plans on behalf of our employees. Substantially all full-time union and non-union employees who have completed one or more years of service and have met other requirements pursuant to the plans are eligible to participate in one or more of these plans.

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

		$(00,000)			$(00,000)			$(00,000)			$(00,000)
	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(In thousands)
Components of net periodic pension cost:
Service cost	$	710		$	683		$	2,130		$	2,049
Interest cost		3,803			4,152			11,409			12,456
Expected return on plan assets		(4,241	)		(4,121	)		(12,723	)		(12,363	)
Recognized settlement gain		—			—			—			—
Amortizations:
Unrecognized transition obligation		28			28			84			84
Prior service cost		191			179			573			537
Unrecognized net loss		2,265			2,285			6,795			6,855

Net periodic benefit cost	$	2,756		$	3,206		$	8,268		$	9,618

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

		$(00,000)			$(00,000)			$(00,000)			$(00,000)
	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	7		$	6		$	21		$	18
Interest cost		190			242			570			726
Amortizations:
Prior service cost		(16	)		(16	)		(48	)		(48	)
Unrecognized net loss		124			131			372			393

Net periodic benefit cost	$	305		$	363		$	915		$	1,089

During the third quarter of 2011, we identified groups of employees who were eligible to receive other postretirement benefits that had historically been excluded from our benefit plan valuations, which resulted in an understatement of our benefit obligations and net periodic benefit cost. These errors relate primarily to periods prior to 2011. As the effects of the errors are not material to the unaudited Condensed Consolidated Financial Statements for the three months or nine months ended September 30, 2011 and were not material to any individual period prior to 2011, we recorded a non-cash charge, and the related benefit obligation, of $16.0 million during the third quarter of 2011, of which $0.8 million relates to the three-month and nine-month periods ended September 30, 2011 and $15.2 million relates to prior periods. The charge and the corresponding liability have been recorded in general and administrative expenses in the unaudited Condensed Consolidated Statements of Operations and other long term liabilities in the unaudited Condensed Consolidated Balance Sheets, respectively, for the three-month and nine-month periods ended September 30, 2011.

DEAN FOODS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Nine Months Ended September 30, 2011 and 2010

(Unaudited)

10. Facility Closing and Reorganization Costs

Approved plans within our multi-year initiatives and related charges are summarized as follows:


	Three Months Ended September 30				Nine Months Ended September 30
	2011		2010		2011			2010
	(In thousands)
Fresh Dairy Direct-Morningstar:
Closure of facilities(1)	$	1,516	$	8,216	$	15,021		$	11,776
Broad-based reduction of facility and distribution personnel(2)		—		—		(281	)		4,500
Organization Optimization Initiative(3)		2,274		—		4,166			—
Other