Dean Foods Reports Fourth Quarter And Full Year 2013 Results

DALLAS, Feb. 11, 2014 /PRNewswire/ -- Dean Foods Company (NYSE: DF) today announced that the Company earned $8.58 per diluted share for the full year 2013, as compared to $1.70 per diluted share for the full year 2012.  Full year 2013 reported results include the gain on disposition of WhiteWave common stock of $416 million, the gain on sale of Morningstar of $492 million (net of tax) and other one-time or non-recurring items, as more fully described in the attached tables. On an adjusted basis, the Company earned $0.86 per diluted share for the full year 2013, compared to $0.77 for the full year 2012.

For the fourth quarter of 2013, the Company reported a loss from continuing operations attributable to Dean Foods of $0.40 per share, compared to fourth quarter 2012 income from continuing operations of $0.08 per share. The loss for the fourth quarter of 2013 includes a $63 million (net of tax) loss on the early retirement of debt, $10 million (net of tax) of restructuring charges, and other one-time or non-recurring items, as more fully described in the attached tables.   On an adjusted basis, fourth quarter 2013 diluted earnings from continuing operations were $0.18 per share, compared to fourth quarter 2012 adjusted earnings of $0.23 per share.  

Fourth quarter 2013 operating income totaled $35 million, compared to fourth quarter 2012 operating income of $38 million. Fourth quarter 2013 adjusted operating income totaled $48 million, compared to $62 million in the year-ago period on an adjusted basis.

Full year 2013 operating income totaled $131 million, compared to full year 2012 operating income of $261 million.  Full year 2013 adjusted operating income totaled $228 million, compared to $256 million in the year ago period on an adjusted basis.

Net loss from continuing operations attributable to Dean Foods totaled $37 million for the fourth quarter of 2013, compared with $8 million in income the previous year. On an adjusted basis, fourth quarter net income from continuing operations attributable to Dean Foods totaled $17 million, compared with $21 million in the previous year. 

Net income attributable to Dean Foods totaled $813 million for the full year 2013, compared with $159 million in the previous year.  On an adjusted basis, net income for the full year 2013 totaled $82 million, compared to $72 million in 2012.  

"We continue to feel confident in our long-term trajectory," said Gregg Tanner, Chief Executive Officer of Dean Foods. "In 2013, Dean Foods successfully transformed itself, generating more than $2 billion in shareholder value, substantially deleveraging the company, and focusing the company on its core dairy business.  At the same time, we faced significant challenges in the inflationary commodity environment and through competitive pressures on our business.  This very challenging environment will persist for Dean Foods, particularly during the first half of 2014, but we are confident that we have the right strategies in place to drive meaningful productivity savings and top line volume growth through the balance of the year."

Dean Foods' share of U.S. fluid milk sales volume increased to 35.7 percent during the fourth quarter of 2013 from 34.9 percent in the third quarter of 2013. Industry fluid milk volumes declined approximately 2.2 percent year-over-year in the fourth quarter on an unadjusted basis, based on USDA data and company estimates. Due to the previously disclosed loss of business at a large retailer, Dean Foods' unadjusted fluid milk volumes declined 9 percent on a year-over-year basis. Excluding the previously announced loss of business at a major customer and another customer's decision to vertically integrate its dairy operations last year, Dean Foods' milk volumes declined 0.6 percent in the fourth quarter of 2013, significantly better than the overall category and an improvement from last quarter's comparable 1.7 percent decline. Total volumes across all products declined 8 percent from the year ago period to 699 million gallons in the fourth quarter of 2013.

The Company continued to make solid progress against its cost savings targets including the planned closure of eight to twelve (10-15 percent) of its manufacturing facilities by mid-2014. The Company has closed 8 plants and announced a 9^th since its accelerated cost reduction initiatives began in the fourth quarter of 2012. 

The fourth quarter 2013 average Class I Mover, a measure of raw milk costs, was $19.92 per hundred-weight, a 2 percent decline from the fourth quarter of 2012, and 5 percent above the third quarter 2013 level.

CASH FLOW
Consolidated net cash used in continuing operations for the twelve months ended December 31, 2013 totaled $331 million. Free cash flow from continuing operations, which is defined as net cash provided by or used in continuing operations less capital expenditures, was an outflow of $506 million for the twelve months ended December 31, 2013. Negative cash flow was driven primarily by non-recurring items, most of which were associated with strategic separation activities, including the payment of approximately $420 million of taxes related to the Morningstar divestiture, $31 million related to the impact of moving WhiteWave and Morningstar accounts receivable from intercompany to third party transactions, and $32 million of transaction costs, as well as a $19 million litigation settlement payment in the second quarter. On an adjusted basis, which excludes these, and certain other items, Dean Foods generated $60 million in free cash flow for the twelve months ended December 31, 2013.  A reconciliation between net cash used in continuing operations and adjusted free cash flow provided by continuing operations is provided in the tables below.

NET DEBT
Total debt at December 31, 2013, net of $17 million cash on hand, was approximately $881 million. On an all cash netted basis, the Company's leverage ratio was 2.21 times funded net debt to EBITDA at the end of 2013.

Forward Outlook
"Turning to our forward outlook, there are several broad themes that are expected to drive business results and our earnings progression this year," continued Tanner.

"First, the consensus view of the dairy commodity outlook for 2014 appears to be more challenging than previously expected as current dairy commodity prices have moved near or beyond all-time highs despite strong global production growth.  On our last earnings conference call, we expressed a view that raw milk prices would begin to fall in the early part of 2014, before moderating and rising slightly over the back half.  However, since then, raw milk prices have risen sharply driven by global demand for imported dairy products.   We now expect Class I dairy commodity prices to climb throughout the majority of the first half, before flattening and declining moderately in the second half of 2014.

"Second, the RFP driven volume losses and the associated margin pressures we experienced occurred primarily late in the second quarter and early third quarter of 2013 resulting in very tough first half 2014 overlaps.

"Third, because overall 2013 performance was meaningfully below our plan, we significantly underpaid our 2013 bonus targets.  Our 2014 guidance assumes we will pay short term incentive at targeted levels. This higher level of incentive compensation is expected to be a drag on our financial performance in 2014.

"Finally, the fluid milk category finished the year with industry volumes down 2.2 percent in the fourth quarter and we continue to keep a watchful eye on the impacts associated with higher dairy commodity prices and the recent reduction in Supplemental Nutrition Assistance Program, or SNAP benefits.  We are hopeful that our new volume wins, and increasing share gains, will partially offset the asset deleverage soft category volumes create; however soft volumes, coupled with inflation,  can negate some of the impact of our cost reduction efforts, and makes it harder to take those savings to the bottom line.

"On the plus side, we continue to have a robust cost reduction effort in place.  We are working to offset both commodity and non-commodity related inflation through a combination of cost reductions and price realization.  That said, we are clearly beginning the year behind commodity inflation in the first quarter given the rapid rise in Class I prices to all-time highs.  In order to mitigate soft volumes, we have won new business that should continue to come on line late in the first quarter and we are continuing to execute against our plant closure initiatives in order to increase efficiencies within our existing network. 

"Taking all of these factors into account, we expect full year adjusted diluted earnings of $0.73 to $0.86 per share.

"We expect the first half of 2014 to be particularly difficult as we battle the RFP driven volume losses and the associated margin pressures we experienced primarily late in the second quarter and early third quarter of 2013.  We will not fully lap these impacts until the second half of the year, which will make for a very tough first half comparison, particularly in Q1.  We expect our first quarter will be our most difficult quarter of this year as we chase the current all-time high Class I commodity environment, overlap the full brunt of the RFP driven volume losses and margin pressures, and continue to work through the transitory costs associated with our accelerated plant closure agenda.  All in, we expect first quarter adjusted diluted earnings per share to be approximately break-even with three cents of potential risk or benefit implied. We expect our performance to improve throughout the year as we adjust to offset inflation, volume from new business flows into the system and our cost reduction initiatives continue to gain momentum."  

CONFERENCE CALL/WEBCAST
A webcast to discuss the Company's financial results and outlook will be held at 9:00 a.m. ET today and may be heard live by visiting the "Webcast" section of the Company's website at http://www.deanfoods.com/. A slide presentation will accompany the webcast.

ABOUT DEAN FOODS
Dean Foods^® is a leading food and beverage company in the United States and is the nation's largest processor and direct-to-store distributor of fluid milk. Headquartered in Dallas, Texas, the Dean Foods portfolio includes TruMoo®, the leading national flavored milk brand, along with well-known regional dairy brands such as Alta Dena^®, Berkeley Farms^®, Country Fresh^®, Dean's^®, Garelick Farms^®, LAND O LAKES^® milk and cultured products*, Lehigh Valley Dairy Farms^®, Mayfield^®, McArthur^®, Meadow Gold^®, Oak Farms^®, PET^®**, T.G. Lee^®, Tuscan^® and more. In all, Dean Foods has more than 50 local and regional dairy brands and private labels. Dean Foods also makes and distributes ice cream, cultured products, juices, teas, and bottled water. Nearly 18,000 employees across the country work every day to make Dean Foods the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion. For more information about Dean Foods and its brands, visit www.deanfoods.com.

*The LAND O LAKES brand is owned by Land O'Lakes, Inc. and is used by license.
**PET is a trademark of The J.M. Smucker Company and is used by license.

FORWARD-LOOKING STATEMENTS
Some of the statements in this press release are "forward-looking" and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These "forward-looking" statements include statements relating to, among other things, projected sales, operating income, net income, diluted earnings per share, adjusted diluted earnings per share, debt covenant compliance, cost reduction strategies, divestitures,  planned share repurchases, and expected financial performance. These statements involve risks and uncertainties that may cause results to differ materially from the statements set forth in this press release. The cost and supply of commodities and other raw materials are determined by market forces over which we have limited or no control. The Company's ability to meet targeted financial and operating results, including targeted cost reductions, sales, operating income, net income and earnings per share depends on a variety of economic, competitive and governmental factors, including raw material availability and costs, the demand for the Company's products, and the Company's ability to access capital under its credit facilities or otherwise, many of which are beyond the Company's control and which are described in the Company's filings with the Securities and Exchange Commission. The declaration and payment of cash dividends under our dividend policy remains at the sole discretion of the Board of Directors or a committee thereof and will depend upon our financial results, cash requirements, future prospects, applicable law and other factors that may be deemed relevant by the Board or such committee. For other risks and uncertainties that may cause actual results to differ from the forward-looking statements contained in this press release, see the "Risk Factors" section of the Company's most recent Annual Report on Form 10-K filed with the SEC. The forward-looking statements in this press release speak only as of the date of this release. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to such statements to reflect any change in its expectations with regard thereto or any changes in the events, conditions or circumstances on which any such statement is based.

NON-GAAP FINANCIAL MEASURES
In addition to the results prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), we have presented certain adjusted financial results and certain other non-GAAP financial measures, including Adjusted EBITDA, Free Cash Flow and Adjusted Free Cash Flow, each as defined below.  These non-GAAP financial measures are from continuing operations and are adjusted to eliminate the net expense, net gain and cash flow impacts related to the items identified in the "Reconciliation of GAAP to Non-GAAP Information" tables below. This information is provided to assist investors in making meaningful comparisons of our operating performance between periods and to view our business from the same perspective as our management. Additionally, certain pro forma adjustments were made to our GAAP results for the three and twelve months ended December 31, 2012 to facilitate a meaningful comparison of operating results between 2012 and 2013. Because we cannot predict the timing and amount of charges associated with certain non-recurring items; asset impairment charges; gains or losses related to discontinued operations and divestitures; deal, integration and separation costs; facility closing, reorganization and realignment costs; litigation settlements; and certain other charges, as well as the timing and amount of any cash outflows or inflows associated with such items, our  management does not consider these items when evaluating our performance, when making decisions regarding the allocation of resources, in determining incentive compensation for management, or in determining earnings estimates.

We have defined Adjusted EBITDA as net income attributable to Dean Foods, which is the most comparable GAAP financial measure, adjusted for the items above as well as interest, taxes, depreciation and amortization. We believe Adjusted EBITDA is a useful measure for analyzing the performance of our business and is an indicator of our ability to incur and service indebtedness and generate free cash flow. We also believe that EBITDA measures are commonly reported and widely used by investors and other interested parties as measures of a company's operating performance and debt servicing ability because such measures assist in comparing performance on a consistent basis without regard to capital structure, depreciation or amortization (which can vary significantly) and non-operating factors (such as historical cost). EBITDA is also a widely-accepted financial indicator of a company's ability to incur and service indebtedness. The reconciliation of net income to Adjusted EBITDA for the three and twelve months ended December 31, 2013 and 2012 is included in the tables below.

Additionally, we believe free cash flow provided by (used in) continuing operations ("Free Cash Flow") and adjusted free cash flow provided by (used in) continuing operations ("Adjusted Free Cash Flow") are meaningful non-GAAP measures that offer supplemental information and insight regarding the liquidity of our operations and our ability to generate sufficient cash flow above what is required in our business to sustain our operations.

We define Free Cash Flow as net cash provided by (used in) continuing operations less cash payments for capital expenditures.

We define Adjusted Free Cash Flow as Free Cash Flow adjusted for the impact on operating cash flows related to certain significant or non-recurring items, including income taxes paid on the divestiture of Morningstar; litigation payments; payments associated with our restructuring, reorganization and realignment activities; transaction costs and other separation costs resulting from the Morningstar divestiture and WhiteWave spin-off in 2013; income tax payments related to certain deferred intercompany transactions between us and WhiteWave which were recognized by us upon  completion of the WhiteWave spin-off; and other increases in or reductions to income tax payments associated with the adjustments described above.  Additionally, the computation of Adjusted Free Cash Flow for the twelve months ended December 31, 2013 has been further adjusted to exclude the net impact on working capital of accounts receivable and accounts payable associated with our transitional services agreements with WhiteWave and Morningstar, as well as the movement of WhiteWave and Morningstar trade accounts receivable and trade accounts payable from intercompany transactions (which were previously eliminated in consolidation) to third-party transactions in 2013.  A reconciliation of net cash used in continuing operations, which is the most comparable U.S. GAAP financial measure, to Adjusted Free Cash Flow, is included in the tables below.

This non-GAAP financial information is provided as additional information for investors and is not in accordance with, or an alternative to, GAAP. Additionally, these non-GAAP measures may be different than similar measures used by other companies. We believe that the presentation of these non- GAAP financial measures, when considered together with our GAAP financial measures and the reconciliations to the corresponding GAAP financial measures, provides investors with a more complete understanding of the factors and trends affecting our business than could be obtained absent these disclosures.  A full reconciliation of our results and financial measures reported in accordance with GAAP for the three and twelve months ended December 31, 2013 and 2012 to the non-GAAP financial measures described above is set forth herein.  

CONTACT: Corporate Communications, Jamaison Schuler, +1-214-721-7766; or Investor Relations, Tim Smith, +1-214-303-3713

For the three and twelve months ended December 31, 2013 and 2012, the adjusted results and certain other non-GAAP financial measures differ from the Company's results under GAAP due to the exclusion of net gains or net losses associated with certain non-recurring items, including the disposition of our investment in WhiteWave common stock that was completed in July 2013; asset impairment charges; discontinued operations; integration and separation expenses; costs associated with the cash tender offer on our senior notes; as well as facility closing, reorganization and realignment costs. These adjustments are made to facilitate meaningful comparisons of our operating performance between periods as the Company cannot predict the timing and amount of charges associated with such items.  Additionally, certain pro forma adjustments were made to our GAAP results for the three and twelve months ended December 31, 2012 to reflect the pro forma impact of certain commercial agreements that became effective in October 2012 related to our strategic activities, to facilitate a meaningful comparison of our operating performance between 2013 and 2012.  These adjustments are described in more detail below. 

(a)    The adjustment reflects the elimination of the following:

a.      Asset write-downs, including our evaluation of the impact that we expect certain changes in our business, including the loss of a portion of a significant customer's volume and related plans for consolidating our production network to have on our estimated future cash flows. The charges year-to-date include the impairment of certain fixed assets of $35.5 million, the write-off of a favorable lease asset of $3.5 million and write-downs related to one of our indefinite-lived trademarks of $4.4 million;

b.      Accelerated depreciation of $4.9 million related to machinery and equipment at certain of our production facilities as a result of revisions made to the estimated remaining useful lives due to our evaluation of the impact that we expect changes in our business to have on estimated future cash flows at those production facilities;

c.      Other operating loss of $2.2 million related to a final settlement of certain liabilities associated with the prior disposition of one of our manufacturing facilities; and

d.      A pre-tax gain resulting from the sale of our approximate 25% non-controlling interest in Consolidated Container Company, which closed on July 3, 2012.

(b)   The adjustment reflects the elimination of severance charges and non-cash asset write-downs related to approved facility closings and restructuring plans, as well as other organizational realignment activities. We have accelerated our cost reduction efforts in 2013, including the closure of eight facilities in our network, the elimination of a significant number of distribution routes, functional and operational realignments and other cost-savings initiatives. 

(c)    The adjustment reflects the elimination of the following separation activities related to the spin-off of WhiteWave from Dean Foods on May 23, 2013: 

a.      Transaction and separation costs of $4.4 million; and

b.      Additional stock compensation expense of $6.7 million related to the proportionate adjustment of the number and exercise prices of certain stock options, restricted stock units and phantom shares granted to Dean Foods employees that were outstanding at the time of the WhiteWave spin-off in order to maintain the aggregate intrinsic value of such awards.

(d)   During the fourth quarter of 2013, we successfully completed a cash tender offer for $400 million of our Senior Notes Due 2018 and 2016.  As a result of the tender offer, we recorded a $63.3 million pre-tax loss on early extinguishment of debt ($38.7 million, net of tax) in the fourth quarter of 2013, which consisted of debt tender premiums of $57.2 million, the write-off of unamortized debt issue costs of $5.5 million, and other direct costs associated with the tender offer of $0.6 million. The adjustment reflects the elimination of this loss.

(e)    The adjustment reflects the elimination of the following:

a.      A gain of $415.8 million associated with the disposition of our investment in WhiteWave common stock in July 2013; and

b.      Interest expense associated with a short-term loan agreement entered into to facilitate our disposition of WhiteWave common stock.

(f)    We completed the sale of our Morningstar division on January 3, 2013. Our Morningstar operations have been reflected as discontinued operations in our Consolidated Financial Statements under GAAP for all periods presented.  In addition to the elimination of discontinued operations, net of tax, the adjustment reflects the elimination of the following:

a.       Write-off of deferred financing costs associated with debt that was fully repaid with proceeds from the sale of our Morningstar division;

b.      Interest expense of $28.0 million related to the interest rate swaps we terminated as the result of debt repayments made with proceeds from the sale of our Morningstar division; and

c.      Separation costs of $0.5 million.

(g)   We completed the spin-off of WhiteWave on May 23, 2013.  WhiteWave's operations have been reflected as discontinued operations in our Consolidated Financial Statements under GAAP for all periods presented.  In addition to the elimination of discontinued operations, the adjustment reflects the elimination of $66.7 million of losses related to interest rate swaps that were novated to WhiteWave in connection with the WhiteWave IPO. Upon completion of the spin-off, we recognized the losses previously recorded in accumulated other comprehensive income in interest expense as a one-time, non-cash charge.

(h)   The adjustment reflects the elimination of the following:

a.      Interest accretion in connection with our previously disclosed dairy farmer class action lawsuit filed in the United States District Court for the Eastern District of Tennessee.  The Court granted final approval of the settlement agreement on June 15, 2012;

b.      A modest reduction in a litigation settlement liability due to plaintiff class "opt-outs";

c.      A litigation settlement reached in 2012 related to certain contingent obligations we retained in connection with the 2006 sale of our Iberian operations;

d.      The write-off of unamortized deferred financing costs associated with our prior credit facility as a result of the termination of such facility and the extinguishment of the associated debt; and

e.      Net income attributable to the 13% interest in WhiteWave that we did not own during the period prior to the spin-off of WhiteWave on May 23, 2013.

(i)     The adjustment reflects the income tax impact on adjustments (a) through (h) and to reflect our adjusted tax rate at 38%, which we believe represents our normalized long-term effective tax rate as a U.S. domiciled business.

(j)     Certain pro forma adjustments were made to 2012 results to reflect the impact of certain commercial agreements that became effective upon completion of the WhiteWave IPO. These agreements modified the previous intercompany arrangements to reflect arms length pricing for certain transactions between Dean Foods and our former segments.

(k)   The adjustment reflects an add-back of the dilutive shares, which were anti-dilutive for GAAP purposes.

SOURCE Dean Foods Company