Battered by weak top-line performance, Dean Foods Company (DF) posted disappointed fourth-quarter and full-year 2013 results. The company’s quarterly adjusted earnings of 18 cents per share from continuing operations declined 21.7% from the year-ago comparable period pro-forma adjusted earnings of 23 cents and fell short of the Zacks Consensus Estimate by a penny.
This Zacks Rank #4 (Sell) company’s adjusted earnings do not include the income from its former subsidiaries, The WhiteWave Foods Co. (WWAV) and Morningstar. Including these, the company reported a loss of 40 cents per share as against a gain of 8 cents in the year-ago quarter.
Quarter in Detail
Dean Foods’ adjusted net sales declined nearly 7% year over year to $2,295.5 million from $2,467.6 million in the prior-year quarter. As per the data from the U.S. Department of Agriculture (USDA) and the estimates of the company, the fall in the top line was owing to a decline of 2.2% in the overall industry volumes for fluid milk partially offset by an 80 basis points (bps) sequential improvement in the company’s market share for U.S. fluid milk to 35.7%. However, the company’s quarterly net sales were slightly higher than the Zacks Consensus Estimate of $2,220.0 million.
Adjusted operating income for the quarter decreased 22.4% to $47.9 million from the prior-year quarter figure of $61.7 million. Consequently, Dean Foods’ adjusted operating margin for the quarter contracted 40 bps to 2.1% from2.5% in the prior-year quarter.
The year-over-year decline in operating income was primarily due to reduced sales and decline in fluid milk volumes, which were partially mitigated by the company’s cost saving initiatives and lower raw milk prices. The raw milk cost of Class I Mover registered a year-over-year decrease of 2% to $19.92 per hundred-weight.
Dean Foods has achieved its targeted goal of generating cost savings of $120 million in fiscal 2013. The cost cutting measures that were announced in the fourth quarter of fiscal 2012 pertain to eight to twelve manufacturing facilities or 10%–15% of the company’s total manufacturing facilities. The company expects to reap the success of these measures by mid 2014.
Full-Year 2013 Performance
For the year, the company’s adjusted earnings from continuing operations came in at 86 cents per share, which missed the Zacks Consensus Estimate by a penny. However, earnings were up 11.7% year over year. Net sales for the year declined 3.2% to $9,016.3 million from the year-earlier quarter. However, it surpassed the Zacks Consensus Estimate of $8,949.0 million.
Financial Position
The company ended the year with cash and cash equivalents of $16.8 million, long-term debt of $897.3 million and shareholders’ equity of $714.3 million. During 2013, the company spent $316.6 million of net cash for continuing operations, while it generated a free cash flow of $60.1 million.
Further, the company remains focused on curtailing its overall leverage. At the reported quarter-end, the company's funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio, as defined by its credit agreements, was 2.21 times, which was much lower than its maximum leverage covenant ratio of 5.25 times. This indicates the company’s adequate financial flexibility to service its debt.
Outlook
Looking at the current industry volume trends, Dean Foods expects volumes to remain weak in 2014. However, raw milk prices are anticipated to fall from the beginning of 2014.
Further, Dean Foods expects its full-year 2014 earnings to come in the range of 73–86 cents per share. Currently, the Zacks Consensus Estimate for 2014 stands at $1.16 per share.
Other Stocks Worth Considering
Better-placed stocks in the food category business include ConAgra Foods, Inc. (CAG) and Diamond Foods, Inc. (DMND). Both of these carry a Zacks Rank #2 (Buy).
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