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| DF > SEC Filings for DF > Form 10-Q on 5-Nov-2008 | All Recent SEC Filings |
5-Nov-2008
Quarterly Report
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the "Form 10-Q") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are subject to risks, uncertainties and assumptions that are difficult to predict. Forward-looking statements are predictions based on our current expectations and our projections about future events, and are not statements of historical fact. Forward-looking statements include statements concerning our business strategy, among other things, including anticipated trends and developments in and management plans for our business and the markets in which we operate. In some cases, you can identify these statements by forward-looking words, such as "estimate," "expect," "anticipate," "project," "plan," "intend," "believe," "forecast," "foresee," "likely," "may," "should," "goal," "target," "might," "will," "could," "predict," and "continue," the negative or plural of these words and other comparable terminology. All forward-looking statements included in this Form 10-Q are based upon information available to us as of the filing date of this Form 10-Q, and we undertake no obligation to update any of these forward-looking statements for any reason. You should not place undue reliance on these forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied by these statements. These factors include the matters discussed in the section entitled "Part II - Item 1A - Risk Factors" in this Form 10-Q, "Part I - Item 1A - Risk Factors" in our 2007 Annual Report on Form 10-K, and elsewhere in this Form 10-Q. You should carefully consider the risks and uncertainties described under these sections.
Business Overview
We are one of the leading food and beverage companies in the United States. Our DSD Dairy segment is the largest processor and distributor of milk and other dairy products in the country, with products sold under more than 50 familiar local and regional brands and a wide array of private labels. Our WhiteWave-Morningstar segment markets and sells a variety of nationally branded dairy and dairy-related products, such as Silk® soymilk and cultured soy products, Horizon Organic® milk and other dairy products, International Delight® coffee creamers, LAND O'LAKES® creamers and other fluid dairy products. Our WhiteWave-Morningstar segment's Rachel's Organic® dairy products brand is the second largest organic yogurt brand in the United Kingdom. Additionally, our WhiteWave-Morningstar segment markets and sells private label cultured and extended shelf life dairy products through our Morningstar platform.
During 2007, we began aligning our leadership teams and strategy around distinct supply chain and delivery channels. Effective January 1, 2008, consistent with this direction, we disaggregated the former Dairy Group segment into a DSD Dairy fluid and ice cream platform and a Morningstar platform. The Morningstar platform is now a part of our WhiteWave-Morningstar segment.
DSD Dairy - Our DSD Dairy segment is our largest segment, with approximately 79% of our consolidated net sales in the three and nine months ended September 30, 2008. The DSD Dairy segment manufactures, markets and distributes a wide variety of branded and private label dairy case products, including milk, creamers, ice cream, juices and teas, to retailers, distributors, foodservice outlets, educational institutions, and governmental entities across the United States. Due to the perishable nature of its products, our DSD Dairy segment delivers the majority of its products directly to its customers' locations in refrigerated trucks or trailers that we own or lease. This form of delivery is called a "direct store delivery" or "DSD" system. We believe that our DSD Dairy segment has one of the most extensive refrigerated DSD systems in the United States. The DSD Dairy segment sells its products primarily on a local or regional basis through its local and regional sales forces, although some national customer relationships are coordinated by the DSD Dairy segment's corporate sales department. Our DSD Dairy segment does not have contracts with many of its customers, including its largest customers, and most of its existing contracts are generally terminable at will by the customer.
WhiteWave-Morningstar - Our WhiteWave-Morningstar segment net sales are approximately 21% of our consolidated net sales in the three and nine months ended September 30, 2008. The WhiteWave-Morningstar segment manufactures, develops, markets and sells a variety of nationally branded soy, dairy and dairy-related products such as Silk soymilk and cultured soy products, Horizon Organic dairy and other products,
International Delight coffee creamers, LAND O'LAKES creamers and fluid dairy products and Rachel's Organic dairy products. Our WhiteWave-Morningstar segment also sells The Organic Cow® organic dairy products. We license the LAND O'LAKES name from a third party. With the addition of Morningstar, our WhiteWave-Morningstar segment now includes private label cultured and extended shelf life dairy products such as ice cream mix, sour and whipped cream, yogurt and cottage cheese. The WhiteWave-Morningstar segment sells its products to a variety of customers, including grocery stores, club stores, natural foods stores, mass merchandisers, convenience stores, drug stores, and foodservice outlets. The WhiteWave-Morningstar segment sells its products through its internal sales force and through independent brokers. Our WhiteWave-Morningstar segment does not have contracts with many of its customers, including its largest customers, and most of its existing contracts are generally terminable at will by the customer.
Recent Developments
Developments Since January 1, 2008
Hero/WhiteWave Joint Venture - We have formed a strategic joint venture with Hero Group ("Hero"), producer of international fruit and infant nutrition brands, that will introduce a new innovative product line to North America. The joint venture, called Hero/WhiteWave, combines Hero's expertise in fruit, innovation and process engineering, with WhiteWave's deep understanding of the American consumer and manufacturing network, as well as the go-to-market system of Dean Foods.
The joint venture, which is based in Broomfield, Colorado, will serve as a strategic growth platform for both companies to further extend their global reach by leveraging each other's established innovation, technology, manufacturing and distribution capabilities over time. The initial product of the joint venture will be launched in the middle of 2009 under the Fruit2Daytm brand. The initial products will expand the WhiteWave product footprint beyond the dairy case to capitalize on the chilled fruit-based beverage opportunity. We have invested in this initiative in 2008. Our investment will step-up in 2009 with start-up and introductory marketing costs, which is expected to negatively impact our 2009 earnings.
Credit Markets - Recent disruptions in global financial markets and banking systems have made credit and capital markets more difficult for companies to access. We have assessed the implications of these factors on our current business and determined that these financial market disruptions have not had a significant impact on our financial position, results of operations or liquidity as of September 30, 2008. However, continuing volatility in the credit and capital markets could potentially impair our and our customers' ability to access these markets and increase associated costs, and there can be no assurance that we will not be materially affected by these financial market disruptions as economic events and circumstances continue to evolve.
Current Dairy Environment - Rapidly increasing and record high dairy commodity costs created a challenging operating environment throughout 2007. While conventional raw milk prices decreased in the first nine months of 2008 from the levels experienced in the fourth quarter of 2007, they remained significantly higher than prices in the first six months of the prior year. In the third quarter of 2008, conventional raw milk prices were lower than the third quarter of 2007, a trend we expect to continue into the fourth quarter. In addition to a challenging commodity environment, we face an intensely competitive environment with higher pricing sensitivity by our customers as well as continued consolidation in the retail grocery industry resulting in increased competition for a smaller customer base. Despite these challenges, we continue to focus on cost control and supply chain efficiency through initiatives such as the reduction in workforce executed late last fall, improved effectiveness in the pass through of costs to our customers, and our continued focus to drive productivity and efficiency within our operations.
Throughout most of 2007, the industry, including us, experienced an oversupply in organic raw milk. This oversupply led to aggressive discounting within this product category, particularly in the second half of 2007. In 2008, the supply and demand balance has improved, which has lessened the level of discounting. However, significant pricing pressures remain, particularly from private label products. Net price increases to our customers have not kept pace with the rising input cost of organic milk as upward pressure on pay prices to our farmers continues to reflect the sharp rise in feed and fuel costs experienced by our network of over 400 organic family farms.
Public Offering of Equity Securities - On March 5, 2008, we issued and sold 18.7 million shares of our common stock, $0.01 par value per share, in a public offering pursuant to a registration statement on Form S-3. We received net proceeds of approximately $400 million from the offering. The net proceeds from the offering were used to reduce debt outstanding under the revolving portion of our senior credit facility.
Acquisitions - During the first nine months of 2008, our DSD Dairy segment completed four acquisitions. The aggregate purchase price of these acquisitions was approximately $75 million, including transaction costs. We have noted an increase in potential transaction activity. We attribute this increase in activity in part to higher commodity prices, tightening of financial markets, and shifting consumer behavior.
Results of Operations
The following table presents certain information concerning our financial
results, including information presented as a percentage of net sales.
Three Months Ended September 30 Nine Months Ended September 30
2008 2007 2008 2007
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 3,194.7 100.0 % $ 3,116.8 100.0 % $ 9,374.2 100.0 % $ 8,590.2 100.0 %
Cost of sales 2,463.0 77.1 2,457.5 78.8 7,214.6 77.0 6,555.6 76.3
Gross profit(1) 731.7 22.9 659.3 21.2 2,159.6 23.0 2,034.6 23.7
Operating costs and expenses:
Selling and distribution 468.5 14.6 430.8 13.9 1,368.1 14.6 1,275.0 14.9
General and administrative 120.7 3.8 103.1 3.3 345.0 3.7 312.9 3.6
Amortization of intangibles 1.7 0.1 2.3 0.1 5.0 0.1 6.2 0.1
Facility closing,
reorganization and other costs 9.0 0.3 19.8 0.6 16.4 0.1 29.4 0.3
Total operating costs and
expenses 599.9 18.8 556.0 17.9 1,734.5 18.5 1,623.5 18.9
Total operating income $ 131.8 4.1 % $ 103.3 3.3 % $ 425.1 4.5 % $ 411.1 4.8 %
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(1) As disclosed in Note 1 to our Consolidated Financial Statements in our 2007 Annual Report on Form 10-K, we include certain shipping and handling costs within selling and distribution expense. As a result, our gross profit may not be comparable to other entities that present all shipping and handling costs as a component of cost of sales.
Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007 -
Consolidated Results
Net Sales - Net sales by segment are shown in the table below.
Quarter Ended September 30
$ Increase/ % Increase/
2008 2007 (Decrease) (Decrease)
(Dollars in millions)
DSD Dairy $ 2,523.4 $ 2,498.6 $ 24.8 1.0 %
WhiteWave-Morningstar 671.3 618.2 53.1 8.6 %
Total $ 3,194.7 $ 3,116.8 $ 77.9 2.5 %
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The increase in net sales was due to the following:
Quarter Ended September 30, 2008
vs Quarter Ended September 30, 2007
Pricing
And Product Total Increase/
Acquisitions Volume Mix Changes (Decrease)
(Dollars in millions)
DSD Dairy $ 39.2 $ 23.4 $ (37.8 ) $ 24.8
WhiteWave-Morningstar - 41.9 11.2 53.1
Total $ 39.2 $ 65.3 $ (26.6 ) $ 77.9
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Net sales increased during the third quarter of 2008 as compared to the third quarter of 2007 primarily due to acquisitions, as well as volume growth in both the DSD Dairy and WhiteWave-Morningstar segments.
Cost of Sales - All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; and plant and equipment costs, including costs to operate and maintain our coolers and freezers. Although cost of sales was relatively flat as a percentage of net sales in the third quarter of 2008 as compared to the third quarter of 2007, there were significant offsetting drivers, which included a decrease in net raw milk and other related costs of $58.5 million as DSD Dairy's raw material costs decreased more than WhiteWave-Morningstar's increase, partially offset by higher packaging costs, particularly resin; an increase in personnel-related costs of $15.0 million; and an increase in other manufacturing overhead costs of $16.2 million due to higher utilities and maintenance costs.
Operating Costs and Expenses - Our operating expenses increased $43.9 million, or 7.9%, in the third quarter of 2008 as compared to the same period in the prior year. Significant changes to operating costs and expenses include the following:
• Selling and distribution costs increased $37.7 million primarily due to higher fuel, third-party freight and fleet costs of $26.2 million, increased personnel-related costs of $8.2 million and higher advertising expenses of $3.9 million;
• General and administrative costs increased $17.6 million primarily due to personnel-related costs of $9.7 million including incentive based compensation, as well as professional fees and other outside services of $3.9 million primarily related to strategic corporate driven initiatives; and
• Net facility closing, reorganization and other costs decreased $10.8 million from the third quarter of 2007. See Note 10 to our Condensed Consolidated Financial Statements for further information on our facility closing and reorganization activities.
Other (Income) Expense - Interest expense decreased to $74.7 million in the third quarter of 2008 from $89.7 million in the third quarter of 2007, primarily driven by the reduction in debt related to our $400 million paydown of the revolving portion of our senior credit facility with proceeds from our equity offering on March 5, 2008, as well as the paydown of debt with cash flow from operations.
Income Taxes - Income tax expense was recorded at an effective rate of 34.1% in the third quarter of 2008 compared to 50.0% in the third quarter of 2007. During the third quarter of 2008, our effective tax rate was reduced due to the settlement of taxing authority examinations, adjustments to tax credit carryforwards, and the effects of state tax law changes. During the third quarter of 2007, the reduction in income before taxes increased the unfavorable effect that non-deductible, permanent items had on our estimated annual effective tax rate.
Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007 -
Results by Segment
DSD Dairy
The key performance indicators of our DSD Dairy segment are sales volumes, gross
profit and operating income.
Quarter Ended September 30
2008 2007
Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 2,523.4 100.0 % $ 2,498.6 100.0 %
Cost of sales 1,958.4 77.6 1,993.3 79.8
Gross profit 565.0 22.4 505.3 20.2
Operating costs and expenses 424.5 16.8 388.8 15.6
Total segment operating income $ 140.5 5.6 % $ 116.5 4.6 %
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Net Sales - The increase in our DSD Dairy segment's net sales of 1.0% was due to acquisitions and volume growth that were partially offset by the effects of slightly lower selling prices resulting from the pass-through of lower raw material prices. DSD Dairy's fluid milk volumes, which represented approximately 73% of DSD Dairy's sales volume during the quarter, increased 3.2% during the third quarter of 2008 compared to the same period a year ago, including a positive impact from our acquisitions this year.
Our DSD Dairy segment generally increases or decreases the prices of its fluid dairy products on a monthly basis in correlation to fluctuations in the costs of raw materials, packaging supplies and delivery costs. However, in some cases, we are competitively or contractually constrained with respect to the means and/or timing of price increases. This can have a negative impact on our DSD Dairy segment's profitability. The following table sets forth the average monthly Class I "mover" and its components, as well as the average monthly Class II minimum prices for raw skim milk and butterfat for the third quarter of 2008 compared to the third quarter of 2007:
Quarter Ended September 30*
2008 2007 % Change
Class I mover(1) $ 18.97 $ 21.53 (12 )%
Class I raw skim milk mover(1)(2) 13.58 16.37 (17 )
Class I butterfat mover(3)(4) 1.68 1.64 2
Class II raw skim milk minimum(1)(2) 11.55 17.07 (32 )
Class II butterfat minimum(3)(4) 1.75 1.58 11
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* The prices noted in this table are not the prices that we actually pay. The federal order minimum prices applicable at any given location for Class I raw skim milk or Class I butterfat are based on the Class I mover prices plus a location differential. Class II prices noted in the table are federal minimum prices, applicable at all locations. Our actual cost also includes producer premiums, procurement costs and other related charges that vary by location and supplier. Please see "Part I - Item 1. Business - Government Regulation - Milk Industry Regulation" in our 2007 Annual Report on Form 10-K and "- Known Trends and Uncertainties - Prices of Raw Milk and Other Inputs" below for a more complete description of raw milk pricing.
(1) Prices are per hundredweight.
(2) We process Class I raw skim milk and butterfat into fluid milk products.
(3) Prices are per pound.
(4) We process Class II raw skim milk and butterfat into products such as cottage cheese, creams and creamers, ice cream and sour cream.
Cost of Sales - All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs; labor costs; and plant and equipment costs, including costs to operate and maintain our coolers and freezers. DSD Dairy's cost of sales decreased by $34.9 million, or 1.8% in the third quarter of 2008, due to lower raw milk and other related costs of $84.3 million, such as shrink costs and the higher net contribution from excess cream, partially offset by higher packaging costs, particularly resin, and other raw material costs of $31.5 million; increased manufacturing overhead costs due to higher utilities and maintenance costs of $8.6 million; and increased personnel-related costs of $7.4 million.
Operating Costs and Expenses - DSD Dairy's operating costs and expenses increased by $35.7 million, or 9.2%, during the third quarter of 2008 from the third quarter of 2007. The increase was primarily due to higher distribution costs of $17.7 million driven primarily by higher fuel, third-party freight and fleet costs; as well as higher personnel-related costs of $15.9 million, including increased incentive compensation costs, and salaries and wages.
While operating income margin increased 1.0%, DSD Dairy's operating income was approximately 21% above year ago levels in the quarter. In addition to the factors described above, DSD Dairy results benefited from tight cost controls across the business including continued benefits from the reduction in our manufacturing and distribution workforce completed in the fourth quarter of 2007, as well as disciplined pricing execution to offset continued commodity volatility and inflationary pressure across the cost spectrum.
WhiteWave-Morningstar
The key performance indicators of our WhiteWave-Morningstar segment are sales
volumes, net sales dollars, gross profit and operating income.
Quarter Ended September 30
2008 2007
Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 671.3 100.0 % $ 618.2 100.0 %
Cost of sales 504.2 75.1 463.8 75.0
Gross profit 167.1 24.9 154.4 25.0
Operating costs and expenses 125.8 18.7 111.3 18.0
Total segment operating income $ 41.3 6.2 % $ 43.1 7.0 %
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Net Sales - The increase in our WhiteWave-Morningstar segment's net sales of 8.6% was driven by a mix of both increased volumes and higher pricing across our branded products, primarily in response to higher raw material and commodity costs. For the third quarter of 2008, total net sales for the WhiteWave brands increased 12.8% to $378.7 million, with continued strong sales growth across all of our key brands. Silk net sales increased more than 13% driven by higher pricing, as well as continued distribution expansion and integrated marketing that featured both print and television advertising highlighting the heart health benefits of our soymilk products. Net sales of the Horizon Organic brand increased almost 15% in the quarter driven by continued distribution expansion and differentiated innovation like our DHA-enhanced and single serve products, as well as higher realized pricing. International Delight grew net sales in the high single digits through improved price realization. LAND O'LAKES creamer products also grew net sales in the high single digits over the same period last year as a result of both higher volumes and commodity related price increases. Our Morningstar business also posted sales growth in the quarter, increasing net sales almost 4% to $292.6 million primarily behind higher yogurt, ice cream mix and creamer sales volume and increased pricing due to higher average Class II butter prices.
The primary raw material used in our organic milk-based products is raw organic milk. We generally enter into supply agreements with organic dairy farmers with typical terms of one to two years, which obligate us to purchase certain minimum quantities. In the past, the industry-wide demand for organic raw milk generally exceeded supply, resulting in our inability to fully meet customer demand. However, in 2006 economic incentives for conventional farmers to begin the transition to organic farming combined with a
change in the organic farm transition regulations dramatically increased the growth of supply in 2007. This oversupply led to significant discounting and aggressive distribution expansion by processors in an effort to stimulate incremental demand and sell their supply in the organic milk market. Faced with the potential of losing market share in the organic milk market, we made the strategic decision to defend the long-term value of the Horizon Organic brand by increasing our price competitiveness and marketing investment behind the brand in 2007. In 2008, the supply and demand balance has improved, which has lessened the level of discounting. However, the impact of price increases has been offset by higher raw organic milk costs that are significantly higher on a year over . . .
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